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TMI Blog2024 (5) TMI 162X X X X Extracts X X X X X X X X Extracts X X X X ..... that the transaction with connected entities are at market price. When seen in totality, we are inclined to agree with the plea of the assessee on first principles that rigours of Section 80IA(10) are not applicable in a case where neither the AO has discharged its onus to establish existence of arrangement nor such arrangement is demonstrable on factual analysis. The findings of the TPO/AO holding existence of arrangement between the eligible units and AEs merely on the basis of higher operating profits of the eligible units cannot be upheld on first principles in the instant case. The assessee has placed additional evidences to rebut the unsupported finding of the TPO/AO to dislodge existence of arrangement and transactions between the eligible units and AEs to be at market price. Hence, to the limited extent of verification of additional evidences, we deem it appropriate to remit the matter back to the file of the AO. AO shall be at liberty to verify the correctness of the claim of the assessee that transactions of purchase undertaken by the eligible units with its AEs are at ordinary and comparable market price to justify ALP. The assessee shall also be entitled to benchmark t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in (iiihk) or (iiihl) of sub-section 2 clause (a) of S. S. 80G of the Act. The action of the Revenue Authorities is thus not sustainable in law. The claim of deduction on CSR expenses on the touchstone of Section 80G is thus allowed. Eligibility towards weighted deductions u/s 35(2AB) - amount of weighted deduction to the extent of approval by prescribed authority - HELD THAT:- The quantification of eligible expense for weighted deduction is procedural or a machinery exercise. Hence, there is no warrant to negate the effect of the substituted Rule which seeks to limit the amount of weighted deduction to the extent of approval by prescribed authority supposedly carrying domain expertise in the field. The observations made by the Co-ordinate Bench in Natural Remedies [ 2020 (1) TMI 1361 - ITAT BANGALORE] are merely in the nature of obiter while adjudication of the case relating to A.Y. 2016-17 where the substituted Rule had not come into force. The observations made thus do not carry any precedent value per se. Similarly, the coordinate bench in USV P. Ltd.[ 2023 (10) TMI 1128 - ITAT MUMBAI] has applied the decision rendered in assessee s own case in earlier year without any discuss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appreciating that the assessee being an entrepreneur is engaged in activities such as research and development, brand building and advertising and therefore cannot be selected as the tested party for the purpose of undertaking benchmarking analysis. 3.3 That the assessing officer/TPO erred on facts and in law in not appreciating that the associated enterprises being the simpler of the transacting entities ought to have been selected as the tested party. 3.4 That the assessing officer / TPO erred in facts and in law in selecting functionally different companies as comparable for the purpose of undertaking benchmarking analysis Re: Disallowance of deduction under section 80G of the Act amounting to Rs. 6,38,13,601/- 4. That the assessing officer erred on facts and in law in making disallowance of Rs. 6,38,13,601 on account of disallowance of deduction under section 80G of the Act holding that expenditure incurred for the purpose of meeting Corporate Social Responsibility requirements is not an allowable expenditure. 4.1 That the assessing officer erred on facts and in law in not appreciating that there is no bar in claiming deduction under section 80G of the Act in respect of donatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction under section 35(2AB) of the Act only to the extent of expenditure approved by Department of Scientific and Industrial Research (DSIR) in Form 3CL. 5.3 That the assessing officer erred on facts and in law in not appreciating that there is no provision under the Act empowering DSIR to approve the quantum of expenditure for the purposes of claiming deduction under section 35(2AB) of the Act. 5.4 That the assessing officer erred on facts and in law in not appreciating that the only requirement for claiming deduction under section 35(2AB) of the Act is that the in-house Research and Development facility is to be approved by DSIR and not for approval of expenses. 