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

PER PRADIP KUMAR KEDIA-AM:

The captioned appeal has been filed at the instance of the assessee against the final assessment order dated 28.07.2022 passed under Section 143(3) r.w. Section 144C(13) r.w. Section 144B of the Income Tax Act (in short ‘the Act’) in pursuance of directions issued by Dispute Resolution Panel (DRP) dated 21.06.2022 relevant to Assessment Year 2018-19.

“1. That the assessing officer erred on facts and in law in completing assessment under section 144C(13) read with section 143(3) and 144B of the Income-tax Act, 1961 (the Act') at Rs.808,53,61,917 as against returned income of Rs.7,68,21,64,860. 2. That on the facts and circumstances of the case and in law the order dated 28.07.2022 passed by the assessing officer under section 144C(13), having been passed beyond limitation provided in terms of Section 144C(13) read with section 153(3) of the Act, is illegal being barred by limitation, void ab initio and is liable to be quashed. 3. That the assessing officer erred on facts and in law in making transfer

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pricing adjustment of Rs. 21,92,40,676/- in relation to the specified domestic transactions undertaken by the appellant. 3.1 That the assessing officer erred on facts and in law in adding the transfer pricing adjustment made by the TPO to the income of the appellant not appreciating that the addition / disallowance ought to have been restricted to the deduction under section 80IC/80IE of the Act 3.2 That the assessing officer / TPO erred on facts and in law in not appreciating that the assessee being an entrepreneur is engaged in activities such as research and development, brand building and advertising and therefore cannot be selected as the tested party for the purpose of undertaking benchmarking analysis. 3.3 That the assessing officer/TPO erred on facts and in law in not appreciating that the associated enterprises being the simpler of the transacting entities ought to have been selected as the tested party. 3.4 That the assessing officer / TPO erred in facts and in law in selecting functionally different companies as comparable for the purpose of undertaking benchmarking analysis Re: Disallowance of deduction under section 80G of the Act amounting to Rs. 6,38,13,601/- 4. That the assessing officer erred on facts and in law in making disallowance of Rs. 6,38,13,601 on account of disallowance of deduction under section 80G of the Act holding that expenditure incurred for the purpose of meeting Corporate Social Responsibility requirements is not an allowable expenditure. 4.1 That the assessing officer erred on facts and in law in not appreciating that there is no bar in claiming deduction under section 80G of the Act in respect of donations made as part of CSR expenditure. Re: Disallowance of Deduction under section 35(2AB) amounting to Rs. 12,01,42,780/- 5. That the assessing officer erred on facts and in law in allowing weighted deduction under section 35(2AB) of the Act at Rs.100,90,68,000 as against Rs.112,92,10,780 claimed by the appellant towards expenditure incurred on scientific research. 5.1 That the assessing officer failed to appreciate that the appellant having approved R&D Centres and having fulfilled the conditions of section 35(2AB) of the Act, is entitled to weighted deduction in respect of the entire gross expenditure incurred on scientific research. 5.2 That the assessing officer erred on facts and in law in allowing deduction under section 35(2AB) of the Act only to the extent of expenditure approved by Department of Scientific and Industrial Research (DSIR) in Form 3CL. 5.3 That the assessing officer erred on facts and in law in not appreciating

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that there is no provision under the Act empowering DSIR to approve the quantum of expenditure for the purposes of claiming deduction under section 35(2AB) of the Act. 5.4 That the assessing officer erred on facts and in law in not appreciating that the only requirement for claiming deduction under section 35(2AB) of the Act is that the in-house Research and Development facility is to be approved by DSIR and not for approval of expenses. 6. That on the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under Section 270A of the Act.” 3. 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:

“"Re: Disallowance of Deduction under section 35(2AB) amounting to Rs 12,01,42,780 5. That the assessing officer erred on facts and in law in allowing weighted deduction under section 35(2AB) of the Act at Rs.100,90,68,000 as against Rs.112,92,10,780 claimed by the appellant towards expenditure incurred on scientific research. 5.1 That the assessing officer failed to appreciate that the appellant having approved R&D Centres and having fulfilled the conditions of section 35(2AB) of the Act, is entitled to weighted deduction in respect of the entire gross expenditure incurred on scientific research. 5.2 That the assessing officer erred on facts and in law in allowing deduction under section 35(2AB) of the Act only to the extent of expenditure approved by Department of Scientific and Industrial Research (DSIR) in Form 3CL. 5.3 That the assessing officer erred on facts and in law in not appreciating that there is no provision under the Act empowering DSIR to approve the quantum of expenditure for the purposes of claiming deduction under section 35(2AB) of the Act. 5.4 That the assessing officer erred on facts and in law in not appreciating that the only requirement for claiming deduction under section 35(2AB) of the Act is that the in-house Research and Development facility is to be approved by DSIR and not for approval of expenses."

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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.

8.1 For the assessment year under consideration, the return filed by the assessee was selected for scrutiny under Section 143(3) of the Act. The

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case was referred to the Transfer Pricing Officer (TPO) in terms of S. 92BA r.w.s 80IA(8) & 80IA(10) of the Act for computing Arms’ Length Price in respect of Specified Domestic Transactions (SDTs) towards purchase and sale of goods & services, entered into between the units eligible for deduction under Section 80IC/80IE of the Act and other units inter se and also other AEs of the assessee entity. The assessee as per its Transfer Pricing Study Report did not separately benchmark the SDTs entered into by the eligible units with the Associated Enterprises (AEs) of the assessee. The Assessee conducted entity level comparison of OP/OR of the assessee-company (combining all units) as a whole and compared it with the operating margins of other comparable companies. Considering the OP/OR/TNM (Transaction Net Margin) of the assessee- company as a whole which amounted to 19.11% as compared to OP/OR/TNM of comparable companies averaging 8.72%, the entire transactions, whether Specified Domestic Transaction or International Transactions were opined to pass the Arms’ Length Price test as per the TP Study Report.

