MANKIND PHARMA LIMITED,DELHI vs. DCIT, CIRCLE-1(1)(1), MEERUT

The assessee has also moved an application under Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963 dated 08.02.2024 seeking admission of additional ground which read as under:

The ld. counsel contended that additional ground so filed are admissible in view of judgment rendered by the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC) and by the judgment of the Hon’ble Delhi High Court in the case of Taylor Instrument Co. (India) Ltd. vs. CIT 198 ITR 1 (Del.) The prayer for admission of additional ground noted above which are not in memorandum of appeal are being admitted for adjudication in terms of Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963 owing to the fact that objections raised in additional ground are legal in nature for which relevant facts are stated to be emanating from the existing records.

The assessee has also filed application under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 for admission of additional evidences to support the case built by the assessee before the lower authorities. A paper book (volume 4) dated 04.10.2023 containing additional evidences were sought to be referred and relied upon on its admission by the Tribunal. The additional evidences are stated to be primarily in the nature of invoices and comparative charts / tabulations to justify the execution of transactions of eligible units at ALP. We shall deal the petition for admission of the additional evidences in the subsequent paragraph at appropriate place.

Grounds No.1 and 2 are dismissed as not pressed.

Ground No.3 and sub-grounds thereto concerns Transfer Pricing Adjustment in relation to Arms’ Length Price(ALP) of Specified Domestic Transactions(SDTs).

Briefly stated, the assessee-company is engaged in the business of manufacturing of pharmaceutical and healthcare products. The assessee has three manufacturing units at Paonta Sahib- Himachal Pradesh, Unit-I, II and III. Out of the said three units, Unit-II and Unit-III are eligible for deduction under Section 80-IC of the Act, whereas Unit-I is not eligible for any beneficial treatment or deduction under tax laws. Besides, the assessee has another manufacturing unit situated in Sikkim, which is eligible for deduction under Section 80-IE of the Act.

Pursuant to the order of the TPO, the AO forwarded a draft of the proposed order of the assessment to the assessee proposing inter alia following adjustments.

On receipt of the draft order, the assessee filed its objection to such variations with the Dispute Resolution Panel (DRP).

Pursuant to reference made by the Assessee, the DRP issued its direction dated 21.06.2022 wherein the view of the TPO that there existed an arrangement between the assessee and its Associated Enterprises (AEs) to shift profit to the eligible units from AEs in order to claim higher deductions was upheld on first principles. The transfer pricing adjustments of SDTs undertaken between eligible units and the AEs of the assessee were thus carried out based on OP/OR of comparable companies to reduce the claim of eligible deductions. The DRP, on facts, however modified and restricted the proposed adjustments in proportion to the value of Specified Domestic Transactions undertaken by the assessee.

In terms of the directions of the DRP, the TPO passed an order giving effect to the DRP direction dated 21.06.2022 vide order dated 21/07/2022 and recomputed the ALP adjustment as per the directions issued. The proposed adjustment was thus brought down from Rs.64,34,78,261/- to Rs.21,92,40,676/-.

The AO passed final assessment order dated 28.07.2022 and made additions/disallowances as under:

Aggrieved by the adjustments made to the returned income, the assessee preferred appeal before the Tribunal.

As regards impugned adjustments to the deductions eligible under s.80IC & s.80IE of Act in terms of section 80IA(10) r.w.s 92CA(3) of the Act, the ld. counsel for the assessee made wide ranging submissions which are broadly enumerated hereunder:

It is at this stage and in this context to canvass & vindicate the point that the transactions entered into by eligible units with its AEs were at arm length indeed and were quite comparable to contemporaneous prices of similar transactions with non-AEs, an exhorted reference was made to the additional evidences so filed on behalf of assessee. It was submitted that additional evidences are essentially meant to augment its plea of bonafides and probity in the transactions carried out at market price between eligible units and AEs of the Assessee entity.

Expounding on the petition for admission of additional evidences, the ld. Counsel submitted that for the purposes of Section 92BA r.w. Section 80IA(10) of the Act, the true test is Arms’ Length Price of purchase and sales between eligible units and parties in close connection. It is only when the TPO/AO arrives at a finding that transactions of purchase and sales between the eligible units and its AEs are in departure to Arms’ Length Price, i.e., the question of any adjustment to profits of eligible units, by applying any TP method, would arise. A reference was made to Section 80IA(8) and s. 80IA(10) of the Act to submit that these provisions require that the profits and gains of an eligible business to be computed as if the transfer of goods or services were made at the market value of goods or services on the date of transfer. As a corollary, what is required to be ascertained is whether the transfer of goods and services between eligible unit and the non eligible unit inter se under s.80IA(8) or with AEs of the assessee under s. 80IA(10) has happened at market price or otherwise. The Ld. Counsel submitted that there is no inter transfer of goods or services between eligible units and non eligible units and hence section 80IA(8) is neither attracted nor alleged. The transactions of purchase and sale of goods / services between eligible units with AEs of the Assessee entity have however happened albeit in an insignificant proportion. As pointed out, the additional evidences have been filed to demonstrate that transactions with AEs have happened on commercial considerations and at ordinary market price and consequently no breach of Section 80IA(10) of the Act can be perceived.