4. The ld. counsel contended that additional ground so filed are admissible in view of judgment rendered by the Hon ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC) and by the judgment of the Hon ble Delhi High Court in the case of Taylor Instrument Co. (India) Ltd. vs. CIT 198 ITR 1 (Del.) The prayer for admission of additional ground noted above which are not in memorandum of appeal are being admitted for adjudication in terms of Rule 11 of the Income Tax (Appellate Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company (combining all units) as a whole and compared it with the operating margins of other comparable companies. Considering the OP/OR/TNM (Transaction Net Margin) of the assessee-company as a whole which amounted to 19.11% as compared to OP/OR/TNM of comparable companies averaging 8.72%, the entire transactions, whether Specified Domestic Transaction or International Transactions were opined to pass the Arms Length Price test as per the TP Study Report. 8.2 However, on reference to TPO for verification of ALP of Specified Domestic Transaction entered into by the eligible units, the TPO passed order dated 30.07.2021 under Section 92CA(3) of the Act alleging that since the respective eligible units have earned higher profits vis a vis median of OP/OR of comparable companies, there was an existence of arrangement between eligible units and AEs which resulted in higher than ordinary profits to eligible units and thus has given rise to excessive deduction under s. 80IC/ 80IE of the Act. 8.3 The TPO after conducting fresh search on comparable companies determined the OP/OR at 11.33% [median of comparable companies selected by the TPO]as against OP/OR of eligible Unit II @ 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Specified Domestic Transactions undertaken by the assessee. 12. In terms of the directions of the DRP, the TPO passed an order giving effect to the DRP direction dated 21.06.2022 vide order dated 21/07/2022 and recomputed the ALP adjustment as per the directions issued. The proposed adjustment was thus brought down from Rs.64,34,78,261/- to Rs. 21,92,40,676/-. 13. The AO passed final assessment order dated 28.07.2022 and made additions/disallowances as under: Details of Transaction Amount (in Rs. ) TP adjustment w.r.t. specified domestic transaction Adjustment u/s 92CA(3)/80IA(10)/80IC/80IE of the Act 21,92,40,676 Other additions/disallowances Addition w.r.t. to expenditure incurred on in-house scientific research under section 35(2AB) of the Act 12,01,42,780 Disallowance w.r.t. deduction claimed under Section 80G of the Act on account of donations given 6,38,13,601 14. Aggrieved by the adjustments made to the returned income, the assessee preferred appeal before the Tribunal. 15. As regards impugned adjustments to the deductions eligible under s.80IC s.80IE of Act in terms of section 80IA(10) r.w.s 92CA(3) of the Act, the ld. counsel for the assessee made wide ranging submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the eligible units and AEs by implication that resulted in higher profits. The existence of so called arrangement contemplated under s. 80IA(10) was thus supposed and presumed having regard to higher profits by eligible units vis- -vis non-eligible unit. For holding presumption of arrangement the TPO failed to point out any inaccuracy at the transaction level between eligible units and AEs and whether such transactions were at market price / Arms Length Price or not. (vi) As per the mandate of section 80IA(10) of the Act read with first proviso thereto, existence of arrangement is a pre-condition before proceeding to make an arm s length adjustment under s. 92BA of the Act. 16. It is at this stage and in this context to canvass vindicate the point that the transactions entered into by eligible units with its AEs were at arm length indeed and were quite comparable to contemporaneous prices of similar transactions with non-AEs, an exhorted reference was made to the additional evidences so filed on behalf of assessee. It was submitted that additional evidences are essentially meant to augment its plea of bonafides and probity in the transactions carried out at market price be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gth nature of transactions with the help of such additional evidences. The Ld. Counsel submits that the additional evidences placed under Rule 29 of the ITAT Rules will only bring ground realities to the fore and will only testify the arm length nature of transactions by eligible units. The additional evidences merely supports the transaction at market price by the eligible units. 