2011 (4) TMI 1354 - AT - Income Tax

Summary

Issues Involved:
1. Exclusion of DFRC income from "Profits of the Business" for deduction under Section 80 HHC.
2. Treatment of "Liabilities no longer required" for deduction under Section 80 HHC.
3. Interest charged and penalty proceedings due to reduction in claim under Section 80 HHC.
4. Adjustment of royalty payment as per Arm's Length Price (ALP) under Section 92CA(3).

Issue-wise Detailed Analysis:

1. Exclusion of DFRC Income from "Profits of the Business" for Deduction under Section 80 HHC:

The appellant contended that the CIT (Appeals) erred in excluding the DFRC income of Rs. 1,25,51,860/- from "Profits of the Business" for calculating deduction under Section 80 HHC. The appellant argued that only "Profits on transfer of DFRC licenses" should be excluded, not the total DFRC income. Alternatively, the appellant suggested excluding only the DFRC licenses transferred during the year and not the total amount, as licenses worth Rs. 36,53,850/- were still on hand and not transferred or utilized. The appellant also argued that only 90% of the DFRC income should be excluded, not 100%.

The CIT (Appeals) confirmed the addition, stating that the appellant's export turnover exceeded Rs. 10 Crores and the appellant did not satisfy the twin conditions required for claiming the benefit on these incentives. The CIT (Appeals) upheld the action of the Assessing Officer (AO) in excluding the DFRC income from the profits of the business.

The Tribunal noted that the appellant conceded that the export turnover exceeded Rs. 10 Crores and did not satisfy the conditions for claiming the benefit. The Tribunal found that the issue was covered against the appellant by the decision of the Hon'ble Bombay High Court in the case of CIT Vs Kalptaru Colours & Chemicals, where it was held that the appellant was not entitled to deduction under Section 80 HHC on the amount received on transfer of DEPB. The Tribunal confirmed the orders of the authorities below in rejecting the claim of the appellant but restored the alternate contention to the file of the AO for reconsideration, directing the AO to verify if any profit was earned on the DFRC license utilized/transferred.

2. Treatment of "Liabilities No Longer Required" for Deduction under Section 80 HHC:

The appellant argued that the amount of Rs. 1,61,067/- under the head "Liabilities no longer required" should not be excluded from the "Profits of the Business" for the purpose of calculating deduction under Section 80 HHC. The appellant contended that this amount was a reversal entry of excise duty on closing stock of finished goods and did not fall under the explanation to Section 80 HHC (4a).

The CIT (Appeals) confirmed the addition, stating that the liability was claimed as a provision for excise duty of finished goods in the previous year and was written back after the amount was paid during the year. The CIT (Appeals) directed the AO to reduce this amount from the profits and work out the deduction under Section 80 HHC.

The Tribunal upheld the findings of the authorities below and dismissed the appellant's claim on this issue.

3. Interest Charged and Penalty Proceedings Due to Reduction in Claim under Section 80 HHC:

The appellant challenged the charging of interest and initiation of penalty proceedings on the enhanced income due to the reduction in the claim under Section 80 HHC, arguing that no interest should be levied as the additions were mainly due to the Taxation Laws Amendment Act, 2005.

The CIT (Appeals) did not accept the appellant's contention, stating that the Board Circular only provides that interest chargeable may be waived if the demand has arisen due to the implementation of the provisions contained in the Taxation Laws Amendment Act, 2005.

The Tribunal found that the issue was covered in favor of the appellant by the decision of the ITAT Ahmedabad in the case of Intas Exports Vs ACIT, where it was held that the short payment of tax could not be attributable to the appellant due to the amendments. The Tribunal directed the AO to recalculate the interest accordingly.

4. Adjustment of Royalty Payment as per Arm's Length Price (ALP) under Section 92CA(3):

The appellant challenged the adjustment of Rs. 24,47,286/- made by the AO relying on the order under Section 92CA(3), wherein the ALP for royalty payment was reduced from Rs. 1,02,49,154/- to Rs. 34,68,448/-. The appellant argued that the payment of royalty was justified and should be allowed in total without any adjustment.

The CIT (Appeals) confirmed the adjustment, following the order of the CIT (A) in the earlier year.

The Tribunal noted that the issue had been decided by the ITAT Ahmedabad in the preceding assessment year 2002-03, where it was held that the ALP computed by the appellant was correct. The Tribunal remanded the matter to the AO for reconsideration in light of the decision of the Tribunal in the preceding assessment year, directing the AO to verify the payment of TDS and allow the claim of expenses accordingly.

Conclusion:

The Tribunal partly allowed the appeals of the appellant, confirming the rejection of the claim for deduction under Section 80 HHC on DFRC income, directing the AO to reconsider the alternate claim regarding the DFRC licenses, and directing the AO to recalculate the interest and reconsider the adjustment of royalty payment as per the ALP. The Tribunal restored the matter to the AO for reconsideration and verification in accordance with the law.