TaxTMI 
TaxTMI 
2026 (6) TMI 722
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....certified note u/s. 35(1)(iv) of the Act. The Revenue is challenging the deletion of TP adjustment by the CIT(A) for both the AYs under consideration. Assessment Year 2017-18: Assessee's appeal - ITA No.3462/CHNY/2025 3. The assessee is a company engaged in the business of designing manufacturing and sale of watches, jewellery and eye wear. The assessee filed a return of income for AY 2017-18 on 30.11.2017 declaring total income of Rs. 862,47,59,640/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. Since the assessee had Specified Domestic Transactions (SDP), the A.O made a reference to the Transfer Pricing Officer (TPO) to complete the Arm's Length Price (ALP) of SDP. The TPO proposed an adjustment towards deduction claimed u/s. 80IC of the Act to the tune of Rs. 68,27,55,035/-. The A.O passed draft assessment order incorporating the TP adjustment. The A.O also made disallowance of deduction claimed u/s. 35(2AB) of the Act to the tune of Rs. 16,98,45,034/- and also disallowance of provision made on customer loyalty programme amounting to Rs. 2,23,74,072/-. The CIT(A) deleted the TP adjustment by placing reliance on t....
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....ennai-Trib.). 5. The Ld. Departmental Representative (DR), on the other hand, relied on the orders of the lower authorities. 6. We have heard the parties, and perused the material available on record. The assessee has incurred expenditure to the tune of Rs. 1.073 Crores towards scientific research for the year under consideration and has claimed the weighted deduction 200% i.e. Rs. 2.146 Crores u/s. 35(2AB) of the Act in the return of income. Out of the amount actually incurred by the assessee a sum of Rs. 0.8452 Crores was approved by DSIR in Form-3CL along with the revenue expenditure of Rs. 13.9346 Crores towards revenue expenditure. From the perusal of the order giving effect passed by the A.O (page 99 & 100 of paper book), we notice that the A.O while allowing the amount certified by DSIR has only allowed 100% of the amount i.e. Rs. 14.7798 Crores instead allowing 200%. We further notice from the perusal of the table submitted by the assessee which is extracted as below that with regard to the Revenue expenditure the assessee has already been allowed the deduction in excess of the amount allowable u/s. 35(2AB) of the Act. 7. However, with regard to the capital expendi....
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....e had claimed weighted deduction at 200% being Rs. 200,42,44,032/-. According to the AO, this entire claim was to be disallowed. The AO is noted to have specifically denied the alternate claim raised by the assessee in respect of 100% of capital expenditure u/s 35(1)(iv) of the Act and instead allowed depreciation @ 15% on the capital expenditure being Rs. 30,06,36,605/- [Rs.100,21,22,016 X 15%]. The AO accordingly disallowed sum of Rs. 557,94,03,835/- (Rs.387,57,96,408/- + Rs. 170,36,07,427) u/s 35(2AB) of the Act. Being aggrieved by the order of the AO, the assessee carried the matter in appeal before the Ld. CIT(A). 4.3 It is noted that the Ld. CIT(A) has in principle upheld the action of the AO. However, before the Ld. CIT(A), the assessee brought to his notice that, the AO had made the disallowance u/s 35(2AB) on the erroneous presumption that, the assessee had claimed weighted deduction @ 200%, whereas the assessee had actually claimed weighted deduction @ 150%. The assessee accordingly pointed out that, the AO had made excessive disallowance of Rs. 314,04,44,623/-. The Ld. CIT(A) is noted to have found this contention of the assessee to be factually correct and acco....
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.... the grant of the approval, in a case referred to in subclause (i) of clause (b); (ii) of the submission of the audit report, in a case referred to in subclause (ii) of clause (b); (c) The company shall maintain a separate account for each approved facility; which shall be audited annually and a report of audit in Form No. 3CLA shall be furnished electronically to the Secretary, Department of Scientific and Industrial Research on or before the due date specified in Explanation 2 to subsection (1) of section 139 of the Act for furnishing the return of income, for each succeeding year." 4.5 In light of the above Rule, as introduced by the IT (10th Amendment) Rules, 2016 applicable with effect from 01.07.2016, the position of law as prevailing in AY 2018-19 is that, furnishing of Form 3CL by DSIR is a pre-requisite to claim the weighted component of deduction u/s 35(2AB) of the Act. The reliance placed by the assessee on the decisions rendered by this Tribunal in their own case in earlier AY 201112 is found to be distinguishable as the AY involved was prior to the insertion of the aforementioned Rule. Accordingly, due to the change in position of law, the af....
