Case I R&D Deductions Certified by DSIR Cannot Be Overruled

Case I: R&D Deductions Certified by DSIR Cannot Be Overruled by Assessing Officer Based on Survey

Issue

Whether the Assessing Officer or Dispute Resolution Panel can override the weighted deduction certified by the Department of Scientific and Industrial Research (DSIR) under Section 35(2AB) based merely on subsequent survey statements.

Facts

The assessee, an Indian tyre manufacturer, claimed a weighted deduction under Section 35(2AB) for revenue and capital expenditure incurred at its in-house R&D facility for AY 2015-16 and 2016-17.
The claim was supported by Form 3CL, which was duly issued by the prescribed authority, the DSIR.
The Assessing Officer (AO) conducted a survey later in 2019 and concluded that the unit was only doing sample testing, lacked expert technical manpower, and lacked certain large testing equipment.
Relying on the 2019 survey statements, the AO disallowed the R&D deduction.

Decision

Held, yes: The DSIR is the sole prescribed authority under Section 35(2AB) to quantify and approve eligible R&D deductions; the AO or DRP cannot sit in judgment over DSIR’s technical approval.
Held, yes: A disallowance based purely on statements recorded during a survey is legally unsustainable.
Held, yes: A survey conducted down the line in 2019 cannot be retroactively applied to invalidate valid deductions already certified for earlier assessment years (AY 2015-16 and 2016-17).
Held, yes: The impugned disallowance was ordered to be completely deleted [In favour of assessee].

Key Takeaways

Jurisdictional Boundaries: The AO’s jurisdiction is limited to verifying expenditure; they cannot review or override the technical assessments and certifications made by a specialized body like the DSIR.
Temporal Relevance of Surveys: Evidence gathered during a survey is snapshot-based and cannot be automatically presumed to represent the operational realities of preceding financial years.

Case II: Assessing Officer Cannot Re-Benchmark Transfer Pricing Transactions Already Approved by the TPO

Issue

Whether the Assessing Officer can independently disallow business expenditure under Section 40A(2) after the Transfer Pricing Officer (TPO) has already benchmarked and accepted the arm’s length price of the same transaction.

Facts

The assessee procured raw materials through its Associated Enterprise (AE) and compensated it on a 3% cost-plus commission basis for market intelligence and supplier negotiations during AY 2015-16.
The TPO examined the international transaction and successfully completed the benchmarking process for this commission.
Despite the TPO’s benchmarking, the AO invoked Section 40A(2)(b) and Section 37(1) to disallow 2.5% out of the 3% commission.
The AO based the disallowance on sworn survey statements, inferences regarding the AE’s operational setup (board meetings, registered office, staff roles), and references to lower margins indicated by Advance Pricing Agreement (APA) authorities.

Decision

Held, yes: Once the specialized TPO has benchmarked an international transaction, the AO cannot re-evaluate or question the reasonableness of that exact same expenditure under corporate tax provisions like Section 40A(2) or Section 37(1).
Held, yes: Simultaneous or double disallowance under both Transfer Pricing regulations and domestic corporate tax provisions for the same transaction is legally impermissible.
Held, yes: The ad hoc disallowance made by the AO was ordered to be deleted [In favour of assessee].

Key Takeaways

No Double Jeopardy in Tax Assessment: A transaction cannot be subjected to a parallel reasonableness test under domestic business expenditure rules once it has cleared the rigorous arm’s length price validation by the TPO.
Exclusivity of TPO’s Domain: The TPO holds primary authority over pricing compliance of international transactions; the AO cannot use domestic provisions to circumvent TPO findings.

Case III: Corporate Guarantee Pricing Must Match Bilateral APA Rates Instead of High Bank Guarantee Benchmarks

Issue

Whether the TPO is justified in applying high commercial bank guarantee rates to impute a notional fee on a zero-cost corporate guarantee when a Bilateral APA for similar transactions dictates a lower rate.

Facts

The assessee provided a corporate guarantee to banks on behalf of its wholly-owned subsidiary for AY 2015-16 and 2016-17 without charging any commission.
The assessee argued that it incurred zero cost and that providing backup to a subsidiary falls under a non-chargeable “shareholder function”.
The TPO classified the corporate guarantee as an international transaction under Section 92B and applied a Comparable Uncontrolled Price (CUP) rate of 2.34% based on commercial bank guarantee rates to impute notional income.
Concurrently, a Bilateral Advance Pricing Agreement (APA) entered into by the assessee had determined the Arm’s Length Price (ALP) for similar guarantee transactions to be 0.5%.

Decision

Held, yes: The TPO was not justified in applying a commercial bank-based CUP rate of 2.34% given the distinct non-retail nature of corporate parental support.
Held, yes: In light of the existing Bilateral APA governing similar transactions of the assessee, the transfer pricing adjustment must be restricted to the APA-specified rate of 0.5% [Partly in favour of assessee].

Key Takeaways

Corporate vs. Bank Guarantees: Corporate guarantees cannot be directly equated with commercial bank guarantees because banks act as profit-seeking financial intermediaries, whereas parents act out of shareholder stewardship.
Precedence of APAs: Bilateral APA benchmarks offer highly reliable pricing guidance and should be preferred over generic commercial banking data for identical transaction profiles.

Case IV: Admissibility of Provisions for Litigation Requires Factual Verification of Evidence by Assessing Officer

Issue

Whether a provision created for pending litigation and statutory cess liabilities requires direct factual verification by the Assessing Officer before being disallowed.

