TaxTMI 
TaxTMI 
2026 (6) TMI 1112
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....e Act. An original assessment order was issued on 19.12.2018, introducing certain adjustments to the declared income. Subsequently, reassessment proceedings were initiated through a notice u/s. 148 dated 31.03.2021 on the following grounds: • Examination of transactions with MRF SG Pte Ltd ("MRF SG") following a survey conducted on 22 November 2019. • Review of the deduction claimed u/s. 35(2AB) based on the same survey. • Disallowance of provisions made for litigation and related disputes. The TPO, through an order dated 29.01.2023, made an upward adjustment of Rs. 7,00,04,297/-. A summary of the draft order issued by the AO/TPO is as follows: Based on sworn statements, the AO concluded that the Thiruvottiyur R&D unit does not qualify for deduction u/s. 35(2AB) as claimed. The AO treated the provision created for electricity charges as contingent in nature. The AO, relying on his interpretation of sworn statements and making observations regarding MRF SG's operations-such as board meetings, registered office, and roles of employees and directors disallowed expenses related to transactions with MRF SG. He fu....
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....: The impugned reassessment order is barred by limTribunalion of time as per section 153 of the Act (Ground No. 9): Through a letter dated 02.03.2026, the assessee requested withdrawal of the grounds of appeal relating to this issue. Accordingly, the request of the assessee is accepted. Therefore, the grounds of appeal relating to this issue are dismissed as withdrawn. 4.2 Issue 5 (COVERED ISSUE): Disallowance of claim made by the Appellant u/s. 35(2AB) of the Act amounting to Rs. 21,16,94, 757/- (Ground No. 21 to 28): The Appellant claimed a deduction u/s. 35(2AB) of the Act for both revenue and capital expenditure incurred on scientific research at its Thiruvottiyur R&D facility, based on Form 3CL issued by the DSIR. The AO contended that the Appellant was not undertaking advanced R&D activities at the Thiruvottiyur facility and was limited to sample testing functions. It was further alleged that the personnel employed lacked the required technical expertise. The AO also stated that the Appellant had claimed deductions for significant testing equipment that was not actually installed at the Thiruvottiyur R&D centre. Based on the above observations, t....
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....l order Relevant extracts of the DRP order: The DRP rejected the claims of the Appellant and upheld the proposed disallowances of the learned AO. An excerpt of the DRP's order is provided below: "i) R&D centre at Tiruvottiyur .....Although it is observed that the prescribed authority for approval of a claim of deduction u/s. 35(2AB) is the DSIR, the facts emerging from the conduct of the survey u/s. 133A cannot be ignored. Clearly emanating from the statements recorded from the survey are the facts that this unit was doing only manufacturing. The assessee, during the course of hearing before the Panel, has not made any efforts to rebut these findings, except saying that the AO was not empowered to disturb the expenditure quantified by DSIR and that the statement recorded during the survey proceedings did not carry any evidentiary value. However, being factual in nature, the findings of the survey u/s. 133A cannot be ignored. These findings were not available before the DSIR and hence there was no opportunity to examine the same by the DSIR. Hence, on the basis of facts presented before us by the AO, which were not controverted by the assessee, we....
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.... Further, the same issue has been decided in favour of the Appellant by the Hon'ble TRIBUNAL in ITA Nos. 54 and 55/Chny/2025 for AYs 2013-14 and 2014-15 dated 05.05.2025. The Tribunal upheld the allowability of deduction u/s. 35(2AB), including on capital expenditure, in line with Form 3CL issued by the DSIR, and affirmed the order of the CIT(A) granting relief to the Appellant. The Tribunal also observed that findings from a survey conducted on 20.11.2019 would not affect earlier assessment years, particularly where DSIR certification had already been issued after due inspection. Reliance is also placed on judicial precedents including Tejas Networks Limited (Karnataka High Court), CIT vs. F.C.S. International Marketing [2006] 203 CTR 601 (Punjab & Haryana), and Ranbaxy Laboratories Limited (2011) 7 ITR(T) 161 (Delhi), which support the Appellant's position. In view of the foregoing, it is the ld.AR submitted that the disallowance should be deleted, consistent with the favourable decisions rendered in the Appellant's own cases in IT(TP)A Nos. 64 & 65/Chny/2022 and 41/Chny/2023 dated 20.09.2024, as well as ITA Nos. 54 and 55/Chny/2025 for AYs 2013-14 and 201....
