2018 (4) TMI 1971 - AT - Income Tax

Revision u/s 263 - withdrawal of deduction u/s 80IC for the reason that AO failed to verify whether Form No.10CCB was available with him at the time of scrutiny and also AO failed to verify whether those are covered in the negative list as specified in Schedule XII of the Act - HELD THAT - On a reading of the decision in Kewal Kishan Clothing P. Ltd. ( 2015 (4) TMI 1323 - ITAT MUMBAI ) we find that the facts are almost identical. In that case also form 10 CCB was not filed and the AO allowed the claim made by the assessee for earlier nine years. While placing reliance on the decision in Zenith Processing Mills ( 1995 (9) TMI 37 - GUJARAT HIGH COURT the Mumbai tribunal held that the Audit Report in prescribed form no.10CCB could be filed even if revision jurisdiction is exercised by the CIT u/s 263 of the Act. Thus we hold that non-submission of the form 10 CCB or the non-verification of the eligibility of the product to claim deduction under section 80 IC of the Act in view of the fact that such a deduction was allowed for 5 years earlier do not constitute valid grounds to exercise jurisdiction under section 263. We therefore find it difficult to sustain the order passed u/s 263 by the Commissioner of income tax Delhi. Decided in favour of assessee. Deduction u/s 80IC - Manufacturing item or not? - manufacturing DGX and Pillar filler - assessee s case is that the Pillar filler is in an irregular shape specific to the requirement of the motor vehicle manufactured has assumed the character of an automobile component and it cannot be used for any other purpose - As per AO Application of DGX need very high level of thixotropic properties so that it can be pumped and applied as stable bead and therefore the assessee company is manufacturing item which is included in the negative list of Schedule XIII which disentitle the assessee to claim deduction u/s 80IC - HELD THAT - AO made the report of CIPET the sole basis for his conclusion that the assessee has been manufacturing plastic and plastic product and failed to notice the elaborate process which the raw materials have undergone to become the finished product which have only one usage i.e. in automobile industry and none else. It is not brought to our notice that these two products either pillar filler or the DGX are generic in their use as plastic or they could be put to use everywhere the plastic could be. The sole and single purpose of the finished goods in the automobile industry sets the raw material of plastic apart from the finished goods which are known as automobile parts in the commercial world. We do not find any perversity either in the approach or in the conclusions reached by the learned CIT(A) after appreciating the same material which the learned AO made basis for his conclusion. AO stopped at the chemical composition whereas learned CIT(A) took it a little further to its logical conclusion by identifying the products with their usage and their nomenclature in the world where they are made use of. The reasoning given by the learned CIT(A) is impeccable and we find ourselves in agreement with the same. Such findings of learned CIT(A) do not warrant any interference. Nature of expenses - deduction of royalty paid by the assessee to Company in Germany - revenue treated such an expenditure is towards the acquisition of assets by way of intangible assets of the nature provided u/s 32(1)(ii) of the Act and accordingly allowed depreciation @ 25% and made addition on that account - HELD THAT - Tribunal in own case allowed the royalty fee paid to Company in Germany u/s 37(1) of the Act as revenue expenditure on the ground that such payment was only for right to use the technical knowhow and no benefit of enduring nature accrued to the assessee. CIT(A) further recorded that in respect of Asstt. Year 2006-07 to 2008-09 such a finding was returned by the first appellate authority only. As rightly observed by the learned CIT(A) the AO has not brought on record any change in the facts and circumstances that took place from the earlier years. In the absence of any compelling reasons pleaded by the revenue before us we do not find any reason to take a different view from the one taken for the earlier years by the authorities below. Difference of 10% gross profit rate - Basing on the comparative gross profit learned AO opined that the assessee had disclosed more profit in 80IC unit than the other unit by 10% just to claim enhanced deduction u/s 80IC and the profit of the eligible unit need to be calculated and resultant disallowance on account of claim of deduction u/s 80IC need to be calculated - CIT(A) found that since the full details and figures were not available to examine the price at which the inputs are obtained or the output is transferred to the warehouse so to draw an appropriate conclusion the AO may make further enquiry to arrive at a suitable conclusion - HELD THAT - CIT(A) observed that basically if in market condition the goods could have been sold at the same prices at which these are transferred by the non-eligible unit to the eligible unit or vice versa then there is no case of any addition u/s 80 IA(8) following the arm s-length principle. He considered the submissions advanced on behalf of the assessee that only to ensure timely delivery as per the requirement the finished goods are first transferred to the warehouse of Gurgaon Pune and Chennai units with warehouse facility only in order to provide proximity to the location of the customer to ensure immediate transfer as per requirement. CIT(A) further considered the submission on behalf of the assessee that as per Excise the transfer is to be made to the warehouse at the final sale price to the customers that is market price and therefore question of adjustment under section 80 IA (8) does not arise. Lastly he recorded that he broadly agreed with the rationale of this argument. However inasmuch as the facts and figures were not available to the full extent he allowed the AO to make further enquiry in this regard. Having observed so CIT(A) found that to draw an appropriate conclusion the full details and figures are necessary to examine the price at which the inputs are obtained are the output is transferred to the warehouse and for such purpose learned CIT(A) permitted the AO to make further enquiry in this regard and reach a suitable conclusion. No necessity to interfere with this observation of the Ld. CIT(A) and suffice it to say that the Ld. AO may base the conclusion on the facts and figures obtained during the enquiry but not on any surmises and conjectures or extraneous inferences. We therefore approve the observations of the learned CIT(A) to the Ld. AO to cause enquiry after obtaining the full details and figures to examine the price at which the inputs are obtained or the output is transferred to the warehouse and reach a factual conclusion firmly based on the facts and figures.Cross objection filed by the assessee are allowed accordingly.

