R&D deduction, software TDS, and book-profit adjustments: tribunal limits disallowance, remands aircraft claim, upholds UPS depreciation

Weighted deduction for approved in-house R&D expenditure could not be curtailed merely because DSIR had not quantified the full amount in Form 3CL before the amendment to Rule 6(7A), so the section 35(2AB) restriction was deleted. Software licence payments were not disallowed under section 40(a)(i) on the basis of a later retrospective royalty amendment, as a taxpayer cannot be expected to comply with an unanticipated deeming fiction. Disallowance under section 14A read with Rule 8D could not be imported into book-profit computation under section 115JB, since only permitted adjustments under that provision apply. Aircraft depreciation and related expenditure were remanded for reconsideration, while UPS depreciation at 60% was upheld as computer-related equipment.

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Issues: (i) Whether weighted deduction for approved in-house research and development expenditure could be restricted to the amount quantified by the DSIR before the amendment to the rules; (ii) whether software licence payments made in the relevant year could be disallowed under section 40(a)(i) on the basis of a retrospective amendment treating such payments as royalty; (iii) whether disallowance under section 14A read with Rule 8D could be imported into computation of book profit under section 115JB; (iv) whether the claim for depreciation and related expenditure on aircraft required reconsideration in line with the earlier order in the assessee's own case; and (v) whether depreciation on UPS was to be restricted to 15% or allowed at 60%.

Issue (i): Whether weighted deduction for approved in-house research and development expenditure could be restricted to the amount quantified by the DSIR before the amendment to the rules.

Analysis: The assessee's in-house R&D centres were already approved by the prescribed authority. The dispute was only about the quantum of expenditure reflected in Form 3CL. The settled position noted in the order was that, prior to the amendment to Rule 6(7A) of the Income Tax Rules, 1962 with effect from 01.07.2016, the prescribed authority was required to certify approval of the facility and was not required to quantify the expenditure for limiting the deduction. The Tribunal followed its earlier view that the deduction under section 35(2AB) could not be curtailed merely because the DSIR had not quantified the full expenditure before the amendment took effect.

Conclusion: The restriction based on DSIR quantification was deleted and the issue was decided in favour of the assessee.

Issue (ii): Whether software licence payments made in the relevant year could be disallowed under section 40(a)(i) on the basis of a retrospective amendment treating such payments as royalty.

Analysis: The software purchases were made and accounted for in the relevant assessment year without deduction of tax at source. The Tribunal held that the assessee could not have been expected to anticipate a later retrospective amendment inserted by the Finance Act, 2012. Applying the principle that the law does not compel a person to do an impossible act, the Tribunal held that the retrospective explanation to section 9(1)(vi) could not be used to fasten a TDS disallowance for the year in question. The alternative contention based on treaty protection was not required to be decided.

Conclusion: The disallowance under section 40(a)(i) was deleted and the issue was decided in favour of the assessee.

Issue (iii): Whether disallowance under section 14A read with Rule 8D could be imported into computation of book profit under section 115JB.

Analysis: The Tribunal reiterated that section 115JB operates as a separate code and that the computation mechanism under normal provisions, including Rule 8D, cannot be bodily imported into book-profit computation. Reliance was placed on the settled view that only the adjustments specifically permitted by the Explanation to section 115JB can be made while determining book profit.

Conclusion: The addition was directed to be deleted and the issue was decided in favour of the assessee.

Issue (iv): Whether the claim for depreciation and related expenditure on aircraft required reconsideration in line with the earlier order in the assessee's own case.

Analysis: The Tribunal noted that an earlier order in the assessee's own case had already directed verification of the aircraft-use and licensing requirements before allowing depreciation and operating expenditure. Since the claim had earlier been examined on that footing, the present issue was sent back to be examined again in accordance with the earlier directions and after hearing the assessee.

Conclusion: The issue was remanded for fresh consideration.

Issue (v): Whether depreciation on UPS was to be restricted to 15% or allowed at 60%.

Analysis: The Tribunal noted that in the assessee's own earlier years, UPS had been treated as part of computer accessories and depreciation at 60% had been accepted. No infirmity was found in the appellate order adopting the same approach for the year under consideration.

Conclusion: The Revenue's challenge was rejected and the higher depreciation rate was upheld in favour of the assessee.

Final Conclusion: The assessee succeeded on the substantial tax additions concerning R&D deduction, software disallowance, and section 14A adjustment in book-profit computation, the aircraft issue was sent back for reconsideration, and the Revenue's appeal on UPS depreciation failed.

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