As contended, the TPO also ignored the significant contention of the assessee that each of the eligible unit manufactures different kind of products having different production process and different margins of profits by having different FARs. The TPO continued with the same exercise of conducting comparison of operating profits of eligible units at unit level with operating profits of alleged comparable companies by applying TNM Method. The entire basis of benchmarking conducted by the TPO by comparing profit of eligible unit (instead of entity level) with operating profits of alleged comparable companies is inherently fallacious without fulfilling the test of presence of ‘arrangement’ as judicially understood, which holds the key for invoking provisions of Section 92BA r.w. Section 80IA(10) of the Act. The ld. counsel thus harped that the additional evidences would merely demonstrate the basic tenet that the transaction between the eligible units, vis-a-vis its AEs are comparable and at Arms’ Length and has not resulted in any clandestine profits to eligible units for which deduction has been claimed under Section 80IC/80IE of the Act.

The Ld. Counsel adverted to the DRP directions and submitted that the DRP has endorsed the action of the TPO/AO on existence of arrangement between the assessee and its associated enterprises to shift the profits to the eligible units from AEs without making any independent examination of the test of alleged ‘arrangement’ either. The DRP has acted in a mundane and nonchalant manner as can be seen from para 3.1 and 3.2 of the DRP order wherein it was sweepingly observed that in view of the higher profits declared by eligible units qua non eligible units, the presence of arrangement i.e. collusion automatically exists. No objective considerations to legal or factual position has been given by the DRP.

The Ld. Counsel thus urged for admission of additional evidences for adjudication of the grievance raised in its grounds of appeal.

In rejoinder, the Ld. Counsel submitted that Rule 29 permits the Tribunal to admit the additional evidences where the test of ‘substantial cause’ is found to exist. In the present case, the TPO as well as AO proceeded against the assessee without showing existence of ‘arrangement’. Such point goes to the root of the matter. The whole addition is a complete non-starter in the absence of fulfillment of such paramount condition. The additional evidences, on the contrary, positively proves absence of ‘arrangement’. Notwithstanding, the onus which lay upon the revenue was not discharged, assessee on its part proactively seeks to demonstrate otherwise. The additional evidences provide enunciation of bonafides in the action of Assessee and absence of any arrangement per se and non admission thereof may possibly provide misleading results would in turn, led to substantial miscarriage of justice. This is more so where the TPO has made bald allegation of arrangement giving rise to alleged more than normal profits to the eligible units based on a novice comparison of profit margins of eligible and non eligible units [page 9 of TPO order] without taking note of different FARs of such units. The ld. counsel next submitted that it is wrong to contend on the part of revenue that the assessee seeks to make out a new case by changing the stance on benchmarking from TNMM to CUP method with the aid of additional evidences. In this regard, the ld. counsel pointed out that the assessee did not specifically benchmark its SDTs through any specific method in the TP Study Report. Otherwise also, the assessee is entitled to resile from wrong position taken in law and can even choose to change the MAM for TP benchmarking for the first time before ITAT as held in the case of Star India (P) Ltd. vs. ACIT, 151 Taxmann.com 77 (Mum)(SB); Rosoboronservices India Ltd. vs. DCIT, ITA No.7255/MUM/2018. It was contended that in any event CUP is most direct and reliable method and thus most appropriate method for determination of ALP where reasonably comparable data are available.

We have heard the rival submissions in length and perused the relevant order passed by the TPO/AO/DRP. The material referred to and relied upon have also been perused carefully. The contentions on admission of additional evidences filed with reference to Rule 29 of Income Tax (appellate) Tribunal Rules 1963 argued in length, has been simultaneously examined.

The adjustment made by the AO under Section 92BA r.w. Section 92CA r.w. Section 80IA(10) is in question which has the effect of reduction of quantum of deduction under Section 80IC/80IE of the Act to the extent of Rs.21,92,40,676/- in controversy.

We shall first address ourselves on the admission of additional evidences strongly contested by both sides.

