2016 (10) TMI 1062 - AT - Income Tax

Disallowance of Technical Fees - revenue or capital expenditure - Held that - The assessee company was given only limited rights to use the prototype tooling and drawing developed by M/s Samlip by M&M (for which purpose the payment was paid by M/s M&M to the said MIs Samlip) in lieu of which payment of technical fee to M/s Mahindra & Mahindra was made for the purpose of manufacturing the IFS system for MIs Mahindra & Mahindra. It is obvious that the assessee company, being auto part manufacturer for M/s Mahindra & Mahindra is solely dependent upon the business given to it by M/s Mahindra & Mahindra. In view of the required modernization in the IFS system, the said M/s Mahindra & Mahindra made payment to the Korean company, M/s Samlip for developing the prototype tooling and allowed the assessee to use the same for manufacturing the IFS components as per the requirement of M/s Mahindra & Mahindra on payment of technical fee. Clearly in such a case, M/s Mahindra & Mahindra got the ownership over the asset and the assessee was granted limited rights to use the same by Mahindra & Mahindra to Manufacture IFS System, in accordance with their requirement, on payment of Technical fees. In view of the same, the payment was rightly held to be revenue in nature by the Ld. CIT(A), which was rightly claimed by the assessee and also rightly allowed by the AO in original assessment proceedings. - Decided against the Revenue. Addition on account of excess claim of deduction u/s. 80IB - Held that - Allocation of head office expenses for the purpose of computation of deduction 80lB on the basis of ratio of eligible sale to total sales, is only in the nature of a thumb-Rule for practical ease for such allocation. However, there is no specific provision in the Income Tax Act, 1961, to provide that head office expense should be apportioned in a particular ratio and in a particular manner only. Therefore, merely for invoking the thumb-Rule, proceeding under section 147 should not have been initiated, since there will always be more than one opinion while adopting any thumb-Rule. Furthermore, we find that the principle of consistency is also an important one for the purpose of computation of taxable income as was held by Supreme Court in the case of M/s Radhasoamy Satsang vs. CIT (1991 (11) TMI 2 - SUPREME Court). On the other hand, the assessee s claim under section 80lB is duly supported by the Auditors and which also, on examination, was found acceptable by the AO in the original assessment proceedings. In view thereof, the addition made on this ground was rightly deleted by the Ld. CIT(A). In view of the above, we are of the view that the Ld. CIT(A) has passed a well reasoned order on the issue in dispute, which does not need any interference on our part, hence, we uphold the order of the Ld. CIT(A) on the issue in dispute. Accordingly, the issue in dispute is decided against the Revenue.

Summary

Issues Involved:
1. Deletion of addition of ?65,14,891 on account of disallowance of Technical Fees being Capital Expenditure.
2. Deletion of addition of excess claim of deduction u/s 80IB amounting to ?3,56,046.

Issue-Wise Detailed Analysis:

1. Deletion of Addition of ?65,14,891 on Account of Disallowance of Technical Fees Being Capital Expenditure:

The Department appealed against the deletion of ?65,14,891 by the CIT(A), which was initially disallowed by the AO as capital expenditure. The CIT(A) found that the technical fees paid by the assessee for designing the Exhaust System were considered revenue in nature in previous assessments from AY 1999-2000 onwards, except for AY 2009-10. The reassessment proceedings were initiated on the same grounds for the current year.

The CIT(A) examined the tripartite agreement dated 21 March 1998 among the appellant, Samlip, and Mahindra & Mahindra (M&M). The agreement indicated that the prototype tooling and production tooling developed under the agreement would become the sole property of M&M. The appellant was given limited rights to use the tooling and drawings developed by Samlip for manufacturing IFS components for M&M upon payment of technical fees. The CIT(A) concluded that the payment was revenue in nature as the appellant did not gain ownership of the asset but only the right to use it.

The Tribunal upheld the CIT(A)'s decision, noting that the technical fees were rightly claimed as revenue expenditure by the assessee and allowed by the AO in the original assessment proceedings. The Tribunal found no need to interfere with the well-reasoned order of the CIT(A).

2. Deletion of Addition of Excess Claim of Deduction u/s 80IB Amounting to ?3,56,046:

The Department also appealed against the deletion of ?3,56,046, which was disallowed by the AO as an excess claim of deduction under section 80IB. The CIT(A) found that the assessee’s various undertakings had an aggregate turnover of ?1,83,44,93,675, from which ?7,55,38,858 related to inter-unit transfers was excluded for calculating the total turnover as per the Companies Act, 1956. The basis of allocation of head office expenses by taking the actual turnover was justified and consistently followed by the assessee in earlier years without challenge from the Department.

The CIT(A) emphasized that allocation of head office expenses for computing deduction under section 80IB was a practical thumb-rule, and there was no specific provision in the Income Tax Act, 1961, mandating a particular method of allocation. The principle of consistency, supported by the Supreme Court in the case of M/s Radhasoamy Satsang vs. CIT, was also considered important. The assessee’s claim under section 80IB was supported by auditors and accepted by the AO in the original assessment.

The Tribunal upheld the CIT(A)'s decision, finding the order well-reasoned and noting that the addition made on this ground was rightly deleted. The Tribunal found no need to interfere with the CIT(A)'s order.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s well-reasoned order on both issues. The reassessment proceedings were deemed unjustified, and the technical fees were correctly treated as revenue expenditure. The allocation of head office expenses for section 80IB deduction was justified and consistent with prior years. The appeal of the Revenue was dismissed in its entirety.