2019 (10) TMI 73 - AT - Income Tax

Tribunal decision: Assessee's appeal partly allowed, Revenue's appeal partly allowed. Re-examination directed.

Asstt. Commissioner of Income Tax Circle–10 (1), Mumbai Versus Wockhardt Ltd. And Vice-Versa

Asstt. Commissioner of Income Tax Circle–10 (1), Mumbai Versus Wockhardt Ltd. And Vice-Versa - TMI Issues Involved:1. Disallowance of weighted deduction under section 35(2AB) of the Income Tax Act, 1961.2. Transfer pricing adjustment on the provisions of corporate guarantee.3. Allocation of research and development expenditure to section 80IB and 80IC units.4. Disallowance under section 40(a)(i) for failure to deduct tax at source.Issue-wise Detailed Analysis:1. Disallowance of Weighted Deduction under Section 35(2AB):The primary issue in the assessee’s appeal was the disallowance of weighted deduction under section 35(2AB) of the Income Tax Act, 1961. The assessee claimed a 150% deduction towards capital and revenue expenditure incurred in its in-house R&D facility. The Assessing Officer disallowed this claim, noting that the research activities were outsourced and not conducted in-house. The Commissioner (Appeals) allowed the deduction, but the Tribunal found that the activities were not conducted in-house as required by section 35(2AB). The Tribunal referred to the Gujarat High Court decision in Cadila Healthcare Ltd. and remanded the issue back to the Assessing Officer for fresh adjudication, instructing to consider various decisions cited by the assessee and the Supreme Court judgment in Commissioner of Customs v/s Dilip Kumar & Co. & Ors.2. Transfer Pricing Adjustment on Corporate Guarantee:The Revenue challenged the deletion of an addition of Rs. 35,12,209 towards transfer pricing adjustment on a corporate guarantee provided by the assessee to its AE in the UK. The assessee charged a 0.75% guarantee fee, supported by a quotation from HSBC India. The Transfer Pricing Officer determined a 2.08% fee as arm's length. The Commissioner (Appeals) found the 0.75% fee reasonable and deleted the addition. The Tribunal upheld this decision, noting that the method used by the assessee to benchmark the fee was valid and consistent with previous Tribunal decisions and jurisdictional High Court rulings.3. Allocation of R&D Expenditure to Section 80IB and 80IC Units:The Revenue also contested the decision to not allocate R&D expenditure to units eligible for deductions under sections 80IB and 80IC. The Assessing Officer had allocated these expenses, reducing the deduction claims. The Commissioner (Appeals) reversed this, following Tribunal decisions from previous years. The Tribunal upheld this decision, noting consistent rulings in favor of the assessee in earlier years and dismissed the Revenue’s ground.4. Disallowance under Section 40(a)(i) for Failure to Deduct Tax at Source:The final issue was the disallowance of Rs. 2,14,20,270 under section 40(a)(i) for non-deduction of tax on payments to non-residents for pilot bio studies and clinical research. The assessee argued these payments were not fees for technical services under DTAA agreements. The Assessing Officer disagreed and disallowed the amount. The Commissioner (Appeals) deleted the addition, referencing Tribunal decisions from earlier years. The Tribunal upheld this deletion, citing consistent Tribunal decisions that such payments were not fees for technical services and thus not subject to TDS under section 195.Conclusion:The assessee’s appeal was allowed for statistical purposes, and the Revenue’s appeal was partly allowed for statistical purposes. The Tribunal directed the Assessing Officer to re-examine specific issues, ensuring compliance with judicial precedents and providing the assessee a reasonable opportunity to present its case.