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TMI Blog2021 (9) TMI 139X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions was Payment of Research and development expenses to three Associated enterprises (AEs) situated in the USA, Japan and Germany. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions. The TPO accepted the transaction of Payment of R&D expenses at ALP. In the computation of total income, the assessee had claimed weighted deduction u/s.35(2AB) of the Act amounting to Rs. 26,73,42,263/- on Research and development expenses. The assessee was called upon to furnish details of such expenditure claimed as qualifying for the weighted deduction, which were filed. On perusal of such details, the Assessing Officer (AO) observed that the assessee claimed weighted deduction on Research and Development costs of Rs. 9,61,80,237/- carried outside India. Rejecting the assessee's contention, the AO disallowed a sum of Rs. 8,86,84,811/-, being, the amount of capital R&D expenditure incurred outside India. Aggrieved thereby, the assessee filed appeal before the ld. CIT(A), who, after issuing enhancement notice, held that the AO erred in allowing weighted deduction u/s.35(2AB) at a higher sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total B); and `Expenses Debited to P&L A/c' amounting to Rs. 3,41,34,804/- (Sub-total C). The three heads have further been bifurcated into `Outside India' and `Remaining' inside India. Total of three expenses incurred outside India comes to Rs. 9,61,80,237. As the aggregate Sub-total C was claimed as revenue expenditure in Profit and Loss account, the assessee claimed deduction u/s 35(2AB) at two times of the aggregate Sub-totals (A) and (B) and one time of the aggregate Sub-total C for a total sum of Rs. 26,73,42,263/-. Against such a claim of the assessee, the AO disallowed a sum of Rs. 8.86 crore, being, the weighted part of sub-totals (A) and (B) of the expenditure incurred outside India, thereby allowing a single unweighted deduction of such costs incurred outside India. The ld. CIT(A) further disallowed even the one time of the amount of the revenue expenses allowed by the AO and also sub-totals (A) & (B) except for granting depreciation allowance on the amount considered by the assessee in FA additions amounting to Rs. 4,98,21,138/-. Thus, the ld. CIT(A) allowed total weighted deduction of Rs. 2.57 crores by primarily relying on the amount approved by the Prescribed authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above clause (i). The view point of the ld. CIT(A) considering the expenditure only from the date of the approval, namely, 07-12-2010, in our considered opinion is not in accordance with the relevant rules. This portion of the impugned order is thus vacated. 8. The ld. CIT(A) restricted the claim of weighted deduction to the amount of Rs. 1,32,39,000/-, being, the amount permitted by the Prescribed authority. For this, he relied on Rule 6 (7A) as applicable from 01-07-2016. Clause (b) of Rule 6 (7A) provides as under: "(b) The prescribed authority shall furnish electronically its report - (i) In relation to the approval of in-house research and development facility in Part A of Form No.3CL; (ii) quantifying the expenditure incurred on in-house research and development facility by the company during the previous year and eligible for weighted deduction under sub-section (2AB) of section 35 of the Act in Part B of Form No. 3CL;'. 9. Sub-Clause (i) of clause (b) of Rule 6 (7A) provides that the prescribed authority shall furnish its report in relation to the approval of in-house R&D facility quantifying the amount of expenditure incurred during the previous year, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature of Intangibles incurred by the assessee could not qualify for the weighted deduction. For this purpose, he relied on the `Guidelines for approval in Form 3CM of in-house R&D Centres recognized by DSIR' dated May 2014. Para 4 of such Guidelines contains `Conditions subject to which approval is given'. Clause (xi) of para 4 runs as under: "Capital expenditure on R&D, eligible for weighted deduction will include only plant and equipment or any other tangible item. Capitalized expenditure of intangible nature will not be eligible for weighted deduction." 12. It can be seen from the above that the capital expenditure of intangible nature has been made ineligible for the weighted deduction. However, it is crucial to note that this ineligibility has been introduced by means of Guidelines issued in May 2014. The predecessor Guidelines of May 2010 did not contain any clause similar to clause (xi) of the 2014 Guidelines. Since the assessment year under consideration is 2011-12, the Guidelines issued in May, 2014 can have no application to the case. We, therefore, overturn the impugned order on this score. 13. Now we come to the expenditure incurred outside India for which the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e incurred by the assessee outside India has not been incurred on in-house R&D facility as approved by the prescribed authority. What to talk of in-house R&D facility of the assessee approved by the prescribed authority, here is a case in which the assessee incurred these costs for availing services from the R&D facilities of its AEs. Since the R&D facilities for which the assessee incurred costs outside India are neither of the assessee nor approved by the prescribed authority, there can be no question of granting any weighted deduction on the expenses incurred outside India. To sum up, it is held that the assessee is entitled to weighted deduction u/s.35(2AB) on total amount of expenditure incurred in India amounting to Rs. 5,45,58,297/-. Resultantly, no weighted deduction is admissible in respect of expenditure incurred outside India amounting to Rs. 9,61,80,237/-. 16. At this juncture, it is pertinent to note the mandate of section 35 with the caption `Expenditure on scientific research'. Clause (iv) of section 35(1) provides for deduction of expenditure on scientific nature "in respect of any expenditure of a capital nature on scientific research related to the business carri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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