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2019 (7) TMI 1751 - AT - Income TaxDeduction u/s 80HHC - not to exclude the Sample Design and Development charges receipt amounting to ₹ 1352700/- for the calculation of deduction - assessee failed to file documentary evidence to justify its claim and as per provisions of explanation (baa) of section 80HHC, for computing profits of business 90% of sums referred to in clauses (iiia) to (iiie) of section 28 or any receipt by way of brokerage, commission, interest, rent, charges of any receipt of similar nature included in such profits have to be deducted from the profits and gains of business or profession - HELD THAT - We find an identical issue had come up before the Tribunal in the assessee s own case in the preceding assessment year. We find the Tribunal, in assessee s own case 2017 (5) TMI 1639 - ITAT DELHI 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 from the receipt under Explanation (baa) of section 80HHC of the Act. In view of the consistent decision of the Tribunal, we hold that receipts on account of sample design and development charges are export turnover and represents the business income of the assessee and this cannot be excluded from the receipts under Explanation (baa) of section 80HHC. DEPB receipts - CIT(A) directed the Assessing Officer to exclude the DEPB receipts for the calculation of deduction u/s 80HHC by accepting the contention of the assessee and without examining the actual profit component or loss. Since the computation along with evidence was not submitted by the assessee either before the Assessing Officer or before the CIT(A) and since no such details are available in the audited accounts of the assessee as in the P L Account, there is only one entry i.e., receipt on account of DEPB, therefore, we agree with the argument of the ld. DR that this matter should be restored to the file of the Assessing Officer with a direction to examine the profit element in the sale of DEPB licence and to recompute the deduction u/s 80HHC in the light of the decision of the Hon'ble Supreme Court in the case of Topman Exports 2012 (2) TMI 100 - SUPREME COURT . The Assessing Officer shall decide the issue as per fact and law. Interest income on fixed deposits for the computation of deduction u/s 80HHC - The assessee fairly conceded that this issue has been decided against the assessee by the Hon'ble High Court in the case of Ram Honda Power Equipment 2007 (1) TMI 86 - HIGH COURT, DELHI . In view of the above submission of the ld. counsel for the assessee, this issue is decided against the assessee. Denial of deduction being contribution to Group Gratuity Policy of LIC of India - HELD THAT - We find an identical issue had come up before the Visakhapatnam Bench of the Tribunal in the case of District Cooperative Central Bank vs. ITO 2018 (4) TMI 553 - ITAT VISAKHAPATNAM . We find the Tribunal relying on various decisions held that the assessee is entitled for deduction for payment of group gratuity to LIC of India towards group gratuity scheme - Thus we hold the assessee is entitled to the deduction for contribution to Group Gratuity Policy of LIC of India. Addition on account of ALP of the international transaction - royalty payment on various services - TPO disallowed the royalty paid by the assessee to its AE on the ground that the assessee is a contract manufacturer of its AE and is not deriving any benefit from payment of royalty and, therefore, he should not have paid any royalty - HELD THAT - A perusal of the royalty agreement w.e.f. 1st April, 2003 shows that the terms and conditions of the agreement are same as that of royalty agreement applicable during assessment years 2002-03 and 2003-04. The agreement effective as on 01.04.2001 as applicable during assessment years 2002-03 and 2003-04 was a single agreement which dealt with both technical know-how and assistance and trade mark whereas in the current year the assessee had split the royalty agreement into two separate agreements i.e., technical know-how and assistance agreement and use of trade mark made under the label of corporate agreement. We find the Tribunal in assessee s own case for assessment year 2003-04. 2017 (5) TMI 1639 - ITAT DELHI held 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). We, therefore, considering the totality of the facts, do not see any valid ground to interfere with the findings given by the ld. CIT(A). We further find some force in the argument of the ld. counsel for the assessee that the transaction is revenue neutral as the royalty expenses are embedded in the sale price from the AEs to whom goods are sold and pays to other AE i.e., PRC, USA. The price to be charged to buyer is determined on the basis of cost plus mark up. Further, the assessee is consciously recovering royalty from AEs by including it in the price quoted to the buyer and royalty is also part of cost of production and, therefore, arm s length nature of expenses is established while benchmarking the international transaction of export of sales. We also find force in the argument of the ld. counsel for the assessee that the agreements with PRC, USA are for providing technical know-how and allowing use of trade names and trade marks by PRC, USA to the assessee and not a contract manufacturing agreement and, therefore, the action of the TPO in re-writing the agreement is not permissible in law. Further, for the purpose of computing the ALP on export garments, the assessee has compared itself with companies which are full-fledged risk bearing manufacturers, a comparison which has been accepted by the TPO. TPO has himself acknowledged that for the purpose of manufacture and export of garments, the assessee is a full-fledged manufacturer and not a contract manufacturer. The TPO has also accepted the functional, assets and risk profile of the assessee given in the TP documentation which is that of full-fledged risk bearing manufacturer - We further find the assessee during the impugned assessment year has exported to non-AEs as well as AEs and, therefore, it is factually incorrect on the part of the TPO that the sale of the entire finished product is to the AE. In view of the above discussion and considering the fact that the Tribunal in assessee s own case in the immediately preceding assessment year has deleted the adjustment made by the A.O./TPO on account of payment of royalty, therefore, we uphold the order of the CIT(A) on this issue and the ground raised by the Revenue on this issue is dismissed. Depreciation @ 60% on computer accessories and peripherals, namely, UPS and printers - HELD THAT - We find the issue relating to depreciation on computer peripherals, namely, printers and UPS at 60% stands decided in favour of the assessee by the coordinate Benches of the Tribunal where it is being consistently held that printers and UPSs are integral part of the computer system and are entitled to depreciation @ 60%. We, therefore, uphold the order of the CIT(A) in allowing depreciation @ 60% on computer peripherals and reverse the order of the CIT(A) in allowing 25% depreciation on UPSs as against 60% claimed by the assessee. Thus, the ground raised by the Revenue on this issue is dismissed and the additional ground raised by the assessee in Cross Objections is allowed.
