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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAJESH KUMAR
Date of Hearing – 20.03.2019 Date of Order – 12.06.2019 2 Wockhardt Ltd. O R D E R PER SAKTIJIT DEY. J.M.
Aforesaid cross appeals arise out of the order dated 27th December 2010, passed by the learned Commissioner of Income Tax (Appeals)–15, Mumbai, for the assessment year 2006–07.
./2011 Assessee’s Appeal
The only issue raised in this appeal pertains to the disallowance of weighted deduction under section 35(2AB) of the Income Tax Act, 1961 (for short "the Act"). Pertinently, the Revenue has also challenged the decision of the learned Commissioner (Appeals) on this issue in ground no.3 of its appeal being ITA no.1875/Mum./2011. Since these grounds raised by the assessee and the Revenue are on a common issue, we proceed to dispose of these grounds together.
Brief facts are, the assessee company is engaged in manufacturing and trading of pharmaceutical products. While verifying the return of income filed for the impugned assessment year in the course of assessment proceedings, the Assessing Officer noticed that the assessee had claimed deduction @ 150% under section 35(2AB) of the Act towards capital and revenue expenditure incurred in the in–
3 Wockhardt Ltd. house research and development (R & D) facility. Therefore, the Assessing Officer called upon the assessee to furnish necessary details and justify its claim. In response, it was submitted by the assessee that it has not yet received certificate in Form no.3CL from the appropriate authority DSIR. From the details furnished by the assessee, the Assessing Officer found that research activity in respect of which the capital and revenue expenditure were claimed was not carried out in the in–house research facility but was done outside. Therefore, he called upon the assessee to explain why the deduction claimed under section 35(2AB) of the Act should not be disallowed. In response, the assessee filed a detailed reply stating that deduction claimed under section 35(2AB) of the Act is allowable even in respect of expenditure incurred on research and development activity carried out outside the R & D facility of the assessee. The Assessing Officer, however, was not convinced with the explanation of the assessee. He observed, the assessee was otherwise entitled to claim deduction under section 35(1) of the Act. However, for claiming weighted deduction under section 35(2AB) of the Act, the assessee must incur the expenditure for carrying out the activity in its own in–house research and development facility. Therefore, he disallowed assessee’s claim of deduction under section 35(2AB) of the Act fully. Being aggrieved with such disallowance, the assessee preferred appeal before learned Commissioner (Appeals). After considering the 4 Wockhardt Ltd. submissions of the assessee, learned Commissioner (Appeals) directed the Assessing Officer to allow assessee’s claim of deduction under section 35(2AB) of the Act.
The learned Authorised Representative submitted, assessee is entitled to claim deduction of revenue and capital expenditure incurred towards research and development activity even if such activity is not carried out in the in–house research and development facility of the assessee. He submitted, the Hon’ble Gujarat High Court in CIT v/s Cadila Healthcare Ltd., [2013] 31 taxmann.com 300 (Guj.), has decided the issue in favour of the assessee. The learned Authorised Representative submitted, though, in assessee’s own case for the assessment years 2002–03, 2003–04, 2004–05, the Tribunal has decided the issue against the assessee, however, while deciding identical issue in the assessment year 2007–08, the Tribunal has restored it to the Assessing Officer for fresh adjudication keeping in view the decision of the Hon’ble Gujarat High Court in Cadila Healthcare Ltd. (supra). Thus, he submitted, the issue may be restored back to the Assessing Officer for fresh adjudication.
The learned Departmental Representative submitted, as per the provisions of section 35(2AB) of the Act, the assessee can claim deduction if the research and development activity is carried out in the in–house research and development facility. He submitted, since the 5 Wockhardt Ltd. assessee has carried out such activity by out sourcing, it is not entitled to claim deduction under section 35(2AB) of the Act. However, he agreed that in the assessment year 2007–08, the issue has been restored back to the Assessing Officer for fresh adjudication.
