The Pune bench Income Tax Appellate Tribunal (ITAT) has held that deduction u/s 35(2AB) can allow only for expenditure incurred R&D facility in India and upholds the order confirming the disallowance of the weighted deduction.
The appellant is engaged in manufacturing and selling air conditioning systems which filed a return of total income of Rs.9,58,15,960/-. The appellant contented filter of export to a total sale of 75%. The TPO rejected the contention of the appellant by placing reliance on the provisions of Rule 10B (2) of the Rules. The Assessing Officer passed assessment u/s 143(3) r.w.s. 144C (1) of the Act making addition on account of TP adjustments of Rs.4,67,55,636/-, disallowance of weighted deduction u/s 35(2AB) of Rs.3,38,82,341/- and disallowance on account of Product Development Expenses treated as capital expenditure of Rs.1,74,00,000/-.
The appellant contended that learned DRP and the AO erred in confirming the disallowance of the weighted deduction of Rs.3,38,82,341/- claimed under Section 35(2AB) of the Income Tax Act,1961 about in-house Research and Development (R&D) activity.
DRP confirmed the expenditure incurred R&D facility outside India cannot be allowed as a “deduction” as the object of the provisions of section 35(2AB) only promote R&D in India and held that the appellant is not eligible to claim deduction which is in excess to the amount approved by the DSIR.The appellant contended that the disallowance of revenue expenditure incurred on product development expenses claimed as “revenue expenditure” on the ground that the said expenditure was incurred actually on an ongoing basis to upgrade the existing products.
The Coram consists of Shri Inturi Rama Rao, Accountant Member and Shri Sonjoy Sarma, Judicial Member held that the expenditure incurred on product development expenses is “revenue expenditure” and set aside. Further, uphold the action of the lower authorities in disallowing the expenditure incurred on in-house R&D facility. The appeal filed by the appellant was partly allowed. Shri R. D. Onkar appeared for the appellant and Shri Sunil Kumar appeared for the respondent.
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