17. Expounding on the petition for admission of additional evidences, the ld. Counsel submitted that for the purposes of Section 92BA r.w. Section 80IA(10) of the Act, the true test is Arms Length Price of purchase and sales between eligible units and parties in close connection. It is only when the TPO/AO arrives at a finding that transactions of purchase and sales between the eligible units and its AEs are in departure to Arms Length Price, i.e., the question of any adjustment to profits of eligible units, by applying any TP method, would arise. A reference was made to Section 80IA(8) and s. 80IA(10) of the Act to submit that these provisions require that the profits and gains of an eligible business to be computed as if the transfer of goods or services were made at the market value of goods or service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a mundane and nonchalant manner as can be seen from para 3.1 and 3.2 of the DRP order wherein it was sweepingly observed that in view of the higher profits declared by eligible units qua non eligible units, the presence of arrangement i.e. collusion automatically exists. No objective considerations to legal or factual position has been given by the DRP. 20. The Ld. Counsel thus urged for admission of additional evidences for adjudication of the grievance raised in its grounds of appeal. 21. Joining the issue, the ld. CIT-DR for the Revenue strongly raised its objection to the admission of additional evidences at this belated stage before the Tribunal. 21.1 The ld. DR pointed out that Rule 29 does not confer, as a matter of right, any allowance to parties to produce any additional evidence either oral or documentary before the Tribunal. The rules governing the admission of additional evidences are quite narrow and strict in nature. Rule 29 is couched in a negative language to bar the parties to produce the additional evidences before Tribunal. The power to admit additional evidences under Rule 29 is only vested with Tribunal. The Tribunal has a discretion to admit the additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. counsel pointed out that the assessee did not specifically benchmark its SDTs through any specific method in the TP Study Report. Otherwise also, the assessee is entitled to resile from wrong position taken in law and can even choose to change the MAM for TP benchmarking for the first time before ITAT as held in the case of Star India (P) Ltd. vs. ACIT, 151 Taxmann.com 77 (Mum)(SB); Rosoboron services India Ltd. vs. DCIT, ITA No.7255/MUM/2018. It was contended that in any event CUP is most direct and reliable method and thus most appropriate method for determination of ALP where reasonably comparable data are available. 23. We have heard the rival submissions in length and perused the relevant order passed by the TPO/AO/DRP. The material referred to and relied upon have also been perused carefully. The contentions on admission of additional evidences filed with reference to Rule 29 of Income Tax (appellate) Tribunal Rules 1963 argued in length, has been simultaneously examined. 24. The adjustment made by the AO under Section 92BA r.w. Section 92CA r.w. Section 80IA(10) is in question which has the effect of reduction of quantum of deduction under Section 80IC/80IE of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... II is 14.91%, Unit-III is/38.33%, Sikkim Unit is 33.31%). Therefore it is clearly seen that assessee s business model is designed in such a way that to grant more than normal profits to the eligible party, the profits are actually being shifted from the non-eligible party to the eligible party, which then unjustifiably claims higher deduction under section 80-IC/80IE. 25.4 Likewise, the directions of DRP on such observations of TPO is also extracted for easy reference 3.1 The assessee has claimed deduction u/s.80IC/80IE fo the Act. It has three eligible units for claiming the above deductions, namely Unit-II (Paonta Shahib). Unit-III (Paonta Shahib) Unit-IV (Sikkim). Unit-I (Paonta Sahib) is the non-eligible unit. The TPO has noted as follows:- S. No. Name of Unit OP/OR ratio 1. Unit I (Paonta Sahib) Non-eligible 5.76% 2. Unit II (Paonta Sahib) eligible 14.91% 3. Unit III (Paonta Sahib) eligible 38.30% 4. Unit IV (Sikkim) eligible 38.31% 3.2 In view of the above, the TPO has pointed out that there is an arrangement between the assessee and the AE to shift profit to the eligible units from the non-eligible units. 25.5 The controversy towards TP adjustments and admission of additiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... associated enterprises. 