Income Tax Appellate Tribunal - Pune
Cummins India Ltd.,, vs Deputy Commissioner Of Income-Tax,, on 15 May, 2018
आयकर अपीऱीय अधिकरण पण
ु े न्यायपीठ "बी" पण
ु े में
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
सुश्री सुषमा चावऱा, न्याययक सदस्य एवं श्री अयिऱ चतुवेदी, ऱेखा सदस्य के समक्ष
BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM
आयकर अपीऱ सं. / ITA No.309/PUN/2014
यििाारण वषा / Assessment Year : 2009-10
Cummins India Limited,
Kothrud, Pune - 411038 .... अऩीऱाथी/Appellant
PAN: AAACC7258B
Vs.
The Dy. Commissioner of Income-Tax,
Circle 1(1), Pune .... प्रत्यथी / Respondent
अऩीऱाथी की ओर से / Appellant by : S/Shri Arvind Sonde,
Gopal Agarwal
प्रत्यथी की ओर से / Respondent by : Ms. Nirupama Kotru
सन
ु वाई की तारीख / घोषणा की तारीख /
Date of Hearing : 02.04.2018 Date of Pronouncement: 15.05.2018
आदे श / ORDER
PER SUSHMA CHOWLA, JM:
The appeal filed by assessee is against order of the Dy. Commissioner of Income Tax, Circle 1(1), Pune dated 06.01.2014 relating to assessment year 2009-10 passed under section143(3) r.w.s. 144C(13) of the Income Tax Act 1961 (in short 'the Act').
2. The assessee has raised the following grounds of appeal:- 2 ITA No.309/PUN/2014
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A. Transfer Pricing Adjustment:
1.1 The learned DCIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in making an adjustment amounting to Rs.61,19,00,000 to the value of international transactions entered into by the Appellant with its Associated Enterprises in respect of export of IC engines and provision of procurement support services.
1.2 The learned DCIT, pursuant to the directions of the learned DRP, erred in law and on the facts and in circumstances of the case in disregarding the benchmarking of manufacturing activity done by the Appellant following "aggregation of transactions" approach using third party comparable companies whilst following "aggregation of transactions" approach himself using internal "comparables".
B. International Transaction relating to export of IC Engines under Manufacturing Activity
2. Rejection of benchmarking done by the Appellant:
2.1 The learned DCIT, pursuant to the directions of the learned DRP, erred in law and on the facts and in circumstances of the case in rejecting the external comparable companies selected by the Appellant for benchmarking the manufacturing function.
3. Inappropriate comparison of profitability between "export to Associated Enterprises (AEs)" segment and "domestic sales"
segment ignoring differences in Functions, Assets and Risks (FAR), differences in products sold and comparison of controlled transactions with controlled transactions
3.1 The learned DCIT, pursuant to the directions of the learned DRP, erred in law and on the facts and in circumstances of the case in comparing segmental profitability of the Appellant i.e. between "export to AEs"
segment and "domestic sales" segment ignoring product differences, differences in markets as well as differences in the functions, assets and risks (FAR).
3.2 The learned DCIT, pursuant to the directions of the learned DRP, erred in law and on facts and in circumstances of the case in comparing segmental profitability of the Appellant "exports to AEs" segment and "domestic sales" segment. This is a comparison between controlled transactions, which is against the transfer pricing regulations in India, which stipulates comparing controlled transactions with uncontrolled transactions.
3.3 The learned DCIT, pursuant to the directions of the learned DRP, erred in law and on facts and in circumstances of the case in ignoring the adjusted margins submitted by the Appellant in order to account for the differences between two segments of "export to AEs" and "domestic sales" on account of product and risk differences.
3.4 Without prejudice to above, the learned DCIT erred in law and on facts and in circumstances of the case in computing the operating margins of the manufacturing activity while comparing the segmental 3 ITA No.309/PUN/2014 Cummins India Limited.
profitability of the Appellant‟s "exports to AEs" segment and "domestic sales" segment.
4. Inappropriate approach adopted by TPO in application of "net profit to total cost" as Profit Level Indicator (PLI)
4.1 The learned DCIT, pursuant to the directions of the learned DRP, erred in law and on facts and in circumstances of the case and without providing cogent reasons in considering PLI as "net profit to total cost"
as against "net profit to sales" as selected by the Appellant.
5. Benefit of the variation / reduction of 5 percent from the arithmetic mean 5.1 The learned DCIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in not granting the benefit of +/- 5 percent as per proviso to Section 92C (2) of the Act. C. International Transaction relating to Procurement Support Services
6. Inappropriate approach adopted by TPO in benchmarking procurement support services provided to associated enterprises 6.1 The learned DCIT pursuant to the direction of the learned DRP erred in facts and circumstances of the case in rejecting without giving any cogent reasons the following comparable companies -
Kirloskar Consultants Limited Mahindra Consulting Engineers Limited HSCC (India) Limited 6.2 The learned DCIT pursuant to the direction of the learned DRP erred in facts and circumstances of the case in considering without giving any cogent reasons the following companies as comparable - NTPC Electric Supply Co. Limited L&T Ramboll Consulting Engineers Limited
7. Disallowance of Deduction u/s. 80IB of the Act 7.1 The learned DCIT, pursuant to the directions of the learned DRP erred in disallowing the deduction u/s. 80IB by allocating a portion of common expenses to the profits of eligible unit.
