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Income Tax Appellate Tribunal, “C” BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI S. JAYARAMAN
आदेश/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-6, Chennai in dated 27.04.2017 for the assessment year 2013-14.
:-2-: ITA No. 1665/Mds/2017
2. M/s. Harita Seating Systems Limited, the assessee, is engaged in the manufacture of seating systems for automobiles and its units are located at Hosur, Pune, Bangalore and Himachal Pradesh. In respect of Himachal Pradesh unit, the assessee arrived the income at Rs. 53,12,694/ and claimed a deduction of Rs. 15,93,808/-u/s. 80IC . From the income of other units, the assessee claimed a deduction of Rs. 7,78,74,366/- towards Research and Development expenditure u/s. 35(2AB). Since, all the units of the assessee are engaged in the manufacture of the same product viz., seating systems and the benefit of research and development also accruing to all the units, the AO obtained unit wise profitable statement, found that the turnover of the 80IC unit was at 10.01%, based onsuch turnover he apportioned the research and development expenses related to Himachal Pradesh unit at Rs. 77,61,703/- and then computed the income. This has resulted in determination of a business loss from Himachal Pradesh unit at Rs. 24,49,009/-as against the admitted income of Rs. 53,12,694/ . Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) held as under:
“4.3 The matter is considered. I am not in agreement with the views of the ld. Authorised Representative. The reliance on the ratio of Liberty India Limited (supra) is misplaced and does not aid the case for the appellant. My reasons for taking this position are the following: 1. The decision in the case of Liberty India Limited (supra) was rendered in the context of deduction under Section 80lB of the Act and more specifically on the position whether there is a 'first degree nexus' between the DEPB credit/duty drawback receipt and the profits. The Hon'ble Supreme Court had held
:-3-: ITA No. 1665/Mds/2017 that duty drawback receipts do not come within first degree source for allowing deduction under Section 80lB of the Act.
The case of the appellant is on a totally different footing. The appellant company has not disputed the finding of the AO that all the units are engaged in the manufacturing of the same product viz., automotive seating systems and the benefit of research and development is accruing to all the units. Hence, in my considered view, there is a direct connection, and proximity between the R&D expenses and the profitability of the manufacturing units. Hence, I do not find any infirmity in the basic philosophy of apportionment of R&D expenditure to 4.4 However, it is seen that the AO has allocated weighted deduction claimed at 200 percent amounting to Rs.7,78,74,366/- under Section 35(2AB) of the Act. In my opinion, the enhanced weighted deduction at 200 percent is for the specific purpose of claim under Section 35(2AB) of the Act. Apportionment of the expenditure must be made of the real expenditure, i.e. 100 percent of the actual expenditure, and not the notional enhanced one taken for a specific deduction or claim. Hence, the apportionment of expenditure is to be taken at 100 percent of the actual expenditure incurred by the appellant on Research & Development. The actual expenditure as reproduced by the AO on page 4 of the assessment order is as under: Nature of Expenditure As per Form No.3CL (In Rs.) Capital expo Other than land and building 13,68,000 Recurring expenditure 3,74,02,000 R & D expenditure Total 3,87,70,000
Hence, the allocation of R&D expenditure, in my view, is to be limited to 10.01 percent of R&D expenditure (other than capital expenditure), i.e. Rs.3,74,02,000/-. The allocation of amount hence is computed as under:
Income from 80lC unit: Net Profit as per computation Rs.52,12,694/-
:-4-: ITA No. 1665/Mds/2017
Less: R&D expenditure allocation Rs.37,47,680/- ------------------ Income from 80lC Unit Rs.15,65,014/- Eligible Deduction u/s 80lC(30 percent) Rs. 4,69,504/- ------------------- 4.5 In view of the facts, circumstances and discussion above, the appellant is allowed deduction under Section 80lC of the Act to the extent of Rs. 4,69,504/-. This ground is partly allowed.”
