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TMI Blog2025 (1) TMI 902X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 35(2AB) of the R & D expenditure for the reason that the appellant is not eligible to claim deduction u/s 35(2AB) for the amount which is in excess of the amount approved by DSIR. 3. Without prejudice to the above, after having denied weighted deduction claimed u/s 35 (2AB) in respect of the said expenditure on scientific research the learned DRP and the AO erred in law and on facts, in not allowing the deduction of the same under the provisions of Section 35(1) (iv) Income Tax Act, 1961 at least to the extent of One hundred percent. 4. Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacture and sale of air conditioners, radiators, heat exchangers parts and components thereof which are used in cars and SUVs and in providing IT enabled design engineering services in the automotive industry segment. It filed its return of income on 30.11.2012 declaring total income of Rs. 9,58,15,960/-. Since the assessee had entered into certain international transactions reported in Form No.3CEB, the matter was referred to the Transfer Pricing Officer (TPO) who made certain upwards adjustments. Accordingly, the Assessing Officer passed the draft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved expenditure of only Rs. 4.74 crores. Therefore, the assessee has claimed an excess of Rs. 0.6 crores related to its claim of revenue R&D expenditure which is not eligible for deduction. The DRP further observed that out of capital R&D expenditure claimed of Rs. 5.1 crores, DSIR has approved the expenditure of only Rs. 21 lakhs. Therefore, the assessee has claimed an excess amount of Rs. 4.89 crores related to its claim of capital R&D expenditure. Since the assessee has claimed deduction u/s 35(2AB) of the Act @ 200% on this excess amount of Rs. 4.89 crores, the amount to be disallowed out of the claim u/s 35(2AB) works out to Rs. 9.78 crores. Since the Assessing Officer has disallowed only an amount of Rs. 3.38 crore, therefore, the DSIR issued a show cause notice asking the assessee to explain as to why the balance amount of Rs. 6.46 crore should not be enhanced. 8. The assessee submitted that the expenditure incurred by it outside the in-house R&D facility is also allowable as deduction u/s 35(2AB). It was further submitted that the Assessing Officer has only allowed the expenditure incurred within in-house R&D facility which implies that the Assessing Officer in principle h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred as an intangible asset in the Balance Sheet. 10. The Assessing Officer in the final order passed on 19.01.2017 however, made disallowance of weighted deduction u/s 35(2AB) to the extent of Rs. 3,38,82,341/-. 11. Aggrieved with such order of the Assessing Officer / TPO / DRP, the assessee is in appeal before the Tribunal. 12. The Ld. Counsel for the assessee submitted that the Assessing Officer in the final assessment order has not enhanced the income. He submitted that till the amendment to Rules 6 and 7A from 1st July 2016 vide Income Tax Rules, 2016 (10th Amendment) the DSIR had to only approve the R&D facility and there was no requirement for DSIR to quantify the expenditure. He submitted that the claim of the assessee was in respect of expenses on R&D incurred in the period prior to the introduction of the said Rules 6 and 7A. 13. Referring to the decision of the Pune Bench of the Tribunal in assessee's own case for assessment year 2011-12 he submitted that under similar facts and circumstances the Tribunal has held that the stipulation for quantifying the eligible R&D expenditure was not there for assessment year 2011-12 and therefore can have no applicability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd an identical issue had come up before the Tribunal in assessee's own case for assessment year 2011-12. The Tribunal vide ITA No.624/PUN/2018, order dated 31.08.2021 has decided the issue in favour of the assessee by observing as under: "3. Succinctly, the facts of the case are that the assessee is engaged in manufacturing automobile accessories particularly Heat exchangers, i.e. Radiators, Evaporators, Condensers and Automotive air conditioning systems. The return was filed declaring total income of Rs. 3.56 crore and odd. One of the reported international transactions 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 qualifyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,18,45,866 - Travel Expenses 2,05,632 - 2,05,632 - Sub-Total (B) 6,67,82,591 5,47,24,293 1,20,58,298 13,35,65,182 Expenses Debited to P&L A/c. (Sub-total C) 3,41,34,804 74,95,427 2,66,39,378 3,41,34,804 Grand Total 15,07,38,534 9,61,80,237 5,45,58,297 26,73,42,263 5. It can be seen from the above Table that the assessee categorized R&D expenses under three broad heads: `Considered in FA Additions' amounting to Rs. 4,98,21,138/- (Sub-total A); `Considered in CWIP' amounting to Rs. 6,67,82,591/- (Sub-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 exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viding for the approval to be considered from the date of recognition, applies only in case of companies not having DSIR recognized in-house R&D. Since the assessee has a valid approval granted by the DSIR for R&D Centre, it is covered within the four walls of clause (i) and there is no scope for applying clause (iii) and accordingly making it eligible for deduction only from the date of recognition. Accordingly, it is held that the approval to the assessee's in-house R&D centre is to be considered from Ist April of 2010 under 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 deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduced w.e.f. 01-07-2016. As the assessment year under consideration is 2011-12 and the approval was granted by DSIR on 07-12-2010, the amended sub-clause (b) of Rule 6 (7A) coming into vogue even after the passing of the assessment order can have no applicability. We, therefore, hold that the ld. CIT(A) was not justified in restricting the amount of weighted deduction to the quantification done by the prescribed authority. The impugned order is reversed on this score. 11. The ld. CIT(A) also held that the capital expenditure in the 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 bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isticated technology and set up is required that is not available in India. It was for such Performance Evaluation Test under variant weather conditions artificially created that the assessee availed services from its three AEs situated abroad. It was pointed out that the three AEs conducted the needful tests for which the assessee incurred total cost of Rs. 9.61 crore tabulated under Column "Outside India", which was accepted by the TPO at ALP. 15. From the above discussion, it is abundantly clear that the total sum of Rs. 9.61 crore 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on scientific research and development incurred outside India u/s. 35(1)(iv). He submitted that no such ground has been taken by the assessee. It is apparent that the assessee raised a claim for weighted deduction on such an amount u/s. 35(2AB) of the Act. We have held hereinabove that the amount does not qualify for the weighted deduction. The fact that the claim of the assessee cannot be entertained under one provision does not oust it from consideration under any other provision, if it is otherwise allowable under such latter provision. We have noticed that the amount of capital expenditure incurred on research and development outside India is eligible for deduction u/s. 35(1)(iv). The same, therefore, has to be allowed as such. The ld. DR's contention in this regard is sans merit and hence repelled. 19. To summarize, the entire amount of R&D expenditure incurred in India is eligible for weighted deduction u/s 35(2AB); revenue R&D expenditure incurred outside India as claimed by the assessee got allowed in the assessment itself; total of capital R&D expenditure incurred outside India will be eligible for deduction u/s 35(1)(iv) of the Act." 18. Respectfully following the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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