2014 (1) TMI 16 - AT - Income Tax

Tribunal rules in favor of assessee on R&D expenditure eligibility under Section 35(2AB)

The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes, directing the AO to verify the R&D ... Expenditure on corporate brand image - Held that:- Following assessee's own case for A.Y. 2006-07 - The brand building of the corporate in advertisement is inherent and it cannot be inferred that such an advertisement goes to create a fixed capital - Even if there is some enduring benefit on account of brand building through advertisement then also, it cannot be held that it is on capital field - Advertisement creates on impression of the brand and product in the mind of the consumer and if there is no frequent advertisement of brand or the product, it is very difficult to push sales in the market - The advertisement on the TV, whether be it for the brand or the product, only goes to enhance the sales and profitability of the assessee company and, hence, the same is to be held as revenue in nature - Decided against Revenue. Transfer pricing adjustment - Held that:- Following assessee's own case for A.Y. 2006-07 - Charging of guarantee commission depends upon the transaction to transaction and mutual understanding between the bank and the parties - There could be instances, where on the evaluation of various parameters, of financial credibility and stakes of the client, the bank may not charge any guarantee commission which completely depends upon its evaluation, of a particular client - This is also evident from the fact that, in some of the years, in assessee‟s own case, no charges have been paid on account of guarantee commission - when there was an internal CUP in the form of bank guarantee charges, charged by the bank from the assessee, the same ought to have been first analysed and examined wherein the guarantee commission charged ranged between 0.25% to 0.35% - In the earlier years, the Tribunal has deleted the similar addition and no question of law on this score has been raised by the Department - No upward adjustment in the ALP in relation to charging of guarantee commission over and above 0.20% can be made - Decided against Revenue. Weighted deduction u/s 35(2AB) - Held that:- Following ACIT vs Torrent Pharmaceuticals Ltd. [2009 (11) TMI 819 - ITAT AHMEDABAD] - The relevant provisions of the Act did not contain any specific condition that the deduction u/s 35(2AB) and accordingly the claim of the assessee for deduction u/s 35(2AB) will be restricted to the amount of R & D expenditure as contained in the certificate - Even the expenditure is not included in the said certificate was eligible for deduction u/s 35(2AB) in respect of the said expenditure - The claim of the assessee of having incurred the expenditure has not been examined either by the AO or by the ld. CIT(A) - The issue was restored for fresh adjudication. Issues Involved:1. Deletion of disallowance on television advertisement expenditure.2. Deletion of addition on account of transfer pricing adjustment for guarantee commission/fees.3. Addition on account of weighted deduction claimed under section 35(2AB) for research and development expenditure.Issue-wise Detailed Analysis:1. Deletion of Disallowance on Television Advertisement Expenditure:The Revenue challenged the CIT(A)'s deletion of the disallowance of Rs.777.80 lakh made by the AO for expenditure on television advertisements related to corporate image/brand. The assessee, engaged in manufacturing and sales of paints and enamels, had debited Rs.1109.81 lakhs for sales promotion and advertisement, including Rs.30.76 crores for television advertisements. The AO considered Rs.10.36 crores of this as capital expenditure, allowing only depreciation and resulting in a Rs.777.80 lakh disallowance. The CIT(A) deleted this disallowance, noting that such expenses are recurring and necessary for business, not creating any new capital asset. The Tribunal upheld the CIT(A)'s decision, referencing a similar case from A.Y. 2006-07 where such expenditure was deemed revenue in nature, emphasizing that advertisement expenses, even for corporate brand, facilitate business and enhance sales and profitability.2. Deletion of Addition on Account of Transfer Pricing Adjustment for Guarantee Commission/Fees:The Revenue contested the CIT(A)'s deletion of Rs.2.44 crores added by the AO for transfer pricing adjustment related to guarantee commission/fees for guarantees given by the assessee to its AEs. The assessee had provided guarantees to banks for loans to its AEs, charging a 0.20% commission/fees. The TPO determined the arm's length rate at 3%, leading to the addition. The CIT(A) deleted this addition, referencing previous years' decisions where similar adjustments were not sustained. The Tribunal agreed, noting the lack of comparability analysis and the internal CUP showing a lower rate of 0.25% to 0.35%. The Tribunal upheld the CIT(A)'s order, finding no basis for the 3% rate applied by the TPO.3. Addition on Account of Weighted Deduction Claimed Under Section 35(2AB) for Research and Development Expenditure:The assessee's appeal involved the addition of Rs.27.17 lakhs made by the AO and confirmed by the CIT(A) on account of weighted deduction claimed under section 35(2AB) for R&D expenditure. The AO reduced the claimed R&D expenditure based on a certificate from DSIR, which certified a lower amount as eligible. The CIT(A) upheld this reduction. The Tribunal, however, found merit in the assessee's claim, referencing similar cases where such reductions were not justified if the expenditure was indeed incurred for R&D. The Tribunal restored the issue to the AO for verification of the claimed R&D expenditure's eligibility under section 35(2AB), treating the assessee's appeal as allowed for statistical purposes.Conclusion:The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes, directing the AO to verify the R&D expenditure's eligibility under section 35(2AB). The Tribunal's decisions were based on consistency with previous rulings and the lack of substantive evidence from the Revenue to justify the disallowances and adjustments.