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2019 (10) TMI 73 - AT - Income TaxWeighted deduction u/s 35(2AB) - AR submitted, assessee is entitled to claim deduction of revenue and capital expenditure incurred towards research and development activity even if such activity is not carried out in the in house research and development facility of the assessee - HELD THAT - Undisputedly, the research and development activity in respect of which the assessee has claimed deduction under section 35(2AB) of the Act were not carried out in assessee s own in house research and development facility. Therefore, the issue which arises for consideration is, whether the expenditure incurred for carrying out research and development activity outside by way of out sourcing or otherwise can be eligible for deduction under section 35(2AB) of the Act? As per the provision contained under section 35(2AB) of the Act, weighted deduction can be allowed in respect of expenditure on scientific research carried out in the in house research and development activity as approved by the prescribed authority. Therefore, going by the plain meaning of the words used in section 35(2AB) of the Act, only those expenditures which are incurred in the in house research and development facility are eligible for deduction. In fact, while dealing with identical issue in assessee s own case in the assessment years 2002 03 to 2004 05 2012 (4) TMI 743 - ITAT MUMBAI the Tribunal decided the issue against the assessee. However, while deciding the same issue in assessee s own case in assessment year 2007 08, the Tribunal has restored the issue to the Assessing Officer for fresh adjudication keeping in view various decisions cited by the assessee including the decision of the Hon ble Gujarat High Court in Cadila Healthcare Ltd. 2013 (3) TMI 539 - GUJARAT HIGH COURT . Therefore, following the decision of the Tribunal in assessment year 2007 08, we are inclined to restore the issue to the Assessing Officer for de novo adjudication. While doing so, the Assessing Officer is also directed to examine the ratio laid down by the Hon'ble Supreme Court in Commissioner of Customs v/s Dilip Kumar Co. Ors. 2018 (7) TMI 1826 - SUPREME COURT TP adjustment on the provisions of corporate guarantee - HELD THAT - The assessee itself has charged guarantee commission on the corporate guarantee provided to the AE @ 0.75%. The guarantee fee charged has been benchmarked by the assessee by obtaining a quotation from HSBC India which has been used as an external CUP. The method adopted by the assessee to benchmark the guarantee commission cannot be faulted with. It is necessary to observe, while deciding the appeal of the Revenue in assessee s own case in assessment year 2007 08, the Co ordinate Bench has held that guarantee fee charged @ 0.75% is at arm's length. It is relevant to observe, in various other cases involving similar nature of dispute not only the Tribunal but the Hon'ble Jurisdictional High Court has held that arm's length price of guarantee fee can reasonably be fixed @ 0.5%. In view of the aforesaid, we uphold the decision of learned Commissioner (Appeals). This ground is dismissed. Allocate research and development expenditure to section 80IB and 80IC units - HELD THAT - Commissioner (Appeals) having found that identical dispute has been decided by the Tribunal in favour of the assessee in the preceding assessment year, followed the same and directed the Assessing Officer not to allocate research and development expenditure to units eligible for claiming deduction under sections 80IB and 80IC of the Act. TDS u/s 195 - payment to non residents on account of pilot bio study, clinical research, etc., without withholding / deducting tax at source - disallowance made under section 40(a)(i) of the Act for failure to deduct tax at source - HELD THAT - Both the parties have agreed before us that the issue has been decided in favour of the assessee by the Tribunal in the preceding assessment year. It is observed, while deciding the appeal arising out of an order passed under section 201 and 201(1A) of the Act in Assessment Year 2007 08 fastening liability on the assessee due to non deduction of tax under section 195 of the Act on similar payments made by the assessee to the non resident, the Tribunal in 2010 (7) TMI 1081 - ITAT MUMBAI has held that the payment made by the assessee to the non residents cannot be treated as fee for technical services. Hence, the assessee was not required to deduct tax at source under section 195 of the Act - Decided in favour of assessee.
Issues Involved:
1. Disallowance of weighted deduction under section 35(2AB) of the Income Tax Act, 1961. 2. Transfer pricing adjustment on the provisions of corporate guarantee. 3. Allocation of research and development expenditure to section 80IB and 80IC units. 4. Disallowance under section 40(a)(i) for failure to deduct tax at source. Issue-wise Detailed Analysis: 1. Disallowance of Weighted Deduction under Section 35(2AB): The primary issue in the assessee’s appeal was the disallowance of weighted deduction under section 35(2AB) of the Income Tax Act, 1961. The assessee claimed a 150% deduction towards capital and revenue expenditure incurred in its in-house R&D facility. The Assessing Officer disallowed this claim, noting that the research activities were outsourced and not conducted in-house. The Commissioner (Appeals) allowed the deduction, but the Tribunal found that the activities were not conducted in-house as required by section 35(2AB). The Tribunal referred to the Gujarat High Court decision in Cadila Healthcare Ltd. and remanded the issue back to the Assessing Officer for fresh adjudication, instructing to consider various decisions cited by the assessee and the Supreme Court judgment in Commissioner of Customs v/s Dilip Kumar & Co. & Ors. 2. Transfer Pricing Adjustment on Corporate Guarantee: The Revenue challenged the deletion of an addition of ?35,12,209 towards transfer pricing adjustment on a corporate guarantee provided by the assessee to its AE in the UK. The assessee charged a 0.75% guarantee fee, supported by a quotation from HSBC India. The Transfer Pricing Officer determined a 2.08% fee as arm's length. The Commissioner (Appeals) found the 0.75% fee reasonable and deleted the addition. The Tribunal upheld this decision, noting that the method used by the assessee to benchmark the fee was valid and consistent with previous Tribunal decisions and jurisdictional High Court rulings. 3. Allocation of R&D Expenditure to Section 80IB and 80IC Units: The Revenue also contested the decision to not allocate R&D expenditure to units eligible for deductions under sections 80IB and 80IC. The Assessing Officer had allocated these expenses, reducing the deduction claims. The Commissioner (Appeals) reversed this, following Tribunal decisions from previous years. The Tribunal upheld this decision, noting consistent rulings in favor of the assessee in earlier years and dismissed the Revenue’s ground. 4. Disallowance under Section 40(a)(i) for Failure to Deduct Tax at Source: The final issue was the disallowance of ?2,14,20,270 under section 40(a)(i) for non-deduction of tax on payments to non-residents for pilot bio studies and clinical research. The assessee argued these payments were not fees for technical services under DTAA agreements. The Assessing Officer disagreed and disallowed the amount. The Commissioner (Appeals) deleted the addition, referencing Tribunal decisions from earlier years. The Tribunal upheld this deletion, citing consistent Tribunal decisions that such payments were not fees for technical services and thus not subject to TDS under section 195. Conclusion: The assessee’s appeal was allowed for statistical purposes, and the Revenue’s appeal was partly allowed for statistical purposes. The Tribunal directed the Assessing Officer to re-examine specific issues, ensuring compliance with judicial precedents and providing the assessee a reasonable opportunity to present its case.
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