2017 (12) TMI 1771 - AT - Income Tax

Eligibility for 80IC deduction - adjustment of proportionate R D expenditure certified by DSIR in Form 3CL by the AO is unwarranted as these R D expenditures does not relate to HP unit - HELD THAT - R D expenditure certified by DSIR is location specific and recognition of R D unit by DSIR is given only for R D unit in Hosur. On the other hand the Revenue pleads that the assessee is carrying out research development activities relating to automotive seating applications. The research activities cover seating applications for Buses Trucks Tractors and Two-wheelers. The research activities encompassing product conceptualization designing development of sample lots testing and commercialization. The benefits of such research is availed by all the units of the assessee and hence the R D expenditure has to be apportioned. AO as well as the CIT (A) have given a concurrent findings. In spite of it from the entire pleadings it is clear that the assessee has not disputed such facts. It has not laid any material to say that the unit in the Himachal Pradesh has not availed or is not or would not avail the benefits of the impugned R D etc and hence the apportionment made by the AO and as modified by the CIT(A) is upheld. On the above facts and circumstances the case laws relied on by the assessee are held as not applicable .The assessee s grounds fail.

Summary

Issues:
1. Apportionment of Research and Development (R&D) expenditure for units engaged in the same business.
2. Deduction claimed under Section 80IC for the Himachal Pradesh unit.
3. Allocation of weighted deduction under Section 35(2AB) for R&D expenditure.

Issue 1: Apportionment of Research and Development (R&D) expenditure for units engaged in the same business:
The appellant, engaged in manufacturing seating systems, claimed a deduction of &8377; 7,78,74,366/- towards R&D expenditure under Section 35(2AB) for all its units. The Assessing Officer (AO) apportioned the R&D expenses related to the Himachal Pradesh unit based on turnover, resulting in a business loss for that unit. The Commissioner of Income Tax (Appeals) upheld the apportionment, emphasizing the direct connection between R&D expenses and profitability of all units. The CIT(A) limited the allocation to 10.01% of R&D expenditure, allowing a deduction of &8377; 4,69,504/-. The appellant challenged this decision, arguing that R&D expenses should not be notionally allocated to specific units. However, the Tribunal upheld the apportionment, stating the benefits of R&D accrue to all units, and the appellant failed to prove otherwise. Therefore, the Tribunal dismissed the appeal.

Issue 2: Deduction claimed under Section 80IC for the Himachal Pradesh unit:
The appellant disputed the apportionment of R&D expenditure for the Himachal Pradesh unit, claiming that expenses incurred by the R&D center should not be allocated to specific business units. The appellant argued that only profits "derived" by the eligible unit should be considered, not profits "attributable" to it. The AO and CIT(A) found a direct connection between R&D expenses and profitability of all units. The Tribunal upheld the apportionment, stating that the appellant did not provide evidence to refute the benefits of R&D to the Himachal Pradesh unit. The Tribunal held that the appellant's arguments were not applicable, and therefore, the appeal was dismissed.

Issue 3: Allocation of weighted deduction under Section 35(2AB) for R&D expenditure:
The CIT(A) noted that the AO allocated a weighted deduction of &8377; 7,78,74,366/- under Section 35(2AB) at 200 percent, which the CIT(A) deemed excessive. The CIT(A) directed the apportionment based on actual expenditure, limiting it to 100 percent of the incurred R&D expenditure. The Tribunal concurred with this decision, emphasizing the need to allocate expenditure based on actual costs rather than notional enhanced deductions. The Tribunal calculated the allocation at 10.01% of R&D expenditure, allowing a deduction of &8377; 4,69,504/-. Therefore, the Tribunal partially allowed this ground of appeal.

In conclusion, the Tribunal upheld the apportionment of R&D expenditure for units engaged in the same business, denied the deduction claimed under Section 80IC for the Himachal Pradesh unit, and directed the allocation of R&D expenditure under Section 35(2AB) based on actual costs. The Tribunal dismissed the appeal and pronounced the order on December 8, 2017, in Chennai.