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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य राजे�� के अनुसार लेखा सद�य राजे�� के अनुसार PER RAJENDRA, AM- लेखा सद�य राजे�� के अनुसार लेखा सद�य राजे�� के अनुसार Challenging the order dt.05/12/2006 of the CIT(A)-XXI, Mumbai the assessee has filed the present appeal. Assessee-company, engaged in the business of providing research services, filed its return of income on 31.10.2003 declaring total income of Rs.8,31,59,860/-. The Assessing Officer (AO) completed the assessment on 24.3.2006, u/s. 143(3) of the Act determining the income of the assessee at Rs.9,83,94,180/-. 2.First ground of appeal is about payments made for collaborative projects.During the assessment proceedings,the AO found that the assessee had debited Rs.1.48 crores on account of consultancy services. He called for the details in that regard and found that the assessee had incurred expenses amounting to Rs.1.30 crores under the head ‘collaborative projects undertaken’.He found that payment was made to Indian Institute of Technology, Indian Institute of Science, Dr. C. Manohar, Mumbai, Avastha Gengiline Technologies Pvt. Ltd., University of Mumbai,Madhurai Kamraj University, Madhurai,NMHANS, Sofia University, TIFR,Unilever Port Sunlight-UK and others. The AO was of the opinion that nature of the expenses on collaborative projects was of expenditure on knowhow acquired for the purpose of the assessee’s business. He held that assessee had made long term arrangements with the above-referred institutions/persons, that the agreement with Indian Institute of Science was for a collaborative project between Unilever Industry Pvt. Ltd. and the institute for the project in the area of Tea. He also referred to the agreement entered into with Dr. Manohar.Finally, he held the expenses were not in the nature of revenue expenses as claimed by the assessee, that same were incurred for long term benefit, that the amount paid by the assessee had to be treated as payment to acquire no know-how being intangible assets of the nature of capital expenses as per the provisions of sections 35AB of the Act.Treating the expenditure as capital, he added it to the total income of the assessee. 3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority (FAA).Before him, it was argued that the assessee was engaged in the business of research activity that it had outsourced some of the activities to various parties based on agreements with each of the parties in the normal course of business, the payments were revenue in nature and were allowable u/s. 37 of the Act, that the AO did not allow depreciation as per the provisions of section 32 of the Act. After considering the submissions of the assessee and the assessment order,the FAA held that the payments made by it to various persons/institutions were termed as technical services,that the payments could not be categorised the payments for some technical services only,that a sustained and ongoing research work was carried out by the persons/institutions,that research work and the result of experimenting with various chemicals was part of the work assigned by the assessee, the whole process could be termed as an intangible asset within the meaning of the Act, that the clauses of the agreement entered into by the assessee with the third party showed that the technical knowhow/findings of the research were treated as the own property of the assessee, that same were not shown/share or disclosed to any third party. Referring to the provisions of section 2(14) of the Act,the FAA held that the assessee has obtained exclusive right/copy right on the output of the research work, that it had acquired formula/a body of knowledge of certain kind and same had its own intrinsic value, that same was to be treated as capital asset, that expenditure incurred on acquisition of the asset had to be treated as capital expenditure. Finally,he held that the payments made by the assessee were before acquiring capital asset, that the research were and outcome of the research project was having permanent character which could be sold/utilised over a long period of time, that it was an intangible capital asset, that expenditure incurred for acquiring such rights and property was a capital expenditure. The FAA also rejected the claim made by the assessee with regard to depreciation. He also referred to the order of his predecessor for A.Y. 2002-03, wherein such expenditure was allowed by the then FAA.Deferring with the view of his predecessor, he held that the assessee was not carrying out scientific research itself, that it had the copy right of such scientific research, that it was not entitled to claim deduction u/s.35/35AB of the Act. 4.During the course of hearing before us,the Authorised Representative(AR)of the assessee argued that similar issue had arisen in the earlier AY. That the Tribunal had