2011 (10) TMI 238 - AT - Income Tax

Deduction u/s 80-IB - in view of decision in the case of Liberty India v. CIT (2009 - TMI - 34471 - SUPREME COURT)- Duty draw back, cash assistance and income of the like are not eligible for deduction. Tax Deduction at Source - nature of payment - Royalty or Technical Service - Held That - Assessee was the manufacturer of Indian Made Foreign Liquor (IMFL) on behalf of others, as per the quality controls prescribed and supervised by them. However, the sales admittedly were effected in assessee s own name under assessee s own invoices and the sales were reflected in its Profit and Loss account as well. - None of the authorities below have verified the relevant clauses of the agreement, vis- -vis the definition of royalty as given under the Act before coming to a conclusion that payments effected by the assessee to the concerned parties were indeed royalty. None of the authorities have also seen how the amounts were worked out and whether it could be considered as paid for any technical services. - The matter was set aside and was sent for fresh consideration by AO.

Summary

Issues Involved:
1. Non-reckoning of certain income for computing deduction under Section 80-IB of the Income-tax Act, 1961.
2. Disallowance of Rs. 1,46,89,936 under Section 40(a)(ia) of the Income-tax Act for non-deduction of tax at source.

Issue-wise Detailed Analysis:

1. Non-reckoning of Certain Income for Computing Deduction under Section 80-IB:
The appellant contested the Commissioner of Income Tax (Appeals) [CIT(A)]'s decision to confirm disallowances made by the Assessing Officer (AO) in the computation of deduction under Section 80-IB of the Income-tax Act, 1961. The appellant did not press this issue seriously, acknowledging the Supreme Court's decision in Liberty India v. CIT [2009] 317 ITR 218, which held that duty draw back, cash assistance, and similar incomes could not be considered for deduction under Sections 80-I, 80-IA, or 80-IB of the Act. Consequently, the grounds relating to this issue were dismissed.

2. Disallowance under Section 40(a)(ia) for Non-deduction of Tax at Source:
The appellant, a manufacturer of Indian Made Foreign Liquor (IMFL), entered into agreements with five parties for manufacturing and selling IMFL under their brand names. The AO noted that the appellant accounted for a sum of Rs. 3,27,39,322 as 'Royalty,' excluding payments to M/s Shaw Wallace Distilleries Ltd., for which a certificate under Section 197 was produced. For the balance amount of Rs. 1,46,89,936, the AO found that tax was not deducted before payments, and though TDS was later remitted, it was belated. Consequently, the AO disallowed Rs. 1,46,89,936 under Section 40(a)(ia).

In the appeal before the CIT(A), the appellant argued that the agreements were for job work using excess manufacturing capacity, and no intellectual rights were transferred. The appellant contended that the payments could not be considered as 'Royalty' under Explanation 2 to Section 9(1)(vi) of the Act and were part of the sale consideration realized. However, the CIT(A) confirmed the AO's disallowance, stating that the payments were debited as 'Royalty and Supervisory Charges' in the Profit and Loss account, and no TDS was deducted.

Before the tribunal, the appellant's representative argued that the agreement with M/s Shaw Wallace Distilleries Ltd. was representative of agreements with other parties and that the payments were part of the sale consideration, not royalty. The representative highlighted that trademarks and intellectual rights belonged to the licensees, and the appellant was only entitled to fixed conversion charges. The appellant's contention was that the sales were reflected in its Profit and Loss account due to regulations in Pondicherry, and the amounts paid did not fall under the definition of "royalty."

The tribunal observed that the AO did not adequately verify whether the payments fell within the definition of "Royalty" under Explanation 2 to Section 9(1)(vi) of the Act. The tribunal noted that the agreements with other parties were differently worded, and the sales were effected in the appellant's name and reflected in its accounts. The tribunal opined that the matter required a re-examination to verify if the payments were indeed royalty or technical services as defined under the Income-tax Act. The tribunal set aside the orders of the authorities below and remitted the issue back to the AO for a fresh consideration in accordance with the law.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, with the issue of disallowance under Section 40(a)(ia) being remitted back to the AO for re-examination.