Summary

Issues Involved:
1. Legality of proceedings under section 263 of the Income-tax Act, 1961.
2. Disallowance of deduction under section 80IC of the Income-tax Act, 1961.
3. Nature of royalty payments and their classification under section 37(1) of the Income-tax Act, 1961.
4. Reworking of profits for the eligible unit at Parwanoo under section 80IC.

Detailed Analysis:

1. Legality of Proceedings under Section 263:
The assessee challenged the order under section 263 of the Act for AY 2009-10, where the CIT directed the AO to withdraw the deduction under section 80IC due to the non-availability of Form 10CCB and lack of verification of the product's eligibility under the negative list in Schedule XIII. The Tribunal found that the CIT's order was flawed as the basic issue of how the AO's order was erroneous and prejudicial to revenue was not discussed. The Tribunal relied on the Mumbai Tribunal's decision in Kewal Kishan Clothing P. Ltd. vs CIT, which held that the non-submission of Form 10CCB does not constitute valid grounds for revision under section 263, especially when the deduction was allowed for five previous years. The Tribunal allowed the appeal, stating that the CIT's order under section 263 was unsustainable.

2. Disallowance of Deduction under Section 80IC:
The Revenue's appeals challenged the deletion of disallowance of deduction under section 80IC for AYs 2009-10 to 2012-13. The assessee contended that the products manufactured (DGX adhesive and pillar filler) were not covered under the negative list of Schedule XIII. The AO's reliance on the CIPET report, which classified the products as plastics, was found insufficient. The CIT(A) noted that the excise classification and audit confirmed that the products fell under Chapter 35 and 87 of the Central Excise Act, not under the negative list. The Tribunal upheld the CIT(A)'s findings, agreeing that the products were appropriately classified and eligible for deduction under section 80IC. The Tribunal dismissed the Revenue's appeals on this ground.

3. Nature of Royalty Payments:
The Revenue also challenged the deletion of additions related to royalty payments treated as capital expenditure by the AO. The CIT(A) held that the royalty payments to Henkel KGaA were revenue in nature, as they were for the right to use technical know-how without acquiring any enduring benefit. The Tribunal noted that similar findings were upheld in the assessee's own case for earlier years by both the CIT(A) and the Tribunal. The Tribunal found no reason to deviate from the settled position and dismissed the Revenue's appeals on this aspect.

4. Reworking of Profits for the Eligible Unit at Parwanoo:
The assessee's cross-objection challenged the AO's observation that the deduction claimed under section 80IC for AY 2012-13 should be reworked due to a higher gross profit rate in the eligible unit. The CIT(A) allowed the AO to make further inquiries to verify the transfer prices between units. The Tribunal upheld the CIT(A)'s direction for further inquiry based on full details and figures but emphasized that the AO should base conclusions on factual data, not conjectures. The cross-objection was allowed in part, affirming the need for a factual basis in the AO's findings.

Conclusion:
The Tribunal allowed the assessee's appeal against the order under section 263, dismissed the Revenue's appeals challenging the deletion of disallowance under section 80IC and royalty payments, and allowed the assessee's cross-objection in part regarding the reworking of profits for the eligible unit. The Tribunal emphasized the need for factual verification and consistency in the application of tax provisions.