Facts

The assessee created financial provisions for ongoing litigation and related operational disputes (including electricity charges, fuel charges, and regulatory cesses) for AY 2015-16 and 2016-17.
The assessee submitted partial documentary evidence during the assessment proceedings to substantiate the crystallization and basis of these provisions.
The complete evidentiary trail was not fully verified during the initial assessment cycle.

Decision

Held, yes: The matter surrounding the provision for litigation requires thorough factual verification of the underlying legal liabilities.
Held, yes: The issue was restored and remanded back to the file of the Assessing Officer for fresh examination and evaluation of the complete evidence [Matter remanded].

Key Takeaways

Crystallized Liabilities: Provisions for litigation are allowable as business expenditure under Section 37(1) provided they represent a certain, quantified, and accrued liability rather than a contingent, hypothetical future loss.
Remand for Completeness: Where evidence is partial, appellate bodies will remand the issue to ensure the revenue authority evaluates the entire evidentiary packet.

Case V: Ad Hoc Disallowances From Chapter VI-A Deductions Without Explanation Must Undergo Remedial Verification

Issue

Whether an ad hoc, unexplained reduction of claimed Chapter VI-A deductions by an Assessing Officer constitutes a mistake apparent from the record that must be verified and corrected.

Facts

The assessee claimed eligible tax deductions under Chapter VI-A for AY 2015-16.
The Assessing Officer made a direct ad hoc disallowance from the claimed deductions without providing any discussion, reasoning, or calculation basis in the assessment order.
The assessee approached the Tribunal, pointing out that this arbitrary reduction was a glaring “mistake apparent from the record”.

Decision

Held, yes: An ad hoc disallowance applied to Chapter VI-A deductions without an explanatory framework cannot be sustained without validation.
Held, yes: The matter was remanded back to the Assessing Officer with instructions to verify the records and completely delete the disallowance if it was found to be an unreasoned error [Matter remanded].

Key Takeaways

Speaking Orders Mandatory: Every disallowance or modification to a tax return by an AO must be accompanied by a clear, logical, and legally backed explanation within the text of the order.
Rectification of Arbitrary Errors: Arbitrary adjustments devoid of any discussion qualify as rectifiable mistakes, and the taxpayer is entitled to a full re-verification.

IN THE ITAT CHENNAI BENCH ‘D’

MRF Ltd.

Deputy Commissioner of Income-tax, Central Circle 3(3)^*

Manu Kumar Giri, Judicial Member
and S.R.RAGHUNATHA, Accountant Member

IT (TP) Appeal Nos. 5 & 6 (Chny) of 2024
[Assessment years 2015-16 and 2016-17]

MAY 4, 2026

Vikaram Vijayaraghavan, Adv. for the Appellant. ARV Sreenivasan, CIT for the Respondent.

ORDER

Manu Kumar Giri, Judicial Member.- The captioned appeal in filed by the assessee, arise from the final assessment orders of Deputy Commission of Income Tax, Central Circle 3(3), Chennai dated 19.01.2024 and 27.01.2024 issued u/s. 147 read with Section 144C(13) of the Income Tax Act, 1961 (“the Act”) for Assessment Years 2015-16 and 2016-17.

2. Background of the case for Assessment for AY 2015-16:

The Appellant is an Indian company and the country’s largest tyre manufacturer, with its headquarters in Chennai. It produces tyres, treads, tubes, conveyor belts, and other related rubber products. The Appellant reported an income of Rs.15,78,70,07,910/- under the normal provisions of the 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 further concluded that out of the 3% commission paid, 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 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 0.5% margin fell within the permissible 3% tolerance range.

The TPO also rejected the argument that a corporate guarantee does not constitute an international transaction u/s. 92B.

Under the CUP method, the TPO upheld a rate of 2.34%, referencing rates charged by leading banks for guarantee services.

3. Upon objections raised before the DRP, its order dated 22.12.2023 upheld all adjustments made by the AO/TPO. Following the final order issued by the AO, the Appellant has filed an appeal before the Tribunal on the stated grounds as under:

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Ground 1: General

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Ground 2 to 8 (Issue 1): Questioning the validity of the reassessment proceedings initiated u/s. 147 of the Act

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Ground 9 (Issue 2): Reassessment order being barred by lim Tribunalion of time u/s. 153 of the Act

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Ground 10,11 (Issue 3): Contended the disallowance of provision for litigation and related disputes

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Ground 12 to 20 (Issue 4): Contended disallowance of the transaction with MRF SG u/s. 40A(2)(b) rws. 37 of the Act.

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Ground 21 to 28 (Issue 5): Contended disallowance of deduction claimed u/s. 35(2AB)

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Ground 29, 30 (Issue 6): Contended the TP upward adjustment towards purchase of raw materials from MRF SG

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Ground 31 to 34 (Issue 7): Contended the TP adjustment on account of provision for corporate guarantee

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Ground 35 (Issue 8): Appeal against the adhoc disallowance of Chapter VIA deduction claimed by the Appellant

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Ground 36 (Issue 9): Contended the short credit of TDS eligible to Appellant

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Ground 37 (Issue 10): Contended the erroneous levy of interest u/s. 234B of the Act

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Ground 38 (Others): Appeal against erroneous initiation of penalty proceedings

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Ground 39 (Others): General

4. Issue 1: Reassessment proceedings initiated u/s. 147 of the Act are invalid, bad and void-ab-initio (Ground Nos. 2 to 8):

The Appellant has chosen not to pursue these grounds of appeal hence dismissed as not pressed.