Issues Involved:
1. Exclusion of Sample Design and Development Charges for Deduction u/s 80HHC. 2. Depreciation on Computer Peripherals/Accessories. 3. Addition on Account of Arm’s Length Price (ALP) for Royalty Payment. 4. DEPB Credit and its Impact on Deduction u/s 80HHC. 5. Contribution to Group Gratuity Scheme of LIC. 6. Interest Income Treatment for Deduction u/s 80HHC. Detailed Analysis: 1. Exclusion of Sample Design and Development Charges for Deduction u/s 80HHC: The Revenue contended that the CIT(A) erred in directing the AO not to exclude Sample Design and Development charges receipts from the calculation of deduction u/s 80HHC. The Tribunal upheld the CIT(A)’s decision, stating that receipts on account of sample design and development charges are export turnover and represent business income, thus cannot be excluded from the receipts under Explanation (baa) of section 80HHC. 2. Depreciation on Computer Peripherals/Accessories: The Revenue challenged the CIT(A)’s decision to allow depreciation at 60% on computer peripherals and accessories. The Tribunal upheld the CIT(A)’s decision regarding printers but allowed the assessee’s claim for 60% depreciation on UPS, reversing the CIT(A)’s restriction to 25%. The Tribunal noted that printers and UPSs are integral parts of the computer system and are entitled to depreciation at 60%. 3. Addition on Account of Arm’s Length Price (ALP) for Royalty Payment: The Revenue appealed against the deletion of the addition of ?1,67,07,324/- on account of ALP for royalty payment. The Tribunal upheld the CIT(A)’s decision, noting that the terms and conditions of the agreements for the current year were identical to those of the preceding years. It was established that the royalty expenses were embedded in the sale price, making the transaction revenue neutral. The Tribunal also noted that the TPO had accepted the functional, assets, and risk profile of the assessee as a full-fledged risk-bearing manufacturer in previous years, and thus, treating the assessee as a contract manufacturer in the current year was inconsistent. 4. DEPB Credit and its Impact on Deduction u/s 80HHC: The assessee contended that only the profit component on the sale of DEPB licenses should be included for the computation of deduction u/s 80HHC and not the face value. The CIT(A) directed the AO to exclude DEPB receipts from the calculation of deduction u/s 80HHC. The Tribunal remanded the matter to the AO to examine the profit element in the sale of DEPB licenses and to recompute the deduction in light of the Supreme Court’s decision in Topman Exports. 5. Contribution to Group Gratuity Scheme of LIC: The AO disallowed the contribution to the Group Gratuity Policy of LIC on the ground that the trust was not approved by the Department. The Tribunal, relying on various decisions, held that the assessee is entitled to a deduction for payment of group gratuity to LIC of India. The Tribunal noted that the payment was made to an approved scheme and was not a mere provision, thus allowing the deduction. 6. Interest Income Treatment for Deduction u/s 80HHC: The AO treated the interest income on fixed deposits as ‘Income from other sources’ and excluded it from the computation of deduction u/s 80HHC. The CIT(A) upheld this decision. The Tribunal, following the High Court’s decision in Ram Honda Power Equipment, decided this issue against the assessee, confirming that interest income on fixed deposits should be treated as ‘Income from other sources’. Conclusion: The Tribunal dismissed the Revenue’s appeal and partly allowed the assessee’s Cross Objections for statistical purposes. The Tribunal upheld the CIT(A)’s decisions on several issues, including the exclusion of sample design and development charges from the calculation of deduction u/s 80HHC and the allowance of 60% depreciation on UPS. The Tribunal remanded the issue of DEPB credit for further examination by the AO and allowed the deduction for contributions to the Group Gratuity Policy of LIC. The treatment of interest income as ‘Income from other sources’ was upheld against the assessee.
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