8.2 However, on reference to TPO for verification of ALP of Specified Domestic Transaction entered into by the eligible units, the TPO passed order dated 30.07.2021 under Section 92CA(3) of the Act alleging that since the respective eligible units have earned higher profits vis a vis median of OP/OR of comparable companies, there was an existence of arrangement between eligible units and AEs which resulted in higher than ordinary profits to eligible units and thus has given rise to excessive deduction under s. 80IC/ 80IE of the Act.

8.3 The TPO after conducting fresh search on comparable companies determined the OP/OR at 11.33% [median of comparable companies selected by the TPO]as against OP/OR of eligible Unit II @ 14.91%; Unit III 38.33% and Sikkim Unit 33.61% reported by the Assessee and consequently quantified adjustment of Rs. 64,34,78,261/- under s. 92CA(3) by invoking Section 80IA(10) of the Act in respect of eligible profit for the purposes of claiming deduction under Section 80IC/80IE of

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the Act. The TPO/ AO also observed that the OP/OR of non eligible Unit- I is 5.76% whereas OP/OR of eligible units i.e. Unit-II and Unit-III are 14.91% and 38.33% respectively. The OP/OR of Sikkim unit was found to stand at 33.31%. The TPO thus observed that the assessee’s business model has been designed in such a way so as to grant more than ordinary profits to the eligible party and the profits were being actually shifted from non eligible unit and AEs to eligible units.

8.4 The TPO thus concluded that the assessee has unjustifiably claimed higher deduction under Section 80IC/80IE quantified at Rs. 64,34,78,261/- and proceeded to make adjustment under s. 80IA(10) of the Act.

Details of Transaction Amount (in Rs.) TP adjustments w.r.t. specified domestic transaction Adjustment u/s 92CA(3)/80IA(10)/801C/80IE of the Act 64,34,78,261 Ageing of Receivables 5,72,619 Other additions/disallowances Addition w.r.t. to expenditure incurred on in-house 12,01,42,780 scientific research under section 35(2AB) of the Act Disallowance w.r.t. deduction claimed under section 638,13,601 80G of the Act on account of donations given Addition w.r.t. difference in Duty Drawback 2,18,481

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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.

Details of Transaction Amount (in Rs.) TP adjustment w.r.t. specified domestic transaction Adjustment u/s 92CA(3)/80IA(10)/80IC/80IE of the 21,92,40,676 Act Other additions/disallowances Addition w.r.t. to expenditure incurred on in-house 12,01,42,780 scientific research under section 35(2AB) of the Act Disallowance w.r.t. deduction claimed under Section 6,38,13,601 80G of the Act on account of donations given

(i) the unit-wise deduction claimed by the respective units of the assessee situated in Himachal Pradesh (available for deduction under Section 80IC) and manufacturing unit situated at Sikkim (eligible for deduction under Section 80IE) during the year under consideration is as under:

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Unit Total Profit Deduction claimed during the year under consideration

Unit II; Poanta Rs. 37,37,59,333/- Rs. 11,21,27,800/- (@30%) Unit-III; Rs. 37,36,74,411/- Rs. 11,21,02,323/ - Poanta (@30%) Sikkim Unit Rs. 16,41,98,940/- Rs. 16,41,98,940/- (@100%) Total Rs. 91,16,32,684/- Rs. 38,84,29,063/-

(ii) The aforesaid eligible units have entered into some transactions relating to purchase(mainly raw-material/ packing material etc.) and sale (mainly scrap etc.) with other related Associated Enterprises(AEs) of the assessee company. The summary of unit wise purchase and sale transactions between the deduction seeking units and associated enterprises (AEs) is tabulated as under:

Figures in Crore(s) Sikkim Unit Unit –II Unit – III

Total Sales 77.53 268.42 138.73 Sales to AEs 0.15 17.91 0.65 % of sales to AEs 0.19% 6.67% 0.47% Total Purchase 13.28 67.85 18.50 Purchase from 4.38 19.65 5.99 AEs % of purchase to 32.98% 28.96% 32.39% AEs

(iii) The assessee did not separately benchmark the SDTs entered into by the eligible units with the AEs of the assessee-company with any specific most appropriate method but conducted entity level comparison of OP/OR of the assessee-company as a whole and compared it with the operating margins of other comparable companies. Considering the OP/OR/TNM Method of the assessee-company as a whole, the profit

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margin stands at 19.11% which is far more than the operating margin of comparable companies which stands at an average of 8.72% as computed by the Assessee.

(iv) The operating profits of the respecting eligible units as stated are tabulated below.

Units Turnover (Rs. Operating Profit OP/OR % Crores) (Rs. Crores)

Paonta Unit-II 268.42 40.03 14.91

Paonta Unit- 138.73 53.17 38.33 III

Sikkim Unit, 77.55 26.06 33.31 Sikkim

(v) The TPO proceeded to make adjustments under s. 80IA(10) on the sole ground that eligible units have reported higher profits compared to Unit-I not eligible for deduction. The TPO in page 9, para 2 of its order observed that since the eligible units have earned higher profits, there existed an arrangement between the eligible units and AEs by implication that resulted in higher profits. The existence of so called arrangement contemplated under s. 80IA(10) was thus supposed and presumed having regard to higher profits by eligible units vis-à-vis non-eligible unit. For holding presumption of ‘arrangement’ the TPO failed to point out any inaccuracy at the transaction level between eligible units and AEs and whether such transactions were at market price / Arms’ Length Price or not.

(vi) As per the mandate of section 80IA(10) of the Act read with first proviso thereto, existence of ‘arrangement is a pre-condition before proceeding to make an arm’s length adjustment under s. 92BA of the Act.

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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.

16.1 The Ld. Counsel paused to contend here that the need to file additional evidences emanate from the purport of findings of the TPO at page 9 of its order. The ld. counsel stoutly pointed out that the additional evidences have been filed with a solemn intent to demonstrate with high quality internal CUP data that the transactions between eligible units and its AEs are at arms length and comparable with the transactions carried out with non AEs/ third parties. Taking the point further, the Ld. counsel contends that it was incumbent on TPO/AO in law to demonstrate existence of so called ‘arrangement’ with reference to some material to indicate indulgence of the Assessee in any ‘arrangement’ so as to produce to the assessee more profits than what the assessee might have ordinarily expected to arise from such business. The AO/TPO has miserably failed to discharge its onus in this regard. The Ld. Counsel reiterated that the existence of ‘arrangement’ under Section 80IA(10) of the Act can not be alleged and presumed solely for the reason that eligible units have earned more profits than non eligible units as wrongly done by the AO/TPO without sanction of law. The AO thus has glaringly failed to discharge its onus while alleging existence of ‘arrangement.

