2011 (6) TMI 888 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of testing charges paid under Section 40(a)(i) of the IT Act.
2. Disallowance of reimbursement of expenses made to Allergan Australia Pvt. Ltd.
3. Denial of depreciation on plant and machinery acquired during the financial year 1997-98.
4. Denial of depreciation on plant and machinery for the assessment years 2003-04, 2004-05, and 2005-06.
5. Disallowance of write-off of value of demonstration equipment and alternative depreciation thereon.
6. Disallowance of validation charges paid to Nicholas Piramal.
7. Levy of interest under Section 234B of the IT Act.

Issue-wise Detailed Analysis:

1. Disallowance of Testing Charges Paid Under Section 40(a)(i) of the IT Act:
The assessee was disallowed deductions for testing charges paid to European Testing Centre (ETC), Ireland, as it failed to deduct tax at source under Chapter XVIIB. The authorities held the assessee liable under Sections 201(1) and 201(1A). The Tribunal found that the assessee accepted the department's decision and paid taxes in subsequent years. The Tribunal remitted the issue to the assessing authority to verify the payment of taxes and allow deductions under proviso to Section 40(a)(i) if taxes were paid.

2. Disallowance of Reimbursement of Expenses Made to Allergan Australia Pvt. Ltd.:
The assessee booked expenses for training and travel of employees to Allergan Australia but reversed the entries when RBI denied remittance permission. The AO disallowed these expenses, and the CIT(A) confirmed the disallowance. The Tribunal accepted the alternate claim that if expenses are not allowed in the years they accrued (1997-98 and 1998-99), they should be reduced from the business income of AY 2004-05.

3. Denial of Depreciation on Plant and Machinery Acquired During the Financial Year 1997-98:
The assessee purchased machinery installed in Nicholas Piramal's premises for manufacturing ophthalmic solutions. The AO disallowed depreciation, and the CIT(A) confirmed it. The Tribunal allowed the depreciation, holding that the machinery was used for the assessee's business, satisfying the conditions of ownership and use.

4. Denial of Depreciation on Plant and Machinery for Assessment Years 2003-04, 2004-05, and 2005-06:
The machinery was written off as obsolete in FY 1998-99. The AO disallowed depreciation for subsequent years, and the CIT(A) confirmed it. The Tribunal held that once an asset is part of a block of assets, its individual use is irrelevant. However, as the machinery was considered obsolete, the assessee should have reduced its written-down value from the block of assets. The Tribunal confirmed the disallowance.

5. Disallowance of Write-off of Value of Demonstration Equipment and Alternative Depreciation Thereon:
The assessee issued demonstration equipment to doctors and wrote off its value over three years. The AO treated this as capital expenditure and allowed depreciation only for certain years. The Tribunal held that the expenditure was revenue in nature as it was for promoting business and allowed it in the year claimed.

6. Disallowance of Validation Charges Paid to Nicholas Piramal:
The AO disallowed validation charges reimbursed to Nicholas Piramal without TDS, treating it as a contract for services. The Tribunal remitted the issue back to the AO to verify if the assessee had a liability to reimburse these charges based on the agreement with Nicholas Piramal.

7. Levy of Interest Under Section 234B of the IT Act:
The issue of interest levy under Section 234B for AY 2003-04 was remitted to the AO as it was consequential in nature.

Conclusion:
The appeals for AYs 1997-98 to 2001-02 were allowed, and the appeals for AYs 2003-04 to 2005-06 were partly allowed. The Tribunal directed the AO to verify specific claims and deductions based on the provided evidence and applicable laws.