7.2 The learned DCIT pursuant to the directions of the learned DRP erred in not appreciating that the eligible unit of the Appellant was an independent unit managed independently without any interference by other divisions of the Appellant and therefore no part of the common expenses could be attributed to the said unit of the Appellant.
8. Disallowance of expenses under section 14A 8.1 The learned DCIT, pursuant to the directions of the learned DRP, erred in law and on the facts and in circumstances of the case in disallowing the expenses allegedly incurred in relation to exempt income earned by the Appellant.
9. Bad debts inadvertently not claimed in the return of income 4 ITA No.309/PUN/2014 Cummins India Limited.
9.1 The learned DRP erred in law and on the facts and in circumstances of the case in not directing the learned DCIT for allowing the Appellant‟s claim of bad debts written off which was inadvertently not claimed in the Return of income filed by the Appellant.
10. Disallowance of deduction u/s 35(2AB) of the Act 10.1 The learned DCIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in rejecting weighted deduction u/s. 35(2AB) of the Act.
10.2 The learned DCIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in rejecting weighted deduction u/s. 35(2AB) of the Act by relying upon the approval granted by Department of Scientific and Industrial Research („DSIR‟) to the assessee‟s claim for R&D expenses.
10.3 Without prejudice to the above and strictly in the alternative, the learned DCIT ought to have granted normal (100%) deduction u/s 35(1) upon rejecting the assessee‟s claim for weighted deduction u/s. 35(2AB) of the Act.
11. Initiation of Penalty Proceedings 11.1 The learned DCIT erred on the facts and in law in initiating penalty proceedings under section 271(1)(c) of the Act.
12. Each one of the above grounds of appeal is without prejudice to the other.
3. The learned Authorized Representative for the assessee at the outset pointed out that the issues raised in the present appeal are squarely covered by the order of Tribunal in assessee's own case relating to assessment years 2007-08 and 2008-09 except for the issues raised vide grounds of appeal No.9.1 i.e. Bad debts inadvertently not claimed in the return of income and 10.1 to 10.3 i.e. disallowance of deduction under section 35(2AB) of the Act. The learned Authorized Representative for the assessee thereafter, took us through the issues raised ground-wise to point out how the same are covered by the order of Tribunal.
4. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below but fairly conceded that the said 5 ITA No.309/PUN/2014 Cummins India Limited.
issues were adjudicated by the Tribunal in assessee's own case in preceding years.
5. We have heard the rival contentions and perused the record. Briefly, in the facts of the case, the assessee was engaged in the business of manufacturing and sale of IC engines. For the year under consideration, the assessee had filed the return of income declaring total income of ₹ 478.77 crores. Thereafter, the assessee filed revised return of income declaring total income of ₹ 478.77 crores due less TDS claim in original return. The assessee had entered into international transactions with its associated enterprises, for which the Assessing Officer made reference to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Act to determine the arm's length price of international transactions. The TPO in order passed under section 92CA(3) of the Act proposed an upward adjustment of ₹ 61,19,00,000/- in respect of international transactions with associated enterprises after considering the contentions raised by the assessee on account of sale of IC Engines to the associated enterprises and receipt of the procurement support services. The Assessing Officer in order passed under section 143(3) r.w.s. 144C(13) of the Act made the addition, after the objections filed by the assessee were rejected by the Dispute Resolution Panel (DRP).
6. The assessee is aggrieved by the order of Assessing Officer / TPO. The first issue which was adjudicated by the TPO was the claim of aggregation approach adopted by the assessee for benchmarking its manufacturing activities, which was rejected. The second aspect of transfer pricing issue was the most appropriate method to be applied, wherein the TPO 6 ITA No.309/PUN/2014 Cummins India Limited.
had compared the profitability of export to associated enterprises undertaken by the assessee with domestic sales. The assessee is aggrieved by two aspects, wherein it has pointed out that because of controlled transactions, no comparison could be made and also because of FAR analysis, the most appropriate method to be applied was TNMM method and the comparison had to be made with external comparables which were applied by the assessee in its TP study report.
7. The assessee at the outset pointed out that ground of appeal No.1.1 is general in nature and the same merits to be dismissed.
8. The issue raised vide ground of appeal No.1.2 is against rejection of aggregation approach adopted by the assessee for benchmarking its manufacturing activities. We find that similar issue arose before the Tribunal in assessee's own case relating to assessment year 2007-08 in ITA No.1681/PUN/2011 and vide order dated 21.08.2017, the Tribunal vide para 9 at page 9 of the order has applied the ratio laid down in earlier years and held that aggregation approach is to be applied. The relevant findings of the Tribunal are as under:-
"9. The Tribunal thus, held that where various activities were so interlinked to the export of manufactured IC engines, then the said international transactions undertaken by the assessee for the year under consideration need to be aggregated for undertaking benchmarking analysis applying TNNM method. The Tribunal in this regard placed reliance on the principles laid down by the Hon‟ble High Court of Delhi in Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT (supra). Following the same principle and where the assessee was engaged in similar activity of manufacturing, we hold that various activities need to be aggregated. Accordingly, we direct so."