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.... Tribunal, by holding as under: "2. The present Appeal has been filed by the Revenue under Section 260-A of the Income Tax Act by raising the following purported substantial questions of law arising from the order passed by the Income Tax Appellate Tribunal dated 31.7.2008, by which the learned Tribunal upheld the order of the learned Commissioner of Income Tax (Appeals) and held that the expenditure incurred by the Assessee on Scientific Research was not entitled to weighted deduction of 1.5 times under Section 35(2AB) of the Act as the Project in question was not duly approved by the Competent Authority, however, the Assessee, was entitled to normal deduction of 100% of expenditure incurred only under Section 35(1)(i) of the Act. 3. The learned Commissioner of Income Tax (Appeals) had discussed the above aspect in his order dated 31.10.2006 as hereunder: - 3.2 After considering the submissions I find that the assessing officer has rightly rejected the claim of the appellant u/s. 32(2AB) as there was no approval from the prescribed authority as on the date of completion of assessment. Having regard to alternative claim, I find that the assessing officer ....
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.... to prefer any further appeal, as the expenditure was allowed only under Section 35(1)(i) of the Act which does not require any approval by the Competent Authority. 7. Since the spending of the amount on Scientific Research itself was not even disputed by the Revenue, in our opinion, the Appellate Authorities have rightly allowed the claim under Section 35(1)(i) of the Act. The Assessee has not preferred any Appeal against that finding and therefore, the question of approval by the Competent Authority for making such claim becomes irrelevant. Therefore, we do not find any substantial question of law to be arising in the present Appeal. 8. We do not find any merit in the present Appeal filed by the Revenue and the same is liable to be dismissed and accordingly, it is dismissed. No order as to costs. A copy of this judgment may be sent to the Assessee forthwith." 4.8 In view of the above decision supra, the legal position which emerges is that, the denial of weighted deduction u/s 35(2AB) will not disable the assessee from claiming normal deduction for the said R&D expenditure, both revenue & capital, u/s 35(1)(i) and 35(1)(iv) of the Act respectively. Now ....
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.... of the Act is eligible for deduction u /s. 35(1)(iv) of the Act. We therefore directed the A.O to verify the impugned amounts and allow the claim u/s. 35(1)(iv) of the Act. Revenue's appeal in ITA No. 159/Chny/2026: Disallowance u/s. 80IC of the Act: 10. The A.O during the course of assessment proceedings made a reference to TPO for determination of ALP with reference to SDT and the TPO proposed an adjustment of Rs. 78.9015 Crores towards the determination of ALP between the eligible 80IC units and non eligible 80IC units. Accordingly, the A.O disallowed the deduction claimed by the assessee u/s. 80IC to the tune of Rs. 68.2755 Crores. The A.O/TPO did not accept the submissions made by the assessee that the profitability in 80IC of the Act eligible units were higher on account of product mix and gross contribution of specific type of jewellery or watch were similar irrespective of the fact whether the product was manufactured by 80IC unit or non 80IC unit. The A.O/TPO also did not accept the submission of the assessee that the inter unit transfers took place at Arm's length. The CIT(A) deleted the disallowance by holding that: "5.2.4 The appellant also ra....
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....hat the profits of an undertaking is determined by the product mix and therefore there is no intention to shift profits. 9. The profitability from selling of finished goods to unrelated customers will be different from profit derived from selling semi-finished goods to other units. 10. The Ld. TPO has erred in comparing the profit margins of two different products, i.e., Sales of finished goods to third party customers; and Transfer of semi-finished goods to other units of the Appellant Company. 5.2.5 1 have considered the appellant's submissions. On examination of the material on record, it is seen that the TPO has rejected the transfer pricing study of the appellant for the reason that the Tax Holiday Units have made more profits when compared to the appellant's ineligible units, As heid in DCIT Vs Deepak Industries Ltd [2022] 142 taxmann.com 49 (Kolkata-Trib), mere extraordinary profit cannot be criteria for adjustment in the transfer price. In the appellant's own case in ITA No.393 and IT(TP)(A) No.89/Chny/2018 dated 19-09- 2025 for AY 2013-14 & 2014-15, the Hon'ble Tribunal held as under: "It is an undisputed fact that the as....
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....and 2014-15 are applicable for the year under consideration also. Accordingly, we see no infirmity in the decision of the CIT(A) in deleting the disallowance towards deduction claimed u/s. 80IC of the Act. Assessment year 2019-20 in ITA No.159/CHNY/2026 12. The facts in Revenue's appeal for AY 2019-20 are identical and therefore our above decision with regard to the issue of disallowance of deduction u/s. 80IC of the Act in AY 2017-18 (refer above finding) is mutatis mutandis applicable for AY 2019-20 also. We therefore see no reason to interfere with the decision of the CIT(A) in deleting the disallowance u/s. 80IC of the Act for AY 2019-20 also. 13. In the result, the appeal of the assessee for AY 2017-18 is allowed and the appeals of the Revenue for AY 2017-18 & 2019-20 are dismissed. Order pronounced on 13th day of May, 2026 at Chennai. ============= Document 1 Reconciliation of deduction lalieu, druWeu alu at war 0 1 ] ] === p ;. .. ... Particulars Formula Capital Expenses (Rs. Lakhs) Revenue Expenses (Rs. Lakhs) Total (Rs. Lakhs) Remarks / Reference . Actual expenses incurred 116.00 2,007.00 2,123.00 Note 33 at page 153 of annual report. Copy of Annu....