2011 (6) TMI 172 - AT - Income Tax

Addition - Unutilised modvat credit in the closing stock u/s 145A - The said section provides for adjustment on account of tax duty to cess, fee actually paid by the assessee in the valuation of inventory on the date of valuation - The assessee had been following exclusive method of accounting as per which the modvat debits/credits were not rooted through trading account - The Assessing Officer worked out the adjustment on account of excise duty by following inclusive method and thus came to the conclusion that addition of ₹ 1,97,310 was required to be made to total income - The difference found by Assessing Officer was on account of modvat adjustment to opening stock which has not been made by the Assessing Officer - In view of the judgment of Hon ble Delhi High Court in the case of Mahavir Aluminium Ltd. 2008 297 ITR 77/168 Taxman 27. which has also been affirmed by the Hon ble Bombay High Court in Mahalaxmi Glass Works Ltd. 2009 318 ITR 116 , adjustment on account of unutilized modvat credit u/s 145A is also required to be made in opening stock - In this case after making adjustment to opening stock, there is no addition required to be made - Decided in favour of assessee. disallowed under the provisions of section 40(a)(i) - the assessee placing reliance on the judgment of Hon ble Punjab and Haryana High Court in the case of Ess Ess Kay Engg. (supra) has argued that once the expenditure was disallowed by Assessing Officer under section 40(a)(i) the assessee had passed the test of allowability of claim as revenue expenditure and no disallowance can be made as capital expenditure - The Assessing Officer in this case disallowed the claim u/s 40(a)(i) and held that alternatively it was also disallowable as capital expenditure - Thus once the Assessing Officer held that the expenditure was capital in nature and also held that even if revenue in nature it had to be disallowed u/s 40(a)(i), the Appellate Authorities are required to consider both aspects and give a clear finding as to the real treatment of expenditure - In this case, CIT(A) has not considered the capital nature of the expenditure - The other aspect also, as pointed out earlier has not been examined properly - Since the issue has not been examined properly we set aside the order of the CIT(A) and restore the issue back to him for passing fresh order after necessary examination in the light of the observation made above and after allowing opportunity of hearing to the assessee. Deduction u/s 80HHE - Export of design and drawings - Since, deduction u/s 80HHE is allowed in respect of export of computer software which has been defined in the Explanation (b) to section 80HHE which includes any customized electronic data or any product or service of similar nature as may be notified by the Board - It is thus clear that computer software also includes customized electronic data - Further CBDT have also issued notification No. SO 1031(E) dated 13-10-1999 in which information technology enabled products or services have been identified u/s 10A/10B/80HHE which includes engineering and design - In the present case the assessee had exported design and drawing in electronic media - Therefore, considering the definition of the term computer software and Board notification it has to be treated as export of computer software and claim of deduction has to be allowed u/s 80HHE - Decided in favour of assessee.

Summary

Issues Involved:
1. Addition on account of unutilized MODVAT credit under section 145A.
2. Addition on account of payment to a foreign company without tax deduction at source under section 40(a)(i).
3. Disallowance of claim of deduction under section 80HHE.

Detailed Analysis:

1. Addition on Account of Unutilized MODVAT Credit under Section 145A:

The first issue pertains to the addition on account of unutilized MODVAT credit under section 145A. The Assessing Officer (AO) observed that the assessee was following the exclusive method of accounting for excise duty and had not included the unutilized MODVAT credit in the valuation of closing stock. The AO made an addition of Rs. 1,97,310 based on the provisions of section 145A, which mandates the inclusion of tax, duty, cess, or fee in the valuation of inventory. The AO referred to the judgment of the Hon'ble Bombay High Court in Molmould Corpn. v. CIT, which stated that changing the value of opening stock would lead to a chain reaction affecting the income of preceding years. The CIT(A) deleted the addition, agreeing with the assessee's argument that the amount was already taxed in the previous year, thus preventing double taxation. The Tribunal upheld the CIT(A)'s decision, citing the judgments of Hon'ble Delhi High Court in CIT v. Mahavir Aluminium Ltd. and Hon'ble Bombay High Court in CIT v. Mahalaxmi Glass Works (P.) Ltd., which necessitated adjustments in the opening stock as well.

2. Addition on Account of Payment to a Foreign Company Without Tax Deduction at Source under Section 40(a)(i):

The second issue involves an addition of Rs. 36,37,679 paid to a foreign company (KWPT) without tax deduction at source. The AO disallowed the expenditure under section 40(a)(i), arguing that the payment for technical drawings was equivalent to technical know-how, thus taxable in the hands of the recipient. The AO also considered the expenditure as capital in nature, referencing the Supreme Court judgment in Scientific Engg. House (P.) Ltd. v. CIT. The CIT(A) overturned the AO's decision, stating that the payment was for the outright purchase of drawings, not for services rendered in India, and thus not taxable. The Tribunal found that the matter required further examination, noting that the CIT(A) had not provided a reasoned order and had not considered whether the parent company constituted a Permanent Establishment (PE) in India. The Tribunal remanded the issue back to the CIT(A) for a fresh order after a detailed examination of the facts and applicable laws, including the DTAA.

3. Disallowance of Claim of Deduction under Section 80HHE:

The third issue concerns the disallowance of a claim for deduction under section 80HHE for the export of design and drawings in electronic media. The AO disallowed the claim, arguing that the assessee's business was manufacturing and that the designs were part of the manufacturing process, not software development. The CIT(A) allowed the claim, stating that the assessee had exported customized electronic data, which falls under the definition of "computer software" as per the Explanation (b) to section 80HHE and the CBDT notification No. SO 1031(E). The Tribunal upheld the CIT(A)'s decision, agreeing that the export of design and drawings in electronic media qualifies as "computer software" and is eligible for deduction under section 80HHE.

Conclusion:

The Tribunal upheld the CIT(A)'s decision regarding the addition on account of unutilized MODVAT credit and the claim for deduction under section 80HHE. However, it remanded the issue of payment to the foreign company back to the CIT(A) for a fresh examination. The appeal of the revenue was thus partly allowed for statistical purposes.