MAHLE ANAND THERMAL SYSTEMS PRIVATE LIMITED,PUNE vs. DY COMMISSIONER OF INCOME TAX, PUNE

16. At this juncture, it is pertinent to note the mandate of section 35 with the caption Expenditure on scientific research Clause (iv) of section 35(1) provides for deduction of expenditure on scientific nature "in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2)." Sub-section (2) of section 35, in turn, provides through sub-clause (ia) that for the purposes of clause (iv) of sub-section (1): 'in a case where such capital expenditure is incurred after the 31st day of March, 1967, the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year. The proviso provides for not allowing deduction in respect of expenditure incurred on acquisition of any land. On a conjoint reading of section 35(1) (iv) read with section 35(2), it is manifested that any expenditure of capital nature incurred on scientific research, other than the cost of land etc., qualifies for full one time deduction in the year of such incurring. Unlike sub-section (2AB), sub-section (1) does not require any specific approval from the prescribed authority for this purpose. Further, there is no stipulation that the expenditure should be incurred in India or outside or in-house R&D facility or otherwise, save and except as provided in other clauses of subsection (1) of section 35. However, the amount of deduction u / s 35(1) is equal to the amount of capital expenditure on scientific research.

17. Coming back to the amount of expenditure incurred by the assessee outside India amounting to Rs 9,61,80,237/-, we find that the expenditure of revenue nature, namely, Rs.74,95,427/- was claimed by the assessee as revenue expenditure and accordingly allowed also. It is only the remaining capital expenditure of Rs.8,86,84,811/- [Rs. 3,39,60,518/- being sub-total (A) and Rs.5,47,24,293/- being sub-total (B)] that qualifies for deduction u/s 35(1)(iv). We order accordingly.

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." UNQUOTE" It is seen from the above discussion in the honourable ITAT Pune's order that the facts are somewhat similar here. Respectfully following the above decision, it is accordingly held that the product development expenses of Rs.4,15,53,737 spent outside India is not eligible for weighted deduction u/s 35(2AB). However it is allowed as a deduction u/s 35(1)(iv) as capital expenditure incurred on scientific purpose. Appeal is partly allowed on this ground.”

7. Aggrieved with such order of the Ld. CIT(A) giving part relief, the assessee is in appeal before the Tribunal by raising the following grounds of appeal: Being aggrieved by the order passed u/s 250 of the Income Tax Act 1961 (the Act) by the learned Commissioner of Income Tax Appeals 13, Pune (CITA) your CO No.12/PUN/2024 appellant submits following grounds for your kind and sympathetic consideration which are raised without prejudice to each other: On facts and in circumstances of the case and in Law,

1. The Learned CITA erred in not allowing claim of Rs. 8,31.07,474/- at two hundred percent of Rs. 4,15.53,737/- made by the appellant u/s 35(2AB) of the Income Tax Act, 1961 in respect of research expenditure of revenue nature on product testing, validation and prototyping incurred outside India.

2. The learned CITA erred in not appreciating the fact that even though the said expenditure of revenue nature Rs. 4,15,53,737/-incurred on product testing, validation and prototyping was incurred outside appellant's in house R & D facility in India it was eligible for weighted deduction claim u/s 35 (2AB) of the Act since the said expenditure was nothing but a part of the self sufficient and self reliant own in house R & D conducted by it. It is prayed that the aforesaid disallowance addition to income be deleted.

3. Your Appellant craves leave to add, modify or delete grounds of appeal.

8. Aggrieved with the part relief granted by the Ld. CIT(A), the Revenue is in appeal before the Tribunal by raising the following grounds of appeal:

1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the expenses incurred outside India on R&D u/s 35(1)(iv) of Income Tax Act, 1961, when the claim of the assessee was not u/s 35[1](iv) of the Income Tax Act, 1961 but was under section 35(2AB) of the Income Tax Act. 1961?

2. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that the expenditure incurred by the assessee of Rs.1,04,77,500/- on product development was incurred only for up-gradation of existing products without appreciating that the said expenses were incurred by the assessee for development of new prototype product and assessee was also getting patent for the products developed.

3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing expenditure of Rs 1,04,77,500/- un product development as revenue expenses without appreciating that the said expenses were incurred by the assessee for development of new prototype product and assessee was also getting patent for the products developed and hence the expenses incurred were for a capital asset and therefore, capital in nature.

4. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing expenditure of Rs. 1,04,77,500/- on product development expenses as revenue expense by relying upon the decisions of Hon'ble ITAT CO No.12/PUN/2024 in assessee's own case for AY 2011-12, without appreciating that the said decision has not beers accepted by the Department and an appeal has been filed before the Hon'ble Bombay High Court.

5. The appellant craves leave to add, amend, or alter any ground(s) of appeal at the time of hearing before the Hon'ble Tribunal.

9. So far as ground of appeal

No.1 by the Revenue challenging the order of the Ld. CIT(A) in allowing the capital expenditure outside India on R&D u/s 35(1)(iv) is concerned, we find the same stands covered in favour of the assessee by the Tribunal in assessee’s own case for assessment year 2011-12 wherein the Tribunal has observed 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 qualifying for the weighted deduction, which were filed. On perusal of such details, the Assessing Officer (AO) observed that the assessee claimed weighted deduction on Research and Development costs of Rs.9,61,80,237/-carried outside India. Rejecting the assessee’s contention, the AO disallowed a sum of Rs.8,86,84,811/-, being, the amount of capital R&D expenditure incurred outside India. Aggrieved thereby, the assessee filed appeal before the ld. CIT(A), who, after issuing enhancement notice, held that the AO erred in allowing weighted deduction u/s.35(2AB) at a higher sum. He observed that the prescribed authority had restricted the amount of eligible deduction to the amount of expenditure incurred for the period 07-12-2010 to 31-03-2011 to only Rs.1,32,39,000/- as per Form No. 3CL dated 08-07-2014. As the approval was granted w.e.f. 07-12-2010, the ld. CIT(A) held that the assessee was not eligible for weighted deduction on the expenditure incurred from 01-04-2010 to 06-12- 2010. He further held that any expenditure capitalized by the assessee in the nature of `Intangibles’ was not eligible for the weighted deduction. The amount capitalized by the assessee was held to be eligible for depreciation allowance at 25%. To sum up, he allowed deduction for a sum of Rs.2,56,94,285/- CO No.12/PUN/2024 (Rs.1,32,39,000/- as permitted by the Prescribed authority u/s.35(2AB) plus depreciation @ 25% on the amount of capital expenditure of Rs.4,98,21,138/-. This resulted into enhancement of income by Rs.15,29,63,167/-, other than the confirmation of addition made by the AO. This has brought the assessee before the Tribunal.

6. The case of the ld. CIT(A) is that the assessee was not eligible for weighted deduction on any amount spent by it on a date prior to the grant of approval. For this purpose, he relied on Guidelines of in-house R&D centres recognized by DSIR issued in May, 2010. The relevant part of the guidelines given in para 6 – Policy for approval is as under : “(i) Approval to the in-house R&D centres having valid recognition by DSIR are considered from 1st April of the year in which application is made Form 3CK. (ii) Approval is considered co-terminus with DSIR recognition. (iii) For companies not having DSIR recognized in-house R&D Centre, approval is considered from the date of recognition.”

9. Sub-Clause (i) of clause (b) of Rule 6 (7A) provides that the prescribed authority shall furnish its report in relation to the approval of in-house R&D facility quantifying the amount of expenditure incurred during the previous year, which is eligible for weighted deduction under sub-section (2AB) of section 35. It is on the basis of the above sub-clause (ii) of clause (b) of Rule 6(7A) that the ld. CIT(A) opined that the quantification of the expenditure incurred on in-house R&D facility has to be done by the prescribed authority and the amount eligible for weighted deduction cannot cross that threshold. It is no doubt true that sub- clause (ii) of clause (b) of Rule 6 (7A) categorically provides that the amount of weighted deduction u/s.35(2AB) has to be restricted to the amount quantified by the prescribed authority. However, it is relevant to note that the clause (b) as extracted above has been substituted by the Income-tax (10th Amendment) Rules, 2016 w.e.f. 01-07-2016. Prior to this substitution, the clause (b) read as under : “(b) The prescribed authority shall submit its report in relation to the approval of in-house Research and Development facility in Form No.3CL to the Director General (Income-tax Exemptions) within sixty days of its granting approval.”

