ITAT Mumbai rules against revenue on transfer pricing, TDS, and R&D deduction disputes

The ITAT Mumbai ruled against revenue on multiple transfer pricing and tax deduction issues. The tribunal held that corporate guarantee commission charges cannot be subjected to transfer pricing adjustments, distinguishing them from bank guarantees per Bombay HC precedent. Share buyback transactions at different rates were deemed genuine business practices not requiring notional interest charges. R&D expense allocation to 80-IB/80-IC units was rejected as expenses were for specific research purposes unrelated to qualifying units. TDS provisions under section 195 were held inapplicable to commercial laboratory testing services as they don't constitute technical services. The tribunal remanded weighted deduction claims under section 35(2AB) for fresh consideration and allowed deduction where Form 3CL was delayed by DSIR.

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Issues Involved:
1. Deletion of addition on account of guarantee fee income.
2. Deletion of notional interest on buy-back of shares.
3. Allocation of R&D expenses to 80-IB and 80-IC qualifying units.
4. Allowing the claim of weighted deduction u/s. 35(2AB).
5. Disallowance of weighted deduction u/s. 35(2AB) due to non-submission of Form 3CL.
6. Deletion of addition u/s. 40(a)(i) for non-deduction of tax at source.
7. Rejection of application u/s. 154 for rectification regarding deduction u/s. 35(2AB).

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Guarantee Fee Income:
The AO made an upward adjustment of Rs. 2.17 crores based on the TPO's determination of the Arm's Length Price (ALP) for guarantee fees charged by the assessee to its AE. The TPO rejected the assessee's benchmark rate of 0.75% provided by HSBC Mumbai and used comparables from Standard Chartered Bank and FMO Netherlands, resulting in a higher rate. The FAA deleted the adjustment, holding that the TPO's rejection of the HSBC quotation was not justified and that the assessee's method was appropriate. The Tribunal upheld the FAA's decision, citing the Bombay High Court's ruling in Everest Kento Cylinder Ltd., which differentiated between corporate and bank guarantees, thus dismissing the AO's appeal on this ground.

2. Deletion of Notional Interest on Buy-back of Shares:
The AO treated the buy-back of shares by Wockhardt Europe Ltd. (WEL) as a loan transaction and charged notional interest. The FAA found that the TPO had not disputed the valuation of shares and that the transaction was a common business activity. The Tribunal upheld the FAA's decision, noting that the TPO had not provided evidence to support the claim that the transaction was a loan. The Tribunal concluded that the buy-back of shares was a genuine transaction and dismissed the AO's appeal on this ground.

3. Allocation of R&D Expenses to 80-IB and 80-IC Qualifying Units:
The AO allocated R&D expenses to units eligible for deduction under sections 80-IB and 80-IC, which the FAA had previously ruled against. The Tribunal referenced its earlier decisions in the assessee's own case and other similar cases, concluding that the R&D expenses were not related to the specific units claiming the deduction. The Tribunal upheld the FAA's decision and dismissed the AO's appeal on this ground.

4. Allowing the Claim of Weighted Deduction u/s. 35(2AB):
The AO disallowed the weighted deduction claimed by the assessee for in-house scientific research expenses, arguing that the expenses were incurred through third parties. The FAA deleted the disallowance, following earlier years' orders where the deduction was allowed upon receiving Form 3CL from DSIR. The Tribunal remitted the issue back to the AO for further verification, directing the AO to consider the case laws cited by the assessee. The Tribunal partially allowed the ground.

5. Disallowance of Weighted Deduction u/s. 35(2AB) Due to Non-submission of Form 3CL:
The AO denied the deduction due to the non-submission of Form 3CL from DSIR. The FAA ruled that the delay in receiving the form was beyond the assessee's control and directed the AO to allow the deduction upon submission of the form. The Tribunal upheld the FAA's decision, citing similar cases where the delay in receiving Form 3CL was not held against the assessee. The Tribunal dismissed the AO's appeal on this ground.

6. Deletion of Addition u/s. 40(a)(i) for Non-deduction of Tax at Source:
The AO disallowed expenses for payments made to non-residents for pilot-bio studies and clinical research, citing non-deduction of tax at source. The FAA deleted the disallowance, referencing the Tribunal's earlier decisions in favor of the assessee. The Tribunal upheld the FAA's decision, citing the Bombay High Court's ruling in Kotak Securities Ltd., which supported the assessee's position. The Tribunal dismissed the AO's appeal on this ground.

7. Rejection of Application u/s. 154 for Rectification Regarding Deduction u/s. 35(2AB):
The AO rejected the assessee's application for rectification, stating that no mistake was apparent from the record. The FAA ruled that the AO should allow the deduction upon submission of Form 3CL, which was received after the assessment order. The Tribunal upheld the FAA's decision, noting that the delay in receiving the form was beyond the assessee's control. The Tribunal dismissed the AO's appeal on this ground.

Conclusion:
The Tribunal partly allowed ITA/5557/Mum/2012 and dismissed ITA/4156/Mum/2012, pronouncing the order on 05th January, 2018.

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