26. For the purposes of adjudication of Ground no. 3 of the appeal towards TP adjustments in controversy, s. 80IA(10) of the Act was adverted and assessee has raised a plea that the TPO has made a bald allegation towards shifting of profits from AEs / non eligible units to the eligible units of the assessee to make unjustifiable claims of higher deductions under Section 80IC/80IE of the Act by the eligible units of assessee. To arriving at such sweepings conclusions, the TPO has not called for any documents to compare transactions wise details nor gathered any material in corroboration as self evident from the observations noted in para 25.4 supra. Mere earning of higher profits by eligible units vis-a-vis other units has been made the basis for allegation of arrangement contemplated under s. 80IA(10) of the Act which is squarely opposed to legal position as echoed in judicial precedents. The transactions with AE by eligible units or transactions of AE with third parties etc. as tabulated in the additional evidence documents manifestly depicts arm length nature of transactions as sought to be demonstrated in the course of hearing. The transactions when comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consequently defeated and denied to the assessee. The Assessee contends that the additional evidences merely seek to discharge onus which was never shifted to the Assessee by revenue. As pleaded, a fair comparison of controlled and uncontrolled transactions would be necessary for drawing fair conclusions on the issue. 27. To address the controversy, we firstly affirmatively notice that the legal position for applicability of Section 80IA(10) is the existence of arrangement between the eligible unit and AEs which holds the key and is a condition precedent to trigger the provisions of Section 80IA(10). In the absence of any arrangement, the business transacted between eligible units and its AE do not get covered within the ambit of SDTs defined under 92BA of the Act and eventual Transfer Pricing analysis. It is the plea of the assessee that no efforts were made by the AO to prima facie conclude existence of any arrangement per se as called upon by law before making reference to TPO for TP analysis. The existence of arrangement thus goes to the root of the matter of the controversy and unless the existence of arrangement is demonstrated with some evidences, the adjustment made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Honeywell Automation India Ltd. vs. DCIT in ITA No.287/PUN/2015 order dated 25.02.2015, wherein it was held that onus is placed upon the AO to discharge the burden of existence arrangement. 29. On conspectus of the various judgments cited viz; M/s. Schetmz India India Pvt. Ltd., (2012) 26 taxmann.com 336 (Bom), Pr.CIT vs. Vedansh Jewels Pvt. Ltd., (2018) 97 taxmann.com 521 (Raj); CIT vs. H.P. Global Soft Ltd., 342 ITR 263 (Kar.); Eton Technologies Pvt. Ltd. vs. DCIT, ITA No.1002/PUN/2017 (Pune ITAT); M/s. AB Knowledge Systems v ITO (ITA 894/PUN/2016) (Pune ITAT); ACIT vs. Faurecia Interior Systems India (P) Ltd. (2020) 116 taxmann.com 973 (Pune-Tribunal); Honeywell Automation India Ltd. vs. DCIT in ITA No.287/PUN/2015 order dated 25.02.2015. Following salient principles emerges on application of provisions of Section 80IA(10) of the Act read with first proviso thereto. (i) Existence of arrangement between the deduction seeking units and other associated enterprises is a pre-condition for invoking the rigor of section 80-IA(10) of the Act and needs corroboration. ii) Mere close connection cannot per se lead to an inference that there is an arrangement which has resulted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o account the low percentage of such SDTs in the context of the case and hence no significant impact on resultant profits. The assessee, on the other hand, has adverted to tabulations to show that transactions between eligible units and its AE are at ALP indeed. We thus find ostensible merit in plea for admission of additional evidences filed under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963. 32. While admitting the additional evidences, yet another angle occur in our mind. If the documentary evidences filed by way of additional evidences are ignored, it would be rather difficult for revenue to take a rational view towards existence of such arrangement. Hence, the documentary evidences filed for such purposes would be rather be necessary from the perspective of revenue also. The cause of substantial justice also demands admission to arrive at just and fair conclusion. 