2016 (7) TMI 383 - AT - Income Tax

Deduction u/s.80IC - profit attributable to marketing division and brand value to be disallowed or not - Held that - CIT(A) while deciding the issue in favour of assessee has given a finding that there was no marketing division and, therefore, there was no transfer of goods from eligible to non-eligible undertaking and in the absence of marketing division being a separate undertaking, no profit could be attributed to the marketing activity. With respect to brand value, the ld.CIT(A) has given finding that the same is owned by the foreign collaborator and there cannot be any profit attributable to brand. He has further given a finding that AO had quantified the gross profit attributable to marketing and brand value and disallowance and that since deduction u/s.80IC is claimed in respect of net profit and, therefore, disallowing gross profit attributable to marketing and brand value is not correct and that further, since the marketing expenses debited to the Profit & Loss Account are more than gross profit computed by the AO, that there cannot be any disallowance of deduction u/s.80IC of the Act. Before us, Revenue has not placed any material to controvert the findings of ld.CIT(A). We further find that the assessee had claimed deduction u/s.80IC in AY 2006-07 also and the claim has been allowed in the assessment framed u/s.143(3) of the Act, and that no reopening of assessment u/s.147/148 or u/s.263 has been initiated for withdrawing the claim meaning thereby that the claim of assessee has been accepted by Revenue and has attained finality. - Decided in favour of assessee

Summary

Issues Involved:
1. Deduction under Section 80IC of the Income Tax Act, 1961.
2. Allocation of common expenses between different units.
3. Attribution of profits to brand value and marketing activities.
4. Consistency in the assessment of deductions across different assessment years.

Detailed Analysis:

Issue 1: Deduction under Section 80IC of the Income Tax Act, 1961

The core issue revolves around the deduction claimed by the assessee under Section 80IC for the profits generated by the Baddi Unit. The AO noticed an abnormal high profit from the Baddi Unit compared to a book loss from the Ahmedabad Unit. The AO concluded that the profits from the Baddi Unit were inflated due to misallocation of expenses and attributed a portion of the profits to brand value and marketing activities, which he deemed ineligible for deduction under Section 80IC. The AO recomputed the profits, reducing the deduction claim by ?4,27,43,358/-.

Issue 2: Allocation of Common Expenses Between Different Units

The AO found that the allocation of common expenses, particularly interest expenses, was misallocated, inflating the Baddi Unit's profits. The AO adjusted the profits by reallocating these expenses, specifically reducing the Baddi Unit's profit by ?22,83,883/- due to misallocation of interest expenses.

Issue 3: Attribution of Profits to Brand Value and Marketing Activities

The AO attributed 40% of the Baddi Unit's profits to brand value and marketing activities, based on the premise that these profits were not solely derived from manufacturing activities. He relied on the Rolls Royce PLC case, attributing 5% to brand value and 35% to marketing activities. The CIT(A) disagreed, noting that marketing was a cost center, not a profit center, and that the brand value was owned by a foreign collaborator, thus not contributing to the Baddi Unit's profits.

Issue 4: Consistency in the Assessment of Deductions Across Different Assessment Years

The CIT(A) highlighted that the deduction under Section 80IC for the Baddi Unit was allowed in the previous assessment year (2006-07) without any adjustments or reopening of the assessment. The CIT(A) found no change in facts between the assessment years, implying that the deduction should be consistently allowed.

Judgment:

The CIT(A) provided a detailed explanation, rejecting the AO's adjustments. The CIT(A) held that the marketing expenses debited to the Baddi Unit's Profit & Loss Account were higher than the gross profit attributed to marketing and brand value by the AO, thus nullifying any disallowance of the deduction. The CIT(A) emphasized that marketing was not an independent profit-generating activity and that the brand value was owned by a foreign collaborator, negating the AO's basis for profit attribution.

The Tribunal upheld the CIT(A)'s order, noting that the Revenue failed to provide any material evidence to counter the CIT(A)'s findings. The Tribunal also acknowledged the consistency in the assessment process, as the deduction under Section 80IC was allowed in the previous year without any dispute.

Conclusion:

The Tribunal dismissed the Revenue's appeals for both assessment years (2007-08 and 2008-09), affirming the CIT(A)'s decision to allow the deduction under Section 80IC. The Tribunal found no merit in the AO's reallocation of expenses and attribution of profits to brand value and marketing activities, thereby upholding the assessee's claim for deduction in full.