restored the issue to the file of the AO(ITA/5461/Mum/2004-AY.2000-01,ITA/1409/Mum/2005-AY.2001-02 and ITA/996/Mum/2006-AY.2002-03, dated 27.8.2014).He further argued that the FAA, while deciding the appeal for AY 2002-03,had allowed the similar expenditure. The Departmental Representative(DR) supported the order of FAA. 5.We have heard the rival submissions and perused the material before us.We find that while deciding the appeal for the earlier years the Tribunal had decided the issue as under : “8. We have considered the rival submissions and carefully perused the orders of the authorities below. As per the Memorandum of Association of the assessee, it is not in dispute that one of the objects of the assessee company is to conduct scientific technical and industrial research. After a careful perusal of the assessment order and the order of the Ld. CIT(A), we find that none of these authorities have discussed the Research agreement dt. 16.11.2000 which is between Unilever PLC and Unilever N.V and the assessee. Under the head ‘scope’ this agreement clearly provides for the services to be rendered by the assessee to Unilever group of companies for which ‘fees’ have been provided. We, further find that there is a specific clause in this agreement relating to ‘intellectual property rights’. We find that none of the revenue authorities have considered the facts of the case in the light of this agreement of the assessee. In our considered opinion, the matter needs to be decided afresh in the light of this agreement dt. 16.11.2000. 8.1 In the interest of justice and fair play, we restore this issue to the file of the AO. The AO is directed to decide this issue afresh considering 5 Unilever Industries Ltd. the agreement dt. 16.11.2000 vis-a-vis objects of the assessee as per Memorandum of Association , after giving reasonable and fair opportunity of being heard to the assessee. 8.2. While deciding this issue afresh, the AO is also directed to consider the additional plea of the assessee u/s. 35(1)(ii) and Sec. 35(1)(iv) of the Act as per provisions of law. Ground No. 1 alongwith additional grounds are allowed for statistical purpose.
9. The second ground relates to holding that the payment of Rs. 16,21,017/- made on registration of patents is capital in nature.
10. In our considered opinion, this issue also has to be decided afresh in the light of clause (III) in the agreement dt. 16.11.2000 under the head “intellectual property rights”. This issue is also restored to the file of the AO to be decided afresh in line with our directions hereinabove. This ground is allowed for statistical purpose.”
The Tribunal had given similar instructions for the remaining two years also. We find that there were more than 10 parties with whom the assessee had entered into agreement during the year under appeal, that the AO had not discussed and analysed the agreement as suggested by the tribunal in its order dated 27.8.14 (supra). We are of the opinion the matter needs further verification and investigation.Therefore, in the interest of justice we are restoring back the issue to the file of the AO.He is directed to decide the issue as per the directions given by the Tribunal for the last three AYs. Ground no. 1 is allowed in favour of the assessee, in part.
6.Second ground is about disallowance made by the AO u/s. 80M of the Act. During the assessment proceeding,the AO found that the assessee had received dividend of Rs.50.07 lacs on shares of Indian companies, that it had claimed deduction u/s 80M on the ground that the dividend of Rs.60 lacs was disbursed for the year under consideration.He directed the assessee to furnish the justification for the claim made u/s 80M of the Act and to file details of expenses incurred for earning the dividend income. He also enquired as to why the claim of deduction should not be considered on the basis of the net dividend(gross receipt – expenses).The assessee contended that it had received dividend from two companies only, that no expenses had been incurred for earning a said dividend. The AO did not accept the explanation of the assessee and held that certain expenses which formed part of total expenditure must have been incurred towards earning the dividend that the assessee had not maintained or furnished any details of expenses.Finally, he made a disallowance of Rs.2,50,375/- (5% of the dividend gross receipt) on estimated basis and held that it had to be taken as expenses incurred for earning the dividend income.
Before the FAA, it was stated that investment made out of own funds, that no expenditure was incurred for realising the dividend.The FAA held that it had not the details of the expenditure before the AO, that his predecessor had upheld the disallowance of 5% while deciding the appeal for AY.2002-03.Following the order of his predecessor, he upheld the order of the assessee for AY.under appeal.