33. We also advert to address the vehement plea of revenue that a new case is sought be prepared in the garb of additional evidences. The assessee in this regard has also pointed out that no new case has been sought to be built. Section 80IA(10) merely postulates existence of arrangement giving rise to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase from non AEs / third parties as demonstrable from the additional evidences. The ld. counsel referred to tabulation/charts of purchases showing comparison of the purchase price of different items with AE and with non AE extracted below to submit that there is no material departure in the purchase price when compared with the quantity and time of purchase etc. is borne in mind. The purchases made with AE and non AE are in the similar range and at times, to a disadvantage of the assessee and has resulted in disadvantaged profit of the eligible units albeit insignificantly. Entity Name of related Concern Nature of transaction As per 10CCB Correction Amount of purchase Poant Unit II ANM Pharma Private Limited Purchase of product 43322738 - 43322738 Poant Unit II Pharma Force Lab- II Purchase of product 97431 - 97431 Poant Unit II Medipack Innovation Private Limited Purchase of product 37111100 - 37111100 Poant Unit II A To Z Printer Purchase of product 21365945 - 21365945 Poant Unit II Printman Purchase of product- 923195 - 923195 Poant Unit II J.K. Print Pack Purchase of product 10075239 - 10075239 Poant Unit II Pharma Pet Industries Purchase of product 5546657 - 5546657 Poant U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000117 Povidone IP (K-30) 0000100046 Pharma Force Lab- Unit II Yes KG 50.00 29500.00 590 590 590 10000117 Povidone IP (K-30) 0000100112 Nischem International (blank) KG 100.00 61000.00 610 610 610 10000376 Alpha Lipoic Acid USP 0000102706 ANM Pharma Pvt. Ltd. Yes KG 1000.00 4175805.60 4176 4105 4275 10000376 Alpha Lipoic Acid USP 0000102126 Nischem International Pvt. Ltd. (blank) KG 500.00 2095501.93 4191 4030 4275 10000572 Ofloxacin IP 0000102706 ANM Pharma Pvt. Ltd. Yes KG 13175.00 25869960.00 1964 1836 2345 10000572 Ofloxacin IP 0000100094 Archit Chemicals Pvt. Ltd. (blank) KG 1500.00 2962500.00 1975 1975 1975 10000813 Calcium Carbonate (Fine Powder) IP 0000100046 Pharma Force Lab- Unit II Yes KG 455.65 13669.50 30 30 30 10000813 Calcium Carbonate (Fine Powder) IP 0000100097 Clarion Pharmaceuticals Co. (blank) KG 33875.00 926175.00 27 27 28 10001213 MCC (Avicel PH-102) Ph. Eur/USNF 0000100038 Mediforce Health care Pvt. Ltd. Yes KG 250.00 122500.00 490 490 490 10001213 MCC (Avicel PH-102) Ph. Eur/USNF 0000100117 Signet Chemical Corp. Pvt. Lt d. (blank) KG 550.00 275657.75 501 490 585 10001287 Microcrystaline Celulose (Avicel PH101) IP 0000100046 Pharma Force Lab- Unit II Yes KG 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neral Mart (blank) KG 25.00 3050.00 122 122 122 37. On being inquired by the bench, the ld. counsel strenously took us through the various items of purchase and corresponding purchases from unrelated entities or such purchases made by AEs etc. to demonstrate that the supply rate by the AEs to eligible units and the third party are broadly in the similar range and having no real impact on the so called extraordinary profits of the eligible unit on account of SDTs. The ld. counsel thus asserts that all the transactions of purchase and sale undertaken by the eligible units with AEs are at market price / ALP and therefore, in the absence of any arrangement giving rise to any abnormal profits to the eligible units, invocation of Section 80IA(10) r.w. Section 92BA of the Act is wholly unwarranted and consequently the adjustment made under transfer pricing provisions in the final assessment order is contrary to the position of law and factual matrix and thus requires to be reversed. 38. In essence, it is the case of assessee that revenue has merely alleged existence of arrangement to invoke rigours of Section 80IA(10) of the Act merely on the ground that the eligible units have derived hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Section 80IA(10) of the Act. To this limited extent, the matter is set aside to the file of the AO. The assessee shall be entitled to adduce such evidences as may be considered expedient to support its plea on comparability of purchase transactions carried out by eligible units with its AE viz. uncontrolled transactions. 41. As regards sale transactions by eligible units with its AEs, we do not consider it necessary to beset with further burden of proof on assessee towards aspects of ALP having regard to nominal percentage of sale transactions carried out with AEs owing to miniscule effect, if any, on the overall profitability when seen in the context. 