For the purposes of adjudication of Ground no. 3 of the appeal towards TP adjustments in controversy, s. 80IA(10) of the Act was adverted and assessee has raised a plea that the TPO has made a bald allegation towards shifting of profits from AEs / non eligible units to the eligible units of the assessee to make unjustifiable claims of higher deductions under Section 80IC / 80IE of the Act by the eligible units of assessee. To arriving at such sweepings conclusions, the TPO has not called for any documents to compare transactions wise details nor gathered any material in corroboration as self evident from the observations noted in para 25.4 supra. Mere earning of higher profits by eligible units vis-a-vis other units has been made the basis for allegation of ‘arrangement’ contemplated under s. 80IA(10) of the Act which is squarely opposed to legal position as echoed in judicial precedents. The transactions with AE by eligible units or transactions of AE with third parties etc. as tabulated in the additional evidence documents manifestly depicts arm length nature of transactions as sought to be demonstrated in the course of hearing. The transactions when compared would show that no perceptible increase in the profits of the eligible units have resulted firstly on account of small percentage of transaction of purchase / sale carried out by the assessee with its AEs / non eligible units and thus have no material impact on profitability, secondly the transaction prices are quite comparable with market prices and thirdly in terms of S. 80IA(10) of the Act, the onus lay upon the revenue to prove existence of arrangement which was never discharged. The allegation by TPO/AO/DRP is abstract in nature and has been made solely for the reason that the profits of eligible units are higher than that of non eligible unit as can be seen from para 25.3 and 25.4 extracted above. Adverse inference based on such bald allegation of TPO, endorsed by DRP in a mechanical manner has compelled the assessee to assimilate the data to rebut such bald allegation and discharge the purported onus which was never shifted to Assessee by the revenue while alleging arrangement. The ld. counsel draws a fine distinction and submits that arrangement is a ‘cause’ and the higher profit is the effect. The high profit must necessarily be the consequence of such arrangement. The onus to establish arrangement is upon the one who alleges so. The ld. counsel submits that on examination of additional evidences filed by Assessee as a proactive measure, it will be apparent that the findings of the TPO which resulted in the impugned additions are contrary to the elementary facts available in the matter. The additional evidences filed are in the form of comparative charts and Invoices showing value of purchases / sales made by the eligible units qua comparative transactions carried out by non AEs etc. The additional evidences attempts to uncover the myth propogated by the revenue and exposes the conceptual flaw in the approach adopted by it. The additional evidences would negate the artificial price distortion to claim higher deductions alleged by revenue without any basis. The assessee thus submits that the Tribunal is fully justified in admitting the additional evidences where it is of the opinion that substantial cause of justice cannot be carried out by ignoring the additional evidences. In the absence of such additional evidences, the Tribunal would be prevented from appreciating the relevant facts in perspective and the substantial cause of justice would be consequently defeated and denied to the assessee. The Assessee contends that the additional evidences merely seek to discharge onus which was never shifted to the Assessee by revenue. As pleaded, a fair comparison of controlled and uncontrolled transactions would be necessary for drawing fair conclusions on the issue.

To address the controversy, we firstly affirmatively notice that the legal position for applicability of Section 80IA(10) is the existence of ‘arrangement’ between the eligible unit and AEs which holds the key and is a condition precedent to trigger the provisions of Section 80IA(10). In the absence of any arrangement, the business transacted between eligible units and its AE do not get covered within the ambit of SDTs defined under 92BA of the Act and eventual Transfer Pricing analysis. It is the plea of the assessee that no efforts were made by the AO to prima facie conclude existence of any arrangement per se as called upon by law before making reference to TPO for TP analysis. The existence of arrangement thus goes to the root of the matter of the controversy and unless the existence of arrangement is demonstrated with some evidences, the adjustment made by the TPO would have no leg to stand. Both AO and TPO have clearly proceeded on hypotheses rather than any factual existence and such action of the revenue authorities has caused substantial injustice to the assessee. In the backdrop, while the aforesaid evidences have been brought on record for the first time before the Tribunal, it is manifest that such analysis of comparative purchases and sales strikes to the root of the matter and are extremely necessary to correctly adjudicate the pertinent issue on existence of ‘arrangement’ before taking any rational view in matter. It is further plea of the assessee that the additional evidence goes to prove conspicuous absence of any arrangement and the whole basis of reference to TPO and consequent addition by way of TP adjustment is vitiated and unsustainable in law. It is thus the plea of the assessee that to render substantial cause of justice, the Tribunal is not only entitled in law but also under a sacrosanct duty to admit the additional evidences, more so, where the lower authorities have omitted to examine the factual aspect on comparable market value of goods/services on the date of transfer expected of them in law.

