2018 (10) TMI 610 - HC - Income Tax

Transfer pricing - determination of Arm s Length Price (ALP) - OFCD - Corporate Guarantee fee - Claim of expenditure u/s 37(1) incurred on behalf of others - disallowance of R&D expenditure after excluding export turnover for the purpose of computing allocation of R& D expenses. Appeal admitted.

Summary

Issues:
1. Transfer pricing adjustment on OFCD and corporate guarantee fee
2. Disallowance of expenses incurred on behalf of another company
3. Weighted deduction under section 35(2AB) for lunch, refreshment, and brokerage expenses
4. Treatment of Foreign Exchange fluctuation gain
5. Disallowance of R&D expenditure and weighted deduction under section 35(2AB) for R&D expenses

Issue 1: Transfer pricing adjustment on OFCD and corporate guarantee fee
The High Court considered whether the ITAT erred in setting aside part relief given by the CIT(A) for OFCD and corporate guarantee fee adjustments. The court analyzed the Arm's Length Price calculation based on LIBOR rates and spread, along with the reduction in corporate guarantee fee. The ITAT's decisions were scrutinized concerning the adjustments made by the Assessing Officer.

Issue 2: Disallowance of expenses incurred on behalf of another company
The dispute involved the disallowance of expenses incurred by the assessee for another company, where the Assessing Officer claimed the deduction was not permissible under section 37(1) of the Act. The court examined whether the ITAT erred in deleting this disallowance without sufficient appreciation of the facts presented by the Assessing Officer.

Issue 3: Weighted deduction under section 35(2AB) for lunch, refreshment, and brokerage expenses
The court reviewed whether the ITAT correctly allowed weighted deduction under section 35(2AB) for expenses related to lunch, refreshment, and brokerage paid for property used by R&D unit employees. The court assessed if these expenses were eligible for such deduction and whether they contributed to R&D activities as required by the Act.

Issue 4: Treatment of Foreign Exchange fluctuation gain
The court examined the treatment of Foreign Exchange fluctuation gain, questioning whether it should be considered a revenue receipt or a capital receipt. The ITAT's direction to delete the addition made on this account was scrutinized to determine if it was in line with the provisions of the Act and the nature of the gain.

Issue 5: Disallowance of R&D expenditure and weighted deduction under section 35(2AB) for R&D expenses
The court analyzed the disallowance of R&D expenditure and the weighted deduction under section 35(2AB) for R&D expenses. The dispute revolved around the allocation of R&D expenses, the correlation of expenses with R&D activities, and the eligibility for weighted deduction. The court considered the Assessing Officer's and Commissioner's views on these matters to determine if any legal questions arose.