4.1 Issue 2: The impugned reassessment order is barred by lim Tribunalion 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, the AO disallowed the deduction claimed by the Appellant. An extract from the final order is reproduced below:

(a) Thiruvottiyur R&D unit is only engaged in sample testing activities:

“Therefore, in absence of any documentary evidence and satisfactory explanation and based on the survey findings discussed as above, in the draft order, 30% of the expenditure claimed in R&D Unit, Thiruvottiyur was proposed to be disallowed and hence relevant balance weighted deduction claimed i.e. 30% of Rs. 70,56,49,190/- works out at Rs. 21,16,94,757/- was proposed to be disallowed and added back to the total income of the assessee for the A.Y. 2016-17.”- Para 4.1.1, Pg 16 of final order

(b) The manpower employed by the Appellant lack technical knowledge:

“As the assessee company has not produced sufficient documentary evidences and based on the facts found during the course of survey proceedings that non-technical people and low-quality people were employed in the said R&D Unit, 70% of the weighted deduction claimed towards manpower employed works out to Rs. 21,23,99,500/-(70% of 200% of Rs. 15,17,13,929/-) was proposed to be disallowed and added back to the total income of the assessee company for AY. 2015-16.” – Para 4.2.1,Pg. 18 of final order.

“Clearly from the above statement, in Q2, the assets where there were no installation certificates were pushed to be capitalized earlier years itself which is wrong and should be disallowed. Further, During the course of survey, it was also found that R & D unit at Thiruvottiyur is not doing any retreading of tyres but only manufacturing. In view of all the above discussion, as the company does not incur any expenditure on scientific research on in-house research and development as per section 35(2AB) of Income tax Act, 1961, the capital and revenue expenditure in Thiruvoittyur plant were not correct, in the draft order, 50% of the weighted deduction claimed u/s. 35(2AB) of Income tax Act, 1961 (other than manpower) in respect of R&D Thiruvottiyur Unit to the tune of Rs. 20,11,10,666/- (50% of the weighted deduction Rs. 40,22,21,332/-) (other than manpower) was proposed to be disallowed and added back to the total income of the assessee for AY.2015-16.”-Para 4.3.1, Pg 22 of final 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 concur with the finding of the AO and confirm the addition made in this regard.

(ii) Manpower in R&D Unit, Tiruvottiyur –

….Although the prescribed authority for quantification of the expenditure eligible for weighted deduction u/s 35(2AB) is DSIR, the findings of the survey carried out by the Department u/s 133A cannot be ignored. These are findings of fact and hence are relevant for determining the claim of weighted deduction claimed. The statement recorded threw information on the activities of the assessee which have been corroborated with the facts gathered during the survey which has not been contradicted by the assessee. Hence, we find no reason to interfere with the findings of the AO. Accordingly, the Grounds of objection raised on this issue are rejected.

(iii) Work claim of R&D expenses on large testing items which were not installed at Tiruvottiyur

……During the course of survey, it is also found that the R&D unit at Tiruvottiyur is not doing any retreading of tyres but only manufacturing. Shri. Mohan Kurian, Vice-President, Procurement Operations of MRF Ltd., Chennai, stated in his statement recorded u/s 131 of the Income-tax Act, 1961 on 22.11.2019 that the R&D lab were meant mainly for sample testing for various vendors and this resulted only in vendor selection, which is against the guidelines laid down by DSIR.Since the machinery was not installed, the expenditure cannot be allowed and hence we confirm the disallowance made by the AO in this regard. ” – Para 5.4 of Page No. 25 to 26 of DRP order

The Appellant submits that once the DSIR, after conducting detailed verification, has quantified the eligible deduction u/s. 35(2AB) of the Act, the AO cannot disregard or override such determination and disallow the deduction so approved.

The issue is directly covered in favour of the Appellant by the Hon’ble Tribunal in its own case for AYs 2017-18, 2018-19, and 2019-20 in MRF Ltd. v. Dy. CIT IT(TP)A Nos. 64 & 65/Chny/2022 and 41/Chny/2023 dated 20.09.2024. The Tribunal held that the AO/DRP exceeded their jurisdiction in disallowing the deduction certified by the DSIR in Form 3CL and that such disallowance, based merely on employee statements recorded during survey proceedings u/s. 133A, is unsustainable. Accordingly, the Tribunal directed the AO to recompute income by allowing the deduction u/s. 35(2AB).

Further, the same issue has been decided in favour of the Appellant by the Hon’ble TRIBUNAL in Dy. CIT v. MRF Ltd. 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 includingCIT, Bangalore v. Tejas Networks India (P.) Ltd. (Karnataka), CIT v. F.C.S. International Marketing (P.) Ltd. [2006] 203 CTR 601/283 ITR (Punjab & Haryana), and Asstt. CIT v. Ranbaxy Laboratories Ltd. [2011] 7 ITR(T) 00161 (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 MRF Ltd. (supra), as well as MRF Ltd. (supra) for AYs 2013-14 and 2014-15 dated 05.05.2025.

4.3 Issue 4: Disallowance of expenses relating to transaction entered with MRF SG amounting to Rs.3,78,29,223/- (Ground No. 12 to 20):

The Appellant procures raw materials for its operations through MRF SG, compensating it on a cost-plus basis at 3%. MRF SG plays an active role in tracking fluctuations in natural rubber prices, offering market insights, and negotiating with suppliers to obtain raw materials at competitive rates. It functions as a value-adding procurement facil Tribunalor by utilizing its supplier network, negotiating freight terms and quality-based price adjustments, and passing on all commercial advantages to the Appellant in return for the agreed 3% margin.

