2016 (1) TMI 1338 - AT - Income Tax

Payments made for collaborative project - assessee not carrying out scientific research itself, that it had the copy right of such scientific research, that it was not entitled to claim deduction u/s.35/35AB - Held that - There were more than 10 parties with whom the assessee had entered into agreement during the year under appeal, that the AO had not discussed and analysed the agreement as suggested by the tribunal. We are of the opinion the matter needs further verification and investigation. Therefore, in the interest of justice we are restoring back the issue to the file of the AO. He is directed to decide the issue as per the directions given by the Tribunal for the last three AYs. Ground no. 1 is allowed in favour of the assessee, in part. Disallowance u/s. 80M - Held that - Expenditure which are not directly relatable to earning of expenditure could not be deduction from dividend income on ad hoc basis for the purpose of allowing deduction u/s. 80M of the Act. We reverse the order of the FAA. See Zindal Iron and Steel Company case 2008 (7) TMI 606 - ITAT MUMBAI - Ground no. 2 is decided in favour of the assessee. Adjustment made under the transfer pricing (TP) provisions - Held that - The arm s length principle of transfer pricing is based on the premise that the amount charged by one related party to another for a product must be the same as if the parties were not related. An arm s length price in respect of a foreign transaction, therefore, is the price which that transaction would obtain in the open market. If the above basic principle is examined with regard to the facts of the case under appeal it becomes very clear that there is no shifting of income to the non-resident entity. Due to a bona-fide mistake the assessee adopted a particular figure, but, if the overall picture is looked in to, it becomes clear that there was act or intention of diverting the profits by the assessee. Considering the peculiar facts and circumstances of the case, we are of the opinion that view taken by the FAA cannot be endorsed. Reversing his order, we decide ground no.3 in favour of the assessee.

Summary

Issues Involved:
1. Treatment of payments made for collaborative projects.
2. Disallowance under Section 80M of the Income-tax Act.
3. Adjustment under the transfer pricing provisions.

Issue-wise Detailed Analysis:

1. Treatment of Payments Made for Collaborative Projects:
The first ground of appeal concerns the payments made for collaborative projects. The Assessing Officer (AO) found that the assessee had debited Rs. 1.48 crores for consultancy services, with Rs. 1.30 crores specifically for collaborative projects. The AO opined that these expenses were for acquiring know-how, thus capital in nature under Sections 35AB of the Act, and added them to the total income of the assessee. The First Appellate Authority (FAA) upheld this view, treating the payments as capital expenditure, arguing that the research work resulted in an intangible asset. The FAA also rejected the assessee's claim for depreciation under Section 32 of the Act. The Tribunal, however, noted that similar issues in previous years were restored to the AO for fresh consideration. Therefore, the Tribunal directed the AO to re-examine the agreements and decide the issue afresh, partially allowing the ground in favor of the assessee.

2. Disallowance Under Section 80M of the Income-tax Act:
The second ground involves the disallowance made by the AO under Section 80M. The AO disallowed Rs. 2,50,375/- on an estimated basis, arguing that certain expenses must have been incurred to earn the dividend income. The FAA upheld this disallowance, following the precedent set in the previous year. The Tribunal, however, found that the disallowance was made on an ad hoc basis without any substantial evidence. Citing the case of Zindal Iron and Steel Company and Central Bank of India, the Tribunal concluded that expenses not directly related to earning the dividend could not be deducted on an ad hoc basis for Section 80M purposes. Thus, the Tribunal reversed the FAA's order, deciding this ground in favor of the assessee.

3. Adjustment Under the Transfer Pricing Provisions:
The last ground pertains to the adjustment made under the transfer pricing (TP) provisions. The AO, based on the Transfer Pricing Officer's (TPO) recommendation, made an adjustment of Rs. 19.40 lakhs to the Arms Length Price (ALP) of the international transactions. The assessee argued that the TPO did not consider certain expenses and that the value of brought-out services and service tax should have been excluded from the actual cost for the purpose of mark-up. The FAA upheld the TPO's adjustments, but the Tribunal found that similar issues in previous years were decided in favor of the assessee, and the AO did not challenge those decisions. The Tribunal noted that the inadvertent mistake in calculation did not result in any income shifting to the non-resident entity. Therefore, the Tribunal reversed the FAA's order, deciding this ground in favor of the assessee.

Conclusion:
The appeal filed by the assessee was partly allowed, with the Tribunal directing the AO to re-examine the first issue, and reversing the FAA's orders on the second and third issues. The judgment was pronounced in the open court on January 8, 2016.