9. Similar proposition has been laid down by the Tribunal in assessee's own case relating to assessment year 2008-09 in ITA No.2417/PUN/2012, order dated 30.10.2017.
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10. Following the same parity of reasoning, we hold that while benchmarking the international transactions of assessee, wherein the assessee was engaged in manufacturing activities, then we hold that various activities are to be aggregated for determining the arm's length price of its international transactions. The ground of appeal No.1.2 is thus, allowed.
11. The issue raised vide grounds of appeal No.2.1, 3.1 to 3.4 is against the method to be applied as most appropriate method and whether internal comparability is to be made i.e. comparing the profitability of export to associated enterprises with domestic sales. The said issue was also adjudicated by the Tribunal in earlier years and vide order dated 21.08.2017, the Tribunal held that while applying TNMM method, margins of assessee are to be compared with average margins of external comparable companies as per para 12, which read as under:-
"12. We have perused the order of Tribunal in assessment year 2005-06 and noted the fact that the assessee had not pressed the said ground of appeal being academic in nature and hence, no adjudication was made on the said ground of appeal. However, in assessment year 2005-06, the assessee is not aggrieved by the findings of Tribunal in dismissing the plea of assessee since the issue has also become academic in nature. However, in the present appeal, after aggregation approach adopted by the assessee and accepted by the Tribunal, there may be case of certain adjustments to be made on account of arm's length price of international transactions. In this regard, we find that the issue is covered by the order of Hon‟ble High Court of Delhi in Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT (supra), wherein vide para 91, the Hon‟ble High Court held that while applying TNNM method and where the transactions are interlinked and combined, then for the purpose of determining arm's length price, controlled bundle transactions cannot be adequately compared on aggregate basis and the comparison, if any, is to be made with uncontrolled transactions. Applying the said proposition laid down by the Hon‟ble High Court of Delhi in Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT (supra), we hold that accepting the aggregation approach of the assessee of its transactions under the manufacturing activity, we hold that while applying TNNM method, the margins of assessee company are to be compared with the margins of external comparables. However, since the TPO had not verified this factum of comparison with external comparables, we direct the Assessing Officer / TPO to consider the case of assessee and determine the arm's length price and re-compute adjustment, if any, in the hands of assessee on account of international transactions. It may be pointed herein itself that the adjustments were made in the hands of assessee in HHP division and no adjustment was made in LHP division. 8 ITA No.309/PUN/2014
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Consequently, the grounds of appeal No.1.1, 2 and 3 are decided as indicated above."
12. Similar proposition has been laid down by the Tribunal in assessee's own case relating to assessment year 2008-09 in ITA No.2417/PUN/2012, order dated 30.10.2017. The issue raised vide grounds of appeal No.2.1, 3.1 to 3.3 is thus, decided in favour of assessee and we hold so. The issue raised in ground of appeal No.3.4, in view thereof, becomes academic in nature and the same is dismissed.
13. The issue in ground of appeal No.4.1 is against determination of PLI, wherein the TPO had applied net profit to cost to work out the PLI. However, the claim of assessee was that PLI of net profit to sales has to be applied. The Tribunal vide order dated 21.08.2017 has decided the issue vide paras 14 and 15 and directed the Assessing Officer to adopt the net profit to sales for determining PLI. The relevant findings of the Tribunal are as under:-
"14. The next issue raised vide ground of appeal No.4 is against the approach adopted by the TPO in application of net profit to cost as PLI. The said issue was also decided by the Tribunal in assessment year 2006-07 vide para 22 at page 30 of the order which reads as under:-
"22. The next issue raised by way of ground of appeal No.7 is the methodology adopted by the TPO in application of net profit to cost as PLI. The case of assessee is that where selling price of component manufactured by it derives the profitability and not the cost of components utilized for manufacturing activity, the PLI should be adopted as net profit to sales and not net profit to cost. We find merit in the plea of assessee in this regard that where the assessee is engaged in the manufacture of components and the main aim of undertaking was to sell the said components, then it is the sales which derive the profitability and not the cost of components. Accordingly, while determining the PLI, the TPO is directed to adopt net profit to sales in order to benchmark the international transactions. Hence, the ground of appeal No.7 is allowed."
15. Following the same parity of reasoning, we direct the Assessing Officer that while determining the PLI to adopt net profit to sales in order to benchmark the international transactions."
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14. Similar proposition has been laid down by the Tribunal in assessee's own case relating to assessment year 2008-09 in ITA No.2417/PUN/2012, order dated 30.10.2017.
15. The issue raised vide ground of appeal No.4.1 is squarely covered in favour of assessee by the orders of Tribunal in earlier years and following the same parity of reasoning, we allow the claim of assessee. The ground of appeal No.4.1 is thus, allowed.
16. The next issue vide ground of appeal No.5 is against the benefit of variation / reduction of 5% from the arithmetic mean. The said issue has also been decided by the Tribunal in assessment years 2007-08 2008-09. Accordingly, we hold that the benefit of range of +/-5% is available if the variation does not exceed the said tolerance margin. The ground of appeal No.5 is thus, allowed.