Before us,the AR argued that no disallowance was made in the earlier years u/s.80M of the Act,that assessee had not borrowed any funds for making investments i.e.for purchasing the shares,that it had not incurred any expenditure, that no disallowance should have been made/upheld, that investment was made as early as 1995-96, that it had earned dividend from two companies only. He referred to the page no. 2, 3 and 200 of the paper book. He relied on the cases of Zindal Iron and Steel Company(25SOT27) and General Insurance of Corporation of India(254 ITR 203).The DR supported the order of FAA.
We have heard the rival submissions and perused the material on record. We find that the AO had made an ad hoc disallowance of Rs.2.50lakhs u/s. 80M of the Act, that the assessee had made investments in AY 1995-96,that except for two earlier years the AO had not made any disallowance with regard to the estimated expenditure to earn dividend income, that the AO/FAA had not given any basis for making the disallowance,that assessee had not borrowed funds to make investment that resulted in earning dividend income. We find that in the case of Zindal Iron and Steel Company (supra), the Tribunal had deleted the disallowance of 5% of dividend income made on ad hoc basis. We find that the facts of both the case are almost identical. We observe that in the case of Central Bank of India (264 ITR 552), the Hon’ble Bombay High Court has dealt the issue as under:
Section 18 of the Income-tax Act, 1961, as it stood at the relevant time, refers to computation of income by way of interest on securities. Section 20 (2) states, inter alia, that expenses deducted under section 20 (1) shall not form part of the deductions admissible under sections 30 to 37 for the pur-poses of computing business profits. Section 80M , on the other hand, comes under Chapter VI-A of the Income-tax Act, 1961. Chapter VI-A refers to special deduction. Chapter VI-A constitutes a separate code dealing with deductions to be made in computing the total income. In order to compute deduction under section 80M , one has to compute the amount of dividend in accordance with the Act after deducting interest on monies borrowed for earning such income. The deductions contemplated by section 80M refer to actual expenditure whereas, deductions contemplated by section 20 (1) are estimated proportionate expenses and interest. Therefore, one cannot import deductions from interest on securities in the case of a banking company under section 20 (1) into the deductions contemplated by section 80M . Section 20 (1) contains a rule of proportionality of expenses and interest and that rule is based on estimation of expenditure whereas, deduction under section 80M is allowable on net dividend arrived at after taking into account actual expenditure incurred for the purposes of earning such dividend unless the facts of a particular case warrant other-wise.
From the above order,it is cleared that expenditure which are not directly relatable to earning of expenditure could not be deduction from dividend income on ad hoc basis for the purpose of allowing deduction u/s. 80M of the Act.Respectfully,following the judgment of the Hon’ble Jurisdictional High court,we reverse the order of the FAA. Ground no. 2 is decided in favour of the assessee.
10.Last ground of appeal is about adjustment made under the transfer pricing (TP) provisions. During the assessment proceedings,the AO found that the assessee had entered into international transaction with associated enterprise.So,he made a reference to the Transfer Pricing Officer (TPO).Vide his order,dated 31.10.2006,the TPO made an adjustment of Rs.19.40 lacs to the Arms Length Price (ALP) of the international transactions.Accordingly, the AO made an addition of Rs.19,40,000/- to the total income of the assessee,being the difference between the price shown by the assessee and the ALP determined by the TPO. 11.Before the FAA, the assessee argued that it had entered into an agreement with Unilever on 16.11.2000, that it was entitled to charge and invoices to Unilever on the basis of actual cost incurred and a mark up of 5% on the actual cost,that the actual cost had been defined in the agreement, that mark up on actual cost was to be calculated from the actual cost, that while raising the invoice the assessee did not include the finance cost of Rs.3.87 crores, that similarly did not exclude the value of brought out services of Rs.4.94 crores and service tax of Rs.61 lacs from the actual cost for the purposes of mark up, that the TPO only considered the finance cost,that he ignored brought out/purchase services and service tax while determining the ALP, that TPO should have considered the expenses and the agreement in their entirety, that the value of brought