16.2 The Ld Counsel valiantly contested that even without the additional evidences, the action of the AO/TPO is outside the bounds of law on the ground of bald supposition of existence of arrangement contemplated under s. 80IA(10) without any corroboration with tangible material. The action of the AO/TPO is dictated by the sole consideration of relatively higher profits reported by the eligible units qua non eligible unit. Presumption of arrangement on such premise is contrary to stated

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legal position as enunciated in CIT vs. Schmetz India P. Ltd. 26 taxmann.com 336(Bom.); PCIT vs. Vedansh Jewels Pvt. Ltd. (2018) 97 taxmann.com 521 (Raj.); CIT vs. H P Global Soft Ltd. 342 ITR 263(Kar.); Honeywell Automation India Ltd. vs. DCIT in ITA no. 287/PUN/2015 order dated 25.02.2015 and many other decisions of the co-ordinate bench of tribunal.

16.3 The Ld. Counsel for the Assessee next submitted that while the onus of existence of arrangement lay upon the revenue, the assessee on its part seeks to blunt any thin suspicion of arrangement by assertively demonstrating arm’s length nature of transactions with the help of such additional evidences. The Ld. Counsel submits that the additional evidences placed under Rule 29 of the ITAT Rules will only bring ground realities to the fore and will only testify the arm length nature of transactions by eligible units. The additional evidences merely supports the transaction at market price by the eligible units.

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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.

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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.

21.1 The ld. DR pointed out that Rule 29 does not confer, as a matter of right, any allowance to parties to produce any additional evidence either oral or documentary before the Tribunal. The rules governing the admission of additional evidences are quite narrow and strict in nature. Rule 29 is couched in a negative language to bar the parties to produce the additional evidences before Tribunal. The power to admit additional evidences under Rule 29 is only vested with Tribunal. The Tribunal has a discretion to admit the additional evidences where it requires any document to be produced or any witness to be examined or any affidavit to be filed to enable it to pass order or for any other substantial cause. The discretion to admit the additional evidences is required to be exercised judicially. The ld. DR thus submitted that the assessee at this stage is not entitled in law to render fresh evidence to support its case which has the consequence to make out a new case altogether. An attempt was made to distinguish the judgment delivered in the case of Sanjay Kumar Singh vs. State of Jharkhand in Civil Appeal No.1760 of 2022 dated 10th March, 2022 (SC); CIT vs. Text Hundred India Pvt. Ltd. in ITA No.2077, 2061 and 2065/2010 judgment dated 14.01.2011 referred to and relied upon by the assesse. A reference was also made to CIT vs. Smt. Kamal C. Mehboobani, (1995) 214 ITR 15 (Bom); Kanniappan Muriugadoss vs. ITO, (2017) 79 taxmann.com 244 (Chennai Tribunal) in this regard.

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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.

25.1 Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963, ostensibly places a bar on the parties to the appeal to produce additional evidences either oral or documentary before the Tribunal. However, the Tribunal is vested with a judicial discretion to allow the production of additional evidences in the following circumstances;

(i) when the Tribunal requires any documents to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders or

(ii) when the Tribunal requires any documents to be produced or any witness to be examined or any affidavit to be filed for any other substantial cause or

(iii) when the Income Tax Authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidences either on points specified by them or not specified by them.

25.2 In this backdrop, we take note of the plea raised on behalf of the assessee that additional evidences filed primarily demonstrate that the transactions between the eligible units and non eligible units / AEs are at arms length and at ordinary market price and therefore, no cause of action arises for invocation of 80IA(10) to allege the existence of any

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kind of ‘arrangement’ fetching more than ordinary profits to the assessee.

25.3 Para 2 page 9 of the order of TPO gathers significance for adjudication of controversy towards Transfer pricing adjustments under challenge as per Ground No. 3 of the Grounds of appeal. The operative para of the order of TPO would be relevant for this purpose.

"In the present case, the point to be noted is that the Assessee is showing excessive profits to claim higher deduction under section 80-1C/80IE of the Act. When two related parties, one of whom is eligible for a profit linked deduction under section 80-IC/80IE of the Act transacts business between them which is not an arm's length, designed in a way to grant more than normal profits to the eligible party, the profits are actually being shifted from the non-eligible party to the eligible party, which then unjustifiably claims higher deduction under section 80-IC/801E. From the above table it can be seen that OP/OR of Unit I (non eligible units) is 5.76% and OP/OR of eligible units (Unit-II is 14.91%, Unit-III is/38.33%, Sikkim Unit is 33.31%). Therefore it is clearly seen that assesse's business model is designed in such a way that to grant more than normal profits to the eligible party, the profits are actually being shifted from the non-eligible party to the eligible party, which then unjustifiably claims higher deduction under section 80-IC/80IE."

25.4 Likewise, the directions of DRP on such observations of TPO is also extracted for easy reference

3.1 The assessee has claimed deduction u/s.80IC/80IE fo the Act. It has three eligible units for claiming the above deductions, namely Unit-II (Paonta Shahib). Unit-III (Paonta Shahib) & Unit-IV (Sikkim). Unit-I (Paonta Sahib) is the non-eligible unit. The TPO has noted as follows:- S. No. Name of Unit OP/OR ratio 1. Unit I (Paonta Sahib) Non-eligible 5.76% 2. Unit II (Paonta Sahib) eligible 14.91% 3. Unit III (Paonta Sahib) eligible 38.30% 4. Unit IV (Sikkim) eligible 38.31%

3.2 In view of the above, the TPO has pointed out that there is an ‘arrangement’ between the assessee and the AE to shift profit to the eligible units from the non-eligible units.”

25.5 The controversy towards TP adjustments and admission of additional evidences has the genesis flowing from the provisions of S. 80IA(10) of the Act which reads as under;

"Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.

