2019 (3) TMI 1298 - AT - Income Tax

Deduction u/s 80IC - manufacturing activity - AO excluded the sub-licensing fee credited to the profit and loss account of the Baddi unit but as far as the royalty payment is concerned, treated the same as expenses of the industrial undertaking - as per assessee income of the eligible undertaking has to be computed on standalone basis and any device adopted for reduction/inflation is not permissible - HELD THAT - Technical know-how was acquired by the assessee from Mr. Ashok Chaturvedi and shared by the assessee not only for the manufacture of products in Baddi and Jammu units but also shared it with others and earned sub-licensing fee which was credited to the profit and loss account by the Assessee company. But the sub-licensing fee is not earned through manufacturing activity. There is no direct nexus between the manufacturing activity, instead it is given after acquiring rights from Mr. Ashok Chaturvedi to sub-license it with any other third party. AO, while computing the deduction u/s 80IC of the Act has excluded the sub-licensing fee credited to the profit and loss account of the Baddi unit amounting to ₹ 7.18 crore, but as far as the royalty payment is concerned, treated the same as expenses of the industrial undertaking. Thus, the Assessing Officer has rightly excluded the sub-licensing income for the purpose of computation of deduction u/s 80IC of the Act, but it cannot be on gross basis without adjusting the royalty paid and which is not as per the provision of law. The proposition of the Ld. AR that the sub-licensing fee, if any, ought to have been excluded on net basis after adjusting the royalty paid against income of sub-licensing because the sub-licensing income and royalty payment both have direct nexus with the know-how agreement, but excluding the direct nexus of sub-licensing to the manufacturing activity of the assessee. The reliance of the Tribunal decision for A.Y. 2004-05 will not be applicable in the present case as the same has not discussed the case on merit. The principle of netting though accepted in A.Y. 2004-05, it will not help the assessee company in the present assessment year as from the beginning the sub-licensing fee is not directly connected with the manufacturing activity but is independent transaction itself. Thus, we direct AO to compute the sub-licensing fee by way of excluding on net basis after adjusting the royalty paid against income of sub-licensing. The assessee must provide all the information and the clauses to bifurcate the said sub-license fee from the original royalty payment. Thus, we remand back this issue to the file of the Assessing Officer. - Additional grounds are partly allowed for statistical purpose. Depreciation of technical know-how - HELD THAT - The technical know-how as acquired by the assessee on payment of ₹ 60 lakhs has been used for earning the sub-license fee and accordingly the depreciation has to be adjusted against the income of sub-licensing only and so the expenses also. This preposition is as per the provisions of law and therefore, the Assessing Officer as well as the CIT(A) should have allowed this claim of depreciation. Sub-licensing activities at corporate unit and should not be considered in Baddi unit - HELD THAT - This issue needs to be verified by the Assessing Officer, therefore, we are remanding back this issue to the file of the Assessing Officer. MAT u/s 115JB - refund of excise duty is a capital receipt/subsidy or not and is not includible in the determination of total income u/s 115JB - HELD THAT - As relying on case of MONTAGE ENTERPRISES PVT. LTD. 2018 (7) TMI 209 - ITAT DELHI the eligibility of excise duty refund was on account of establishment of new industrial undertaking in the State of Jammu & Kashmir as an incentive to promote industrial activity in the State of Jammu & Kashmir and is in the nature of capital subsidy not liable to tax. Thus, the said excise duty refund has to be excluded from the computation of Section 115JB of the Act as well as it is a capital receipt. These two additional grounds are admitted and allowed. Allowability of office expenses - disallowance made by the appellant in the computation of income in respect to items debited in the head office should have been considered while computing the deduction u/s 80IB in Jammu unit and 80IC in Baddi unit - appellant has added back the depreciation and disallowance u/s 43B and reduced the depreciation as per Income Tax Act and deduction u/s 35D - HELD THAT - The assessee has added back the depreciation and disallowance u/s 43B and reduced the depreciation as per Income Tax Act and deduction u/s 35D. In fact, the assessee has claimed lesser deduction by an amount of ₹ 4,71,302/- of the expenses debited in profit and loss account, which should not have been allocated to both the units i.e. Jammu and Baddi unit. After going through the order of the CIT(A) we found that the CIT(A) has rightly allowed this expenses. Miscellaneous income - Computation of deduction u/s 80IB - HELD THAT - Asperused the computation of unit wise income furnished by the appellant and noticed that while working out the profit of Jammu unit, the appellant itself has reduced interest income for calculating profit derived from industrial at Jammu. Thus, further disallowance of this amount of interest amounts to double disallowance. Accordingly, the A.O. is directed to delete the disallowance while computing the deduction u/s 80IB. Depreciation credit - book depreciation charged to profit and loss account is not considered and only depreciation as per Income tax Act is allowed as deduction - HELD THAT - CIT(A) has rightly allowed this claim of assessee. It is rightly held by the CIT(A) that if any depreciation is written back in the books of account, the same is required to be reduced from the income, as in earlier years depreciation was allowed as per Income tax Act only and not as per books of account. Thus, there is no need to interfere with the findings of the CIT(A).

