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2012 (4) TMI 226 - AT - Income TaxDis-allowing deduction U/s. 80IB(3) of the I.T. Act - AO denied availment of such exemption as it is available to only those SSI unit as per Section 80(3)(ii) having investment in plant and machinery of less than Rs. 1 crore whereas the assessee company exceeds such limit assessee contented investment in plant and machinery would be less than Rs. 1 crore if items such as tools jigs, dies, moulds, spare parts for maintenance and cost of consumable stores considered as per Notification No.857 dated 10-12-1999 issued u/s 11B of IDR Act are excluded Held that - vehicles have to be excluded while determining the value of plant and machinery for the purpose of determining the status of industrial undertaking as an SSI - following the ITAT order in assessee s own case A.Y 2003-04 moulds, dies, jigs, fixtures, patterns, tools, consumables, factory equipments AO shall recomputed the value of the plant and machinery installed in the industrial undertaking - the AO is directed to exclude the cost of equipments while determining value of plant and machinery in order to ascertain the status of industrial undertaking of the assessee. As regards computers software, we restore the matter to the file of AO with the direction to ascertain as to whether or not all the computers are installed in office in favour of assessee. Not allowing Royalty payment of Rs. 74,63,975/- being computation of arms length price in relation to international transactions though explained the TPO observed that no royalty was charged by other group entites and accordingly the Arms Length Price for royalty charges was inferred as nil assessee contented that the technical know-how was provided to the assessee and the same was not comparable with other entities of the group. The assessee had not made the one-time payment but making the continuous payment to the know-how provider - Held that - for a transaction to come u/s 92 of the Act, it is necessary to establish that the course of business between resident and non-resident is so arranged that the business transacted between them provides to the resident either no profits or less than ordinary profits which might be expected to arise in the business - the payment of royalty is not hit by the provisions of Section 92 and there is no reason to hold that the expenses should not be allowed u/s.37(1) of the Act, since the expenditure has been incurred by the assessee during the course of business and is having the nexus with the business of the assessee - in favour of assesee not allowing Royalty payment of Rs. 1,15,32,819/- being claimed as expenses U/s 40(a) for the year under consideration relates to A.Y. 2003-04 assessee replied before the AO saying that the TDS could not be deposited within the prescribed time-limit and assessee deposited the same during the year relevant to A.Y. 2004 - Held that - There is no finding in the relevant assessment year to what amount royalty payment pertains to which assessment year and whether TDS thereon was paid by the assessee during the relevant period i.e. A.Y. 2004-05. Accordingly, the issue is restored to file of AO with direction to decide the issue afresh in the light of decision.
Issues Involved:
1. Deduction under Section 80IB(3) of the I.T. Act, 1961. 2. Disallowance of royalty payment as per Arms Length Price. 3. Deduction of royalty payment under Section 40(a) for the year under consideration. Issue-wise Detailed Analysis: 1. Deduction under Section 80IB(3) of the I.T. Act, 1961: The assessee claimed a deduction under Section 80IB of the I.T. Act, asserting its status as a Small Scale Industry (SSI) unit. The Assessing Officer (AO) observed that the total value of the plant and machinery was Rs. 2,04,69,540/-, exceeding the Rs. 1 crore limit set by government norms for SSI units. The AO issued a show-cause notice, questioning the SSI status and suggested excluding income from spares, service, and other sources from the profit derived from the industrial undertaking. The assessee argued that after excluding certain items as per a notification under Section 11B of the IDR Act, the net value of plant and machinery would be Rs. 34,80,428/-. The AO rejected this contention, noting that the assessee had re-categorized various components incorrectly. The AO included vehicles, computer hardware, and other equipment in the plant and machinery value, leading to a disallowance of the deduction claim. The CIT(A) upheld the AO's decision. Both parties referred to the ITAT's decision in the assessee's own case for A.Y. 2003-04. The ITAT directed the AO to exclude the cost of tools, jigs, dies, and consumables while determining the plant and machinery value. For computers, the AO was instructed to verify their installation in the office or for manufacturing purposes. Vehicles were to be excluded from the plant and machinery value. Following the ITAT order for A.Y. 2003-04, the AO was directed to re-compute the plant and machinery value. If it was below Rs. 1 crore, the industrial undertaking should be treated as an SSI, allowing the deduction under Section 80IB. 2. Disallowance of Royalty Payment as per Arms Length Price: The AO disallowed the royalty payment claimed by the assessee to its associated enterprise (AE), as the Transfer Pricing Officer (TPO) determined the Arms Length Price (ALP) of royalty paid at nil. The CIT(A) upheld this decision, noting the assessee's failure to provide details of the cost of technology development by the AE and the manner of cost recovery from other group entities. The assessee argued that the royalty payment was a legal obligation under an agreement approved by the SIA in 1997. The know-how provided by KHS Germany significantly benefited the assessee, enabling it to achieve substantial turnover growth. The royalty expenditure had been allowed in previous assessments, and the assessee contended that the TPO's conclusion was incorrect. The ITAT observed that the AO had not established that the business arrangement resulted in no or less than ordinary profits. The royalty payment was consistent with the agreement and had been accepted in the past. The ITAT concluded that the royalty payment was a business expenditure incurred wholly and exclusively for business purposes, allowing the claim. 3. Deduction of Royalty Payment under Section 40(a) for the Year under Consideration: The AO disallowed the royalty payment claimed for A.Y. 2003-04, as the assessee had not deducted tax at source within the prescribed time. The assessee argued that the tax was deducted and paid in the subsequent year, making the expenditure eligible for deduction in A.Y. 2004-05. The CIT(A) upheld the AO's decision. The ITAT noted that the issue had not been considered in the right perspective. The AO was directed to verify the amount of royalty payment pertaining to each assessment year and whether TDS was paid during the relevant period. The issue was restored to the AO for fresh consideration, providing the assessee an opportunity to be heard. Conclusion: The appeal was partly allowed for statistical purposes, directing the AO to re-compute the plant and machinery value for SSI status, allow the royalty payment as a business expenditure, and re-examine the royalty payment deduction for A.Y. 2004-05.
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