The AO disallowed expenses arising from the Appellant’s transaction with MRF SG, holding that out of the 3% commission paid, 2.5% was liable for disallowance u/s.s 40A(2)(b) and 37 of the Act, in addition to the adjustment already made by the TPO in respect of the same transaction. This conclusion was drawn based on the AO’s interpretation of sworn statements recorded during survey proceedings, along with certain inferences regarding the functioning of MRF SG. These included observations relating to board meetings, the registered office, and the roles of employees and directors, as understood by the AO.

Relevant extracts / excerpt of final order is provided below:

“…….The assessee has not furnished documentary evidences in entirety in respect of the payment of Rs. 3,55,59,246/- towards the said provision. Further, it is also stated that even if the same has been paid in the subsequent year, deduction for the same cannot be claimed in the year under consideration.

In view of the above discussion, in the draft order, the balance deduction claimed under the provisions made towards Litigations and related disputes to the tune of Rs.3,55,59,246/- was proposed to be disallowed and added back to the total income of the assessee company for AY. 2015-16.”-Para 2.1, Pg 5 of the final order.

“Accordingly, the addition proposed in the draft order is hereby confirmed.” – Para 2.4, Pg 6 of the final order

Relevant extracts / excerpt of the DRP order:

“On perusal of the submission, we note that the assessee has produced bills before the Panel pertaining to FY 2013-14. The assessee has claimed that 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 Factual Paper Book). However, the same was not duly considered by the Ld. AO or the Hon’ble DRP.

Accordingly, the Appellant requests that the matter be remitted to the Ld. AO for fresh examination of the sample invoices and for grant of the corresponding deduction.

Without prejudice, in the event the provision is disallowed in the current assessment year, it is submitted that the deduction should be allowed in the year in which the liability is actually discharged. In view of the above, the Appellant prayed that the issue be restored to the Ld. AO for reconsideration of the sample invoices submitted during assessment proceedings, and that the Appellant be granted a reasonable opportunity to place further supporting evidence on record.

4.4 Issue 4: Disallowance of expenses relating to transaction entered with MRF SG amounting to INR 3,78,29,223 (Ground No. 12 to 20):

The Appellant procures raw materials for its business from MRF SG and pays it a remuneration of cost plus 3%. MRF SG actively tracks fluctuations in natural rubber prices, provides market intelligence, and negotiates with suppliers to secure raw materials at competitive rates for the Appellant.

It functions as a value-added procurement facil Tribunalor by leveraging supplier relationships, negotiating freight terms and quality-linked price adjustments, and ensuring that all commercial benefits are fully passed on to the Appellant in consideration of the 3% margin.

The AO disallowed the expenditure arising from the Appellant’s transaction with MRF SG, holding that out of the 3% commission paid, 2.5% was liable for disallowance u/s.s 40A(2)(b) and 37 of the Act, in addition to the adjustment already made by the TPO on the same transaction. This conclusion was based on the AO’s interpretation of sworn statements recorded during survey proceedings, as well as certain assumptions regarding the functioning of MRF SG, including aspects relating to board meetings, the registered office, and the roles of its employees and directors, as understood by the AO.

Relevant extracts / excerpt of final order is provided below:

“1 . In a letter dated November 26, 2017 the assessee has stated that the company had applied for the APA agreement for getting a transfer price on the above transactions with Singapore Entity. The APA Authorities while processing 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 prove that the transactions are sham and are only paper companies created to siphon off profits from the Indian companies. The transactions created by the assessee are a colorable device through complicated paper arrangements to shift profits out of the country. The assessee has not been able to produce satisfactory evidences to prove the genuineness of the role of the Singapore entity in the entire transactions. Section 40A(2)(a) of the Income Tax Act is squarely applicable here.”Pg 9 and 10 of final order.

“In view of the above discussion, AO has the jurisdiction to look into the issue of excessive and unreasonable payments u/s. 40A(2)(b) and Section 37 of the Income Tax Act ” Pg 13 of final order

Relevant extracts/ excerpt of DRP order is provided below:

“4.2.7 Accordingly, the Panel is of the considered opinion that the AO can, therefore, determine u/s. 37 that the expenditure was not for the benefit of the business, and thus, disallow that amount. This does not restrict or in any way bypass the functions of the TPO. Quite to the contrary, it represents the correct division of jurisdiction between the two entities. In view of the above discussion, AO has the jurisdiction to look into the issue of excessive and unreasonable payments u/s. 40A(2)(b) and Section 37 of the Income Tax Act. Hence this contention raised by the assessee is devoid of merit. Para 4.2.7, Pg. 15 of DRP order

During the assessment proceedings in a letter dated November 26, 2017 the assessee has stated that the company had applied for the APA agreement for getting a transfer price on the above transactions with Singapore Entity. The APA Authorities while processing the unilateral agreements have visited the MRF premises, held numerous discussions and after an elaborate process, determined that the armis 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. During the Panel proceedings the assessee has submitted a copy of the Bilateral Advance pricing agreement(BAPA) signed on 24.03.2023, wherein the purchase of raw material and letter of comfort are the covered transaction, however the current assessment year is not covered under BAPA. The BAPA has determine the ALP for the purchase of Raw material from the AE, MRF SG at cost plus 0.5%. Considering the 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 166 to 197 of the paper book).

The AO has misinterpreted the sworn statements recorded during the survey conducted in November 2019, leading to erroneous and prejudiced conclusions.