10. As per the pre-existing clause (b), the prescribed authority was supposed to submit only its report in relation to the approval of in-house R&D facility to the Director General (Income-tax Exemptions). The stipulation of quantifying the eligible expenditure by the competent authority for the purposes of weighted deduction u/s.35(2AB) was not there. The only requirement was to submit the report in relation to the approval of in-house R&D facility. Any amount of expenditure incurred in respect of in-house R&D facility qualified for the deduction - whether or not approved by the prescribed authority. Only the existence of approval and incurring of the expenditure were relevant considerations in the pre-amended era and not the amount quantified by the prescribed authority. The new stipulations came to be introduced 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. CO No.12/PUN/2024 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.”

14. A cursory look at the above provision deciphers the conditions for the weighted deduction, inter alia, that an eligible company incurs any expenditure on scientific research (other than cost of land or building) on in-house research and development facility as approved by the prescribed authority. The key words in the provision are incurring of expenditure on in-house R&D facility as approved by the prescribed authority. Unless a particular R&D facility is approved by the prescribed authority, no weighted deduction can follow. On a pertinent query, the ld. AR admitted that the prescribed authority approved the in- house R&D unit of the assessee situated at “Gat No.626/1/2 and 622/1/0, 26 Milestone, Pune-Nasik Highway, Village Kuruli, Tal : Khed, District Pune”. On a further query, the ld. AR submitted that the assessee’s approved R&D facility was engaged in designing and developing of Engine cooling systems and HVAC systems for vehicles. During the designing and development phase, engine coolant and HVAC systems are required to be put in Performance Evaluation Testing in variant weather conditions artificially created, for which sophisticated technology and set up is required that is not available in India. It was for such CO No.12/PUN/2024 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.

12. Now, coming to the appeal filed by the assessee is concerned, the Ld. Counsel for the assessee fairly conceded that the issue stands decided against the assessee by the decision of the Tribunal. We, therefore, dismiss the grounds raised by the assessee.

ITA No.96/PUN/2024 (AY 2015-16)

13. The grounds raised

by the Revenue are as under:

1. On the facts and circumstances of the case and in law the Ld. CIT(A) erred in holding that the expenditure incurred by the assessee of Rs.4,09,65,000/- on product development was incurred only for up-gradation of existing products without appreciating that the said expenses were incurred by the assessee for development of new prototype product and assessee was also getting patent for the products developed.

2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing expenditure of Rs.1,09,05,000/- on product development expenses as revenue expense without appreciating that the said expenses were incurred by the assessee for development of new prototype product and assessee was also getting patent for the products developed and hence the expenses incurred were for a capital asset and therefore capital in nature. 3 On the facts and circumstances of the case and in law the Ld CIT(A) has erred in allowing expenditure of Rs.4,09,65,000/- on product development CO No.12/PUN/2024 expenses as revenue expense by relying upon the decisions of Hon'ble ITAT in assessee's own case for AY 2011-12, without appreciating that the sad decision has not been accepted by the Department and an appeal has been filed before the Hon’ble Bombay High Court 4. The appellant craves leave to add, amend, or alter any ground(s) of appeal at the time of hearing before the Hon’ble Tribunal.

CO No.12/PUN/2024 (AY 2015-16)

15. The concise grounds of objections raised by the assessee in CO are as under:

1. 1. Against curtailment of revenue expenses by Rs.1,32,51,191/- incurred outside India out of total amount of expenses of Rs.2,58,02,061/- on product testing, validation and prototyping on research and development (R & D) claimed for weighted deduction u/s 35(2AB) of the Income Tax Act, 1961 (the Act).

2. Alternate claim for deduction of expenses on outside India testing and validation Rs.1,32,51,191/- in the course of R & D activities u/s 35(1)(iv) / 37(1) of the Income Tax Act, 1961.

16. The assessee has also raised additional ground of objection which reads as under: The learned Commissioner of Income Tax Appeals National Faceless Centre, Delhi (CTT A) erred in dismissing the grounds raised

including ground in respect of alternate claim of the cross objector for deduction of expenses on approved in house Research & Development (R &D) to the extent of 100% under Section 35. (1) (iv) of the Income Tax Act 1961 (the Act) by self contradicting his findings in respect of the said claim.