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....the submission on page 1146 is sample invoice copies for the provision amount of INR 1,26,26,852, however it is noticed from the footnote that an amount of Rs. 3,93,762 is leviable towards the cross subsidy charges for the month of 05/2013, subject to the outcome of the court case. The assessee has claimed to have paid the amount raised by the electricity board in the subsequent year. We are of the opinion that the assessee has not provided the detailed year-wise breakup of the amounts paid (as claimed by the assessee) and also the assessee was not able to produce any evidence with regard to the payment of the electricity bills/cess/fuel charges pertaining to FY 2014-15 and any relevant payment later on. The deduction cannot be allowed and accordingly the objection raised by the assessee is disposed off" - Para 3.4, Pg 8 of DRP order. The Appellant submits that the provision created is not in the nature of a contingent liability but represents a crystallised obligation. In support of its claim, the Appellant had furnished sample invoices before the Ld. AO and the Hon'ble DRP evidencing cross-subsidy charges aggregating to Rs. 1,26,26,852/- (refer pages 198 to 207 of the Fa....
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....g the unilateral agreements have visited the MRF premises, held numerous discussions and after an elaborate process, determined that the arm's length price should be only 0.5% and not 3%. The assessee has not accepted the same, but has filed one more bilateral application to get greater certainty. In this regard it is an indisputable fact the APA, the supreme transfer pricing body in the country has proposed a margin of 0.5%. This clearly shows that there is also an independent finding by the Advance Pricing Authority that the margin of 3% is excessive and unreasonable and should be only 0.5%. Although section 92CC of the Income Tax Act, the determination by the APA is binding on all authorities including the appellate orders. However, since the APA proceedings has not concluded, section 92CC does not become operational. However APA's independent finding that the price margin charged by the assessee is excessive and unreasonable is undisputable. APA authorities have come to an independent conclusion that the paper arrangements just results in booking excess purchases in India, thus reducing the Indian profits. 2. The findings of the APA and the findings of the AO p....
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....he decision taken by the board in this regard for the subsequent years, we are inclined to confirm the adjustment made by the TPO at 0.5%. Accordingly, we reject this contention of the assessee." Para 4.3, Pg 16 of the DRP directions The ld. AR for the Appellant submitted that the transactions entered into with MRF SG were commercially expedient and incurred wholly and exclusively for the purposes of the Appellant's business. MRF SG performs critical functions in the procurement process, and the complete flow of transactions has been explained in responses to Questions 4, 5, and 13 of the sworn statements available on record. The AO has recorded several factual inaccuracies in the assessment order, all of which have been specifically rebutted by the Appellant (refer pages 129 to 132 of the appeal documents). The same set of transactions with MRF SG has been accepted and confirmed by competent authorities in India and Singapore in subsequent years. In light of this, the AO's conclusion that the transaction is a sham or that MRF SG is a shell entity is wholly untenable. The Advance Pricing Agreement covering the subject transaction is enclosed (refer pages ....
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....nts recorded during survey proceedings and determined an arm's length margin of 0.5%, based on the billing methodology adopted by the Appellant in subsequent years. Accordingly, an adjustment of 2.5% on cost was computed, amounting to Rs. 3,67,27,402/-. The DRP upheld the TPO's action, placing reliance on the sworn statements and the APA entered into for subsequent years. The ld.AR for the assessee submitted that the economic analysis in the transfer pricing documentation, including the adoption of CPM as the Most Appropriate Method, was previously accepted, and a NIL adjustment order was passed by the TPO in the initial round of proceedings for the relevant assessment year vide order dated 31 October 2018. The sworn statement relied upon by the authorities merely records that the Appellant had adopted a 0.5% billing mark-up in subsequent years; it does not state that such rate represents the arm's length price. The AO/TPO has therefore erroneously relied on this statement to apply a 0.5% margin, despite it being only a factual reference to billing practice effective from October 2017. Since the functional profile of MRF SG (tested party) and the comparable companies is si....