Without prejudice, the TPO has already examined the transaction in detail during transfer pricing proceedings and made an adjustment of 2.5% on cost. Therefore, any further disallowance u/s. 40A(2)(b) read with Section 37 would amount to a double disallowance of the same expenditure. The reliance placed by the AO onCIT-I v. Cushman and Wakefield (India) (P.) Ltd. CTR 16/367 ITR 730 (Delhi), dated 23 May 2014) is misplaced. In that case, the Hon’ble Delhi High Court held that once the quantum of expenditure has been examined by the TPO, the AO cannot reexamine the reasonableness of such quantum and may only verify whether the expenditure was actually incurred for business purposes. However, in the present case, the AO himself has proceeded to disallow a portion of the expenditure, thereby questioning the quantum, making the reliance on the said judgment inapplicable. In view of the above, the Appellant respectfully submits that no disallowance u/s. 40A(2)(b) read with Section 37 of the Act is warranted. Without prejudice, sustaining such disallowance would result in double disallowance of the same expenditure—once under transfer pricing provisions and again under corporate tax provisions.

4.5 Issue 6: Transfer Pricing adjustment towards purchase of raw materials from MRF SG (Ground No. 29 to 30):

MRF procured raw materials amounting to INR 1,513,168,941 from MRF SG during the relevant year. MRF SG was remunerated at a mark-up of 3% on the cost of raw materials, along with reimbursement of interest costs and forward premium costs. MRF SG, being the least complex entity in the transaction, was selected as the tested party. Comparable companies engaged in similar activities in the APAC region were identified. The transaction was benchmarked under the Cost Plus Method (CPM), which was adopted as the Most Appropriate Method (MAM), using Gross Profit over Cost of Goods Sold as the Profit Level Indicator (PLI).

The TPO rejected the CPM adopted in the transfer pricing documentation, wherein the 3% margin earned by MRF SG was considered to be at arm’s length, and instead applied the “Other Method” as the Most Appropriate Method. The TPO further relied on sworn statements 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 similar and both are engaged in trading and distribution activities, the adoption of CPM as the Most Appropriate Method is justified and appropriate. Without prejudice, it is submitted that the Bilateral Advance Pricing Agreement (BAPA) for subsequent years also supports a 0.5% margin for the transaction (refer page 169 of the paper book).

4.6 Issue 7: Transfer Pricing adjustment on account of provision of corporate guarantee (Ground No. 31 to 34):

MRF SG, a wholly owned subsidiary of MRF India, commenced operations in July 2014. To meet its working capital requirements arising from extended credit periods granted to MRF India, it availed loans and credit facilities from banks.

Since MRF SG was in its initial stage of operations and its creditworthiness was yet to be established, the Assessee provided corporate guarantees to banks, enabling MRF SG to secure credit facilities. Accordingly, loans were obtained from Bank of Tokyo Mitsubishi UFJ Ltd. and Citibank, Singapore Branch, backed by guarantees issued by the Assessee in its capacity as the holding company and primary beneficiary of the extended credit terms. No guarantee commission was charged, as the Assessee did not incur any cost in providing such guarantees.

The TPO imputed a notional guarantee fee of INR 3,32,76,895 on the corporate guarantee extended by MRF India to MRF SG, by applying a rate of 2.34% based on prevailing bank guarantee rates on the outstanding loan. The DRP upheld the adjustment made by the TPO.

The ld.AR for the assessee submitted that MRF SG, being a wholly owned subsidiary incorporated in 2014, required corporate support during its initial years. The corporate guarantee was extended as a matter of commercial prudence and shareholder responsibility to protect the Assessee’s investment in the subsidiary. Further, the working capital borrowed by MRF SG ultimately benefits MRF India, as it enables MRF SG to provide extended credit periods of 180 days to MRF India for procurement of raw materials. The provision of corporate guarantee does not satisfy the requirements of Section 92B of the Act, as it has no bearing on the profits, income, losses, or assets of the Assessee. No cost was incurred by the Assessee, and there was no financial obligation triggered during the subsistence of the guarantee. Reliance is placed on the decision of the Hon’ble Delhi TRIBUNAL in Bharti Airtel Ltd., which has been followed by the jurisdictional Hon’ble Chennai TRIBUNAL in TVS Logistics Services Ltd. v. Dy. CIT (Chennai – Trib.):

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 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 view. Unless and until order of this Tribunal is reversed by the Madras High Court in Redington (India) Ltd., the authorities below cannot take a different view on the subject. Therefore, by following the decision of co-ordinate Bench of this Tribunal in Redington (India) Ltd. (supra), the orders of the lower authorities are set aside. The adjustment made by the Transfer Pricing Officer as confirmed by the Dispute Resolution Panel is not justified. Accordingly, the addition made by the Transfer Pricing Officer is deleted.”

Without prejudice, he submitted that in respect of similar AE transactions, the APA for subsequent years has upheld a 0.5% rate as the only appropriate compensation, and has further clarified that no additional compensation is warranted for letters of comfort. Accordingly, applying the same APA rationale, no separate adjustment towards corporate guarantee is justified for the present year as well (refer page 171 of the paper book).

Without prejudice, he submitted that even if the adjustment is sustained, it ought to be restricted to 0.5%. This position is also supported by the ratio laid down by the Hon’ble Supreme Court in CIT (LTU) v. Glenmark Pharmaceuticals Ltd. (SC)/ (Civil Appeal No. 12632/2017).

Similar principles have been reaffirmed in Financial Software and Systems Pvt. Ltd. v. Dy. CIT (IT(TP)A No. 87/CHNY/2024).

“We have heard both the parties and gone through the orders. Admittedly, the assessee has given a corporate guarantee during the year for the sanctioned amount of AED 11 million to FSS FZE. However, the loan was utilized and outstanding only at about AED 3.1 million as at 31.03.2021.

