2015 (3) TMI 706 - AT - Income Tax

Deduction under section 80-IB(8A) - Assessing Officer held that the assessee does not meet prescribed conditions in rule 18DA of the Income-tax Rules, 1962 to claim deduction under section 80-IB(8A) - Held that - In the present case, it is not disputed that the entire receipts of the assessee are from contract research and not own research. It is also pertinent to mention that in the appendix to the form for approval to the renewal there is a specific column, namely, column Nos. 2 and 3 dealing with contract research. The said column seeks details of sponsorship fee (if any) name of the sponsors, if any. It is, thus clear that the forms contemplates a sponsor research (contract research) also as falling within the ambit of section 80-IB(8A) of the Income-tax Act, 1961. t is also relevant to note that the prescribed authority after being fully conscious of the fact that the assessee is only a contract research organisation has still though it fit to grant section 80-IB(8A) of the Income-tax Act, 1961. It thus clear that on a overall reading of the relevant provisions and Rules that the deduction under section 80-IB(8A) of the Income-tax Act, would be allowed to a contract research organisation. The decision of Income-tax Appellate Tribunal in the case of Fortis Clinical Research Ltd. 2012 (11) TMI 498 - ITAT DELHI also supports the aforesaid view. In the aforesaid case, though the issue as to whether the contract research organisation are also covered under section 80-IB(8A) of the Act was not directly in issue, yet, it is an authority for the proposition that any violation of the conditions of rule 18DA(8A) can be looked into only by the prescribed authorities and not by the Assessing Officer, while completing the assessment. In that view of the matter, we are of the view that the Revenue authorities fell in error in denying the claim of the assessee. We therefore, hold that the assessee would be entitled to claim for deduction under section 80-IB(8A) of the Income-tax Act, 1961. The Assessing Officer is directed to allow the claim for deduction. - Decided in favour of assessee. Transfer pricing adjustment determination of the arm's length price (ALP) - payment of management fee by the assessee to its associated enterprise (AE) - addition made by the Assessing Officer and confirmed by the Dispute Resolution Panel - Held that - In the present case, as already seen, voluminous evidence was filed by the assessee before the Transfer Pricing Officer. The Transfer Pricing Officer as well as the Dispute Resolution Panel proceeded on wrong facts regarding the nature of services rendered and also made reference to entities which are not in any way connected with the assessee or the payment of management fee. Clearly there has been lack of proper application of mind by the Transfer Pricing Officer as well as the Dispute Resolution Panel. However, for this reason, we are not inclined to accept the submission of learned counsel for the assessee that the addition made should be deleted on this ground alone. We find that evidence on record exists regarding allocation of cost and the basis of such allocation. The invoices regarding nature of services rendered, however, are in the form of invoices supported by e-mails exchanged between the assessee and the associated enterprise. These invoices per se, in our opinion, do not demonstrate the nature of services rendered. The invoices have to be linked to the e-mails in support of the invoices. We also find that the assessee has not made any attempts to demonstrate the arm's length price of the transaction with the associated enterprise. As we have already stated, the evidence in the present case has to be linked with the invoices to show the nature of services rendered. The assessee has to choose a method in accordance with the Act and the Rules. On production of such evidence, the Transfer Pricing Officer will have to give the basis of his price, if he disputes the assessee's claim with comparable cases. We feel that the evidence on record need to be presented in a proper form so that the nature of services rendered can be discerned with reasonable accuracy. The assessee can demonstrate on a sample basis item expenditure comprised in the management fee. We are therefore of the view that it would be just and proper to set aside the order of the Assessing Officer and remand the question of determination of the arm's length price to the Transfer Pricing Officer for fresh consideration. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Deduction under section 80-IB(8A) of the Income-tax Act, 1961.
2. Addition made by the Assessing Officer due to adjustment to the arm's length price (ALP) in respect of an international transaction.

Issue-wise Detailed Analysis:

1. Deduction under section 80-IB(8A) of the Income-tax Act, 1961:

The assessee, a company engaged in scientific research and development, claimed a deduction of Rs. 31,32,49,090 under section 80-IB(8A). The Assessing Officer (AO) denied this claim, stating that the assessee did not have adequate infrastructure to carry out scientific research and development "of its own" as required by Rule 18DA(1)(c). The AO noted that the assessee's assets were mainly communication and data-processing equipment, lacking laboratory facilities. The AO also argued that the assessee's activities were more in the nature of coordination rather than scientific research and development.

The Dispute Resolution Panel (DRP) upheld the AO's decision, emphasizing that the infrastructure should be owned by the assessee. The DRP also found that the assessee only engaged in contract research and did not develop, improve, or transfer technology owned by it, thus not fulfilling the conditions of Rule 18DA(1)(e).

The Tribunal, however, found that the deduction under section 80-IB(8A) is not dependent on capital investment. The expression "of its own" in Rule 18DA(1)(c) qualifies the words "scientific research and development" and not the earlier part of the rule referring to infrastructure. The Tribunal also observed that Rule 18DA(5) contemplates even sponsored research programs, indicating that contract research is covered under section 80-IB(8A). The Tribunal concluded that the prescribed authority, fully aware of the assessee's contract research nature, had granted approval, and the AO could not sit in judgment over this approval. The Tribunal directed the AO to allow the claim for deduction.

2. Addition made by the Assessing Officer due to adjustment to the arm's length price (ALP) in respect of an international transaction:

The assessee paid a management fee of Rs. 1,82,77,397 to its associated enterprises (AE) and did not choose any method prescribed under the rules for determining the ALP, claiming it was a cost allocation. The Transfer Pricing Officer (TPO) and the AO found the justification for the payment unconvincing, citing lack of evidence of services rendered and benefits accrued. The TPO determined the ALP as nil and treated the entire payment as an adjustment under section 92CA.

The DRP upheld the TPO's decision, noting duplicated services and questioning the necessity of the payments. The Tribunal found that the TPO and DRP had proceeded on incorrect facts and entities unrelated to the case. The Tribunal emphasized that the TPO cannot determine the ALP as nil without proper evidence and method. The Tribunal set aside the AO's order and remanded the issue to the TPO for fresh consideration, directing a proper presentation of evidence and selection of an appropriate method in accordance with the Act and Rules.

Conclusion:
The Tribunal allowed the appeal partly, directing the AO to allow the deduction under section 80-IB(8A) and remanding the issue of the ALP adjustment for fresh consideration.