The ld. counsel contends that it is judicially settled that the presence of comparably higher profit yield attributable to eligible units, would not ipso facto lead to a presumption that there inevitably exists an arrangement per se. For such proposition, a reference was made to the judgment delivered in the case of CIT vs. Schmetz India Pvt. Ltd., (2012) 26 taxmann.com 336 (Bom) wherein it was held that where the AO has not been able to prove any arrangement between parties which resulted in extraordinary profit, denial of deduction under Section 10A is not permissible. Similar view has been expressed in Pr.CIT vs. Vedansh Jewels Pvt. Ltd., (2018) 97 taxmann.com 521 (Raj) along with evidence of arrangement is paramount for such allegation. The ld. counsel also referred to the judgment in the case of CIT vs. H.P. Global Soft Ltd., 342 ITR 263 (Kar.) wherein it was inter alia observed by the Court that there should be material to indicate that assessee had indulged in an arrangement with other person so as to produce to the assessee more profits than what the assessee might have been ordinarily expected to arise from such business. The ld. counsel also referred to the decision of the Co-ordinate in the case of Honeywell Automation India Ltd. vs. DCIT in order dated 25.02.2015, wherein it was held that onus is placed upon the AO to discharge the burden of existence arrangement.

On conspectus of the various judgments cited viz; M/s. Schetmz India India Pvt. Ltd., (2012) 26 taxmann.com 336 (Bom), Pr.CIT vs. Vedansh Jewels Pvt. Ltd., (2018) 97 taxmann.com 521 (Raj); CIT vs. H.P. Global Soft Ltd., 342 ITR 263 (Kar.); Eton Technologies Pvt. Ltd. vs. DCIT, (Pune ITAT); M/s. AB Knowledge Systems v ITO (ITA 894/PUN/2016) (Pune ITAT); ACIT vs. Faurecia Interior Systems India (P) Ltd. (2020) 116 taxmann.com 973 (Pune-Tribunal); Honeywell Automation India Ltd. vs. DCIT in ITA No.287/PUN/2015 order dated 25.02.2015. Following salient principles emerges on application of provisions of Section 80IA(10) of the Act read with first proviso thereto.

On a nuanced consideration of the plea raised on behalf of assessee and counter plea of the revenue, we find force in the stance of the assessee that the TPO/AO has made adjustment under Section 80IA(10) r.w.s 92BA by supposition of existence of ‘arrangement’ merely on the grounds of comparably higher profits reported by the eligible units vis-a- vis non eligible party. No other basis is discernible. The TPO/AO has compared the profits, unit wise instead of entity level comparison i.e. Single Unified business entity vis-à-vis uncontrolled comparables. The Assessee unequivocally claims non existence of any arrangement which, as observed earlier, is the bedrock for any plausible TP adjustment. The additional evidences appear to bring comparative purchase prices of various products transacted between AEs and non AE by an eligible unit to the fore. Similar is the case with sales carried out AEs vis a vis non AEs. Noticeably, the sales to AEs are insignificant in the context of total sales. The purchases from close connections are also moderate. In such matrix, to dispel the misconception of facts, if any, and to come to any definitive finding on existence of ‘arrangement’, the admission of additional evidence, in our view, would be paramount.

The TPO had no occasion to make any comparative data analysis of the transactions between eligible units and AEs and similar transaction executed by eligible units with non AEs. The TPO has also not taken into account the low percentage of such SDTs in the context of the case and hence no significant impact on resultant profits. The assessee, on the other hand, has adverted to tabulations to show that transactions between eligible units and its AE are at ALP indeed. We thus find ostensible merit in plea for admission of additional evidences filed under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963.

While admitting the additional evidences, yet another angle occur in our mind. If the documentary evidences filed by way of additional evidences are ignored, it would be rather difficult for revenue to take a rational view towards existence of such arrangement. Hence, the documentary evidences filed for such purposes would be rather be necessary from the perspective of revenue also. The cause of substantial justice also demands admission to arrive at just and fair conclusion.

