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2012 (10) TMI 127 - AT - Income TaxUnutilized Modvat credit in respect of closing stock - addition to income - Held that - As decided in assessee s own case for AY 2001-02 he same was restored by the Tribunal to the file of the AO with a direction to decide the same afresh after verifying the recast accounts to be prepared and furnished by the assessee in terms of sec.145A of the Act after including tax, duty, cess or fees as provided in the said section - thus following the precedent this appeal decided in favour of assessee for statistical purposes. Deduction u/s.80HHC - foreign exchange gain in the profits of business - Held that - What is liable to be excluded from the profits of business for the purpose of computing the deduction u/s.80HHC is the income which is unrelated to the export activity of the assessee. Since the foreign exchange gain earned by the assessee for the year under consideration in respect of realization of export proceeds is directly relatable to its export activity, the same cannot be excluded from the profits of business for the purpose of computing the deduction u/s.80HHC keeping in view the ratio of Hon ble Bombay High Court in assessee s own case for the AY 2002-03 - in favour of assessee. Repairs and maintenance expenses - Held that - It is not clear from the documents filed by the assessee as to whether the expenditure in question incurred by the assessee on repairs and maintenance is of revenue nature inasmuch as it is very difficult to come to a conclusion that the expenses incurred by the assessee on repairs and maintenance were on purchase of spare parts of plant and machinery and miscellaneous work done to the building and there was no new capital asset acquired by the assessee as a result of incurring of the said expenses. Thus the expenses in question incurred by the assessee were rightly treated by the AO as capital expenditure - against assessee. TP adjustments - CIT (A) deleted the addition made by AO - Held that - As decided in assessee s own case in AY 2006-07 that when assessee is dealing with an AE, at least there are no commercial risks, no marketing costs and there could be several other factors as well justifying a normal discount as the assessee could indeed go to many important customers. It hardly needs to be emphasized that even in independent business situations granting discount is a normal occurrence, and unless the Assessing Officer demonstrates that the discount so allowed would not have been allowed in an arm s length situation, ALP adjustment cannot be made in respect of the same - against revenue. Non deduction of TDS - Disallowance of development expenses - CIT (A) deleted the addition made by AO - Held that - The amount in question paid by the assessee to Dresser Rand Company, USA toward development expenses is not chargeable to tax in India in the hands of the said non-resident, & the assessee has deducted the tax at source from development charges paid to Dresser Rand Company, USA in the next financial year and the tax so deducted having been paid before the due date of filing return, the disallowance u/s.40(a)(i) is not sustainable on this ground also as per the amendment made in the relevant provisions which has been held to be retrospective - against revenue.
Issues Involved:
1. Addition of unutilized Modvat credit in respect of closing stock. 2. Computation of deduction under Section 80HHC. 3. Disallowance of repairs and maintenance expenses. 4. Disallowance of technical and administrative service charges. 5. Disallowance of leave encashment. 6. Transfer Pricing (TP) adjustments. 7. Disallowance of development expenses under Section 40(a)(i). Detailed Analysis: 1. Addition of Unutilized Modvat Credit in Respect of Closing Stock: The assessee, a company engaged in manufacturing processed gas compressors, filed a return declaring total income of Rs. 18,31,88,230/-. The AO added Rs. 21,10,564/- to the closing stock value due to unutilized Modvat credit, as the assessee did not include it in the closing stock valuation, which was not in accordance with Section 145A. The CIT (A) confirmed the addition. The Tribunal, following its decision in the assessee's case for AY 2001-02, set aside the CIT (A)'s order and restored the matter to the AO for fresh decision after verifying the recast accounts as per Section 145A. 2. Computation of Deduction Under Section 80HHC: - Recovery of Freight, Insurance, Packaging Expenses, and Sales-Tax Set Off/Refund (Grounds 2.3 to 2.6): The Tribunal upheld the CIT (A)'s decision to exclude these recoveries from business profits for deduction computation under Section 80HHC, following the Bombay High Court's decision in the assessee's case for earlier years. However, it accepted the assessee's alternative contention to include 90% of the net amount after deducting corresponding expenses, as per the Supreme Court's decision in ACG Associate Capsules Pvt. Ltd. vs. CIT. - Foreign Exchange Gain (Grounds 2.7 & 2.8): The Tribunal directed the AO to include the foreign exchange gain in business profits for Section 80HHC deduction computation, as it was related to export proceeds, following the Bombay High Court's ruling in the assessee's case for AY 2002-03. 3. Disallowance of Repairs and Maintenance Expenses: The AO disallowed Rs. 20,73,464/- claimed by the assessee for repairs and maintenance, treating them as capital expenditure. The CIT (A) confirmed the disallowance. The Tribunal upheld this decision, stating that the assessee failed to provide sufficient evidence to prove the expenses were of revenue nature and not for acquiring new capital assets. 4. Disallowance of Technical and Administrative Service Charges: The assessee did not press this ground during the hearing. Hence, it was dismissed as not pressed. 5. Disallowance of Leave Encashment: Similar to the technical and administrative service charges, this ground was not pressed by the assessee and was dismissed as not pressed. 6. Transfer Pricing (TP) Adjustments: The AO made a TP adjustment of Rs. 14,79,692/- based on a 10% discount granted by the assessee to its associated enterprise. The CIT (A) deleted this addition, stating that the AO and TPO did not use any established method to determine the Arm's Length Price but relied solely on the discount. The Tribunal upheld the CIT (A)'s decision, following its ruling in the assessee's case for AY 2006-07, where it was held that discounts in independent business situations are normal and must be justified as Arm's Length. 7. Disallowance of Development Expenses Under Section 40(a)(i): The AO disallowed Rs. 76,78,511/- paid to Dresser Rand Company, USA, for development expenses, due to non-deduction of tax at source. The CIT (A) deleted the disallowance, accepting that the payment was not chargeable to tax in India under the Indo-US DTAA. The Tribunal upheld the CIT (A)'s decision, noting that the assessee deducted tax in the next financial year and paid it before the due date of filing the return, making the disallowance under Section 40(a)(i) unsustainable. Conclusion: The appeal of the assessee was partly allowed, and the appeal of the revenue was dismissed.
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