Tribunal Rules Transfer Pricing Adjustments Unsustainable; Grants Weighted Deduction for R&D Expenses.

The ITAT allowed the assessee's appeals for the assessment years 2011-12, 2012-13, and 2013-14. The Tribunal held that the AO/TPO's adjustments to the Arm's Length Price (ALP) for international transactions were unsustainable due to non-compliance with prescribed methods under section 92C. Additionally, the Tribunal granted the assessee's claim for a weighted deduction under section 35(2AB) for Research and Development expenses, recognizing the approval by the Department of Scientific and Industrial Research. The consolidated order was pronounced on 18th August 2020, favoring the assessee on all grounds.

---

---

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions involving Research and Development fees and Management fees.
2. Granting of weighted deduction under section 35(2AB) of the Income Tax Act.

Detailed Analysis:

1. Determination of ALP for International Transactions:

The primary issue in the appeals was the challenge against the Assessing Officer's (AO) action in determining the ALP of international transactions involving Research and Development fees and Management fees at Nil without applying the most appropriate method as prescribed under section 92CA of the Income Tax Act. The assessee argued that the AO/TPO (Transfer Pricing Officer) did not follow the prescribed procedure and relied on similar issues from previous assessment years (2009-10 and 2010-11) without applying any method. The Tribunal noted that the AO/TPO made upward adjustments without following any prescribed method under section 92C of the Act, which was liable to be deleted. The Tribunal referred to decisions from the Hon’ble Bombay High Court in the cases of Commissioner of Income Tax Vs. Johnson & Johnson Ltd. and Commissioner of Income Tax Vs. Merck Ltd., which held that transfer pricing adjustments without determining the ALP by prescribed methods are unsustainable in law. Consequently, the Tribunal allowed the assessee's grounds regarding the ALP determination.

2. Granting of Weighted Deduction under Section 35(2AB):

In the appeal for the assessment year 2012-13, the assessee questioned the TPO's action in not granting weighted deduction under section 35(2AB) of the Act. The Tribunal found that the issue was covered by previous orders, including the case of M/s. East West Seeds Ltd. and Bharat Forge Ltd., where the Tribunal had allowed the claim of weighted deduction. The Tribunal observed that once the R&D facility is approved by the Department of Scientific and Industrial Research (DSIR), the entire expenditure incurred on the development of the facility is eligible for weighted deduction. The Tribunal emphasized that the role of the AO is to allow the expenditure incurred on in-house R&D facility as weighted deduction under section 35(2AB) once the facility is recognized by the prescribed authority. The Tribunal allowed the assessee's grounds regarding the weighted deduction.

Consolidated Order:

Given the similarity of issues and facts across the appeals for the assessment years 2011-12, 2012-13, and 2013-14, the Tribunal decided to pass a consolidated order for convenience. The Tribunal allowed the appeals for all the assessment years, holding that the adjustments made by the AO/TPO without following the prescribed methods were unsustainable and that the assessee was entitled to the weighted deduction under section 35(2AB).

Result:

All the appeals of the assessee were allowed, and the Tribunal pronounced the order in the open court on 18th August 2020.

---