We also advert to address the vehement plea of revenue that a new case is sought be prepared in the garb of additional evidences. The assessee in this regard has also pointed out that no new case has been sought to be built. Section 80IA(10) merely postulates existence of arrangement giving rise to more than normal profits to eligible units resulting in unlawful excessive deductions. The choice of TNMM or CUP as a most appropriate method is relevant only for the transfer pricing analysis and quantification of adjustments. The provisions of section 80IA(10) itself is a nonstarter in the absence of arrangement. We thus see no merit in the plea raised on behalf of the Revenue that by filing such additional evidences, the assessee is seeking to make out a new case of benchmarking from TNMM to CUP method which allegedly runs contrary to TP Study Report in which the assessee has itself taken stance for non applicability of CUP method. Statedly, the assessee, in the instant case, did not specifically benchmark its STDs through any specific method in the TP Study Report and therefore, it would be erroneous to conclude that the assessee is seeking to make out a new case by changing the method of benchmarking from TNMM to CUP method for the first time before the Tribunal. The internal CUP available in the instant case is the most direct and realistic method to evaluate market price of transactions carried with close connections. The additional evidences filed would throw light on the bonafides of such transactions.

The Hon’ble Supreme Court in the matter of Tek Ram vs. CIT (2014) 44 taxmann.com 367 (SC) has held that documents which are relevant to the case should be looked into by the appellate body. The Hon’ble Delhi High Court in the case of CIT vs. Text Hundred India Pvt. Ltd., 351 ITR 57 (Del) and CIT vs. Virgin Securities and Credits (P.) Ltd. (2012) 20 taxmann.com 681 (Del) relied upon on behalf of the assessee have held that the additional evidences which are crucial to the disposal of the appeal and had a direct bearing on the subject matter requires to be taken into account.

To conclude, the additional evidences placed under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 stands admitted.

On merits, the ld. counsel referred to the additional evidences and contended that firstly; the total sales to AEs in respect of Sikkim units and other eligible units at Paonta Sahib, Himachal Pradesh is miniscule as can be seen from the tabulations made in paragraph 15(ii) supra. Thus, sales to AEs do not have any material impact on the resultant profits derived by the eligible units. Likewise, the purchase from AEs are comparable to similar purchase from non AEs / third parties as demonstrable from the additional evidences. The ld. counsel referred to tabulation/charts of purchases showing comparison of the purchase price of different items with AE and with non AE extracted below to submit that there is no material departure in the purchase price when compared with the quantity and time of purchase etc. is borne in mind. The purchases made with AE and non AE are in the similar range and at times, to a disadvantage of the assessee and has resulted in disadvantaged profit of the eligible units albeit insignificantly.

On being inquired by the bench, the ld. counsel strenously took us through the various items of purchase and corresponding purchases from unrelated entities or such purchases made by AEs etc. to demonstrate that the supply rate by the AEs to eligible units and the third party are broadly in the similar range and having no real impact on the so called extraordinary profits of the eligible unit on account of SDTs. The ld. counsel thus asserts that all the transactions of purchase and sale undertaken by the eligible units with AEs are at market price / ALP and therefore, in the absence of any arrangement giving rise to any abnormal profits to the eligible units, invocation of Section 80IA(10) r.w. Section 92BA of the Act is wholly unwarranted and consequently the adjustment made under transfer pricing provisions in the final assessment order is contrary to the position of law and factual matrix and thus requires to be reversed.

In essence, it is the case of assessee that revenue has merely alleged existence of arrangement to invoke rigours of Section 80IA(10) of the Act merely on the ground that the eligible units have derived higher percentage of profit in comparison to non eligible units. As culled out in the preceding paragraph, in the absence of any material to establish shifting of profit and existence of arrangement, the higher profit derived by eligible unit vis-à-vis unit by itself cannot give rise to any adverse inference of existence of arrangement. The assessee in the instant case has attempted to demonstrate that the transaction between eligible unit and AEs were carried out on market price by producing the bills and tabulations in the shape of additional evidences. As noted in the preceding paragraphs, the primary onus was on the AO to call for such documents as may be considered necessary to scrutinize whether higher profits in eligible units are on account of any arrangement per se. The AO has not discharged such onus but has made bald allegation on the grounds of relatively higher profits earned by the eligible units vis-à-vis non eligible units.

In the course of hearing, we have been greatly assisted on behalf of the assessee to gather understanding that the transaction with connected entities are at market price. When seen in totality, we are inclined to agree with the plea of the assessee on first principles that rigours of Section 80IA(10) are not applicable in a case where neither the AO has discharged its onus to establish existence of arrangement nor such arrangement is demonstrable on factual analysis. The findings of the TPO/AO holding existence of arrangement between the eligible units and AEs merely on the basis of higher operating profits of the eligible units cannot be upheld on first principles in the instant case. The assessee has placed additional evidences to rebut the unsupported finding of the TPO/AO to dislodge existence of arrangement and transactions between the eligible units and AEs to be at market price.