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....elhi TRIBUNAL in Bharti Airtel Ltd., which has been followed by the jurisdictional Hon'ble Chennai TRIBUNAL in TVS Logistics Services Ltd. v. DCIT (72 taxmann.com 89): 10. We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that the assessee has offered Corporate Guarantee to its Associate Enterprises at UK. An identical fact was considered by this Tribunal in Redington (India) Limited (supra). This Tribunal, after considering the decision of Delhi Bench of this Tribunal in Bharati Airtel Ltd. v. Addl. CIT (2004) 43 taxmann.com 150 found that the Corporate Guarantee given by the assessee to its Associate Enterprise does not involve any cost to the assessee, therefore, it was outside the ambit of international transaction. In view of this decision co-ordinate Bench of this Tribunal on identical set of facts in respect of similar Corporate Guarantee, this Tribunal is of the considered opinion that determination of arm's length price may not be necessary. Mere pendency of appeal against the decision of this Tribunal in Redington (India) Limited (supra) cannot be a reason to take a different vi....
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.... prejudice, in the event the adjustment is sustained, it is prayed that the same may be restricted to 0.5%. 4.7 Issue 8: Ad-hoc disallowance of Chapter VIA deduction claimed by the Appellant (Ground No. 35): The ld.AR for the assessee submitted that the ad hoc disallowance made by the AO in the reassessment order is liable to be deleted in its entirety, as it relates to an eligible deduction under Chapter VI-A and appears to be a mistake apparent from the record, given the absence of any discussion in the assessment order (refer page 36 of the appeal documents). The same may be verified by the AO. In view of the above, he submitted that the ad hoc disallowance made by the learned AO constitutes an apparent mistake on record and therefore deserves to be deleted from the impugned order. 4.7 Issue 9 - Short credit of TDS eligible to the Appellant (Ground No. 36): The ld.AR for the assessee submitted that the Appellant is entitled to the full TDS credit for the relevant year, which should be granted accordingly, subject to verification by the AO. He submitted that the Appellant is eligible for complete TDS credit for the subject year and the same ought to be all....
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....ricing Officer (TPO), through an order dated 29.01.2023, proposed an upward adjustment of Rs. 38,75,45,827/-. A brief summary of the draft order issued by the AO/TPO is set out below: • Based on sworn statements, the AO concluded that the Thiruvottiyur R&D unit does not qualify for deduction u/s. 35(2AB) as claimed by the Appellant. • The AO considered the provision made by the Appellant towards electricity charges to be contingent in nature and therefore not allowable. • By misinterpreting the sworn statements and making assumptions regarding the operations of MRF SG-such as its board meetings, registered office, and the roles of its employees and directors-the AO disallowed expenses related to transactions with MRF SG. He further held that out of the 3% commission paid by the Appellant to MRF SG, 2.5% should be disallowed u/s.s 40A(2)(b) and 37 of the Act. • The TPO rejected the Appellant's use of the Cost Plus Method (CPM) and instead applied an alternative method to determine the Arm's Length Price (ALP) for transactions with MRF SG. • The TPO dismissed the Appellant's claim that a margin of 0.5% falls within....
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....drawn. 5.5 Issue 4 (COVERED ISSUES): Disallowance of claim made by the Appellant u/s. 35(2AB) of the Act amounting to Rs. 62,52,04,923/- (Ground No. 21 to 28): The Appellant has claimed a deduction u/s. 35(2AB) of the Act in respect of both revenue and capital expenditure incurred on scientific research activities pertaining to its Thiruvottiyur R&D facility, based on Form 3CL issued by the Department of Scientific and Industrial Research (DSIR). The AO/DRP contended that the Appellant was not engaged in advanced or high-end research and development activities at the Thiruvottiyur R&D unit and was merely undertaking sample testing functions. It was further alleged that the personnel employed by the Appellant lacked the requisite technical expertise to carry out scientific research activities. The AO/DRP also asserted that the Appellant had claimed deductions in respect of substantial testing equipment/items which were allegedly not installed at the Thiruvottiyur R&D facility. Based on the aforesaid contentions, the AO disallowed the deduction claimed by the Appellant. An extract of the final assessment order is reproduced below: d) Thiruvottiyur R&D un....