We have considered rival submissions and perused the material on record. On a perusal of the impugned order of learned Commissioner (Appeals) and, more particularly, his finding in Para–8 to 8.4 of the impugned order, it is very much clear that he has fully allowed the claim of the assessee under section 35(2AB) of the Act. Therefore, we fail to understand how the assessee can be aggrieved with the decision of learned Commissioner (Appeals). Be that as it may, the Revenue has also challenged the decision of learned Commissioner (Appeals) on the issue of deduction claimed under section 35(2AB) of the Act. Undisputedly, the research and development activity in respect of which the assessee has claimed deduction under section 35(2AB) of the Act were not carried out in assessee’s own in–house research and development facility. Therefore, the issue which arises for consideration is, whether the expenditure incurred for carrying out research and development activity outside by way of out sourcing or otherwise can be eligible for deduction under section 35(2AB) of the Act? As per the provision contained under section 35(2AB) of the Act, weighted deduction can be allowed in 6 Wockhardt Ltd. respect of expenditure on scientific research carried out in the in– house research and development activity as approved by the prescribed authority. Therefore, going by the plain meaning of the words used in section 35(2AB) of the Act, only those expenditures which are incurred in the in–house research and development facility are eligible for deduction. In fact, while dealing with identical issue in assessee’s own case in the assessment years 2002–03 to 2004–05 in to 2524/Mum./ 2009, dated 13th April 2012, the Tribunal decided the issue against the assessee. However, while deciding the same issue in assessee’s own case in assessment year 2007–08, in ITA no.5557/Mum./ 2012, dated 5th January 2018, the Tribunal has restored the issue to the Assessing Officer for fresh adjudication keeping in view various decisions cited by the assessee including the decision of the Hon’ble Gujarat High Court in Cadila Healthcare Ltd. (supra). Therefore, following the decision of the Tribunal in assessment year 2007–08, we are inclined to restore the issue to the Assessing Officer for de novo adjudication keeping in view the ratio laid down in the decisions to be cited by the assessee including the decision of the Hon’ble Gujarat High Court in Cadila Healthcare Ltd. (supra). While doing so, the Assessing Officer is also directed to examine the ratio laid down by the Hon'ble Supreme Court in Commissioner of Customs v/s Dilip Kumar & Co. & Ors., vide judgment dated 30th July 2018, in Civil Appeal no.3327 of 2007. Needless to 7 Wockhardt Ltd. mention, the Assessing Officer must afford reasonable opportunity of being heard to the assessee before deciding the issue. These grounds are allowed for statistical purposes.
In the result, appeal is allowed for statistical purposes. ./2011 Revenue’s Appeal
In ground no.1, the Revenue has challenged the deletion of addition made of ` 35,12,209, towards transfer pricing adjustment on the provisions of corporate guarantee.
Brief facts are, in the course of proceedings before him, the Transfer Pricing Officer found that in respect of a loan taken by the assessee’s Associated Enterprise (AE) in United Kingdom (UK), the assessee has provided corporate guarantee and has charged 0.75% per annum as guarantee fee. It was claimed by the assessee that the guarantee fee charged @ 0.75% is at arm's length, since, the HSBC India charges 0.75% as a guarantee fee for rendering financial guarantee. Thus, it was submitted, the letter issued by the HSBC India can be used as Comparable Uncontrolled price (CUP) to benchmark the arm's length price for guarantee fee. The Transfer Pricing Officer, however, did not accept the claim of the assessee and referring to certain comparable transactions he held that the guarantee fee
8 Wockhardt Ltd. chargeable on the corporate guarantee provided should be fixed @ 2.08%. Accordingly, he worked out the arm's length price of the guarantee fee at ` 54,92,778, which resulted in an adjustment of ` 35,12,209. The aforesaid amount was added back to the income of the assessee at the time of completion of assessment. The assessee challenged the aforesaid addition before the first appellate authority.
After considering the submissions of the assessee, learned Commissioner (Appeals) found that the guarantee commission charged by the assessee @ 0.75% is supported by the quotation obtained from HSBC India in respect of the same underlying transaction. He observed, HSBC India after assessing and carrying out due diligence of the assessee’s account, etc., has fixed the commission rate @ 0.75%. Thus, he concluded that the quotation obtained from HSBC India can be used as an external CUP. Accordingly, he deleted the addition made on account of transfer pricing adjustment.
The learned Departmental Representative submitted, the Transfer Pricing Officer has carried out a proper analysis to benchmark the arm's length price of the corporate guarantee commission. Therefore, the adjustment proposed by the Transfer Pricing Officer should be upheld.
9 Wockhardt Ltd. 12. The learned Authorised Representative submitted, while deciding identical issue in assessee’s own case for assessment year 2007–08, the Tribunal has upheld assessee’s benchmarking of corporate guarantee commission @ 0.75%.
We have considered rival submissions and perused the material on record. Undisputedly, the assessee itself has charged guarantee commission on the corporate guarantee provided to the AE @ 0.75%. The guarantee fee charged has been benchmarked by the assessee by obtaining a quotation from HSBC India which has been used as an external CUP. In our view, the method adopted by the assessee to benchmark the guarantee commission cannot be faulted with. It is necessary to observe, while deciding the appeal of the Revenue in assessee’s own case in assessment year 2007–08, vide ITA no. 5557/Mum./2012, dated 5th January 2018, the Co–ordinate Bench has held that guarantee fee charged @ 0.75% is at arm's length. It is relevant to observe, in various other cases involving similar nature of dispute not only the Tribunal but the Hon'ble Jurisdictional High Court has held that arm's length price of guarantee fee can reasonably be fixed @ 0.5%. In view of the aforesaid, we uphold the decision of learned Commissioner (Appeals). This ground is dismissed.