42. The AO shall pass a reasoned order towards presence of arrangement contemplated under Section 80IA(10), if any while determining the issue. The AO may make reference to TPO for determination of ALP of the controlled transactions as per CUP method in the event the prima facie existence of arrangement is discovered by him in the factual matrix. 43. Ground no. 3 is thus allowed for statistical purposes. 44. Ground No.4 concerns disallowance of deduction under Section 80G of the Act amounting to Rs. 6,38,13,601/-. 45. The AO obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on . However, disallowance of such expenses/ outgo in view of stipulations made in section 37 of the Act does not put any fetters on the eligibility under other provisions of the Act viz. Section 80G of the Act. The claim is eligible for deduction under S. 80G unless statutorily prohibited. The ld. counsel contends that there being no bar in law to claim deduction under Section 80G of the Act notwithstanding its ineligibility under Section 37(1) of the Act, the denial of deduction under s. 80G is wholly misconceived and unjustified action. 46.2 The Ld. Counsel submits that section 80G of the Act allows a taxpayer to claim deductions in respect of contributions made to certain charitable Institutions and Funds etc. Further, sub-Section (2)(a) of Section 80G of the Act enumerates Funds to whom contributions are eligible for such deduction. 46.3 Adverting to such list enumerated, the Ld. Counsel points out that Clause (iiihk) and (iiihl) of the Act of sub-section (2)(a) of section 80G of the Act are peculiar and provides for specific instances where CSR expenditure not eligible under s. 37, is also not to be allowed as deduction under s. 80G too. The relevant position of section 80G(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nature CSR expenses under Companies Act, is not eligible for deduction as business expenditure in view of statutory exclusion carved out by Explanation-2 to Section 37(1) of the Income Tax Act, 1961. However, such exclusion extends only to the extent of computing business income under Chapter IV-D of the Act. As per the scheme of the Act, in the absence of any non-obstante clause, there does not appear to be any bar for the assessee to claim benefit under Section 80G, bracketed under Section VIA of the Act, if such contributions are eligible for deduction otherwise. The exclusions provided in 80G (2)(a)(iiihk) (iiihl) qua certain specific contributions such as Swachh Bharat Kosh and Clean Ganga Fund rather exhibits the legislative intent loud and clear. Thus on a plain reading, it is evident that the assessee would be ordinarily entitled to deduction on contributions made to funds and bodies registered under s. 12A of the Act regardless of stipulations made in s. 37(1) of the Act barring the exclusion codified in s. 80G(2)(a)(iiihk) (iiihl). As a corollary to delineations made in the preceeding paragraphs, s. 37 and S. 80G, appear mutually exclusive subject to exceptions provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s against the expenditure claimed to have been incurred by the assessee at Rs. 75,28,07,186/-. The AO thus worked out eligible weighted deduction at 150% of Rs. 67,27,12,000/- and allowed deduction of Rs. 100,90,68,000/- under s. 35(2AB) of the Act. In essence, the AO has scaled down the claim of weighted deduction under Section 35(2AB) to the extent of Rs. 12,01,42,780/-. [ unapproved portion of expenditure Rs. 8,00,95,000 + 50% weight thereon Rs. 4,00,47,500]. 55. The Ld. Counsel adverted to tabulation detailing claim of deduction under Section 35(2AB) of the Act for the relevant A.Y. 201819 under consideration reproduced hereunder: Srl. No. Details of Scientific Expenditure As per Assessee A As per DSIR B Difference C (A-B) 1. Revenue Expenditure 65,29,50,000 57,73,93,000 7,55,57,000 2. Capital Expenditure 9,98,57,000 9,53,19,000 45,38,000 3. Total: 75,28,07,000 67,27,12,000 8,00,95,000 4. 