ITAT Upholds Overseas R&D Expenses as Capital Expenditure, Citing Consistency with Prior Years [Read Order]

The Pune Bench of Income Tax Appellate Tribunal(ITAT) upheld the deduction of overseas Research and Development (R&D) expenses as capital expenditure, citing consistency with prior years.

The Revenue-appellant, appealed against the Commissioner of Income Tax(Appeals)[CIT(A)] order for the Assessement year 2015-2016.In this case, Mahle Anand Thermal Systems Pvt.Ltd,respondent-assessee,was involved in manufacturing automobile parts like heat exchangers and air conditioning systems. It filed its return of income on 29.11.2014, showing a total income of Rs. 9,95,44,850/-.

The Assessing Officer(AO) completed the assessment on 23.12.2016, raising the total income to Rs. 19,31,29,820/-. This included disallowances of Rs. 8,31,07,474/- for the weighted deduction under section 35(2AB) and Rs. 1,04,77,500/- for product development expenses, which were treated as capital expenses.

The AO based the disallowances on decisions from similar cases, such as Cadila Health Care Ltd. vs. Addl. CIT and CIT vs. Ciba of India Ltd.. The disallowance for product development expenses was also supported by previous cases for the assessee from 2006-07 to 2008-09.

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The AO also noted that the assessee had claimed Rs. 16,33,61,805/- for in-house R&D expenses, including Rs. 4,15,53,737/- for R&D costs outside India. As a result, Rs. 8,31,07,474/- was disallowed for the overseas R&D expenses.

In appeal, the CIT(A) allowed the R&D expenses incurred outside India under section 35(1)(iv), even though the claim was made under section 35(2AB). The CIT(A) referred to a similar case decided by the ITAT, Pune, in the appellant’s favor for AY 2011-12. The ITAT had ruled that R&D expenses incurred outside India were not eligible for the weighted deduction under section 35(2AB) but could be allowed under section 35(1)(iv) as capital expenditure on scientific research.

Following this, the CIT(A) concluded that the product development expenses of Rs. 4,15,53,737 spent outside India were not eligible for the weighted deduction under section 35(2AB), but were eligible for a deduction under section 35(1)(iv). The appeal was partly allowed on this ground.

The revenue appealed before the tribunal.

Read More:Capitalized R&D expenditure can be claimed u/s 35(1)(iv) if disallowed u/s 35(2AB): ITAT

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The two member bench comprising Astha Chandra(Judicial Member) and R.K.Panda(Vice President) had already decided this issue in favor of the assessee for AY 2011-12, covering the Revenue’s challenge to the  CIT(A)'s order allowing capital expenditure on R&D outside India under Section 35(1)(iv). In that case involved manufacturer of automobile accessories claimed a ₹26.73 crore weighted deduction under Section 35(2AB) for R&D expenses. The AO disallowed ₹8.86 crore spent abroad, and the CIT(A) further reduced the claim to ₹2.57 crore based on DSIR approval.

The appellate tribunal ruled that Department of Scientific and Industrial Research(DSIR) approval should apply from April 1, 2010, and not December 7, 2010. It held that limiting the deduction to DSIR-approved amounts was incorrect, as the rule applied only from July 1, 2016. It also overturned the disallowance of intangible capital expenditure but upheld the disallowance of foreign R&D expenses, as Section 35(2AB) applies only to in-house R&D in India.

Since the facts matched the assessee’s cases from previous years, and no contrary evidence was presented, the tribunal upheld the CIT(A)’s order and dismissed the Revenue’s appeal.

To Read the full text of the Order CLICK HERE

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