Tribunal directs re-examination of collaborative project payments, reverses disallowance under Section 80M

The Tribunal partially allowed the appeal, directing the AO to re-examine payments for collaborative projects. The Tribunal reversed the disallowance under Section 80M, finding it ad hoc without substantial evidence. Additionally, the Tribunal overturned the adjustment under transfer pricing provisions, noting previous decisions in favor of the assessee and lack of challenge by the AO. The judgment was pronounced on January 8, 2016.

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Issues Involved:
1. Treatment of payments made for collaborative projects.
2. Disallowance under Section 80M of the Income-tax Act.
3. Adjustment under the transfer pricing provisions.

Issue-wise Detailed Analysis:

1. Treatment of Payments Made for Collaborative Projects:
The first ground of appeal concerns the payments made for collaborative projects. The Assessing Officer (AO) found that the assessee had debited Rs. 1.48 crores for consultancy services, with Rs. 1.30 crores specifically for collaborative projects. The AO opined that these expenses were for acquiring know-how, thus capital in nature under Sections 35AB of the Act, and added them to the total income of the assessee. The First Appellate Authority (FAA) upheld this view, treating the payments as capital expenditure, arguing that the research work resulted in an intangible asset. The FAA also rejected the assessee's claim for depreciation under Section 32 of the Act. The Tribunal, however, noted that similar issues in previous years were restored to the AO for fresh consideration. Therefore, the Tribunal directed the AO to re-examine the agreements and decide the issue afresh, partially allowing the ground in favor of the assessee.

2. Disallowance Under Section 80M of the Income-tax Act:
The second ground involves the disallowance made by the AO under Section 80M. The AO disallowed Rs. 2,50,375/- on an estimated basis, arguing that certain expenses must have been incurred to earn the dividend income. The FAA upheld this disallowance, following the precedent set in the previous year. The Tribunal, however, found that the disallowance was made on an ad hoc basis without any substantial evidence. Citing the case of Zindal Iron and Steel Company and Central Bank of India, the Tribunal concluded that expenses not directly related to earning the dividend could not be deducted on an ad hoc basis for Section 80M purposes. Thus, the Tribunal reversed the FAA's order, deciding this ground in favor of the assessee.

3. Adjustment Under the Transfer Pricing Provisions:
The last ground pertains to the adjustment made under the transfer pricing (TP) provisions. The AO, based on the Transfer Pricing Officer's (TPO) recommendation, made an adjustment of Rs. 19.40 lakhs to the Arms Length Price (ALP) of the international transactions. The assessee argued that the TPO did not consider certain expenses and that the value of brought-out services and service tax should have been excluded from the actual cost for the purpose of mark-up. The FAA upheld the TPO's adjustments, but the Tribunal found that similar issues in previous years were decided in favor of the assessee, and the AO did not challenge those decisions. The Tribunal noted that the inadvertent mistake in calculation did not result in any income shifting to the non-resident entity. Therefore, the Tribunal reversed the FAA's order, deciding this ground in favor of the assessee.

Conclusion:
The appeal filed by the assessee was partly allowed, with the Tribunal directing the AO to re-examine the first issue, and reversing the FAA's orders on the second and third issues. The judgment was pronounced in the open court on January 8, 2016.

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