17. The issue raised vide ground of appeal No.6.1 and 6.2 is against benchmarking of procurement support services provided to associated enterprises and whether the same are to be aggregated with the manufacturing activities. We find this issue has also been decided by the Tribunal vide order dated 21.08.2017 vide para 17 holding as under:-
"17. The next issue raised vide ground of appeal No.6 is against benchmarking of payment of technical know-how fees to associated enterprises and vide ground of appeal No.7 against benchmarking of procurement support services provided to associated enterprises. Similar issue also arose before the Tribunal in assessment year 2006-07 and vide order dated 03.03.2017, the Tribunal held that technical know-how and procurement support services have to be aggregated along with other international transactions under the head „manufacturing activity‟ and consequently, the Assessing Officer was directed to compute arm's length price of international transactions after aggregating the international transactions undertaken by the assessee under the head „manufacturing 10 ITA No.309/PUN/2014 Cummins India Limited.
activity‟. The relevant findings of the Tribunal are in paras 24 and 25 at page 31 of the order and following the same parity of reasoning, we hold so. The grounds of appeal No.6 and 7 are thus, allowed."
18. Similar proposition has been laid down by the Tribunal in assessee's own case relating to assessment year 2008-09 in ITA No.2417/PUN/2012, order dated 30.10.2017.
19. Following the same parity of reasoning, we hold that international transactions of procurement support services provided to associated enterprises are to be aggregated and benchmarked along with international transactions under the manufacturing activities. The grounds of appeal No.6.1 and 6.2 are thus, allowed.
20. The issue raised vide grounds of appeal No.7.1 and 7.2 is against the disallowance of deduction claimed under section 80IB of the Act.
21. The learned Authorized Representative for the assessee fairly pointed out that the said issue is covered against the assessee by the earlier order of Tribunal and wherein, the Tribunal following the same parity of reasoning as in assessment years 2007-08 and 2008-09 had upheld the orders of authorities below in allocating head office expenses, Director's salary, etc to Daman unit and upheld the re-computation of deduction under section 80IB of the Act. Following the same parity of reasoning, we dismiss the grounds of appeal No.7.1 and 7.2 raised by the assessee.
22. The next issue raised by the assessee vide ground of appeal No.8.1 is against disallowance of expenses under section 14A of the Act. The assessee 11 ITA No.309/PUN/2014 Cummins India Limited.
is aggrieved by the orders of authorities below in disallowing expenses relatable to exempt income under section 14A of the Act.
23. The learned Authorized Representative for the assessee pointed out that the issue is covered by the order of Tribunal in assessee's own case relating to assessment year 2008-09.
24. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below.
25. We find that similar issue has arisen in assessee's own case in ITA No.2417/PUN/2012, relating to assessment year 2008-09 and the Tribunal vide order dated 30.10.2017 has held as under:-
"23. We have heard the rival contentions and perused the record. The assessee during the year under consideration had received interest and dividend of Rs.50,88,63,558/- which was claimed as exempt under sections 10(15), 10(34) and 10(35) of the Act. The assessee claimed before the Assessing Officer that it was cash rich company and had reserves and surplus as on 31.03.2008 at Rs.1103.69 crores as against secured and unsecured loans at Rs.28.87 crores only. The assessee thus, claimed that investments were made out of own funds of the company. Further contention of the assessee was that general administrative expenses could not be attributed to earning of tax free dividend income and the expression in relation to section 14A of the Act would mean dominant and immediate connection. Hence, the disallowance under section 14A of the Act, if any, is to be restricted to the extent which is related to the income not forming part of total income. The assessee had worked out the disallowance at Rs.19,63,021/-. The Assessing Officer accepted the plea of assessee that no disallowance on account of interest cost is to be made. However, submissions of assessee with regard to general and administrative expenses were found to be not acceptable. The Assessing Officer rejected the contention of assessee that no expenses could be attributed to earning of exempt dividend income on the ground that there may not be any direct attributable expenses under Rule 8D(2)(i) of the Rules but the assessee company must have incurred some expenses to earn tax free dividend income. In view thereof, the disallowance was computed as per Rule 8D of the Rules @ 0.5% of average value of investments which works out to Rs.1,50,26,000/-. The CIT(A) upheld the same. The assessee is in appeal against the same.12 ITA No.309/PUN/2014
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24. The first issue which has to be considered is the satisfaction recorded by the Assessing Officer, in view of provisions of section 14A(2) of the Act. As per said sub-section, where the Assessing Officer having regard to the accounts of assessee, is not satisfied with the correctness of the claim of assessee in respect of such expenditure, in relation to income, which does not form part of total income, then the Assessing Officer has to determine the amount of expenditure incurred in relation to such exempt income, in accordance with such method as may be prescribed. The first step is the satisfaction of the Assessing Officer to be recorded vis-à-vis the correctness of the claim made by the assessee. The assessee had furnished the working of disallowance under Rule 8D of the Rules at Rs.19,63,021/-. The said working was in respect of disallowance to be made under Rule 8D(iii) of the Rules. The Assessing Officer having not recorded any satisfaction as to the correctness or otherwise of the aforesaid disallowance worked out by the assessee has not fulfilled the conditions laid down in sub-section (2) to section 14A of the Act. Accordingly, there is no merit in the exercise undertaken by the Assessing Officer. The learned Authorized Representative for the assessee during the course of hearing has filed the details in respect of disallowance of expenses under section 14A of the Act at Rs.2,80,144/- as against working filed before the Assessing Officer, copy of which is placed at page 680 of the Paper Book, under which the disallowance worked out to Rs.19,63,021/-. On perusal of the statement filed by the assessee, which is placed at page 680 of the Paper Book, we disallow sum of Rs.19,63,021/- under Rule 8D(iii) of the Rules being disallowance to be made in view of provisions of section 14A of the Act. The assessee is cash rich company and the share capital and reserves & surplus of the said concern as on 31.03.2008 are sufficient to take care of investments made by the assessee. Consequently, no disallowance is made on account of interest expenditure under Rule 8D(ii) of the Rules by the Assessing Officer. Accordingly, the ground of appeal raised in this regard, is partly allowed."