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80-IA. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years. ...] (10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom:

Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm's length price as defined in clause (ii) of section 92F." [Emphasis Added]

25.6 The nature of documentary evidence(s) sought to be admitted as additional evidences as per Rule 29 are broadly outlined as under:

o Copy of purchase invoices showcasing a comparison of product-by-product purchases by eligible units from associated enterprises (AEs) and third parties during the year under consideration.

o Copy of a purchase invoice(s) reflecting purchases by the deduction seeking units from the AEs and invoices of sales made by the AEs of same products to third parties. o Copy of the tax invoices for the sale transactions undertaken by the deduction seeking units with the associated enterprises, as well as invoices for further sales of the same products made by the associated enterprises.

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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

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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.

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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.

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that onus is placed upon the AO to discharge the burden of existence arrangement.

(i) Existence of arrangement between the deduction seeking units and other associated enterprises is a pre-condition for invoking the rigor of section 80-IA(10) of the Act and needs corroboration.

ii) Mere close connection cannot per se lead to an inference that there is an arrangement which has resulted into higher profits,

(iii) Extraordinary profits cannot per se lead to the conclusion that there is an arrangement between the parties.

(iv) The concept of PLI cannot per se be applied to hold that the assessee has earned super normal profits in carrying on its business.

(v) The onus is on Revenue to establish the existence of arrangement on the basis of some material while seeking adjustment in the deduction claimed with the aid of Section 80IA(10) read with proviso thereto.

(vi) If the assessee has demonstrated that the transactions between the eligible unit and AE were carried out at market price, the burden placed on the assessee stands discharged and the burden shifts upon the Assessing Officer to rebut the same.

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(vii) The AO has to discharge the burden by proving that the transactions were not at market price, before satisfying the condition of arrangement while making reference to TPO for computation of ALP.

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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.

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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.

Entity Name of related Nature of As per 10CCB Correction Amount of Concern transaction purchase Poant Unit ANM Pharma Purchase of 43322738 - 43322738 II Private Limited product Poant Unit Pharma Force Lab- Purchase of 97431 - 97431 II II product Poant Unit Medipack Purchase of 37111100 - 37111100 II Innovation Private product Limited Poant Unit A To Z Printer Purchase of 21365945 - 21365945 II product Poant Unit Printman Purchase of 923195 - 923195 II product- Poant Unit J.K. Print Pack Purchase of 10075239 - 10075239 II product Poant Unit Pharma Pet Purchase of 5546657 - 5546657 II Industries product Poant Unit Sirmour Remedies Purchase of 33630 - 33630 II Private Limited product

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Poant Unit A.S. Packers (Unit- Purchase of 34510418 - 34510418 II II) product Poant Unit A.S. Packers Purchase of 34510418 22577293 11933125 II product Poant Unit N.S. Industries- Purchase of 6961986 - 6961986 II Poanta product Poant Unit N.S. Industries – Purchase of 28655811 - 28655811 II Unit-II product Sub Total Poanta Unit-II 223114568 22577293 200537275

Poanta Unit A To Z Packers Purchase of 4205460 - 4205460 III product Poanta Unit A.S. Packers Purchase of 376776 - 376776 III product Poanta Unit Medipack Purchase of 26484648 - 26484648 III Innovation Private product Limited Poanta Unit Mediforce Health Purchase of 160300 - 160300 III Care Pvt. Ltd. product Poanta Unit Pharma Force Lab- Purchase of 34810 - 34810 III Unit II product- Poanta Unit Print Man Purchase of 421418 - 421418 III product Poanta Unit ANM Pharma Pvt. Purchase of 63956 - 63956 III Ltd. product Poanta Unit J.K. Print Packs Purchase of 140185 - 140185 III product Poanta Unit JPR Labs Private Purchase of 4011250 - 4011250 III Limited product Sub Total Poanta Unit III Purchase of 35898803 - 35898803 product

Sikkim A To Z Packers Purchase of 1955058 - 1955058 product Sikkim A.S. Packers Unit Purchase of 1039068 - 1039068 II product- Sikkim Copmed Purchase of 41990 - 41990 Pharmaceuticals product Pvt. Ltd. Sikkim J.K. Print Packs Purchase of 683178 - 683178 (Pharma Division) product Sikkim Medipack Purchase of 39166844 - 39166844 Innovations Pvt. product Ltd. Sikkim Pharma Force Lab- Purchase of 357000 - 357000 Unit I product Sub Total Sikkim 43243138 43243138 302256509 22577293 279679216