Hence, to the limited extent of verification of additional evidences, we deem it appropriate to remit the matter back to the file of the AO. The AO shall be at liberty to verify the correctness of the claim of the assessee that transactions of purchase undertaken by the eligible units with its AEs are at ordinary and comparable market price to justify ALP. The assessee shall also be entitled to benchmark transaction of the eligible unit by applying CUP method as most appropriate method to justify lack of any arrangement contemplated under Section 80IA(10) of the Act. To this limited extent, the matter is set aside to the file of the AO. The assessee shall be entitled to adduce such evidences as may be considered expedient to support its plea on comparability of purchase transactions carried out by eligible units with its AE viz. uncontrolled transactions.

As regards sale transactions by eligible units with its AEs, we do not consider it necessary to beset with further burden of proof on assessee towards aspects of ALP having regard to nominal percentage of sale transactions carried out with AEs owing to miniscule effect, if any, on the overall profitability when seen in the context.

The AO shall pass a reasoned order towards presence of ‘arrangement’ contemplated under Section 80IA(10), if any while determining the issue. The AO may make reference to TPO for determination of ALP of the controlled transactions as per CUP method in the event the prima facie existence of ‘arrangement’ is discovered by him in the factual matrix.

Ground no. 3 is thus allowed for statistical purposes.

Ground No.4 concerns disallowance of deduction under Section 80G of the Act amounting to Rs.6,38,13,601/-.

The AO observed that the assessee has claimed deduction to the extent of Rs.6,38,13,601/- under Section 80G of the Act. The AO noted that the assessee has filed the list of mostly private institutions/trust/university to whom the assessee has made contribution during the year under consideration aggregating to Rs.12,76,27,202/- in the computation of income while carrying out the total contribution of Rs.12,87,88,979/- towards Corporate Social Responsibility (CSR) in terms of Explanation-2 to Section 37(1) of the Act. The AO thus observed that the assessee has wrongly claimed deduction of 50% of CSR expenses Rs.12,87,82,979/- under Section 80G of the Act towards outgo/expenses which are otherwise not eligible for business expenses deduction. The AO accordingly denied the claim of deduction under Section 80G of the Act connected to expenses incurred on account of CSR. The DRP endorsed the action of the AO while issuing directions under Section 144C of the Act.

The assessee before us submitted that during the financial year under consideration, the assessee has incurred an expenditure of Rs.12,87,83,000/- in aggregate being donations and contributions to various charitable institutions and funds. Such contributions made to implementing agencies for undertaking CSR activities and registered under s. 12A and 80G of the Act, have not been claimed as business expenditure being in the nature of CSR expenses in view of Explanation- 2 to Section 37(1) of the Act. Operation of section 37 and section 80G being mutually exclusive, a deduction of Rs.6,38,13,601/-[ being 50% of such contributions] was claimed under Section 80G of the Act which was wrongly disallowed by the Revenue Authorities. The claim under 80G was denied on the ground that such expenditure being in the nature of CSR as per terms of Section 135 of the Companies Act, 2013, and thus not an allowable expenditure under the head ‘business and profession’ as per Section 37(1) of the Act and hence also not entitled to be covered for deduction under Section 80G of the Act.

The ld. DR for the Revenue however referred to and relied upon the view taken by the AO and DRP.

We have heard the rival submissions. The controversy revolves around the deductibility of donations and contributions to Funds/bodies registered under s. 12A of the Act on the counters of s. 80G of the Act where CSR contributions are not eligible for deduction under s. 37 of the Act.

The Co-ordinate benches have affirmatively adjudicated the issue as quoted on behalf of the assessee (supra). In consonance with the view taken by the Co-ordinate Benches referred to on behalf of the assessee, we are inclined to accept the plea raised on behalf of the assessee. The contribution made in question are not shown to be falling in exclusions provided in (iiihk) or (iiihl) of sub-section 2 clause (a) of S. S. 80G of the Act. The action of the Revenue Authorities is thus not sustainable in law. The claim of deduction on CSR expenses on the touchstone of Section 80G is thus allowed.

Ground No.4 of the appeal of the assessee is allowed.

Ground No.5 and sub-grounds thereto concerns eligibility towards weighted deductions under Section 35(2AB) of the Act.

Briefly stated, the assessee incurred a sum of Rs.75,28,07,186/- as expenditure on scientific research on which a weighted deduction of Rs.112,92,10,780/- under Section 35(2AB) of the Act [being 150% of sum incurred] was claimed by raising additional ground under Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963. The AO curtailed the claim and quantified the weighted deduction at Rs.100,90,68,000/-. with reference to the approval of expenditure granted by the competent authority i.e. Department of Scientific and Industrial Research (DSIR).