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....tract of the DRP's order is set out below: "4.4.1 R&D center at Tiruvottiyur .......Although it observed that the Prescribed authority for approval claim of deduction u/s. 35(2AB) is the DSIR, the facts emerging from the conduct of Survey u/s. 133A cannot be ignored. Clearly emanating from the statements recorded from the Survey are the fact that this unit was doing only manufacturing. The assessee during the course of hearing before the Panel has not made any efforts to rebut these findings, except saying that the AO was not empowered to disturb the expenditure quantified by DSIR and the statement recorded during the Survey proceedings did not carry any evidentiary value. However, being factual in nature, the findings of the Survey u/s. 133A cannot be ignored. These findings were not available before the DSIR and hence there was no opportunity to examine the same by the DSIR. Hence on the basis of facts presented before us by the AO which were not controverted by the assessee, we concur with the finding of the AO and confirm the addition made in this regard. 4.4.2 Manpower in R&D unit, Tiruvottiyur .......Although the prescribed Authority for qu....
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.... courts (supra), we are of the view that the AO/DRP have stretched their jurisdiction in disallowing the claim of the assessee U/s. 35(2AB) of the Act, by rejecting the eligible amount as certified by the DSIR in Form 3CL dated 08/04/2021. Further the claim of weighted deduction of expenditure on scientific research by the assessee has been denied by the AO/DRP merely relying on the statements of employees recorded during the survey proceedings u/s. 133A of the Act cannot be countenanced. Hence, we are of the view that the claim of the assessee is in accordance with section 35(2AB) is allowable as per the Form 3CL issued by the DSIR and direct the AO to recompute the income by allowing the claim of assessee U/s. 35(2AB) of the Act. Thus, we allow the ground Nos. 33 to 44 of the assessee's appeal." - Para 12.9.1 of Page No. 58 of Tribunal Order Furthermore, the same issue had been decided in favour of the Appellant in its own case by this Tribunal in ITA Nos. 54 and 55/ Chny/ 2025 for AY 2013-14 and AY 2014-15 dated 05.05.2025 as under: "It is also noted that the Tribunal has dealt with the action of the lower authorities disallowing capital R & D expenses claimed ....
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....6,03,801 (Ground No. 11 to 12): The Appellant claimed deduction with respect to provisions created towards electricity charges, fuel surcharge and cess on own power generation, safeguard duty since the liability has crystallised. During assessment, the Appellant has provided sample copies of the invoices for the said electricity charges for Rs. 60,36,230/-. The AO has disallowed a portion of provision for litigation and related disputes relating to provision created by the Appellant towards electricity charges on the contention that the same is contingent in nature and for not furnishing a detailed year-wise break-up of the amount and evidence in entirety for claiming such allowance. Relevant extracts / excerpt of final order is provided below: "2.5 Hence, the assessee's claim of reversal of provision or Rs 60,36,230 is reduced from the provision for litigation and related dispute amount of Rs 3,66,40,031/- and the balance of Rs 3,06,03,801/- is disallowed and added back to the total income of the assessee, as directed by the Hon'ble DRP" - Para 2.5, Pg 7 of final order Relevant extracts / excerpt of DRP order is provided below: ....
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....ricing Agreement ('BAPA') with the CBDT determining the Arm's Length Price ('ALP') in respect of the said transaction to be 0.5% (Pg 166 to 197 of paper book of factual documents) and has filed modified return of income u/s. 92CD of the Act declaring the enhanced income and paying tax on the same (Pg 1 to 51 of paper book of factual documents). Thus, these grounds are acadamic. 5.10 Issue 8: Adhoc addition to book profit u/s. 115JB (Ground No. 27): The ld.AR submitted that the adhoc addition made in the computation sheet forming part of the reassessment order was rectified vide order dated 21.06.2024 passed u/s. 154 read with section 143(3) read with section 144C(13) of the Act. Hence, this ground has become infructuous. 5.11 Issue 9 - Short credit of Tax Deducted at Source ('TDS') eligible to the Appellant (Ground No. 28): The ld.AR submitted that the entire TDS credit eligible to the Appellant for the subject year shall be allowed to the Appellant. This may be verified by AO. It is humbly submitted that the Appellant is eligible to the entire TDS credit and therefore ought to be allowed for the subject year. 5.12 Issue 10- Erroneous levy of int....