26. The learned Authorized Representative for the assessee has pointed out that there is no major change in investments made during the year under consideration. The issue now stands covered by the order of Tribunal in assessee's own case for assessment year 2008-09 and following the same parity of reasoning, we uphold the disallowance of ₹ 21,03,179/- in the hands of assessee. The ground of appeal No.8.1 is thus, partly allowed.
27. The next issue raised vide ground of appeal No.9 is against allowance of bad debts, which as per the assessee were inadvertently not claimed in the return of income.
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28. Brief facts relating to the issue are that the assessee before the Assessing Officer made a claim of bad debts written off totaling ₹ 9.32 crores. The Assessing Officer did not allow the said claim of assessee, in view of the decision of the Hon'ble Supreme Court in Goetze (India) Ltd. Vs. CIT (2006) 284 ITR 323 (SC).
29. The CIT(A) upheld the order of Assessing Officer in denying the aforesaid claim, against which the assessee is in appeal.
30. The learned Authorized Representative for the assessee before us pointed out that claim of bad debts written off was made before the Assessing Officer during the course of assessment proceedings, which was not allowed by the Assessing Officer and also by the CIT(A). However, the Hon'ble Bombay High Court in CIT Vs. Pruthvi Brokers & Shareholders (2012) 349 ITR 336 (Bom) have held that additional ground of appeal in respect of additional claims not made in the return of income can be raised before appellate authorities.
31. The learned Departmental Representative for the Revenue on the other hand, strongly objected to the claim of assessee.
32. We have heard the rival contentions and perused the record. The issue which is raised by way of ground of appeal No.9.1 is against the claim which was not initially made in the return of income but was raised by way of letter before the Assessing Officer and even before the CIT(A) and also before us. The Assessing Officer held the said claim as not allowable relying on the ratio laid down by the Hon'ble Supreme Court in Goetze (India) Ltd. Vs. CIT (supra). The Hon'ble High Court of Gujarat in CIT Vs. Arvind Mills Ltd. 14 ITA No.309/PUN/2014
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referring to the decision of Goetze (India) Ltd. Vs. CIT (supra) held that the Hon'ble Supreme Court while dismissing the appeal clarified that its decision was restricted to the power of Assessing Officer to entertain claim for deduction otherwise than by revised return of income and did not impinge on the powers of assessing authority under section 254 of the Act. The Hon'ble High Court further went on to say that when the claim of assessee was genuine and acceptable on merits, then the same was rightly allowed by the appellate Commissioner and the Tribunal and warrants no interference. In view of the ratio laid down by the Hon'ble High Court of Gujarat in CIT Vs. Arvind Mills Ltd. (supra), we find merit in the plea of assessee. In any case, the Hon'ble Bombay High Court in CIT Vs. Pruthvi Brokers & Shareholders (supra) have laid down that the assessee is entitled to raise before the appellate authority an additional ground in terms of additional claims which were not made in the return of income filed by it. Accordingly, we hold that the additional claim of assessee merits to be considered by the Assessing Officer, who shall verify its allowability in line with provisions of section 36(1)(vii) r.w.s. 36(2) of the Act. It may be pointed out herein that bad debts to the tune of ₹ 1.04 crores have been allowed in the hands of assessee. The dispute is in respect of claim of bad debts of ₹ 9.83 crores, which needs to be decided. The Assessing Officer is directed to verify the claim of assessee and decide the issue in accordance with law and after allowing reasonable opportunity of hearing to the assessee. Thus, the ground of appeal No.9.1 is allowed for statistical purposes.
33. The assessee by way of grounds of appeal No.10.1, 10.2 and 10.3 has raised the issue against disallowance of deduction under section 35(2AB) of the Act.
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34. Brief facts relating to the issue are that the assessee during the year under consideration had claimed deduction of ₹ 3.89 crores under section 35(2AB) of the Act being 150% of expenditure incurred of ₹ 2.594 crores. The Assessing Officer vide draft assessment order had short granted deduction under section 35(2AB) of the Act by ₹ 6,75,000/- on the ground that the Department of Industrial and Scientific Research i.e. DSIR had approved expenditure only to the extent of ₹ 2.594 crores in form No.3CL. The DRP upheld the draft assessment order and accordingly, the Assessing Officer passed final assessment order granting deduction under section 35(2AB) of the Act short by ₹ 6,75,000/-.