Ma t Co d e Ma t – D e s c I n v . I n v - Ve n d o r N a m e R P T U o M Q t y A m t A v g Mi n Ma x V e n d o r R a t e R a t e R a te 1 0 0 0 0 0 0 9 D i S o d i u m 0 0 0 0 1 0 S i r m o u r R e m e d i e s Y e s K G 1 0 0 . 0 0 2 8 5 0 0 . 0 0 2 8 5 2 8 5 2 8 5 E d e t a te I . P. 0 0 6 0 P v t . Lt d . 1 0 0 0 0 0 0 9 D i S o d i u m 0 0 0 0 1 0 K r o n o x L a b ( b l a n k ) K G 6 5 0 . 0 0 1 7 2 2 5 3 . 7 0 2 6 5 2 6 5 2 6 5 E d e t a te I . P. 1 7 6 1 S c i e n c e s L t d . 1 0 0 0 0 0 9 0 L - C a rn i t in e L - 0 0 0 0 1 0 A N M P h a r m a P v t . Y e s K G 4 0 0 . 0 0 7 4 0 0 0 1 . 0 0 1 8 5 0 1 8 5 0 1 8 5 0 T a rt r a t e 2 7 0 6 L t d . 1 0 0 0 0 0 9 0 L - C a rn i t in e L - 0 0 0 0 1 0 J . K . P r i n t s P a c k s ( b l a n k ) K G 2 5 . 0 0 4 4 5 0 0 . 0 0 1 7 8 0 1 7 8 0 1 7 8 0 T a rt r a t e 3 5 9 3 ( P h a r m a D iv i s i o n ) 1 0 0 0 0 1 1 0 P a n to p r a z o l e 0 0 0 0 1 0 J PR L a b s P v t . L t d . Y e s K G 6 0 0 3 9 0 0 0 0 0 . 0 6 5 0 0 6 5 0 0 6 5 0 0 S o d i u m I P 5 5 8 9 0 1 0 0 0 0 1 1 0 P a n to p r a z o l e 0 0 0 0 1 0 A B S Me rc a n t i l e s ( b l a n k ) K G 1 1 0 0 . 0 6 4 1 5 0 0 2 . 2 5 8 3 2 5 4 0 0 6 2 7 5 S o d i u m I P 0 0 9 1 P v t . Lt d . 0 0 1 0 0 0 0 1 1 7 P o v i d o n e I P ( K- 0 0 0 0 1 0 P h a r m a Fo r c e L a b - Y e s K G 5 0 . 0 0 2 9 5 0 0 . 0 0 5 9 0 5 9 0 5 9 0 3 0 ) 0 0 4 6 U n i t I I 1 0 0 0 0 1 1 7 P o v i d o n e I P ( K- 0 0 0 0 1 0 N i sc h e m ( b l a n k ) K G 1 0 0 . 0 0 6 1 0 0 0 . 0 0 6 1 0 6 1 0 6 1 0 3 0 ) 0 1 1 2 I n t e rn a t i o n a l 1 0 0 0 0 3 7 6 A lp h a L i p o ic 0 0 0 0 1 0 A N M P h a r m a P v t . Y e s K G 1 0 0 0 . 0 4 1 7 5 8 0 5 . 6 4 1 7 6 4 1 0 5 4 2 7 5 A c id U S P 2 7 0 6 L t d . 0 0 1 0 0 0 0 3 7 6 A lp h a L i p o ic 0 0 0 0 1 0 N i sc h e m ( b l a n k ) K G 5 0 0 . 0 0 2 0 9 5 5 0 1 . 9 4 1 9 1 4 0 3 0 4 2 7 5 A c id U S P 2 1 2 6 I n t e rn a t i o n a l P v t . 3

26 I.T.A. No.2313/Del/2022

L t d .

1 0 0 0 0 5 7 2 O f l o x a c i n I P 0 0 0 0 1 0 A N M P h a r m a P v t . Y e s K G 1 3 1 7 5 . 2 5 8 6 9 9 6 0 . 1 9 6 4 1 8 3 6 2 3 4 5 2 7 0 6 L t d . 0 0 0 0 1 0 0 0 0 5 7 2 O f l o x a c i n I P 0 0 0 0 1 0 A rc h it C h e m i c a l s ( b l a n k ) K G 1 5 0 0 . 0 2 9 6 2 5 0 0 . 0 1 9 7 5 1 9 7 5 1 9 7 5 0 0 9 4 P v t . Lt d . 0 0

1 0 0 0 0 8 1 3 Ca l c i u m 0 0 0 0 1 0 P h a r m a Fo r c e L a b - Y e s K G 4 5 5 . 6 5 1 3 6 6 9 . 5 0 3 0 3 0 3 0 Ca r b o n a t e ( F in e 0 0 4 6 U n i t I I P o wd e r ) I P 1 0 0 0 0 8 1 3 Ca l c i u m 0 0 0 0 1 0 C l a ri o n ( b l a n k ) K G 3 3 8 7 5 . 9 2 6 1 7 5 . 0 0 2 7 2 7 2 8 Ca r b o n a t e ( F in e 0 0 9 7 P h a r m a c e u t i c a l s 0 0 P o wd e r ) I P C o .

1 0 0 0 1 2 1 3 M CC ( A v i c e l P H - 0 0 0 0 1 0 M e d if o r c e Y e s K G 2 5 0 . 0 0 1 2 2 5 0 0 . 0 0 4 9 0 4 9 0 4 9 0 1 0 2 ) P h . E u r / 0 0 3 8 H e a l th c a re P v t . U S N F L t d . 1 0 0 0 1 2 1 3 M CC ( A v i c e l P H - 0 0 0 0 1 0 S i g n e t C h e m i c a l ( b l a n k ) K G 5 5 0 . 0 0 2 7 5 6 5 7 . 7 5 5 0 1 4 9 0 5 8 5 1 0 2 ) P h . E u r / 0 1 1 7 C o rp . P v t . L t d . U S N F

1 0 0 0 1 2 8 7 Mi c ro c r y st a l i n e 0 0 0 0 1 0 P h a r m a Fo r c e L a b - Y e s K G 7 9 . 4 0 4 0 4 9 4 . 0 0 5 1 0 5 1 0 5 1 0 Ce l u l o s e ( A v i c e l 0 0 4 6 U n i t I I P H 1 0 1 ) I P 1 0 0 0 1 2 8 7 Mi c ro c r y st a l i n e 0 0 0 0 1 0 S i g n e t C h e m i c a l ( b l a n k ) K G 1 0 0 0 . 0 4 7 8 0 0 0 . 4 7 4 7 8 4 7 8 4 7 8 Ce l u l o s e ( A v i c e l 0 1 1 7 C o rp P v t . L t d . 0 P H 1 0 1 ) I P

1 1 0 0 0 0 6 2 P la i n A l u A l u 0 0 0 0 1 0 M e d ip a c k Y e s K G 6 3 4 8 . 1 2 0 9 4 8 7 4 . 6 3 3 0 3 3 0 3 3 0 F o i l 0 . 1 3 x 1 3 9 Mm 2 3 1 6 I n n o v a t i o n s P v t . 1 5 L t d . 1 1 0 0 0 0 6 2 P la i n A l u A l u 0 0 0 0 1 0 I C M P l a s ti c s P v t . ( b l a n k ) K G 1 2 9 6 . 6 4 3 4 3 8 1 . 1 0 3 3 5 3 3 5 3 3 5 F o i l 0 . 1 3 x 1 3 9 Mm 2 1 9 8 L t d . 6

1 1 0 0 0 2 0 5 P la i n A l u A l u 0 0 0 0 1 0 M e d ip a c k Y e s K G 6 0 9 9 . 6 2 0 1 2 8 7 1 . 3 3 3 0 3 3 0 3 3 0 F o i l 0 . 1 3 x 1 7 0 Mm 2 3 1 6 I n n o v a t i o n s P v t . 1 0 L t d . 1 1 0 0 0 2 0 5 P la i n A l u A l u 0 0 0 0 1 0 I C M P l a s ti c s P v t . ( b l a n k ) K G 6 0 1 1 2 0 0 8 5 2 2 3 3 5 3 3 5 3 3 5 F o i l 0 . 1 3 x 1 7 0 Mm 2 1 9 8 L t d .