out/purchase services and the amount of service tax should have been reduced from the actual cost for the purpose of mark up,that there was inadvertent mistake,that the TPO could determine ALP as per the methods prescribed u/s.92C of the Act,that the FAA, while deciding the appeal for A.Y. 2002-03 had adjudicated the issue in favour of the assessee. After considering the submission of the assessee, the FAA held that the computation of ALP was guided as per the provisions of section 92 of the Act, that the contract entered by the assessee with Unilever could not be upheld against the operations of the provisions of the said Act,that the assessee had not pointed out any discrepancy in the calculation made by the TPO. 12.During the course of hearing before us, the AR stated that the TPO had not considered the expenses,that the value of the brought out/purchase services and the amount of service tax should have been reduced for the purpose of mark up, that TPO had shown as to how the conditions stipulated in s.92(3) were not fulfil, that the TPO had to determine the ALP as per the provisions of section 92C(1)of the Act,that the assessee had followed one of the methods mentioned in the Act, that it had adopted TNMM/CUP method, that it was not within the domain of the TPO to disturb the method adopted by the assessee, that the accrual of income could not be determined u/s. 92 of the Act, that the identical issue was decided in favour of the assessee by the FAA.s while decide the appeals for AY.s. 2002-03 and 2004-05, that the department had not challenged the orders of the FAA in that regard before the Tribunal, that brought out component was more than the finance cost. He referred page nos.28, 32, 34, 37- 39, 242-245 of the paper book. The DR relied upon the order of the FAA. 13.We have heard the rival submissions and perused the material before us.We find that the assessee had admitted that due to an inadvertent lapse there occurred a mistake in calculation of APL,that in the earlier and subsequent AY.s. the then FAA.s.had allowed the appeal of the assessee and had held that the value of the brought out purchase and the amount of service tax should have been reduced for the purpose of mark-up,that the AO.s had not challenged the orders of the FAA.s.,that the order of the FAA.s. had become final as far as the AO is concerned, that the AO or the DR could not point out any difference in the facts of the case under appeal and the facts of the earlier/subsequent years.It is also an undisputed fact that the assessee had not included the finance cost (Rs.3.87 Crores),as well as it had not excluded the value of brought out services(Rs.4.94Crores) and service tax (Rs.61 Lacs)from the actual cost for the purposes of mark up.If the above figures are considered,it becomes clear that there was no scope for making any adjustment as per the provisions of section 92 of the Act. It is said the the paramount objective behind enactment of these provisions is that the entities which are connected to each other on account of shareholding or managerial control, etc., and thereby are in a position to influence the business decisions of Indian entities,including the payments made to or received by them from the non-resident entity, are not able to shift payment of taxes from India to other countries, by shifting the income which genuinely belongs to the Indian entity, to the non-resident entity, which is not taxed in India. The arm's length principle of transfer pricing is based on the premise that the amount charged by one related party to another for a product must be the same as if the parties were not related. An arm's length price in respect of a foreign transaction, therefore, is the price which that transaction would obtain in the open market.If the above basic principle is examined with regard to the facts of the case under appeal it becomes very clear that there is no shifting of income to the non-resident entity.Due to a bona-fide mistake the assessee adopted a particular figure,but,if the overall picture is looked in to,it becomes clear that there was act or intention of diverting the profits by the assessee.Considering the peculiar facts and circumstances of the case,we are of the opinion that view taken by the FAA cannot be endorsed.Reversing his order,we decide ground no.3 in favour of the assessee. As a result appeal filed by the assessee stands partly allowed. फलतः िनधा�रती �ारा दािखल क� गई अपील अंशतः मंजूर क� जाती है. Order pronounced in the open court on 8th January, 2016. आदेश क� घोषणा खुले यायालय म# $दनांक 8 जनवरी, 2016 को क� गई । Sd/- Sd/- (पवन �सह/ Pawan Singh) (राजे�� / Rajendra) �याियक सद�य / JUDICIAL MEMBER लेखा लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य मुंबई/Mumbai,�दनांक/Date: 08.01.2016. व.िन.स.Jv.Sr.PS.