2017 (5) TMI 1639 - AT - Income Tax

Calculation of deduction u/s 80HHC - inclusion of the DEPB receipt for calculation of deduction - Held that - Similar facts had already been decided by the ITAT in favour of the assessee for the assessment year 2002-03 as held in the scheme of section 80HHC, the face value of DEPB cannot be reduced from the purchase cost but is separate income under section 28(iiib), which accrues at the time of making application pursuant to exports. Only the profit element on the sale of DEPB, that is the amount in excess of sale proceeds over the face value, is covered under section 28(iiid). Exclude Sample Design and Development charges receipt for calculation of deduction u/s 80HHC - Held that - As decided by the ITAT in assessee's own case we do not see any infirmity in the order of the ld. CIT(A) who rightly held that the receipts on account of sample design and development charges are export turnover and represents the business income of the assessee and thus, cannot be excluded as the receipt under Explanation (baa) of Section 80HHC of the Act. Additional depreciation - Held that - In the present case, it appears that inadvertently the assessee could not make the claim for additional depreciation before the AO but in the appellate proceedings before the ld. CIT(A) the assessee made the claim and furnished the additional evidences in support of its claim. It is well settled that the powers of the ld. CIT(A) are coterminous with the powers of the AO, therefore, considering the totality of the facts, we are of the view that the CIT(A) rightly directed the AO to examine the claim of the assessee and allow after verification. We do not see any valid ground to interfere with the findings of the ld. CIT(A). Addition on account of Arm s Length Price - Disallowance under wrong section - addition on the grounds that the payment of royalty is not wholly and exclusively for business purposes and has been made u/s 92C(4) read with section 92CA(4) - Held that - The assessee derived benefit under the royalty agreement and it was accepted by the AO for the assessment year 2002-03. However, the only dispute raised by the AO in the said assessment year was as to whether the royalty payment was a capital expenditure or revenue expenditure. The said dispute has been settled by the ITAT vide aforesaid referred to order dated 30.03.2016 and it was held that the royalty payment was revenue expenditure and not the capital expenditure. In the present case, the royalty expenditure by the assessee was fully and exclusively incurred in the regular course of business and after incurring this expenditure the assessee declared profit @19% which was better than the GP rate of 12 16% declared by the comparables. Therefore, it was at arm s length and the addition made by the AO was not justified which has rightly been deleted by the ld. CIT(A). - Decided against revenue

Summary

Issues Involved:
1. Inclusion of DEPB receipt for calculation of deduction under Section 80HHC.
2. Exclusion of Sample Design and Development charges for calculation of deduction under Section 80HHC.
3. Claim of additional depreciation under Section 32(iia).
4. Addition on account of Arm's Length Price under Section 90CA(3).

Detailed Analysis:

1. Inclusion of DEPB Receipt for Calculation of Deduction under Section 80HHC:
The first issue pertains to whether the DEPB receipt amounting to ?1,27,73,524 should be included for the calculation of deduction under Section 80HHC of the Income-tax Act, 1961. The AO excluded the DEPB receipt, arguing that the assessee failed to provide evidence that the rate of Duty Drawback was higher than the rate of DEPB. The CIT(A) ruled in favor of the assessee, referencing a similar decision for the assessment year 2002-03. The ITAT upheld the CIT(A)'s decision, citing the Supreme Court's judgment in Topman Exports v. CIT, which clarified that only the profit element on the sale of DEPB, not the face value, should be included under Section 28(iiid).

2. Exclusion of Sample Design and Development Charges for Calculation of Deduction under Section 80HHC:
The second issue involves the exclusion of Sample Design and Development charges amounting to ?96,13,655 from the calculation of deduction under Section 80HHC. The AO included these receipts as 'other income' under Explanation (baa) of Section 80HHC. The CIT(A) reversed this decision, considering the charges as part of the export turnover and business income. The ITAT upheld the CIT(A)'s decision, referencing an earlier ITAT order for the assessment year 2001-02, which treated such charges as export turnover.

3. Claim of Additional Depreciation under Section 32(iia):
The third issue concerns the claim of additional depreciation amounting to ?20,61,050. The AO denied the claim, citing the absence of documentary evidence and the audit report. The CIT(A) admitted additional evidence during the appellate proceedings and directed the AO to verify and allow the claim after verification. The ITAT supported the CIT(A)'s decision, emphasizing that the powers of the CIT(A) are coterminous with those of the AO.

4. Addition on Account of Arm's Length Price under Section 90CA(3):
The fourth issue pertains to the addition of ?1,57,35,495 made by the AO on account of Arm's Length Price (ALP) for royalty payments to an associated enterprise (AE). The TPO treated the royalty payment as having an ALP of Nil, arguing that the assessee was a contract manufacturer and did not derive any benefit from the royalty payment. The CIT(A) deleted the addition, noting that the royalty payment was included in the sale price of the garments and was automatically benchmarked at arm's length. The ITAT upheld the CIT(A)'s decision, citing the principle of consistency and the fact that the royalty payment was accepted as at arm's length for the assessment year 2002-03.

Conclusion:
The ITAT upheld the CIT(A)'s decisions on all four issues, providing detailed justifications and referencing relevant case laws and principles of consistency. The appeal by the department was dismissed.