In ground no.2, the Revenue has challenged the decision of learned Commissioner (Appeals) in reversing the decision of the 10 Wockhardt Ltd. Assessing Officer to allocate research and development expenditure to section 80IB and 80IC units.
Brief facts are, the Assessing Officer noticed that the assessee has claimed deduction under sections 80IB and 80IC of the Act in respect of the eligible units. The Assessing Officer held that the expenditure incurred by the assessee on research and development activity which was claimed as deduction under section 35(2AB) of the Act has to be allocated to sections 80IB and 80IC eligible units. Accordingly, he computed the deduction under sections 80IB and 80IC of the Act by allocating the research and development expenditure which was claimed as deduction under section 35(2AB) of the Act. The assessee challenged the aforesaid decision of the Assessing Officer before the first appellate authority.
Learned Commissioner (Appeals) having found that identical dispute has been decided by the Tribunal in favour of the assessee in the preceding assessment year, followed the same and directed the Assessing Officer not to allocate research and development expenditure to units eligible for claiming deduction under sections 80IB and 80IC of the Act.
We have considered rival submissions and perused the material on record. The learned Counsels appearing for the parties have agreed
11 Wockhardt Ltd. that the issue has been decided in favour of the assessee by the Tribunal in the preceding assessment years. It is noticed, identical dispute arose in assessee’s own case for the assessment years 2001– 02, 2002–03, 2003–04, 2004–05 and 2005–06. In the latest order passed for the assessment year 2007–08, in Mum./2012, dated 5th January 2018, the Tribunal, following its own decision for the earlier assessment years, has upheld the decision of learned Commissioner (Appeals) by dismissing the ground raised by the Revenue. Facts being identical, respectfully following the consistent view of the Tribunal in the preceding assessment years in assessee’s own case, we uphold the decision of learned Commissioner (Appeals) by dismissing the ground.
In view of our decision on the issue raised in assessee’s appeal in the earlier part of the order, no separate adjudication on ground no.3, raised by the Revenue is required.
In ground no.4, the Revenue has challenged the deletion of disallowance made under section 40(a)(i) of the Act for failure to deduct tax at source.
Brief facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee has made payment an amount of ` 3.60 crore to non–residents on account of pilot bio study, clinical
12 Wockhardt Ltd. research, etc., without withholding / deducting tax at source. Therefore, he called upon the assessee to explain why the amount should not be disallowed under section 40(a)(i) of the Act. In response, the assessee submitted its reply stating that as per the double taxation avoidance agreement between India–Canada, India– UK and India–USA, the payments made to the residents of these countries cannot be considered as fee for technical services, hence, there is no liability on the assessee to deduct tax at source under section 195 of the Act. The Assessing Officer, however, did not find merit on the submissions of the assessee. Relying upon the order passed by him under section 201 and 201(1A) of the Act for the assessment year 2005–06, he held that the payment made by the assessee is in the nature of fee for technical services, hence, the assessee was required to deduct tax at source. Accordingly, he disallowed an amount of ` 2,14,20,270, under section 40(a)(i) of the Act. While deciding assessee’s appeal on the issue, learned Commissioner (Appeals) followed the decision of the Tribunal on identical issue arising in earlier years and deleted the addition made by the Assessing Officer.
We have considered rival submissions and perused the material on record. The learned Counsels appearing for both the parties have agreed before us that the issue has been decided in favour of the 13 Wockhardt Ltd. assessee by the Tribunal in the preceding assessment year. It is observed, while deciding the appeal arising out of an order passed under section 201 and 201(1A) of the Act in Assessment Year 2007–08 fastening liability on the assessee due to non–deduction of tax under section 195 of the Act on similar payments made by the assessee to the non–resident, the Tribunal in dated 30th July 2010, has held that the payment made by the assessee to the non– residents cannot be treated as fee for technical services. Hence, the assessee was not required to deduct tax at source under section 195 of the Act. The same view was expressed by the Tribunal while deciding the appeal for the assessment year 2005–06 in ITA no.6323/Mum./2010, dated 13th April 2012. Respectfully following the consistent view of the Tribunal, as referred to above, we uphold the decision of learned Commissioner (Appeals) on the issue. Ground raised is dismissed.
In the result, appeal is partly allowed for statistical purposes.