35. The grievance of assessee is against the order of Assessing Officer in allowing the deduction only to the extent the expenditure is approved in form No.3CL issued by DSIR. The assessee claims that under the provisions of said sub-section, the DSIR is empowered to approve only R&D facility and not the expenditure and it is further contended by the assessee that once R&D facility was approved by the prescribed authority i.e. DSIR in form No.3CM, then the expenses incurred by the assessee have to be allowed under section 35(2AB) of the Act. The learned Authorized Representative for the assessee drew our attention to different clauses of section 35 of the Act to demonstrate that various types of approvals were to be taken under different sub-sections and what was envisaged under each of the section, then the same has to be read and applied for. Where the law wanted the expenditure to be approved by prescribed authority, then the same was expressly provided as in section 35(1)(i) of the Act and in section 35(2B) of the Act. However, for the purpose of section 35(2AB) of the Act, it is provided that facility is to be approved and not the expenditure. Our attention was also drawn to the Memorandum 16 ITA No.309/PUN/2014 Cummins India Limited.
explaining the Finance Bill, 1997 and Notes on clauses when section 35(2AB) of the Act was inserted, where it was stated that deduction was available to companies having in-house R&D facility, approved for the purpose of section by the prescribed authority. The learned Authorized Representative for the assessee thereafter, took us to provisions of IT (Tenth Amendment) Rules, 2016 w.e.f. 01.07.2016 with special reference to Rule 6 (7A) of the Income Tax Rules (in short 'the Rules'), wherein under clause (b), specific provision stipulating the prescribed authority to submit its report in relation to approval of in-house R&D facility in form No.3CL to the DG, Income Tax (Exemption) within sixty days of granting approval, was provided. In other words, it was merely an intimation to be sent by the prescribed authority to the Department, nowhere under the Act, it was stipulated that the deduction under section 35(2AB) of the Act was allowable year after year after approval by DSIR in form No.3CL. The learned Authorized Representative for the assessee further referred to the amended form No.3CL by the IT (Tenth Amendment) Rules, 2016 w.e.f. 01.07.2016, wherein column for certified amounts of expenditure had been inserted in the said form No.3CL. The learned Authorized Representative for the assessee further placed reliance on the ratio laid down by the Ahmedabad Bench of Tribunal in Sun Pharmaceutical Industries Ltd. Vs. Pr.CIT (2017) 162 ITD 484 (Ahmedabad - Trib.), wherein it has been held by the Tribunal that form No.3CL is merely a report in the form of intimation regarding approval of in-house R&D facility to be sent from prescribed authority's end to the Department and once the facility is approved in form No.3CM, the expenses incurred within the notified period have to be allowed under section 35(2AB) of the Act. He further pointed out that the said decision has been affirmed by the Hon'ble High Court of Gujarat in CIT Vs. Sun Pharmaceutical Industries Ltd. (2017) 250 Taxman 270 (Guj). In respect of 17 ITA No.309/PUN/2014 Cummins India Limited.
decision of the Hon'ble High Court of Karnataka in Tejas Networks Ltd. Vs. DCIT (2015) 233 Taxman 426 (Kar), the learned Authorized Representative for the assessee pointed out that the said decision was clearly distinguishable on facts. The issue under consideration in the said decision was whether the activity carried on by the assessee and the expenditure incurred in relation to scientific research, is allowable in terms of section 35(3) r.w.s. 43(4) of the Act. The Hon'ble High Court further held that where the DSIR has certified the expenditure in form No.3CL and if the Assessing Officer had any dispute in respect thereof with respect to expenditure or the approval of the facility, such question will have to be referred by the Board to the prescribed authority. He thus, stressed that for claiming weighted deduction under section 35(2AB) of the Act, it is the facility and not the expenditure in form No.3CL which has to be approved by the prescribed authority. The facility in the case of assessee has been approved by the DSIR in form No.3CM and hence, the assessee was eligible to claim the deduction under section 35(2AB) of the Act.
36. The learned Departmental Representative for the Revenue relying on the orders of authorities below, placed reliance on the ratio laid down by the Hon'ble High Court of Karnataka in Tejas Networks Ltd. Vs. DCIT (supra). He further pointed out that the decision in Sun Pharmaceutical Industries Ltd. Vs. Pr.CIT (supra) was vis-à-vis power of the Commissioner under section 263 of the Act and hence, was not applicable. He stressed that under Rule 6 of the Rules, the prescribed authority had to look into expenditure on scientific research. He further pointed out that though improvement in rules has come later but earlier when it was prescribed to submit the details to prescribed authority, then it was incumbent upon the prescribed authority to go through it. 18 ITA No.309/PUN/2014
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The Assessing Officer cannot sit in judgment over form No.3CL, even if sent through CBDT, it has to go back to the prescribed authority.
37. The learned Authorized Representative for the assessee in rejoinder referring to the decision of the Hon'ble Supreme Court in the case of K.P. Varghese v. ITO (1981) 131 ITR 597 (SC) pointed out that marginal notes of section cannot be read to understand the intent of section. He further referred to old form placed at page 21 of Paper Book and the new form which is placed at page 22 of Paper Book and pointed out that differences between the two and stressed that the requirement to go into the expenditure incurred by the facility, by the prescribed authority only arises after the form has been amended and not before that.
38. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against the claim of deduction under section 35(2AB) of the Act i.e. expenditure incurred on Research & Development activity. For computation of business income under section 35 of the Act, expenditure on scientific research is to be allowed on fulfillment of certain conditions which are enlisted in the said section. Under various sub- sections of section 35 of the Act, the conditions and the allowability of expenditure vary. Sub-section (1) to section 35 of the Act deals with expenditure on scientific research, not being in the nature of capital expenditure, is to be allowed to research association, university, college or other institution; for which an application in the prescribed form and manner is to be made to the Central Government for the purpose of grant of approval or continuation thereto. Before granting the approval, the prescribed authority has to satisfy itself about the genuineness of activities and make enquiries in 19 ITA No.309/PUN/2014 Cummins India Limited.
this regard. Under sub-section (2B) to section 35 of the Act, a company engaged in the specified business as laid there on, if it incurs expenditure on scientific research or in-house Research & Development facility also needs to be approved by the prescribed authority, is entitled to deduction, provided the same is approved by the prescribed authority.
39. Now, coming to sub-section (2AA) to section 35 of the Act, it talks about granting of approval by the prescribed authority but the approval to the expenditure being incurred is missing under the said section. Similar is the position in sub-section (2A). Further in sub-section (2AB), it is provided that facility has to be approved by the prescribed authority, then there shall be allowed deduction of expenditure incurred whether 100%, 150% or 200% as prescribed from time to time. Clause (2) to section 35 of the Act provides that no deduction shall be allowed in respect of expenditure mentioned in clause (1) under any provisions of the Act. Clause (3) further lays down that no company shall be entitled for deduction under clause (1) unless it enters into agreement with prescribed authority for co-operation in such R & D facility. The Finance Act, 2015 w.e.f. 01.04.2016 has substituted and provided that facility has to fulfill such condition with regard to maintenance of accounts and audit thereof and for audit of accounts maintained for that facility.
40. Under Rule 6 of Income Tax Rules, 1962 (in short 'the Rules), the prescribed authority for expenditure on scientific research under various sub- clauses has been identified. As per Rule 6(1B) of the Rules for the purpose of sub-section 2AB of section 35 of the Act, the prescribed authority shall be the Secretary, Department of Scientific and Industrial Research i.e. DSIR. Under sub-rule (4), application for obtaining approval under section 35(2AB) of the 20 ITA No.309/PUN/2014 Cummins India Limited.
Act is to be made in form No.3CK. Under sub-rule (5A) of rule 6 of the Rules, the prescribed authority shall, if satisfied that the conditions provided in the rule and in sub-section (2AB) being fulfilled, pass an order in writing in form No.3CM. The proviso however lays down that reasonable opportunity of being heard is to be granted to the company before rejecting an application. So, the application has to be made under sub-rule (4) in form No.3CK and the prescribed authority has to pass an order in writing in form No.3CM. Sub-rule (7A) provides that the approval of expenditure under sub-section (2AB) of section 35 of the Act, shall be subject to the conditions that the facilities do not relate purely to market research, sales promotion, etc. Clause (b) to sub-rule (7A) at the relevant time provided that the prescribed authority shall submit its report in relation to the approval of in-house R & D facility in form No.3CL to the DG (Income-tax Exemption) within sixty days of its granting approval. Under clause (c), the company at the relevant time had to maintain separate accounts for each approved facility, which had to be audited annually. Clause
(b) to sub-rule (7A) has been substituted by IT (Tenth Amendment) Rules, 2016 w.e.f. 01.07.2016, under which the prescribed authority has to furnish electronically its report (i) in relation to approval of in-house R & D facility in part A of form No.3CL and (ii) quantifying the expenditure incurred on in-house R & D 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. In other words the quantification of expenditure has been prescribed vide IT (Tenth Amendment) Rules, 2016 w.e.f. 01.07.2016. Prior to this amendment, no such power was with DSIR i.e. after approval of facility.
41. Under the amended provisions, beside maintaining separate accounts of R & D facility, copy of audited accounts have to be submitted to the 21 ITA No.309/PUN/2014 Cummins India Limited.
prescribed authority. These amendments to rules 6 and 7a are w.e.f. 01.07.2016 i.e. under the amended rules, the prescribed authority as in part A give approval of the facility and in part B quantify the expenditure eligible for deduction under section 35(2AB) of the Act.
42. The issue which is raised before us relates to pre-amended provisions and question is where the facility has been approved by the prescribed authority, can the deduction be denied to the assessee under section 35(2AB) of the Act for non issue of form No.3CL by the said prescribed authority or the power is with the Assessing Officer to look into the nature of expenditure to be allowed as weighted deduction under section 35(2AB) of the Act. The first issue which arises is the recognition of facility by the prescribed authority as provided in section 35(2AB) of the Act.
43. The Hon'ble High Court of Gujarat in CIT Vs. Claris Lifesciences Ltd. (2010) 326 ITR 251 (Guj) have held that weighted deduction is to be allowed under section 35(2AB) of the Act after the establishment of facility. However, section does not mention any cutoff date or particular date for eligibility to claim deduction. The Hon'ble High Court held as under:-
"8. The Tribunal has considered the submissions made on behalf of the assessee and took the view that section speaks of:
(i) development of facility;
(ii) incurring of expenditure by the assessee for development of such facility;
(iii) approval of the facility by the prescribed authority, which is DSIR; and
(iv) allowance of weighted deduction on the expenditure so incurred by the assessee.