….Ou r above view is supported by the judicial precedents relied upon by the assessee. Therefore, respectfully the following judicial precedents (supra) we direct the TPO to recompute the Upward adjustment of fee on corporate guarantee provided by restricting to 0.5% of the utilized sum of AED 3.1 million.

65. In the result the related grounds of appeal of the assessee are partly allowed.”

In view of the above, he prayed that the adjustment made in respect of the corporate guarantee be deleted, as the APA for subsequent years recognises 0.5% as the only appropriate compensation for the AE transaction and does not require any separate consideration for the letter of comfort.

Without 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 allowed.

4.8 Issue 10 – Erroneous levy of interest u/s. 234B (Ground No. 37):

The ld.AR for the assessee submitted that for the relevant year, the Appellant has already discharged more than 90% of its total tax liability through advance tax and TDS, and therefore, levy of interest u/s. 234B is not warranted. Further, the interest under this section is purely consequential in nature. He submitted that the entire interest charged u/s. 234B deserves to be deleted, as the Appellant has already paid over 90% of its tax liability through advance tax and TDS.

4.9 Issue 11 – Penalty Proceedings u/s. 274 read with Sections 271(1)(c) and 271AA (Ground No. 38):

The ld.AR for the assessee submitted that in the relevant year, penalty proceedings u/s. 274 read with Sections 271(1)(c) and 271AA of the Act were initiated by the learned AO. He submitted that the learned AO has failed to properly consider the submissions of the Appellant and has wrongly initiated penalty proceedings u/s.s 274 read with 271(1)(c) and 271AA of the Income-tax Act, 1961. Accordingly, such initiation is erroneous, invalid, and not sustainable in law, and therefore deserves to be dropped.

Background of the case for Assessment for AY 2016-17:

5. The Appellant is an Indian company and the country’s largest tyre manufacturer, with its headquarters in Chennai. It is engaged in the production of tyres, treads, tubes, conveyor belts, and other allied rubber products. The Appellant reported a total income of Rs.21,10,97,78,170 under the normal provisions of the Act. An original assessment order dated 27.12.2018 was issued, making certain additions to the returned income. This order was later set aside by the Hon’ble Madras High Court in MRF Ltd. v. Dy. CIT ITR 103 (Madras)/WP Nos. 1554, 1561 & 1567 of 2019, with directions to issue a fresh assessment order. Accordingly, a new order u/s.s 143(3) read with 260 of the Act was passed on 29 September 2022. 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”) based on findings from the survey conducted on 20 November 2019.

Verification of the deduction claimed u/s. 35(2AB) of the Act following the same survey.

Disallowance of provisions made towards litigation and related disputes.

The Transfer Pricing 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 the acceptable tolerance band of 3%.

•

The TPO also rejected the Appellant’s argument that the letter of comfort does not qualify as an international transaction u/s. 92B of the Act.

•

Finally, the TPO justified the 3% rate by referencing rates charged by leading banks for guarantee services under the Comparable Uncontrolled Price (CUP) method.

5.1 On objections filed before the DRP, vide order dated 21.12.2023 the DRP has upheld all the adjustments of the AO/ TPO.

5.2 Following the final order issued by the AO, the Appellant has filed an appeal before the Tribunal on the following grounds:

Ground 1: General in nature.

Grounds 2 to 9 (Issue 1): Challenging the validity of the reassessment proceedings initiated u/s. 147 of the Act.

Ground 10 (Issue 2): Contending that the reassessment order is time-barred u/s. 153 of the Act.

Grounds 11 and 12 (Issue 3): Disputing the disallowance of provisions made for litigation and related disputes.

Grounds 13 to 20 (Issue 4): Challenging the disallowance of deduction claimed u/s. 35(2AB).

Grounds 21 to 26 (Issues 5 to 7): Contesting the transfer pricing adjustment arising from the disallowance of transactions with MRF SG.

Ground 27 (Issue 8): Appealing against the ad hoc addition made to book profits u/s. 115JB.

Ground 28 (Issue 9): Raising the issue of short credit of TDS available to the Appellant.

Grounds 29 and 30 (Issue 10): Challenging the incorrect levy of interest u/s.s 234B and 234C of the Act.

Ground 31 (Others): Opposing the improper initiation of penalty proceedings.

Ground 32 (Others): General in nature.

5.3 Issue 1: Reassessment proceedings initiated u/s. 147 of the Act are invalid, bad and void-ab-initio (Ground Nos. 2 to 9):

The Appellant has chosen not to pursue these grounds of appeal hence dismissed as not pressed.

5.4 Issue 2: The impugned reassessment order is barred by lim Tribunalion of time as per section 153 of the Act (Ground No. 10):

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 unit is only engaged in sample testing activities:

“Therefore, in absence of any documentary evidence and satisfactory explanation and based on the survey findings discussed as above, in the draft order, 30% of the expenditure claimed in R&D Unit, Thiruvottiyur was proposed to be disallowed and hence relevant balance weighted deduction claimed i.e. 30% of Rs. 75,17,78,632/- works out at Rs. 22,55,33,590/- was proposed to be disallowed and added back to the total income of the assessee for the A.Y.2016-17.”- Para 3.1.1, Pg 10 of final order

(e)

The manpower employed by the Appellant lack technical knowledge: “As the assessee company has not produced sufficient documentary evidences and based on the facts found during the course of survey proceedings that non-technical people and low-quality people were employed in the said R&D Unit, 70% of the weighted deduction claimed towards manpower employed works out to Rs. 25,20,90,774/-(70% of 200% of Rs. 18,00,64,836/-) is was proposed to be disallowed and added back to the total income of the assessee company for AY. 2016-17.”- Para 3.2.1, Pg 11 of final order

