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2019 (6) TMI 1450 - AT - Income TaxIncome on sale of technology - Addition on account of transfer of technology to a foreign subsidiary - Diversion of Profits on transfer of Technology - whether the statement recorded under section 131 of the Act during the course of survey has any evidentiary value? - HELD THAT - We disagree with the finding of the learned CIT (A) that the statement recorded under section 131 of the Act during survey under section 133A of the Act can be used in conjunction with the materials found during the survey operation. Accordingly we conclude that no reference can be made to the statement recorded under section 131 of the Act while framing the assessment for the year under consideration. It is established law that the statement recorded on oath under section 131 of the Act cannot be the basis of any disallowance/addition until and unless it is supported on the basis of some tangible material. Here it is pertinent to note that the CBDT has discouraged to its officers to make the addition on the basis of the statements and without bringing any tangible materials for any addition/disallowance. CBDT has emphasized to its officers to focus on gathering evidences during search/survey operations and strictly directed to avoid obtaining admission of undisclosed income under coercion/ undue influence. Keeping in view the guidelines issued by the CBDT from time to time regarding the statements obtained during search and survey operation, it is undisputedly clear that the lower authorities have not collected any other evidence to prove the impugned transaction as bogus other than the statement. Whenever assessee has two options, any layman will always go for one which reduces its tax liability but to hold that the transaction as a colorable device - Revenue needs to see it in entirety the impugned transaction cannot be regarded as colorable device merely on the reasoning that there is no tax liability arising in the hands of the assessee. We hold that the impugned transaction cannot be regarded as colorable device merely on the reasoning that there is no tax liability arising in the hands of the assessee. Consideration between SUN BVI and CARACO, USA was fixed in kind i.e. the CARACO was under the obligation to issue the shares to SUN BVI against the supply of the technology in pursuance to the agreement dated 21-11-2002. At the relevant time when the agreement was made between SUN BVI and CARACO the share price of CARACO was low than the price when the technology was actually delivered to the CARACO. Thus, by the time when these technologies were transferred by SUN BVI to CARACO USA, the share price has increased many folds. As a result, the transaction of supplying the technology to CARACO resulted huge profit to SUN BVI. However, it is important to note that it was not possible to forecast/ predict the price of the shares in future at the time of actual delivery of the technologies. Therefore, the increase in the price of the shares cannot be held as colourable device in the hands of the Sun BVI. As such there was no role of the assessee in the market price of the shares of CARACO USA which is regulated by the stock exchange. Even if we assume that SUNBVI is the paper company which was created only to divert the income of the assessee, then the transaction for the sale of transaction will be treated between the assessee and CARACO. Thus such transactions will be governed under the provisions of section 92C of the Act for determining the ALP. But the AO failed to invoke the provisions of the transfer pricing under section 92 of the Act. It is also important to note that the assessee has shown rental income received from UTL which has been duly accepted by the Revenue as income of the assessee. Thus we note that the revenue has taken contradictory stand while holding the transaction between the assessee, UTL sun BVI as colorable device. In our considered view once the transaction has held as colorable device then the assessee should not suffer tax on the income disclosed by it by way of rent from UTL. Regarding the contention of the ld. DR for the use of the R D facility at Baroda, we note that there was also the rent agreement for the use of both the facility for carrying out R D process as evident from page 2 of agreement placed on page 284 of the paper book. We reverse the order of the authorities below and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Disallowance on account of research and development expenses - disallowance of R D expenses after excluding the export turnover of the assessee for the purpose of computing the allocation of R D expenses - HELD THAT - As decided in own case 2017 (9) TMI 1804 - ITAT AHMEDABAD as held appellant company had assisted the partnership firm in carrying on its business by using its network for marketing the pharmaceuticals products successively. Since the assessee is holding 97.5% of share in the partnership firm, SPI it becomes the duty of the assessee to promote the business of the partnership firm in the capacity of the majority stake holders. Incidentally, the revenue authorities have not brought anything on record which could suggest that the expenditures have not been incurred for the purposes of business. Be it assessee's business or the business of the partnership firm where the assessee is a majority stake holder. In our understanding of the law an expenditure is allowable if it is incurred for the purposes of the business of the assessee. Finding that the assessee is having 97.5% share in the profits the firm SPI, we do not find any merit in the disallowance made by the A.O. and confirmed by the First Appellate Authority. We, accordingly, direct the A.O. to delete the addition Weighted deduction under section 35(2AB) - Held that - Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the in-house facility and those can were incurred outside, in our opinion, by itself would not be sufficient to deny the benefit to the assessee under section 35(2AB) of the Act. It is not as if that the said authority was addressing the issue for deduction under section 35(2AB) of the Act in relation to the question on hand. - Following the decision in the case of CIT Vs Cadila Healthcare Ltd. 2013 (3) TMI 539 - GUJARAT HIGH COURT , decided against the Revenue.
Issues Involved:
1. Validity of Notice Issued under Section 148 read with Section 147. 2. Addition on Account of Transfer of Technology to Foreign Subsidiary. 3. Disallowance of R&D Expenses. 4. Wrong Computation of Interest under Section 234D. 5. Weighted Deduction under Section 35(2AB). Detailed Analysis: 1. Validity of Notice Issued under Section 148 read with Section 147: The assessee contended that the notice issued under Section 148 was based on a mere change of opinion and should be quashed. However, this issue was not pressed during the proceedings and was dismissed as not pressed. 2. Addition on Account of Transfer of Technology to Foreign Subsidiary: The main contention was the addition of ?45,35,30,553 on account of technology transfer to a foreign subsidiary. The assessee argued that the technologies were developed by independent companies (UTL and MJPL) and not by the assessee. The AO alleged that the technologies were developed at the assessee's premises and transferred to CARACO, USA, through SUN BVI to evade taxes. The AO based this on incriminating documents and statements from key personnel during the survey. The CIT(A) partly confirmed the addition, considering the transaction as a means to transfer income to a tax haven. The Tribunal, however, found that UTL had its own R&D facilities, and the transactions were properly recorded in the books and accepted by tax authorities. The Tribunal concluded that the transaction was not a colorable device and directed the AO to delete the addition. 3. Disallowance of R&D Expenses: The AO disallowed ?1744.156 lakhs of R&D expenses, alleging they were incurred for products manufactured by SPI, a partnership firm where the assessee held a significant share. The CIT(A) upheld this disallowance. The Tribunal, referencing its previous orders, found that the R&D activities were bona fide and for the business purposes of the assessee, and directed the AO to delete the disallowance. 4. Wrong Computation of Interest under Section 234D: The assessee contended that interest under Section 234D was wrongly computed from the date of reassessment instead of the date of regular assessment. The Tribunal found this issue consequential and dismissed it without separate adjudication. 5. Weighted Deduction under Section 35(2AB): The AO disallowed weighted deduction on expenses incurred for clinical trials conducted outside the approved R&D facility. The CIT(A) allowed the deduction, referencing the Gujarat High Court's decision in Cadila Healthcare Ltd., which held that clinical trials, even if conducted outside the in-house facility, are eligible for deduction. The Tribunal upheld the CIT(A)'s decision, allowing the weighted deduction. Conclusion: The Tribunal allowed the assessee's appeal partly, directing the deletion of the addition on technology transfer and disallowance of R&D expenses. The Tribunal also upheld the CIT(A)'s decision on the weighted deduction under Section 35(2AB). The Revenue's appeal was partly allowed, restoring the addition of hire charges income received from UTL.
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