Assessee wins on transfer pricing adjustments and section 35(2AB) deduction despite database limitations

The ITAT Mumbai allowed the assessee's appeal regarding TP adjustments on exports to AEs in South Africa and Mexico, finding the assessee's transfer pricing study acceptable despite different accounting periods and database limitations. The tribunal noted AEs were in initial operational years with lower profitability than established comparables, indicating no under-invoicing. For section 35(2AB) deduction, the tribunal upheld CIT(A)'s decision favoring the assessee, noting DSIR approval requirements applied from 2016 onwards. The tribunal allowed section 32AC deduction as aggregate asset costs exceeded Rs. 100 crores threshold. Corporate guarantee commission TP adjustment deletion was upheld following Bombay HC precedent. Sales promotion expenses disallowance was remanded for fresh examination due to incorrect approaches by both authorities.

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Issues Involved:
1. Transfer pricing adjustments
2. Disallowance of weighted deduction claimed u/s 35(2AB)
3. Allocation of interest expenses to units eligible u/s 80IC/80IE
4. Disallowance of sales promotion expenses u/s 37(1)
5. Disallowance of Investment Allowance u/s 32AC
6. Relief granted in respect of transfer pricing adjustment on Corporate Guarantee
7. Relief granted in respect of allocation of R & D expenditure
8. Relief granted in respect of addition made u/s 14A
9. Cross objection on disallowance of sales promotion expenses

Summary:

Transfer Pricing Adjustments:
The assessee's appeal included issues on transfer pricing adjustments for exports to Glenmark South Africa and Mexico. The TPO did not accept the assessee's transfer pricing study and made adjustments based on a 10.86% ALP margin. The CIT(A) upheld these adjustments. However, the Tribunal found that the methodology used by the assessee was consistent with previous years and accepted the assessee's explanation for low profits due to initial market penetration efforts. The Tribunal directed the AO to delete the transfer pricing adjustments.

Disallowance of Weighted Deduction u/s 35(2AB):
The assessee claimed a deduction of Rs. 85.38 crores u/s 35(2AB), which the AO reduced by Rs. 36.44 crores due to non-approval by DSIR and revenue from contract R&D. The CIT(A) allowed the deduction but remanded the issue for verification of expenses. The Tribunal upheld the CIT(A)'s decision on the non-approval issue but canceled the remand for verification, as the nature of expenses was not questioned by the AO.

Allocation of Interest Expenses u/s 80IC/80IE:
The AO allocated interest expenses to units eligible for deductions u/s 80IC/80IE, resulting in an addition of Rs. 7.37 crores. The CIT(A) remanded the issue for factual verification. The Tribunal found that the units had sufficient reserves and did not use head office funds, directing the AO to delete the allocation of interest expenses.

Disallowance of Sales Promotion Expenses u/s 37(1):
The AO disallowed Rs. 30.37 crores of sales promotion expenses under MCI guidelines. The CIT(A) confirmed the disallowance but the Tribunal set aside the orders of both authorities, directing the AO to re-examine the nature of expenses and disallow only those incurred in violation of MCI guidelines.

Disallowance of Investment Allowance u/s 32AC:
The AO disallowed Rs. 16.51 crores claimed u/s 32AC, as the assets were transferred from capital work in progress. The CIT(A) upheld the disallowance. The Tribunal, following precedents, held that assets transferred from capital work in progress should be considered for deduction and directed the AO to allow the claim.

Relief on Transfer Pricing Adjustment for Corporate Guarantee:
The TPO made adjustments for guarantee commission at 2% and 1.5%. The CIT(A) deleted the adjustments, following the Tribunal and High Court decisions in the assessee's favor. The Tribunal upheld the CIT(A)'s decision.

Relief on Allocation of R & D Expenditure:
The AO allocated R&D expenses to certain units, reducing deductions u/s 80IC/80IE. The CIT(A) remanded the issue for verification. The Tribunal upheld the remand for factual verification.

Relief on Addition u/s 14A:
The AO disallowed Rs. 11.82 crores u/s 14A, while the CIT(A) limited the disallowance to the exempt income and excluded it from book profit u/s 115JB. The Tribunal upheld the CIT(A)'s decision, consistent with judicial precedents.

Cross Objection on Sales Promotion Expenses:
The Tribunal's decision on the disallowance of sales promotion expenses u/s 37(1) rendered the cross objection moot.

Conclusion:
The assessee's appeal was partly allowed, and the revenue's appeal and cross objection were dismissed. The Tribunal directed the AO to re-examine specific issues and delete certain disallowances based on the facts and judicial precedents.

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