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2018 (9) TMI 1818 - HC - Income TaxTP adjustment - Disallowance of weighted deduction u/s.35(2AB) - addition u/s 14A - HELD THAT - Appeal admitted on substantial question of law from 1 to 10 Disallowance of weighted deduction u/s.35(2AB) - revenue expenditure on clinical trials, patent, trade mark registration charges - Tribunal upholding the assessee s claim of weighted deduction - HELD THAT - With respect to question (6) above, however, there shall be a caveat. The assessee had during the course of assessment proceedings claimed weighted deduction at the rate of 150% in terms of section 35(2AB). The Assessing Officer refused to grant such claim on the ground that no such claim was raised in the return filed and without filing revised return, such claim would not be sustainable. In appeal, CIT(A) in relation to this ground for rejection, also pressed the ground of the expenditure being in relation to inhouse R&D facility approved by DSIR. The Tribunal was of the opinion that the decision of the Supreme Court in case of Goetze (India) Ltd.v. CIT 2006 (3) TMI 75 - SUPREME COURT would not prevent examination of a claim which was based on material already existed on record. The Tribunal noted that such material already existed. We are in agreement with this view of the Tribunal. Tribunal has not opined on the correctness of the findings of the CIT(A) regarding the expenditure in question being in relation to establishment of R&D facilities approved by DSIR. To this limited extent, such question would be examined. Disallowance of expenditure u/s 14A r.w.r. 8D - HELD THAT - Such issues have been coming before the Revenue authorities with respect to this very assessee in past. In the assessment for the assessment year 200708, the Tribunal had approved application of the formula under rule 8D of the Rules, though at the relevant time such rule was not yet brought in force on the ground that such formula would be the most fair means of making disallowance. In the later years, when the rule was already brought under the statute book, such formula was ordered to be applied. We notice that such issue had approved before this Court on earlier occasions as well. In the result, these two questions are not considered.
Issues involved:
1. Transfer pricing adjustments related to interest on loan, sale of products, and other transactions. 2. Disallowance of weighted deduction on revenue expenditure. 3. Claim of weighted deduction under section 35(2AB) for trademark charges and overseas product registration charges. 4. Disallowance of R&D expenses for products manufactured by a specific company. 5. Addition of amount received as "exempted partnership profit" and book profit under section 115JB. 6. Disallowance under section 14A for selling and distribution expenses. Analysis: Issue 1: Transfer Pricing Adjustments The High Court considered multiple substantial questions of law regarding transfer pricing adjustments. These questions revolved around the correctness of the decisions made by the Income Tax Appellate Tribunal (ITAT) in setting aside findings of the Commissioner of Income Tax (Appeals) and directing the Assessing Officer to delete various transfer pricing adjustments. The Court examined the specifics of each adjustment related to interest on loans, sale of products, corporate guarantees, and other transactions. The Court analyzed whether the adjustments were made in accordance with the provisions of section 92C of the Income Tax Act, emphasizing the need for proper appreciation of facts and circumstances in each case. Issue 2: Disallowance of Weighted Deduction Regarding the disallowance of weighted deduction under section 35(2AB) on revenue expenditure for clinical trials, patent, and trademark registration charges, the Court noted a discrepancy in the treatment of the claim by the Assessing Officer. The Court observed that the claim for weighted deduction at the rate of 150% was initially rejected due to procedural reasons, but the Tribunal allowed further examination based on existing material. However, the Court directed a closer examination of the expenditure in question concerning the establishment of R&D facilities approved by the Department of Scientific and Industrial Research (DSIR). Issue 3: Claim of Weighted Deduction The Court addressed the issue of weighted deduction under section 35(2AB) in relation to trademark charges and overseas product registration charges. The ITAT's decision to uphold the assessee's claim was scrutinized, emphasizing the necessity to appreciate the facts presented in the orders of the CIT(A) and the Assessing Officer. The Court evaluated whether the claim for weighted deduction was justified based on the provisions of the Income Tax Act and the specific nature of the expenses incurred. Issue 4: Disallowance of R&D Expenses The Court examined the deletion of the disallowance of R&D expenses incurred by the assessee for products manufactured by a particular company. The ITAT's decision to delete the disallowance was reviewed in light of the arguments presented by the CIT(A) and the Assessing Officer. The Court assessed the correctness of the findings and the applicability of relevant legal provisions in determining the treatment of R&D expenses. Issue 5: Addition of Amount Received The Court analyzed the addition of the amount received as "exempted partnership profit" and its impact on the book profit under section 115JB. The Court reviewed the CIT(A)'s establishment of the receipt as royalty from the partnership firm and the subsequent enhancement of the assessee's income. The correctness of the ITAT's decision to delete the addition was evaluated in connection with the provisions of section 115JB and related clauses. Issue 6: Disallowance under Section 14A The Court addressed the disallowance under section 14A for selling and distribution expenses incurred on behalf of a specific company. The ITAT's decision to delete the disallowance was examined in light of past instances involving similar issues with the same assessee. The Court considered the application of rule 8D and previous judgments to determine the appropriateness of the disallowance in the given circumstances. In conclusion, the High Court's detailed analysis of the various issues related to transfer pricing adjustments, weighted deductions, R&D expenses, partnership profits, and disallowances under section 14A reflects a comprehensive review of the factual and legal complexities involved in the case. The judgment provides clarity on the interpretation and application of relevant provisions of the Income Tax Act, ensuring a thorough examination of each issue raised before the Court.
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