2019 (1) TMI 676 - HC - Income Tax

High Court affirms Tribunal decisions on transfer pricing & R&D deductions, emphasizing correct expense allocation &D

The High Court upheld the Tribunal's decisions in a tax case involving transfer pricing adjustments on a corporate guarantee and deductions for R&D ... TP adjustment - 3% of the amount of guarantee given by the assessee on behalf of AE - Held that:- As decided in COMMISSIONER OF INCOME-TAX VERSUS GLENMARK PHARMACEUTICALS LTD. [2017 (2) TMI 1305 - BOMBAY HIGH COURT] We note that the impugned order of the Tribunal while allowing the assessee's appeal holding that the arm's length price of corporate guarantee cannot be determined on the basis of comparison with the bank guarantee and relied upon the decision of Everest Kento Cylinders Ltd. [2015 (5) TMI 395 - BOMBAY HIGH COURT]. No substantial question of law. Weighted deduction u/s 35(2AB) on whole R&D expenditure - setting aside the issue of allocation of R&D expenses to Baddi unit for computation of deduction u/S 80-IC to the record of Assessing Officer for finding out whether R&D expenditure incurred has any direct nexus to Baddi unit when both these issues are interlinked? - as per ITAT withdrawal of the weighted deduction under Section 35(2AB) is not justified and also noted that merely because the respondent had allocated R&D expenditure on pro rata basis to its Himachal Pradesh unit, it would not operate a bar to raise a claim subsequently, if otherwise it is correct in law - Tribunal set aside the issue of allocation of R&D expenses to the unit in Himachal Pradesh i.e Baddi for computing deduction under Section 80IC of the Act to the Assessing Officer - Held that:- We find that the grievance of the Revenue is not justified. All that the impugned order of the Tribunal did was to follow the binding decision of this Court in Zandu Pharmaceuticals Works Lt. [2012 (9) TMI 620 - BOMBAY HIGH COURT]. No substantial question of law. Issues:1. TP adjustment made by TPO on corporate guarantee2. Deduction under Section 80-IC and Section 35(2AB) for R&D expenses allocation3. Double deduction claimed for R&D expenditureAnalysis:Issue 1 - TP Adjustment on Corporate Guarantee:The Tribunal allowed the appeal of the respondent, holding that the Arm's Length Price of a corporate guarantee cannot be determined based on a Bank Guarantee. The Revenue's appeal to the High Court was dismissed as it did not raise any substantial question of law. The High Court noted no distinguishing feature from a previous case and upheld the Tribunal's decision.Issue 2 & 3 - Deduction for R&D Expenses Allocation:The respondent had units in Himachal Pradesh and Maharashtra, claiming deductions under different sections of the Income Tax Act. Disagreements arose regarding the allocation of R&D expenses for deduction purposes. The Assessing Officer enhanced the allocation of R&D expenses to the Himachal Pradesh unit, reducing the relief under Section 80-IC. The CIT(A) further enhanced the income by disallowing weighted deduction under Section 35(2AB) to the Maharashtra units. The Tribunal found that the CIT(A) erred in law regarding the deduction under Section 35(2AB) as the R&D expenditure was incurred at approved facilities in Maharashtra, not Himachal Pradesh. The Tribunal directed the Assessing Officer to determine if any R&D expenditure had a nexus to the Himachal Pradesh unit. The High Court upheld the Tribunal's decision, emphasizing that expenses incurred on R&D work cannot be allocated to a unit that did not incur such expenses. The High Court concluded that the issue was rightly restored to the Assessing Officer for further examination in line with the decision in Zandu Pharmaceuticals Works Ltd.In summary, the High Court dismissed the appeal, upholding the Tribunal's decisions on both issues and emphasizing the importance of correctly applying tax laws and ensuring expenses are allocated appropriately for deductions.