2012 (12) TMI 1239 - AT - Income Tax

Summary

Issues Involved:
1. Addition to the closing stock on account of unutilised Cenvat credit u/s 145A.
2. Disallowance of royalty by treating it as capital expenditure.
3. Disallowance of provision for old and obsolete stores.
4. Transfer pricing adjustments in respect of royalty paid to the Associated Enterprise (AE).
5. Not granting 5% benefit under the proviso of sec. 92C of the I.T. Act.

Summary:

1. Addition to the closing stock on account of unutilised Cenvat credit u/s 145A:
The assessee challenged the addition of Rs. 4,00,47,285/- to the closing stock due to unutilised Cenvat credit u/s 145A. The Assessing Officer (AO) proposed this addition, and the Dispute Resolution Panel (DRP) concurred, directing adjustments to both opening and closing stocks. The Tribunal noted an apparent contradiction between the draft and final orders, with an unexplained addition of Rs. 59,81,648/- instead of a proposed decrease. The Tribunal set aside this issue to the AO for reconsideration, emphasizing the need to examine whether the inclusive method of accounting would result in a nil net effect.

2. Disallowance of royalty by treating it as capital expenditure:
The AO treated royalty payments for technical know-how as capital expenditure, disallowing Rs. 4,30,05,713/- after adjustments and allowing depreciation on it. The Tribunal referred to its earlier decision for AY 2005-06, where it was held that such payments were of a revenue nature and thus deductible. Following the principle of consistency and relevant case laws, the Tribunal upheld the assessee's claim, deleting the addition.

3. Disallowance of provision for old and obsolete stores:
The AO disallowed Rs. 35,50,000/- for old and obsolete stores, considering it a provision rather than a realized loss. The DRP directed the AO to account for the net realizable value. The Tribunal found discrepancies in the AO's calculations, noting that the AO incorrectly included resale value of plant and machinery. The Tribunal set aside the issue to the AO for proper examination and adjustment, considering the assessee's subsequent income from scrap sales.

4. Transfer pricing adjustments in respect of royalty paid to the AE:
The AO/TPO disallowed a 3% increase in royalty rate, making an adjustment of Rs. 1,99,13,521/-. The Tribunal noted that the Comparable Uncontrolled Price (CUP) method used by the assessee was inappropriate as it compared controlled transactions. The Tribunal directed the AO to determine the Arm's Length Price (ALP) using the most appropriate method, considering all relevant data. Additional evidence submitted by the assessee was also to be considered by the AO.

5. Not granting 5% benefit under the proviso of sec. 92C of the I.T. Act:
The assessee did not press this ground during the hearing, and it was dismissed as not pressed.

Conclusion:
The appeal was partly allowed and partly set aside for statistical purposes, with specific instructions for the AO to reconsider certain issues in accordance with the Tribunal's directions. The order was pronounced in the Open Court on 19th December 2012.