The disallowances were made by the AO in the draft order towards deduction under s. 35(2AB) which was however not challenged by the assessee in the proceedings before DRP under s. 144C of the Act. The AO accordingly reinstated the disallowance in the final assessment order to the extent of Rs. 12,01,42,780/-. The assessee has raised additional ground before the Tribunal seeking to challenge the reduction of claim of deduction.

The ld. counsel for the assessee submits that as against the claim of weighted deduction of Rs. 1,12,92,10,780/-; such deduction claimed by the assessee was restricted to Rs.100,90,68,000/- by the AO on the ground that DSIR has granted approval of the expenditure incurred quantified at Rs.67,27,12,000/- as against the expenditure claimed to have been incurred by the assessee at Rs.75,28,07,186/-. The AO thus worked out eligible weighted deduction at 150% of Rs. 67,27,12,000/- and allowed deduction of Rs.100,90,68,000/- under s. 35(2AB) of the Act. In essence, the AO has scaled down the claim of weighted deduction under Section 35(2AB) to the extent of Rs.12,01,42,780/-. [ unapproved portion of expenditure Rs. 8,00,95,000 + 50% weight thereon Rs. 4,00,47,500].

The Ld. Counsel adverted to tabulation detailing claim of deduction under Section 35(2AB) of the Act for the relevant A.Y. 2018- 19 under consideration reproduced hereunder:

With reference to such tabulations, the ld. counsel submitted that the aggregate expenditure incurred by the assessee on the scientific research stands at Rs.75,28,07,000/-. The DSIR has however approved the expenditure incurred at Rs. 67,27,12,000/- only. Based on approval at a curtailed figure, the AO, in turn, has recomputed the weighted deduction Rs. 100,90,68,000/- being 150% of the approved expenditure.

We advert to first aspect of the issue. Section 35(1) provides for normal deduction in respect of expenditure on scientific research subject to the conditions specified therein. The assessee claims that all the conditions are broadly similar to the eligibility under Section 35(2AB) of the Act and have been fully met to assert claim under s. 35 (1) of the Act. The AO has not tested the claim of expenditure under Section 35(1) and has disallowed the expenditure solely for the reason that such expenditure to the extent of Rs.800,95,000/- has not been approved by the DSIR. As repeatedly echoed in the judicial precedents, the quantification and approval of DSIR is not the condition precedent for the purposes of amount eligible for deduction under s. 35(1) of the Act. We thus see rationale in the plea of the assessee on this score. The disallowance of claim of deduction of Rs. 8,00,95,000 is not justified on the counters of s. 35(1) merely owing to lesser quantification of eligible expenditure by DSIR.

We now advert to the second limb of the argument for eligibility of weighted deduction thereon amounting to Rs.4,00,47,500/- under the shelter of Section 35(2AB) of the Act. In a sequel to plea towards claim of deduction under Section 35(1), the ld. counsel for the assessee submitted that the assessee is also eligible for weighted deduction of additional 50% on expenditure incurred at Rs.8,00,95,000/-. The ld. counsel referred to the provision of Section 35(2AB) which deals with weighted deductions and contended that the substantive provision of Section 35(2AB) only prescribe to the extent that the R&D facility should be approved by the competent authority, i.e., DSIR. The section nowhere provides for approval of expenditure by the competent authority per se. There is no requirement in the substantive provision that the expenditure also needs to be approved by DSIR for the purpose of claiming deduction of weighted amount if the R&D Centre is approved for this purpose. To buttress such proposition, the ld. counsel relied upon the judgment delivered by the Hon’ble High Courts in the case of CIT vs. Claris Lifesciences Ltd., (2010) 326 ITR 251 (Guj.); CIT vs. Sandan Vikas (India) Ltd., 335 ITR 117 (Del.) and Co-ordinate Bench of Tribunal in the case of DCIT vs. Force Motors Ltd., (2021) 133 taxmann.com 71 (Pune-Trib.); Minilec India (P.) Ltd vs. ACIT, (2018) 93 taxmann.com 213 (Pune-Trib.); Provimi Animal Nutrition India Pvt. Ltd. vs. PCIT, (2021) 24 taxmann.com 73 (Bangalore-Trib.).

The ld. DR for the Revenue, on the other hand, cited the decision of the Co-ordinate Bench in the case of Natural Remedies Pvt. Ltd. vs. ACIT, order dated 01.01.2021 to counter the eligibility claim of the assessee under Section 35(2AB) of the Act.