1 1 0 0 0 2 3 5 P la i n A l u A l u 0 0 0 0 1 0 M e d ip a c k Y e s K G 3 4 5 5 . 8 1 1 4 0 4 1 8 . 9 3 3 0 3 3 0 3 3 0 F o i l 0 . 1 3 x 2 4 0 Mm 2 3 1 6 I n n o v a t i o n s P v t . 2 5 L t d . 1 1 0 0 0 2 3 5 P la i n A lu F o i l 0 0 0 0 1 0 I C M P l a s ti c s P v t . ( b l a n k ) K G 1 0 1 . 3 2 3 3 9 4 2 . 2 0 3 3 5 3 3 5 3 3 5 0 . 1 3 x 2 4 0 M m 2 1 9 8 L t d .

1 1 0 0 0 2 6 7 A lu A l u F o i l 0 0 0 0 1 0 M e d ip a c k Y e s K G 1 3 4 9 . 6 4 4 5 3 8 7 . 8 0 3 3 0 3 3 0 3 3 0 0 . 1 3 x 2 1 4 M m 2 3 1 6 I n n o v a t i o n s P v t . 6 L t d . 1 1 0 0 0 2 6 7 A lu A l u F o i l 0 0 0 0 1 0 I C M P l a s ti c s P v t . ( b l a n k ) K G 2 1 8 . 0 2 7 3 0 3 6 . 7 0 3 3 5 3 3 5 3 3 5 0 . 1 3 x 2 1 4 M m 2 1 9 8 L t d .

1 1 0 0 0 2 6 8 P la i n A l u A l u 0 0 0 0 1 0 M e d ip a c k Y e s K G 1 8 7 5 . 2 6 1 8 8 3 2 . 5 0 3 3 0 3 3 0 3 3 0 F o i l 0 . 1 3 x 2 0 2 Mm 2 3 1 6 I n n o v a t i o n s P v t . 5 L t d . 1 1 0 0 0 2 6 8 P la i n A l u A l u 0 0 0 0 1 0 I C M P l a s ti c s P v t . ( b l a n k ) K G 3 0 9 . 6 6 1 0 3 7 3 6 . 1 0 3 3 5 3 3 5 3 3 5 F o i l 0 . 1 3 x 2 0 2 Mm 2 1 9 8 L t d .

1 1 0 0 0 3 9 5 B l. Fo i l P t d . 0 0 0 0 1 0 P ri n t M a n Y e s K G 1 7 9 . 0 9 7 1 9 0 9 . 6 6 4 0 2 4 0 0 4 0 5 R E h e p ti n T a b 0 7 5 9 2 1 0 x 0 . 0 2 5 P S 1 1 0 0 0 3 9 5 B l. Fo i l P t d . 0 0 0 0 1 0 M e d ip a c k ( b l a n k ) K G 1 9 9 . 6 3 8 3 6 4 4 . 9 7 4 1 9 4 1 9 4 1 9 R E h e p ti n T a b 2 3 1 6 I n n o v a t i o n s P v t . 2 1 0 x 0 . 0 2 5 P S L t d .

1 1 0 0 0 4 2 0 P la i n A l u A l u 0 0 0 0 1 0 M e d ip a c k Y e s K G 8 9 0 3 . 5 2 9 3 8 1 7 4 . 8 3 3 0 3 3 0 3 3 0 F o i l 0 . 1 3 x 2 2 2 Mm 2 3 1 6 I n n o v a t i o n s P v t . 6 0 L t d . 1 1 0 0 0 4 2 0 P la i n A l u A l u 0 0 0 0 1 0 I C M P l a s ti c s P v t . ( b l a n k ) K G 1 0 8 0 . 3 3 6 1 1 6 9 . 2 5 3 3 5 3 3 5 3 3 5 F o i l 0 . 1 3 x 2 2 2 Mm 2 1 9 8 L t d . 3

1 1 0 0 0 4 8 0 P la i n A l u A l u 0 0 0 0 1 0 M e d ip a c k Y e s K G 4 4 4 5 . 5 1 4 9 9 6 9 2 . 4 3 3 7 3 3 0 3 8 6 F o i l 0 . 1 3 x 2 1 6 Mm 2 3 1 6 I n n o v a t i o n s P v t . 5 4 L t d . 1 1 0 0 0 4 8 0 P la i n A l u A l u 0 0 0 0 1 0 I C M P l a s ti c s P v t . ( b l a n k ) K G 3 5 6 . 1 2 1 1 8 5 2 8 . 0 5 3 3 3 3 3 0 3 3 5 F o i l 0 . 1 3 x 2 1 6 Mm 2 1 9 8 L t d .

1 1 0 0 0 5 1 7 P la i n A l u A l u 0 0 0 0 1 0 M e d ip a c k Y e s K G 4 6 1 1 . 0 1 5 2 2 0 6 5 . 3 3 3 0 3 3 0 3 3 0 F o i l 0 . 1 3 x 2 4 8 Mm 2 3 1 6 I n n o v a t i o n s P v t . 8 9 L t d . 1 1 0 0 0 5 1 7 P la i n A l u A l u 0 0 0 0 1 0 I C M P l a s ti c s P v t . ( b l a n k ) K G 7 0 9 . 7 9 2 3 4 2 3 0 . 7 0 3 3 0 3 3 0 3 3 0 F o i l 0 . 1 3 x 2 4 8 Mm 2 1 9 8 L t d .