(f)

Deduction claimed with respect to large testing items not installed in Thiruvottiyur R&D centre:

“Clearly from the above statement, in Q2, the assets where there were no installation certificates were pushed to be capitalized earlier years itself which is wrong and should be disallowed. Further, During the course of survey, it was also found that R & D unit at Thiruvottiyur is not doing any retreading of tyres but only manufacturing. In view of all the above discussion, as the company does not incur any expenditure on scientific research on in-house research and development as per section 35(2AB) of Income tax Act, 1961, the capital and revenue expenditure in Thiruvoittyur plant were not correct, in the draft order, 50% of the weighted deduction claimed u/s. 35(2AB) of Income tax Act, 1961 (other than manpower) in respect of R&D Thiruvottiyur Unit to the tune of Rs. 19,58,24,480/-(50% of the weighted deduction Rs. 39,16,48,960/-) (other than manpower) was proposed to be disallowed and added back to the total income of the assessee for AY.2016-17” – Para 3.3.1,Pg. 15 of final order

The DRP dismissed the contentions advanced by the Appellant and confirmed the disallowances proposed by the AO. A relevant extract 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 qualification of the Expenditure eligible for weighted deduction u/s 35(2AB) is DSIR, the findings of the Survey carried out by the Department u/s 133A cannot be ignored. These are findings of fact and hence are relevant for determining the claim of weighted deduction claimed. The statement recorded threw information on the activities of the assessee which have been corroborated with the facts gathered during Survey which has not been contradicted by the assessee. Hence, we find no reason to interfere with the findings of the AO. Accordingly, the Grounds of objection raised on this issue are rejected.

4.4.3 Work claim of R&D Expenses on large testing items which were not installed at Tiruvottiyur

…..During the course of survey, it is also found that the R&D unit at Tiruvottiyur is not doing any retreading of tyres but only manufacturing. Shri. Mohan Kurian, Vice-President, Procurement Operation of MRF Ltd., Chennai, stated in his statement recorded u/s 131 of Income-tax Act, 1961 on 22.11.2019 that the R&D Lab were meant mainly for sample testing for various vendors and this resulted in only vendor selection which is against the guidelines laid down by DSIR. Since the machinery was not installed, the expenditure cannot be allowed and hence we confirm the disallowance made by the assessee in this regard.”- Para 4.4, Pg 24 to 26 of DRP order

The Appellant submits that once the Department of Scientific and Industrial Research (DSIR), upon detailed examination and verification, has quantified and approved the deduction claimed by the Respondent u/s. 35(2AB) of the Act, the AO lacks the jurisdiction to disregard or override such determination and, consequently, cannot disallow the deduction so sanctioned. It is further submitted that the issue stands conclusively settled by the co-ordinate bench of this Tribunal in the Appellant’s own case for Assessment Years 2017-18, 2018-19, and 2019-20 in MRF Ltd. (supra), wherein it was held that once the DSIR, after due verification, has quantified the deduction u/s. 35(2AB) of the Act, the AO is not empowered to supersede the functions of the DSIR or disallow the deduction so granted. The order of Tribunal is as under:

” In the present facts and circumstances of the case and by respectfully following the decisions of hon’ble 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 assessees 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 MRF Ltd. (supra) 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 on account of commission of machinery subsequently capitalized in Thiruvottiyur Unit and also answered as to whether sec.35 allowable on capital expenditure which is under construction and not put to use, and the Tribunal has referred to several judicial precedents on the subject and thereafter, has allowed the claim of the assessee by holding that “we are of the view that the claim of the assessee is in accordance with sec.35(2AB) of the Act is allowable as per Form No.3CL issued by the DSIR and direct the AO to recompute the income by allowing the claim of the assessee u/s.35(2AB) of the Act”.Since we fully concur with the impugned action of the Ld.CIT(A) allowing the appeal of the assessee on the aforesaid issues by following the Tribunal order in the assessee’s own case supra, we don’t give any other reason to uphold the impugned action of Ld.CIT(A) and dismiss the ground of Revenue.” – Para 13 of Page No. 12 and 13 of Tribunal order

“Coming to the contention of the Ld.DR that the disallowance/addition was made by the AO based on the findings of the survey u/s.133A of the Act, and therefore, Ld CIT(A) erred in following Tribunal order, we observe that the survey in question was dated 20.11.2019 and the assessment years before us is AYs 2013-14 & 2014-15 and therefore, the factual finding if any made by survey team, would not have any impact on the Form No.3CL issued by the DSIR after inspection done in the units dated 07.05.2014. Therefore, we don’t find any infirmity in the action of the Ld.CIT(A) deleting the disallowance/addition made by the AO on this issue” – Para 16 of Page No. 16 and 17 of Tribunal order

Other case laws in favour of assessee referred are: Tejas Networks Limited (supra); F.C.S. International Marketing (supra); Ranbaxy Laboratories Limited (supra).

In view of the foregoing submissions, the ld.AR prayed that the disallowance made by the AO be deleted, in accordance with the earlier orders rendered by this Tribunal in the Appellant’s own cases in MRF Ltd. (supra), as well as in MRF Ltd. (supra) for Assessment Years 2013-14 and 2014-15 dated 05.05.2025.

