2017 (3) TMI 1520 - HC - Income Tax

Inclusion of Modvat in the opening stock - Held that - The impugned order of the Tribunal while allowing the respondent assessee s appeal on this issue restored the issue for fresh examination by the Assessing Officer. This was done by following the decision of its coordinate bench on the same issue in respect of the same respondent assessee dated 18th January 2013 relating to Assessment Year 1999-2000. Royalty payment - Tribunal allowing the royalty payment @ 2% instead of 1% as was done by the TPO - Held that - TPO is mandated by law to determine the ALP by following one of the methods prescribed in Section 92C of the Act read with Rule 10B of the Income Tax Rules. However the aforesaid exercise of determining the ALP in respect of the royalty payable for technical know how has not been carried out as required under the Act. Further as held by the CIT(A) and upheld by the impugned order of the Tribunal the TPO has given no reasons justifying the technical know how royalty paid by the Assessing Officer to its Associated Enterprise being restricted to 1% instead of 2% as claimed by the respondent assessee. This determination of ALP of technical know how royalty by the TPO was adhoc and arbitrary as held by the CIT(A) and the Tribunal. Brand usage royalty - Held that - The impugned order of the Tribunal correctly proceeds to hold that in any view of the matter even if there was no agreement to support the agreement yet where the payment is made on account of commercial expediency the same ought to be allowed. See Commissioner of Income Tax Vs. Associated Electrical Agencies 2003 (12) TMI 36 - MADRAS High Court Addition u/s 40A - addition of professional fees paid to Crawford Bailey & Co. (Advocate & Solicitor) to the extent of 10% of the fees paid -one director being a partner of the firm receiving the fees - Held that - The onus would necessarily first be upon the Revenue before it disallows the payment made to persons covered under Section 40A(2)(b) of the Act in respect of professional services to establish that the payment was excessive. This it could do by calling for the details of the services rendered and making enquiries of the fees for such services in comparable cases i.e. taking into account the Advocates involved i.e. the experience and expertise. Thereafter it would be for the assessee to show why the comparison is not proper. No such exercise was done. Therefore the disallowance of 10% is adhoc. Thus in the present facts the Revenue has not even remotely attempted to establish that the payment made to the Advocates for professional services was excessive. In the circumstances no fault can be found with the orders of the CIT(A) and the Tribunal. Addition on account of club entrance fee - revenue expenditure treated by ITAT - Held that - The issue of treatment to be given to club fees is settled by an earlier decision of this Court in Commissioner of Income Tax Vs. Otis Elevators (I) Ltd. 1991 (4) TMI 53 - BOMBAY High Court to be treated as revenue in nature. Dpreciation is allowable on testing equipments even when the equipment is used by its clients. Addition on account of unaccounted production and sales - Held that - Addition has been made in the absence of the regular books of accounts maintained by the respondent assessee being found to be defective in any manner. More particularly in the absence of any evidence that there were purchase and sales outside the regular books of accounts it is not permissible to disregard the normal books of accounts. So far as the production loss is concerned the CIT(A) as well as the impugned order of the Tribunal has followed an earlier order of its coordinate bench in respect of the same respondent assessee for A.Y. 1991-92 to hold that the production loss depends on number of factors and in the absence of any comparable data to show that the loss claimed was in excess the same cannot be disallowed.

Issues Involved:
1. Inclusion of Modvat in the opening stock.
2. Deletion of addition on account of tax on trademark/brand name royalty.
3. Deletion of disallowance of royalty on traded goods.
4. Allowance of royalty payment @ 2% instead of 1%.
5. Brand usage royalty payable without a formal deed.
6. Deletion of addition on account of payment to persons referred to u/s 40A(2)(b).
7. Deletion of addition on account of club entrance fee.
8. Allowance of depreciation on testing equipment used by clients.
9. Deletion of addition on account of unaccounted production and sales.
10. Deletion of addition on account of tax and R&D cess paid on technical royalty.

Detailed Analysis:

1. Inclusion of Modvat in the Opening Stock:
The Tribunal restored the issue for fresh examination by the Assessing Officer by following its coordinate bench's decision for the same respondent for Assessment Year 1999-2000. The High Court noted that the question did not give rise to any substantial question of law, referencing its order dated 28th March 2016 in Income Tax Appeal No.2197 of 2013, thus not entertained.

2. Deletion of Addition on Account of Tax on Trademark/Brand Name Royalty:
The High Court admitted the appeal on this issue as a substantial question of law.

3. Deletion of Disallowance of Royalty on Traded Goods:
The High Court admitted the appeal on this issue as a substantial question of law.

4. Allowance of Royalty Payment @ 2% Instead of 1%:
The Tribunal upheld the CIT(A)'s decision, stating that the TPO did not determine the ALP of the technical know-how royalty by any prescribed methods under Section 92C of the Act. The restriction to 1% was deemed arbitrary and without justification. The High Court found no fault with the Tribunal's decision and did not entertain the question as it did not raise a substantial question of law.

5. Brand Usage Royalty Payable Without a Formal Deed:
The Tribunal reversed the CIT(A)'s decision, acknowledging the draft agreement submitted to the RBI and the final agreement's execution. The Tribunal also noted that payments made on account of commercial expediency should be allowed, referencing the Madras High Court's decision in Commissioner of Income Tax Vs. Associated Electrical Agencies. The High Court found the Tribunal's view plausible and did not entertain the question as it did not raise a substantial question of law.

6. Deletion of Addition on Account of Payment to Persons Referred to u/s 40A(2)(b):
The Tribunal upheld the CIT(A)'s decision, emphasizing that the onus was on the Revenue to prove that the payment was excessive. The High Court noted that the Revenue did not establish the payment's excessiveness and found no fault with the CIT(A) and Tribunal's orders. The question did not raise a substantial question of law and was not entertained.

7. Deletion of Addition on Account of Club Entrance Fee:
The High Court noted that the issue was covered against the Revenue by its decision in Commissioner of Income Tax Vs. Johnson & Johnson Ltd. and Commissioner of Income Tax Vs. Otis Elevators (I) Ltd. The question did not raise a substantial question of law and was not entertained.

8. Allowance of Depreciation on Testing Equipment Used by Clients:
The Tribunal followed its coordinate bench's decision for A.Y. 2001-02, allowing depreciation on testing equipment used by clients. The High Court referenced its order in Income Tax Appeal No.2441 of 2013, which did not entertain the Revenue's appeal on this issue. The question did not raise a substantial question of law and was not entertained.

9. Deletion of Addition on Account of Unaccounted Production and Sales:
The Tribunal upheld the CIT(A)'s decision, noting that the Assessing Officer did not challenge the accounts or invoke Section 145 of the Act. The Tribunal found no evidence of purchases and sales outside the regular books of accounts. The High Court found the CIT(A) and Tribunal's findings to be factual and not perverse, thus not raising a substantial question of law. The question was not entertained.

10. Deletion of Addition on Account of Tax and R&D Cess Paid on Technical Royalty:
The High Court admitted the appeal on this issue as a substantial question of law.

Conclusion:
The High Court admitted the appeal on substantial questions of law for issues (B), (C), and (J) and directed the Registry to communicate a copy of the order to the Tribunal. For the other issues, the High Court found no substantial question of law and did not entertain those questions.

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