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2019 (6) TMI 1252 - AT - Income TaxRevision u/s 263 - Pr. CIT directed to make addition/disallowance in respect of expenditure incurred towards R D u/s 35(2AB); Capital R D expense allocated to Sun Pharmaceuticals Industries and re-characterization of remuneration earned from partnership firm (SPI) as royalty income - same disallowances were already subject matter of appeals before Tribunal in earlier years - HELD THAT - Since issues are covered in assessee s own cases by the order passed by the Co-ordinate Bench in 2019 (4) TMI 868 - ITAT AHMEDABAD and 2017 (9) TMI 1804 - ITAT AHMEDABAD and wherein above disallowances/ additions were deleted. Taking into consideration the order passed by the Co-ordinate Bench in identical issue in assessee s own cases (supra), we find the disallowance ordered by the Learned PCIT is not sustainable in the eye of law. - assessee s appeal is allowed
Issues Involved:
1. Disallowance under Section 35(2AB) of the Income Tax Act, 1961. 2. Addition on account of Capital R&D expense allocated to a partnership firm. 3. Addition on account of re-characterization of remuneration earned from a partnership firm as royalty income. Detailed Analysis: 1. Disallowance under Section 35(2AB) of the Income Tax Act, 1961: The assessee contested the disallowance of ?12,99,26,499/- under Section 35(2AB), arguing that the provisions do not restrict the allowance of expenditure to the amount certified by DSIR in Form No. 3CL. The DSIR's role is to approve the R&D facility, and once approved, the expenditure should be allowed irrespective of the certified amount. The assessee cited judicial precedents supporting the claim that once Form 3CM is issued, the weighted deduction is allowable. The CIT's invocation of revision proceedings under Section 263 was challenged as the disallowance was already a subject of appeal. The Tribunal noted that the issue was covered in the assessee's favor by a Co-ordinate Bench decision in ITA No. 929/Ahd/2017 for AY 2010-11, which allowed similar claims. The Tribunal, following the precedent, directed the AO to allow the weighted deduction under Section 35(2AB) as claimed by the assessee. 2. Addition on account of Capital R&D expense allocated to a partnership firm: The assessee argued that the issue of allocating ?22,93,81,646/- of R&D expenses to Sun Pharmaceuticals Industries (Partnership Firm) was covered by a Co-ordinate Bench decision in ITA No. 929/Ahd/2017 for AY 2010-11. The AO had allocated R&D expenses based on the turnover of formulations, disallowing a proportionate amount. The CIT(A) partly confirmed the AO's order but restricted the disallowance to R&D expenses related to domestic formulations. The Tribunal, referencing its earlier decision, held that the entire R&D activities were conducted by the assessee, and the expenses were for the assessee's business, including its majority stake in the partnership firm. The Tribunal directed the AO to delete the disallowance, following the principle that expenses incurred for business purposes are allowable. 3. Addition on account of re-characterization of remuneration earned from a partnership firm as royalty income: The assessee contested the addition of ?44,09,54,508/- re-characterized as royalty income from the partnership firm for the use of trademarks, brands, and technology. The CIT(A) had treated the remuneration as royalty, believing it was a device for tax evasion. The assessee argued that the remuneration was for technical assistance, product stability advice, and marketing services, as per the partnership deed. The Tribunal, referencing its decision in ITA Nos. 3297 & 3420/Ahd/2014 for AY 2008-09, noted that similar remuneration was not re-characterized in earlier years and that the partnership deed was not considered sham. The Tribunal found the CIT(A)'s action based on assumptions and directed the AO to delete the addition, emphasizing that the arrangement was not a tax evasion device. Conclusion: The Tribunal allowed the assessee's appeal on all grounds, directing the AO to allow the weighted deduction under Section 35(2AB), delete the disallowance of R&D expenses allocated to the partnership firm, and remove the addition re-characterizing remuneration as royalty income. The decision followed precedents and upheld the principle that expenses incurred for business purposes are allowable.
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