ITAT allows Section 80G deductions for CSR expenses to registered bodies despite Section 37 restrictions

The ITAT Delhi ruled on three key issues. First, regarding TP adjustments under Section 92BA read with 92CA and 80IA(10), the tribunal found that the AO failed to establish the existence of arrangements between eligible units and associated enterprises based solely on higher operating profits. The matter was remanded to verify additional evidence regarding market pricing of purchase transactions. Second, on Section 80G deductions for CSR expenses, the tribunal held that contributions to Section 12A registered bodies are deductible under Section 80G despite CSR expense restrictions under Section 37, as these provisions are mutually exclusive except for specific exclusions. Third, regarding weighted deductions under Section 35(2AB), the tribunal upheld that deductions are limited to amounts approved by prescribed authorities per substituted Rule 6(7A).

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Issues Involved:
1. Transfer Pricing Adjustment in relation to Arms' Length Price (ALP) of Specified Domestic Transactions (SDTs).
2. Disallowance of Deduction under Section 80G.
3. Disallowance of Deduction under Section 35(2AB).

Summary:

1. Transfer Pricing Adjustment in relation to Arms' Length Price (ALP) of Specified Domestic Transactions (SDTs):

The assessee-company, engaged in manufacturing pharmaceutical and healthcare products, contested the transfer pricing adjustment of Rs. 21,92,40,676/- made by the TPO. The TPO alleged an arrangement between the eligible units and AEs resulting in higher than ordinary profits to eligible units, invoking Section 80IA(10) r.w.s 92CA(3) of the Act. The Tribunal admitted additional evidence under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963, to demonstrate that transactions between eligible units and AEs were at arm's length. The Tribunal remitted the matter back to the AO for verification of the additional evidence to determine the ALP of the transactions. The AO was directed to pass a reasoned order regarding the presence of an "arrangement" under Section 80IA(10).

2. Disallowance of Deduction under Section 80G:

The AO disallowed the deduction of Rs. 6,38,13,601/- claimed under Section 80G, citing it as CSR expenditure not allowable under Section 37(1). The Tribunal held that Section 37 and Section 80G are mutually exclusive, and there is no bar on claiming deduction under Section 80G for CSR contributions, except for specific exclusions under Section 80G(2)(a)(iiihk) & (iiihl). The Tribunal allowed the deduction under Section 80G, reversing the AO's decision.

3. Disallowance of Deduction under Section 35(2AB):

The assessee claimed a weighted deduction of Rs. 112,92,10,780/- under Section 35(2AB) for expenditure on scientific research. The AO restricted the deduction to Rs. 100,90,68,000/- based on DSIR's approval. The Tribunal held that while the AO's disallowance of Rs. 8,00,95,000/- under Section 35(1) was incorrect, the weighted deduction under Section 35(2AB) could be limited to the approved amount by DSIR. The Tribunal allowed the normal deduction under Section 35(1) but upheld the AO's decision on the weighted deduction under Section 35(2AB).

Conclusion:

The Tribunal partly allowed the appeal, remitting the transfer pricing issue back to the AO, allowing the deduction under Section 80G, and granting partial relief under Section 35(2AB).

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