Tribunal orders deletion of transfer pricing adjustment & disallowance of deductions, stresses consistency in applying methods

The Tribunal allowed the appeal, directing the deletion of the transfer pricing adjustment, the addition under section 69C, and the disallowance of the weighted deduction under section 35(2AB). The decision emphasized the importance of consistency in applying transfer pricing methods, the proper application of section 69C, and the allowance of R&D expenditure once approved by DSIR.

---

---

Issues Involved:
1. Transfer Pricing Adjustment for export of goods.
2. Addition under section 69C of the Income Tax Act.
3. Disallowance of weighted deduction under section 35(2AB) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for Export of Goods:
The assessee challenged the upward adjustment of INR 20,00,44,704 made by the AO/TPO/DRP, arguing that the international transaction with its AE was at arm's length. The assessee used the Transactional Net Margin Method (TNMM) to benchmark the transaction, showing a margin of 23.27% for AE transactions compared to 18.70% for non-AE transactions. The TPO, however, rejected TNMM in favor of the Comparable Uncontrolled Price (CUP) method. The Tribunal found that the TPO did not provide a cogent reason for rejecting the consistently applied TNMM method and emphasized the importance of consistency in applying the most appropriate method. The Tribunal referenced previous cases (ITA No. 638 & 4643/Mum/2017 and ITA 7284/Mum/2018) where TNMM was upheld. The Tribunal concluded that the TPO's switch to the CUP method was unjustified and allowed the appeal, directing the deletion of the adjustment.

2. Addition under Section 69C of the Income Tax Act:
The assessee contested the addition of INR 41,500 under section 69C, arguing that the genuineness of the transaction was substantiated by confirmations from 18 out of 20 parties. The Tribunal noted that the DRP had already reduced the initial addition from INR 12,45,12,834 to INR 41,500. The Tribunal referenced the Delhi High Court's decision in PCIT vs. Param Dairy and Earth Moving Equipment Service Corporation vs. DCIT, which held that section 69C could not be applied where payments were made through banking channels and were duly recorded in the books of account. The Tribunal found no infirmity in the transaction and directed the deletion of the addition.

3. Disallowance of Weighted Deduction under Section 35(2AB) of the Income Tax Act:
The issue involved the disallowance of INR 1,87,96,989 out of the total claim of INR 21,20,74,989 under section 35(2AB). The AO disallowed the amount based on the approval granted by the Department of Scientific and Industrial Research (DSIR). The Tribunal referenced its own decision in ITA No. 7284/Mum/2018 and the Pune Tribunal's decision in Cummins India Ltd. V/s DCIT, which held that once a facility is approved by DSIR, the entire expenditure incurred on R&D should be allowed. The Tribunal found that the AO was not justified in curtailing the deduction based on the quantum approved in Form No. 3CL and directed the deletion of the disallowance.

Conclusion:
The Tribunal allowed the appeal on all grounds, directing the deletion of the transfer pricing adjustment, the addition under section 69C, and the disallowance of the weighted deduction under section 35(2AB). The order emphasized the importance of consistency in applying transfer pricing methods, the proper application of section 69C, and the allowance of R&D expenditure once approved by DSIR.

---