In rejoinder, the ld. counsel submitted that the aforesaid decision in the case of Natural Remedies (supra) relied upon by the Revenue actually helps the case of the assessee. The ld. counsel referred to paragraph 8.5 of the aforesaid order and submitted that the Co-ordinate Bench has observed therein that amended Rule 6(7A) affects the substantive right vested under Section 35(2AB) of the Act due to insertion of conditions towards quantification of expenditure by DSIR in terms of amended Rule and therefore, the provisions of Section 35(2AB) would prevail over amended Rules.

We have carefully considered the rival submissions on the eligibility of weighted deduction under Section 35(2AB) of the Act in the context of the case.

Section 35(2AB), in a plain language, states that where a company engaged in prescribed business incurs any expenditure (excluding expenditure on certain specified capital asset), on in-house research and development facility as approved by the prescribed authority, then such company shall be entitled to weighted deduction of expenditure so incurred. Rule 6(7A) lays down procedure and conditions for eligibility of deduction under Section 35(2AB). One of the conditions prescribed is towards quantification of expenditure by the prescribed authority. The substituted provisions of Rule 6(7A) inter alia provides for approval of in-house research and development facility in Part-A of form 3CL prescribed for this purpose. Besides, in terms of substituted Rule 6(7A) inserted w.e.f 1-6-2016, the prescribed authority shall also quantify the expenditure incurred on in-house research and development facility by the company for the previous year which is eligible for weighted deduction under Section 35(2AB) of the Act as per part-B of Form 3CL. Admittedly, the approval of the prescribed authority is not available in respect of expenditure incurred to the tune of Rs.800,95,000/- in contention. Therefore, weighted deduction of 50% on such amount which works out to Rs.4,00,47,500/- is not eligible for deduction owing to non- compliance of amended Rule 6(7A) of the Income Tax Rules insofar as A.Y. 2018-19 in question is concerned.

Various judgments referred to and relied upon on behalf of the assessee relates to assessment years prior to the amendment in Rule 6(7A) coming into effect w.e.f. 01.07.2016. The Hon’ble Courts had occasion to interpret the provisions of Section 35(2AB) which was silent on the quantification aspect. The erstwhile Rule was also silent on the quantification. Having regard to ambiguity, the Courts, at the relevant time, have held that quantification of expenditure by prescribed authority is not incumbent for the purposes of claiming deduction eligible under Section 35(2AB) of the Act. The judgments were thus rendered at the time when such conditions were not inbuilt by legislature in Rule 6(7A) of the Rules. The Hon’ble Courts were solely dependent on interpretative process to understand the purport of s. 35(2AB) due to prevailing ambiguity in law without the benefit of substituted Rule enacted later.

There can be no quarrel that, in the case of any conflict, ‘Rules’ being sub-ordinate legislation must yield to main Statute. However, there does not appear to be any conflict between the main statute and the underlying Rule. The main Statute is silent on quantification aspect of eligible deduction. The substituted Rule 6(7A), in our view, merely stipulates the quantification of expenditure by a prescribed authority and hence cannot be said to be repugnant to the provisions of Section 35(2AB) of the Act silent on such aspect. Rule 6(7A) is machinery in nature enacted to give full effect to main provision of S. 35(2AB) of the Act. The quantification of eligible expense for weighted deduction is procedural or a machinery exercise. Hence, there is no warrant to negate the effect of the substituted Rule which seeks to limit the amount of weighted deduction to the extent of approval by prescribed authority supposedly carrying domain expertise in the field. The observations made by the Co-ordinate Bench in Natural Remedies (supra) are merely in the nature of obiter while adjudication of the case relating to A.Y. 2016-17 where the substituted Rule had not come into force. The observations made thus do not carry any precedent value per se. Similarly, the co- ordinate bench in USV P. Ltd. (supra) has applied the decision rendered in assessee’s own case in earlier year without any discussion on effect of amendment in Rule 6(7A) of I.T. Rules. Hence, the view expressed in USV P. Ltd. (supra) is not entitled to great weight.

We thus see little merit in the plea raised on behalf of the assessee to ignore the substituted law expressly provided in Rule 6(7A) of the Act and to ignore the quantification carried out by the prescribed authority for the purposes of deduction under Section 35(2AB) of the Act. The contention of the assessee to avail weighted deduction on unapproved amount of Rs.8,00,95,000/- is thus devoid of any merit. The aspect is thus adjudicated against the assessee and in favour of the Revenue.

In the result, the additional Ground No.5 is allowed in part.