Against the CIT(A) order, the assessee filed this appeal . The AR pleaded that the CIT(A) ought to have appreciated the fact that the main object of R&D Centre is to conduct a research for the business. The expenditure incurred by the R&D centre is not of commercial nature necessitating allocation to various business units. The CIT(A) erred in denying deduction claimed u/s. 80IC at Rs. 11,24,304/- by apportioning the R&D centre expenditure (approved by DSIR) of a specific unit to the undertaking eligible for 80IC deduction and thereby allowing the claim partially . The CIT (A) ought to have appreciated that while computing the profits of the undertaking eligible for 80IC deduction, only the profits “derived” by the undertaking is to be considered as against profits “attributable” to that undertaking. Hence , expenses incurred by the R&D centre cannot be notionally allocated for arriving the profits derived by the eligible 80IC undertaking . The AR further submitted that the adjustment of proportionate R&D expenditure certified by DSIR in Form 3CL by the AO is unwarranted as these R&D expenditures does not relate to HP unit. R&D
:-5-: ITA No. 1665/Mds/2017 expenditure certified by DSIR is location specific and recognition of R&D unit by DSIR is given only for R&D unit in Hosur. The relevant section refers the profits derived from the undertaking and hence while computing the profits and gains of the concerned undertaking, only expenses relating thereto can be deducted. In other words, the expenses must be incurred, for and on behalf of the concerned undertaking. The expenses attributable to any other unit or the head office expenses which have no relevance to the industrial undertaking, cannot be deducted in respect of the said undertaking while computing the profits and gains of the undertaking and relied on the decisions of the Supreme Court of India in the case of Liberty India vs Commissioner of Income Tax [2009] 317 ITR 218 , Gujarat High Court in the case of Torrent Pharmaceuticals Ltd vs Commissioner of Income Tax [2017] 393 ITR 625 and the Madras High Court decision in the case of CIT vs L.M.
Van Moppes Diamond Tools Ltd., 145 ITR 195.Per Contra, the DR relied on the orders of the AO and the CIT (A) and submitted that all the assessee’s units are under one PAN, they are all in the same business and the CIT (A) has found direct connection in his order in para 4.3, supra.
We heard the rival submissions and gone through the relevant materials. The assessee is having its units set up in Hosur, Pune, Bangalore and Himachal Pradesh. All of them are undertaking the same business as of manufacture of seats & seating systems. The assessee has computed income
:-6-: ITA No. 1665/Mds/2017 from the units of Hosur, Pune&, Bangalore separately and the income from the unit in the Himachal Pradesh separately. The assessee claimed deduction on the R&D expenditure u/s. 35(2AB) against the income from the units of Hosur, Pune & Bangalore only. Now, the issue here is whether the income computed by the assessee for the unit of Himachal Pradesh without deducting or debiting proportionate R& D expenses is correct or not ?. The assessee pleads that the adjustment of proportionate R&D expenditure certified by DSIR in Form 3CL by the AO is unwarranted as these R&D expenditures does not relate to HP unit. R&D expenditure certified by DSIR is location specific and recognition of R&D unit by DSIR is given only for R&D unit in Hosur. On the other hand, the Revenue pleads that the assessee is carrying out research & development activities relating to automotive seating applications. The research activities cover seating applications for Buses, Trucks, Tractors and Two-wheelers. The research activities encompassing product conceptualization, designing, development of sample lots, testing and commercialization. The benefits of such research is availed by all the units of the assessee and hence the R& D expenditure has to be apportioned. The AO as well as the CIT (A) have given a concurrent findings . In spite of it , from the entire pleadings it is clear that the assessee has not disputed such facts.
It has not laid any material to say that the unit in the Himachal Pradesh has not availed or is not or would not avail the benefits of the impugned R& D etc and hence the apportionment made by the A O and as modified by the :-7-: ITA No. 1665/Mds/2017 CIT(A) is upheld . On the above facts and circumstances , the case laws relied on by the assessee are held as not applicable .The assessee’s grounds fail.
In the result, the assessee’s appeal is dismissed.
Order pronounced on Friday, the 08th day of December, 2017 at Chennai.