5.6 Issue 3: Disallowance of provision for litigation and related disputes amounting to INR 3,06,03,801 (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” – Para2.5, Pg 7 of final order

Relevant extracts / excerpt of DRP order is provided below:

“On perusal of the submissions, we note that the assessee has produced bills before the Panel pertaining to FY 2014-15. The assessee has also contended that INR 60,36,230 has been waived off by the Goa Electricity Board and a No Objection Certificate (NOC) was received by the Company on 28 February 2023, and it has been offered to tax in FY 2022-23 (i.e., in the year of reversal of the provision).In this regard, we direct the AO to verify the return of AY 2023-24 and, if the assessee has offered this reversal of the provision as income in AY 2023-24, then allow the expenditure in the current assessment year. With regard to the balance amount of provision claimed by the assessee, 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 hence the balance amount is confirmed. Accordingly, the objection raised by the assessee is partly allowed and disposed off.” – Para 3.4, Pg 9 of DRP order

The ld.AR for the assessee submitted that the provision created by the Appellant is not a contingent liability but a crystallised liability. The Appellant has provided sample invoice copies before the Ld. AO and Hon’ble DRP to the tune of Rs.60,36,230/- and the same was allowed by the AO as directed by the DRP (Rereferred Pg 208 to 220 of Factual Paper book). With regard to the balance invoices copies, the matter shall go back to the AO for fresh verifying the sample invoice copies and grant the deduction to the Appellant. Without prejudice, where the provision is disallowed in the current year, deduction shall be ultimately allowed in the year in which it is paid. In light of the above, the Appellant prayed that the matter be remanded to the AO to consider the sample invoices provided at the time of assessment and that a reasonable opportunity be granted to furnish balance evidences on record.

5.7 Issue 5: Transfer pricing adjustment- Effect to Bilateral Advance Pricing Agreement (Ground No. 21):

5.8 Issue 6: Transfer Pricing adjustment towards purchase of raw materials from MRF SG(Ground No. 22 to 24):

5.9 Issue 7: Transfer Pricing adjustment on account of fees towards issue of letter of comfort (Ground No. 25 to 26):

The AR for the assessee submitted that pursuant to the order, the Appellant has a signed Bilateral Advance Pricing 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 interest u/s. 234B and 234C of the Act (Ground No. 29 to 30):

The ld.AR submitted that in the subject year, the Appellant has already remitted more than 90% of the total tax payable by way of advance tax and TDS credits and therefore, interest u/s. 234B and 234C of the Act is not applicable. Further, the said interest u/s. 234B and 234C of the Act is consequential in nature. He submitted that the entire levy of interest u/s. 234B and 234C of the Act ought to be deleted as the Appellant has already remitted more than 90% of the total tax payable by way of advance tax and TDS credits.

5.13 Others- Penalty Proceedings u/s. 274 read with section 271(1)(c) and section 271AA of the Act (Ground No. 31):

The ld.AR for the assessee submitted that in the subject year, the AO initiated penalty proceedings u/s. 274 read with section 271(1)(c) and section 271AA of the Act. He submitted that the Assessing Officer (“AO”) has failed to appreciate the contentions put forth by the Appellant and has erroneously initiated penalty proceedings u/s. 274 read with section 271(1)(c) and section 271AA of the Income-tax Act, 1961. Accordingly, he prayed that the initiation of such penalty proceedings is bad in law, invalid, and unsustainable, and therefore ought to be dropped.

6. Before delivering our findings, we make it clear that the findings of the ld.DRP and AO are the submissions of the revenue which are already incorporated supra.

7. Assessment Year 2015-16:

We have considered rival submissions and perused the record and paper book filed. Regarding disallowance u/s 35(2AB), it is undisputed that the prescribed authority u/s. 35(2AB) is the DSIR, which has quantified the eligible deduction. The co-ordinate bench of this Tribunal in assessee’s own case (supra) has consistently held that AO/DRP cannot sit in judgment over DSIR approval. Disallowance based merely on survey statements is unsustainable. Further, survey conducted in 2019 cannot invalidate deductions already certified for earlier years. Respectfully following binding precedents in assessee’s own case supra, disallowance is deleted.

Regarding disallowance u/s 40A(2)(b) r.w.s 37 – MRF SG Transactions, we note that TPO has already benchmarked the transaction. AO cannot again question reasonableness of the same expenditure. Allegation of sham transaction is not supported by cogent evidence. Double disallowance under TP + corporate tax provisions is impermissible. Hence, disallowance is deleted.

Regarding TP Adjustment – Raw Material Purchases, considering APA and subsequent developments, adjustment to be restricted to 0.5% (if not already offered).

Regarding Corporate Guarantee TP Adjustment, following coordinate bench decisions, corporate guarantee without cost may not warrant adjustment. However, considering APA adjustment is deleted. It may be restricted to 0.5%.

Regarding Provision for Litigation, assessee partially submitted evidence. Hence, matter requires verification. Therefore, restored to AO for fresh examination.

Regarding Chapter VI-A Disallowance, it is restored to AO for verification and delete if erroneous.

Regarding TDS Credit, AO directed to grant correct credit after verification. Interest u/s 234B is Consequential.

Assessment Year 2016-17:

Regarding disallowance u/s 35(2AB), facts identical to AY 2015-16. Following earlier order and consistency principle, disallowance is deleted.

Regarding Provision for Litigation, partial relief already granted by DRP and balance requires verification. Hence, restored to AO for verification.

Regarding TP Issues (MRF SG Transactions, APA, Corporate Guarantee), Assessee entered into Bilateral APA. Modified return filed u/s 92CD. Hence, grounds become academic / infructuous.

Regarding MAT Adjustment, it is already rectified hence, infructuous.

TDS Credit, AO is directed to allow after verification. Interest u/s 234B & 234C are consequential. Penalty Proceedings held as premature.

8. In the result, both Appeals for AY 2015-16 and AY 2016-17 are partly allowed for statistical purposes.