100% deduction u/s. 35(1)(i)/(iv) 75,28,07,000 67,27,12,000 8,00,95,000 5. Weighted deduction @ 50% u/s. 35(2AB) 37,64,03,500 33,63,56,000 4,00,47,500 6. Total: 112,92,10,500 100,90,68,000 12,01,42,500 56. With reference to such tabulations, the ld. counsel submitted that the aggregate expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mponent does not include any expenditure incurred on acquisition of any land or building and therefore, whole of the capital expenditure is allowable under Section 35(1)(i) r.w. Section 35(1)(iv) of the Act. The deduction of the expenditure has been denied under Section 35(1)(i)/(iv) solely due to non approval thereof by DSIR. 56.1.2 Secondly, The main provision of weighted deduction under s. 35(2AB) do not postulate the requirement of quantification of expenditure and approval thereof by DSIR either. The underlying Rules imposing such conditions seek to widen the terms of main provisions and thus not enforceable in law. 57. We advert to first aspect of the issue. Section 35(1) provides for normal deduction in respect of expenditure on scientific research subject to the conditions specified therein. The assessee claims that all the conditions are broadly similar to the eligibility under Section 35(2AB) of the Act and have been fully met to assert claim under s. 35 (1) of the Act. The AO has not tested the claim of expenditure under Section 35(1) and has disallowed the expenditure solely for the reason that such expenditure to the extent of Rs. 800,95,000/- has not been approved by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rescribed authority is not the requirement of law and an approval of facility thus would sufficiently entitle the Assessee to claim weighted deduction on whole of expenditure incurred towards scientific research. 58.2 The ld. counsel however thereafter fairly referred to substituted sub Rule (7A) of Rule 6 of the Income Tax Rules 1962 which lays down guidelines relating to procedure to be followed pre and post approval of R D facility by DSIR. The substituted portion of the aforesaid Rule is applicable w.e.f. 01.07.2016 reads as under: [Prescribed authority for expenditure on scientific research. [(7A) Approval of expenditure incurred on in-house research and development facility by a company under sub-section (2AB) of section 35 shall be subject to the following conditions, namely : - (a) The facility should not relate purely to market research, sales promotion, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature; (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 expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 6(7A) is not binding on the AO. The ld. counsel thus sought appropriate relief in the matter. 59. The ld. DR for the Revenue, on the other hand, cited the decision of the Co-ordinate Bench in the case of Natural Remedies Pvt. Ltd. vs. ACIT, ITA No.704/Bang/2020 order dated 01.01.2021 to counter the eligibility claim of the assessee under Section 35(2AB) of the Act. 60. In rejoinder, the ld. counsel submitted that the aforesaid decision in the case of Natural Remedies (supra) relied upon by the Revenue actually helps the case of the assessee. The ld. counsel referred to paragraph 8.5 of the aforesaid order and submitted that the Co-ordinate Bench has observed therein that amended Rule 6(7A) affects the substantive right vested under Section 35(2AB) of the Act due to insertion of conditions towards quantification of expenditure by DSIR in terms of amended Rule and therefore, the provisions of Section 35(2AB) would prevail over amended Rules. 61. We have carefully considered the rival submissions on the eligibility of weighted deduction under Section 35(2AB) of the Act in the context of the case. 62. Section 35(2AB), in a plain language, states that where a company engaged in pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, there does not appear to be any conflict between the main statute and the underlying Rule. The main Statute is silent on quantification aspect of eligible deduction. The substituted Rule 6(7A), in our view, merely stipulates the quantification of expenditure by a prescribed authority and hence cannot be said to be repugnant to the provisions of Section 35(2AB) of the Act silent on such aspect. Rule 6(7A) is machinery in nature enacted to give full effect to main provision of S. 35(2AB) of the Act. The quantification of eligible expense for weighted deduction is procedural or a machinery exercise. Hence, there is no warrant to negate the effect of the substituted Rule which seeks to limit the amount of weighted deduction to the extent of approval by prescribed authority supposedly carrying domain expertise in the field. The observations made by the Co-ordinate Bench in Natural Remedies (supra) are merely in the nature of obiter while adjudication of the case relating to A.Y. 2016-17 where the substituted Rule had not come into force. The observations made thus do not carry any precedent value per se. Similarly, the coordinate bench in USV P. Ltd. (supra) has applied the de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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