Summary

Issues Involved:
1. Allocation of depreciation on technical know-how.
2. Allocation of administrative expenses.
3. Deduction under Section 80-IB/80-IC.
4. Treatment of royalty payments.
5. Treatment of excise duty refund.
6. Allocation of common expenses.
7. Treatment of foreign exchange fluctuation loss.
8. Treatment of miscellaneous income.
9. Treatment of excess depreciation credited.

Detailed Analysis:

1. Allocation of Depreciation on Technical Know-How:
The CIT(A) held that depreciation of ?11,25,000 on technical know-how should be allocated to the three sources of income (Baddi Unit, Jammu Unit, and Corporate Office) in proportion to their turnover. The assessee contended that this depreciation should be allocated solely to the Corporate Unit and adjusted against the sublicensing income of ?7.18 crores. The Tribunal found that the technical know-how was primarily used for earning sublicensing fees and directed that the depreciation should be adjusted against the income from sublicensing only.

2. Allocation of Administrative Expenses:
The lower authorities held that administrative expenses of ?10,90,670 had no bearing on the sublicensing income. The Tribunal remanded this issue back to the Assessing Officer for verification, directing that these expenses should be considered in relation to the sublicensing activities at the corporate unit.

3. Deduction Under Section 80-IB/80-IC:
The Tribunal admitted additional grounds related to the computation of deduction under Section 80-IB/80-IC, emphasizing that income and expenses with a direct nexus to the manufacturing activity should be considered. The Tribunal directed the Assessing Officer to compute the sublicensing fee on a net basis after adjusting the royalty paid.

4. Treatment of Royalty Payments:
The assessee contended that a portion of the total royalty paid should be allowed against the sublicensing income. The Tribunal agreed that the sublicensing income and royalty payment both have a direct nexus with the know-how agreement and directed the Assessing Officer to exclude the sublicensing fee on a net basis after adjusting the royalty paid.

5. Treatment of Excise Duty Refund:
The Tribunal held that the refund of excise duty amounting to ?99,11,460 is a capital receipt/subsidy and not liable to tax under the Income Tax Act. This decision was based on the judgment of the Jammu & Kashmir High Court in the case of Balaji Steel Alloys, which was confirmed by the Supreme Court.

6. Allocation of Common Expenses:
The Tribunal admitted the additional ground that common expenses of ?39,52,063 should be allocated to all three sources of income based on their respective sales and gross receipts. The Tribunal directed the Assessing Officer to verify and allocate these expenses accordingly.

7. Treatment of Foreign Exchange Fluctuation Loss:
The CIT(A) directed the Assessing Officer to reduce the foreign exchange fluctuation loss of ?3,87,000 out of the income from sublicensing in respect of the Jammu unit. The Tribunal upheld this decision.

8. Treatment of Miscellaneous Income:
The CIT(A) directed the Assessing Officer to exclude only ?962 for computation of deduction under Section 80-IB, as it pertained to interest on vehicle loans and was not derived from the industrial undertaking. The Tribunal upheld this decision.

9. Treatment of Excess Depreciation Credited:
The CIT(A) directed the Assessing Officer not to reduce the amount of ?4,44,684 of excess depreciation credited while computing the deduction under Section 80-IC for the Baddi unit. The Tribunal upheld this decision, stating that any depreciation written back in the books should be reduced from the income as per the Income Tax Act.

Conclusion:
The Tribunal provided a detailed analysis and directions on the allocation of depreciation, administrative expenses, and the computation of deductions under Sections 80-IB/80-IC. It also clarified the treatment of royalty payments, excise duty refunds, common expenses, foreign exchange fluctuation losses, miscellaneous income, and excess depreciation credited. The Tribunal emphasized the need for a direct nexus between income and expenses with the manufacturing activity for the purpose of deductions.