9. The provisions nowhere suggest or imply that R&D facility is to be approved from a particular date and, in other words, it is nowhere suggested that date of approval only will be cut-off date for eligibility of weighted deduction on the expenses incurred from that date onwards. A plain reading clearly manifests that the assessee has to develop facility, which presupposes incurring expenditure in this behalf, application to the prescribed authority, 22 ITA No.309/PUN/2014 Cummins India Limited.
who after following proper procedure will approve the facility or otherwise and the assessee will be entitled to weighted deduction of any and all expenditure so incurred. The Tribunal has, therefore, come to the conclusion that on plain reading of section itself, the assessee is entitled to weighted deduction on expenditure so incurred by the assessee for development of facility. The Tribunal has also considered r. 6(5A) and Form No. 3CM and come to the conclusion that a plain and harmonious reading of Rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of R&D facility has to be allowed for weighted deduction as provided by s. 35(2AB). The Tribunal has also considered the legislative intention behind above enactment and observed that to boost up R&D facility in India, the legislature has provided this provision to encourage the development of the facility by providing deduction of weighted expenditure. Since what is stated to be promoted was development of facility, intention of the legislature by making above amendment is very clear that the entire expenditure incurred by the assessee on development of facility, if approved, has to be allowed for the purpose of weighted deduction.
10. We are in full agreement with the reasoning given by the Tribunal and we are of the view that there is no scope for any other interpretation and since the approval is granted during the previous year relevant to the assessment year in question, we are of the view that the assessee is entitled to claim weighted deduction in respect of the entire expenditure incurred under s. 35(2AB) of the Act by the assessee."
44. The Hon'ble High Court of Delhi in CIT Vs. Sandan Vikas (India) Ltd. (2011) 335 ITR 117 (Del) on similar issue of weighted deduction under section 35(2AB) of the Act held that the condition precedent was the certificate from DSIR, but the date of certificate was not important, where the objective was to encourage research and development by the business enterprises in India. In the facts before the Hon'ble High Court of Delhi, the assessee had approached DSIR vide application dated 10.01.2015. The DSIR vide letter dated 23.02.2006 granted recognition to in-house research and development facility of assessee. Further, vide letter dated 18.09.2006, DSIR granted approval for the expenses incurred by the company on in-house research and development facility in the prescribed form No.3CM. The Assessing Officer in that case refused to accord the benefit of aforesaid provision on the ground that recognition and approval was given by DSIR in the next assessment year. The Tribunal allowed the claim of assessee relying on the decision of the Hon'ble High Court of Gujarat in CIT Vs. Claris Lifesciences Ltd. (supra). The 23 ITA No.309/PUN/2014 Cummins India Limited.
Hon'ble High Court of Delhi taking note of the decision of the Hon'ble High Court of Gujarat observed that it has been held that cutoff date mentioned in the certificate issued by DSIR would be of no relevance where once the certificate was issued by DSIR, then that would be sufficient to hold that the assessee had fulfilled the conditions laid down in the aforesaid provisions.
45. The issue which is raised in the present appeal is that whether where the facility has been recognized and necessary certification is issued by the prescribed authority, the assessee can avail the deduction in respect of expenditure incurred on in-house R&D facility, for which the adjudicating authority is the Assessing Officer and whether the prescribed authority is to approve expenditure in form No.3CL from year to year. Looking into the provisions of rules, it stipulates the filing of audit report before the prescribed authority by the persons availing the deduction under section 35(2AB) of the Act but the provisions of the Act do not prescribe any methodology of approval to be granted by the prescribed authority vis-à-vis expenditure from year to year. The amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 01.07.2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No.3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction claim under section 35(2AB) of the Act on the surmise that prescribed authority has only approved part of expenditure in form No.3CL. We find no merit in the said order of authorities below. 24 ITA No.309/PUN/2014
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46. The Courts have held that for deduction under section 35(2AB) of the Act, first step was the recognition of facility by the prescribed authority and entering an agreement between the facility and the prescribed authority. Once such an agreement has been executed, under which recognition has been given to the facility, then thereafter the role of Assessing Officer is to look into and allow the expenditure incurred on in-house R&D facility as weighted deduction under section 35(2AB) of the Act. Accordingly, we hold so. Thus, we reverse the order of Assessing Officer in curtailing the deduction claimed under section 35(2AB) of the Act by ₹ 6,75,000/-. Thus, grounds of appeal No.10.1, 10.2 and 10.3 are allowed.
47. In the result, appeal of assessee is partly allowed.
Order pronounced on this 15th day of May, 2018.
Sd/- Sd/-
(ANIL CHATURVEDI) (SUSHMA CHOWLA)
ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER
ऩुणे / Pune; ददनाांक Dated : 15th May, 2018.
GCVSR
आदे श की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to :
1. The Appellant;
2. The Respondent;
3. The DIT (Intl. Taxation), Pune;
4. The DRP, Pune;
5. The DR 'B', ITAT, Pune;
6. Guard file.
ु ार/ BY ORDER, आदे शािस सत्यापऩत प्रतत //True Copy// वररष्ठ तनजी सचिव / Sr. Private Secretary आयकर अऩीऱीय अचधकरण ,ऩुणे / ITAT, Pune