CO No.12/PUN/2024 Your cross objector prays that the alternate claim for deduction of expenditure on R & D which has impliedly been allowed by the learned Assessing Officer u/s 35 (1) (iv) of the Act for the A.Y. 2015-16 to the extent of 100% at Rs.1,32,51,191/- be upheld.

17. After hearing both the sides, we find the first ground of the CO has already been decided against the assessee which was fairly conceded by the Ld. AR for the assessee. In view of the above submission of the Ld. Counsel for the assessee, the first ground of the CO is dismissed.

18. So far as the second ground and the additional ground are concerned, the Ld. Counsel for the assessee at the outset submitted that this issue was raised before the Ld. CIT(A). However, the Ld. CIT(A) has given a concluding self contrary finding that the grounds raised by the assessee are dismissed. He submitted that the facts and figures are already on record and the Tribunal in assessee’s own case for assessment year 2011-12 has already decided the issue in assessee’s favour and in assessment year 2014-15 also the Ld. CIT(A) had allowed such claim of the assessee. He accordingly submitted that this alternate claim should be allowed.

19. After hearing both the sides, the additional ground of objection raised by the assessee is admitted for adjudication.

by the assessee including the claim for deduction u/s 35. (1) (iv) are dismissed. (Page 19 of CITA order).

CO No.12/PUN/2024 Honourable Tribunal in appellant's own case for the preceding A.Y. 2011-12 has after upholding the disallowance of claim for weighted deduction (at 200%) has allowed the alternate claim for deduction u/s 35 (1) (iv) of the outside India testing and validation expenditure. (Copy of ITAT Order PB Pages 42 to 44 Para 16 & 17). The issue stands covered in favour of the objector by the aforesaid decision of Honourable Tribunal in appellant's own case. It is prayed that the concluding self contradictory finding of the learned CIT(A) be reversed and 100% deduction as allowed by the AO be sustained.

by the Revenue are as under: Being aggrieved by the order passed by the learned CIT(A) National Faceless Appeal Centre the appellant viz. Mable Anand Thermal Systems Private Limited (previously named Mahle Behr India Private Ltd.) submits following grounds which are without prejudice to each other for your due and sympathetic consideration: On the facts & circumstances of the case and in law,

1. The learned CIT(A) erred in confirming disallowance of claim for weighted deduction amounting to Rs.23,89,05,598/- in respect of expenditure incurred by the appellant in the relevant previous year on scientific research undertaken by the appellant in its duly recognised in house research and development (R & D) facility u/s 35(2AB) of the Income Tax Act, 1961 (the Act).

2. The learned CIT(A) failed to appreciate that the said claim of the appellant u/s 35 (2AB) was made after duly complying with and in conformity with the relevant provisions of the Act including the submission of requisite information regarding the R & D expenditure in the prescribed forms and non receipt of the report from Department of Scientific and Industrial Research (DSIR) quantifying in Form 3 CL the said expenditure as per Rule 6 was a technicality beyond the control of the appellant and clearly was not fatal to the entitlement of the said claim.

3. Learned CIT A failed to appreciate that rejection of appellant's claim solely on the basis of non receipt of DSIR report especially when the appellant was held to be eligible to claim deduction of expenditure on in house approved R & D for the period anterior to the year in question did not serve the purpose of meeting ends of substantial justice. The AO erred in drawing an adverse and unwarranted inference that a notified rule takes precedence over the provisions of Law.

4. The CIT(A) erred in passing the order in haste without providing an opportunity of being heard i.e. opportunity to make submissions by appearing in virtual mode through video conferencing) and without appreciating that the facts in the impugned year in question were not similar to that of the AY 2011-12.

5. The learned CIT(A) after having confirmed denial of weighted deduction claimed u/s 35 (2AB) in respect of the salary of employees being revenue expenditure incurred on approved in house scientific research erred in not CO No.12/PUN/2024 allowing deduction thereof under the provisions of Section 35 (1) (iv) or under Section 37 of the Act.

6. The learned CIT(A) after having confirmed the denial of weighted deduction claimed u/s 35 (2AB) in respect of expenditure of capital nature on approved in house R & D viz. cost of tangible assets erred in not allowing deduction at one hundred percent under the provisions of Section 35(1) (iv) or depreciation thereon under Section 32 of the Act.

7. The appellant craves leave to add to, alter, amend or withdraw the grounds of Appeal.

Order pronounced in the open Court on 22nd January, 2025.