2 0 0 0 7 7 9 1 L D P E P o l y B a g 0 0 0 0 1 0 A T o Z P a c k e rs Y e s K G 1 0 3 3 2 . 1 4 9 8 2 3 1 . 3 1 4 5 1 4 5 1 4 5 2 4 ” X 3 6 ” 0 6 6 6 6 3 5 2 0 0 0 7 7 9 1 L D P E P o l y B a g 0 0 0 0 1 0 S a t y a m S t a t i o n e ry ( b l a n k ) K G 2 5 . 0 0 3 0 5 0 . 0 0 1 2 2 1 2 2 1 2 2 2 4 ” X 3 6 ” 4 2 0 6 & G e n e r a l Ma r t

27 I.T.A. No.2313/Del/2022

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.

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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.

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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.

30 I.T.A. No.2313/Del/2022

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.

46.1 In this context, the ld. counsel submits that there can be no quarrel that as per Explanation-2 to Section 37 of the Act, the deduction towards expenditure incurred on CSR activities referred to in Section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of ‘business or profession’. However, disallowance of such expenses/ outgo in view of stipulations made in section 37 of the Act does not put any fetters on the eligibility under other provisions of the Act viz. Section 80G of the Act. The claim is eligible for deduction under S. 80G unless statutorily prohibited. The ld. counsel contends that there being no bar in law to claim deduction under Section 80G of the Act notwithstanding its ineligibility under Section 37(1) of the Act, the denial of deduction under s. 80G is wholly misconceived and unjustified action.

46.2 The Ld. Counsel submits that section 80G of the Act allows a taxpayer to claim deductions in respect of contributions made to certain charitable Institutions and Funds etc. Further, sub-Section (2)(a) of Section 80G of the Act enumerates Funds to whom contributions are eligible for such deduction.

46.3 Adverting to such list enumerated, the Ld. Counsel points out that Clause (iiihk) and (iiihl) of the Act of sub-section (2)(a) of section 80G of the Act are peculiar and provides for specific instances where CSR expenditure not eligible under s. 37, is also not to be allowed as deduction under s. 80G too. The relevant position of section 80G(2)(a) of

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the Act is reproduced hereunder:

"(iiihk) the Swachh Bharat Kosh, set up by the Central Government, other than the sum spent by the assessee in pursuance of Corporate Social Responsibility under sub-section (5) of section 135 of the Companies Act, 2013 (18 of 2013); or (iiihl) the Clean Ganga Fund, set up by the Central Government, where such assessee is a resident and such sum is other than the sum spent by the assessee in pursuance of Corporate Social Responsibility under sub- section (5) of section 135 of the Companies Act, 2013 (18 of 2013); or"

46.4 The learned counsel thus submitted that as corollary to the legislative fiat, save and except cases falling in exceptions under 80G(2)(a)(iiihk) & (iiihl), the assessee is duly eligible for deduction under s. 80G subject to fulfilment of conditions, unhindered by ineligibility under s. 37 of the Act.

46.5 The assessee referred to the decisions rendered by the Co-ordinate Bench in the case of National Seeds Corporation Limited vs. ACIT, ITA No. 6794/Del/2014; First American (India) Private Limited [ITA No. 1762/Bang/2019; Societe Generale Securities India Pvt. Ltd. [TS-770- ITAT-2023 (Mum)]; Goldman Sachs Services Private Limited [IT(TP) A No. 2355/Bang/2019 to buttress its claim that in the similar facts the claim of deduction on CSR expenses have been allowed under Section 80G of the Act notwithstanding ineligibility for claim for the purposes of deduction under Section 37 of the Act. The ld. counsel thus urged for reversal of the action of the Revenue Authorities.

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48.1 We find that the issue is no longer res integra. S. 135 of the Companies Act, 2013 read with FAQs dated 25/08/2021 issued by the Ministry of Corporate Affairs GOI (MCA) provides for different modes of incurring CSR expenses. One of the specified modes is ‘ Contribution to Funds route’, which inter alia allows the assessee to make contributions to various funds specified in Schedule VII of the Companies Act. The contributions to such funds, qualified to be in the nature CSR expenses under Companies Act, is not eligible for deduction as business expenditure in view of statutory exclusion carved out by Explanation-2 to Section 37(1) of the Income Tax Act, 1961. However, such exclusion extends only to the extent of computing business income under Chapter IV-D of the Act. As per the scheme of the Act, in the absence of any non-obstante clause, there does not appear to be any bar for the assessee to claim benefit under Section 80G, bracketed under Section VIA of the Act, if such contributions are eligible for deduction otherwise. The exclusions provided in 80G (2)(a)(iiihk) & (iiihl) qua certain specific contributions such as ‘Swachh Bharat Kosh’ and ‘Clean Ganga Fund’ rather exhibits the legislative intent loud and clear. Thus on a plain reading, it is evident that the assessee would be ordinarily entitled to deduction on contributions made to funds and bodies registered under s. 12A of the Act regardless of stipulations made in s. 37(1) of the Act barring the exclusion codified in s. 80G(2)(a)(iiihk) & (iiihl). As a corollary to delineations made in the preceeding paragraphs, s. 37 and S. 80G, appear mutually exclusive subject to exceptions provided in sub-clause (2)(a)(iiihk) & (iiihl) of S. 80G of the Act.

48.2 Hence, the exception carved out by way of Explanation 2 to s. 37 (1) prohibiting claim of CSR expenses as business expenditure, by itself, will not serve as any kind of impediment for the purposes of claim of deduction under s. 80G of the Act.

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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.

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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].

Srl. Details of Scientific As per As per DSIR Difference No. Expenditure Assessee ‘A’ ‘B’ ‘C’ (A-B) 1. Revenue Expenditure 65,29,50,000 57,73,93,000 7,55,57,000 2. Capital Expenditure 9,98,57,000 9,53,19,000 45,38,000 3. Total: 75,28,07,000 67,27,12,000 8,00,95,000 4. 100% deduction u/s. 75,28,07,000 67,27,12,000 8,00,95,000 35(1)(i)/(iv) 5. Weighted deduction @ 37,64,03,500 33,63,56,000 4,00,47,500 50% u/s. 35(2AB) 6. Total: 112,92,10,500 100,90,68,000 12,01,42,500

56.1 In this regard, the ld. Counsel made two fold submissions.

56.1.1 Firstly, in terms of Section 35(1)(i) r.w. Section 35(1)(iv), expenditure on scientific research being related to the business of the assessee is eligible for business deduction in entirety without any further rider qua approval of expenses by DSIR insofar as Section 35(1) is concerned. Whether the expenditure incurred is capital or revenue in nature is also of no consequence. The requirement of approval of expenses by DSIR, if any, is not applicable insofar as aforesaid

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provisions of Section 35(1)(i)/(iv) is concerned. Hence, without prejudice, the assessee is entitled to normal deduction of 100% of the expenses incurred under the umbrella of s. 35(1) of the Act without any fetters of approval of DSIR. The quarrel regarding approval of entire expenses by DSIR, if any, can possibly exist only with reference to weighted deduction with reference to Section 35(2AB) of the Act. Hence, the deduction of 100% of the revenue and capital expenditure aggregating to Rs.8,00,95,000/- incurred on scientific research is qualified under Section 35(1)(i)/(iv) without prejudice to the contention towards weighted deduction thereof under Section 35(2AB) of the Act. A reference was made to the decision of the Tribunal in the case of FDC vs. PCIT, ITA No.1031/Mum/2023 order dated 02.08.2023. The ld. counsel thus submits that the AO has committed gross error in refusing to grant deduction of Rs.8,00,95,000/- available in law under Section 35(1)(iv) of the Act on the wrong premise of lack of approval of amount eligible by prescribed authority which approval is not necessary in view of judicial fiat. The ld. counsel reiterated that quantification of expenditure by DSIR is not the condition precedent for the purpose of Section 35(1)(i)/(iv) of the Act as long as the facility is approved by DSIR. It is not the case of the AO that such expenditure has not been laid out or expanded for the purposes of scientific research. The ld. counsel also pointed out on facts that the capital expenditure component does not include any expenditure incurred on acquisition of any land or building and therefore, whole of the capital expenditure is allowable under Section 35(1)(i) r.w. Section 35(1)(iv) of the Act. The deduction of the expenditure has been denied under Section 35(1)(i)/(iv) solely due to non approval thereof by DSIR.

56.1.2 Secondly, The main provision of weighted deduction under s. 35(2AB) do not postulate the requirement of quantification of expenditure and approval thereof by DSIR either. The underlying Rules imposing such conditions seek to widen the terms of main provisions and thus not enforceable in law.

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37 I.T.A. No.2313/Del/2022

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.).

58.1 Riding on such decisions, the ld. counsel reiterated that once the R&D Centre/ facility stands approved by the prescribed authority, the assessee becomes entitled to benefit of weighted deduction on whole of actual expenses incurred notwithstanding lesser amount approved by prescribed authority. The judgements referred have interpreted the provisions of s. 35(2B) that quantification of expenditure eligible for weighted deduction by prescribed authority is not the requirement of law and an approval of facility thus would sufficiently entitle the Assessee to claim weighted deduction on whole of expenditure incurred towards scientific research.

58.2 The ld. counsel however thereafter fairly referred to substituted sub Rule (7A) of Rule 6 of the Income Tax Rules 1962 which lays down guidelines relating to procedure to be followed pre and post approval of R&D facility by DSIR. The substituted portion of the aforesaid Rule is applicable w.e.f. 01.07.2016 reads as under:

"[Prescribed authority for expenditure on scientific research. [(7A) Approval of expenditure incurred on in-house research and development facility by a company under sub-section (2AB) of section 35 shall be subject to the following conditions, namely : - (a) The facility should not relate purely to market research, sales promotion, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature; (b) The prescribed authority shall furnish electronically its report, - (i) in relation to the approval of in-house research and development facility in Part A of Form No.3CL; (ii) quantifying the expenditure incurred on in-house research and development 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;”

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58.3 With reference to substituted Rule which seeks to insert condition of approval of expenditure incurred on in-house research and development facility, the ld. counsel submitted that such amendment is subservient to main provision and thus cannot override and broaden the bandwidth of the substantive provisions of Section 35(2AB) of the Act. The ld. counsel submitted that the underlying Rules being sub-ordinate to the main provisions, cannot burden the assessee with additional fetters on the substantive conditions enacted in the main statute, i.e., Section 35(2AB) for the present purpose. The ld. counsel submitted that as interpreted by the Hon’ble High Court of different jurisdiction in chorus, the availability of benefit under Section 35(2AB) towards expenditure incurred in relation to R&D facility is not dependent upon the quantification and approval by DSIR. The benefit under S. 35(2AB) would be available on actual expenditure incurred as long as the R & D facility holds the approval of the prescribed authority.

58.4 The ld. counsel thereafter referred to the judgment rendered in the case of CIT vs. Taj Mahal Hotel, (1971) 821 ITR 44 (SC); CIT vs. Bombay State Transport Corporation (1979) 118 ITR 399 (Bombay) to submit that it is a cardinal rule of construction that Rules are meant only for the purposes of carrying out the provisions of the Act and Rules cannot be take away what was conferred by the Act or whittle down its effect.

58.5 The ld. counsel thus submitted that the essence of such judgment is that substantive provisions of the statute cannot be modified or diluted through delegated legislation in the form of rules, notification and circulars.

58.6 The ld. counsel also referred to the decision of the Co-ordinate Bench rendered in the case of USV Pvt. Ltd. vs. DCIT, ITA No.891/Mum/2021 order dated 20.06.2023 to submit that it pertains to AY 2018-19 and thus despite the amendment in Rule 6(7A) coming in force w.e.f. 01.07.2016, the Tribunal followed the order passed in the

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assessee’s own case for the earlier Assessment years where the amended Rules had not come into force and held that quantification of expenditure by DSIR as provided in Rule 6(7A) is not binding on the AO. The ld. counsel thus sought appropriate relief in the matter.

40 I.T.A. No.2313/Del/2022

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.

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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.

Sd/- Sd/- [CHALLA NAGENDRA PRASAD] [PRADIP KUMAR KEDIA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: /05/2024 Prabhat