2014 (3) TMI 362 - AT - Income Tax

Reduction in computation of deduction u/s 80IA of the Act - Conversion and service charges apportioned Held that - The AO had not examined the books of accounts of the respective units of the assessee before arriving at the conclusion that the amount of ₹ 1crore received by the assessee as know-how fees are to be apportioned - AO had also not examined to the nature of work executed by the assessee and the unit which imparted the know-how he merely came to the conclusion on the basis of certain presumptions inferred from some of the communications transacted between the assessee and its client though, the CIT (A) has examined the issue in detail and arrived at the conclusion that the assessee had engaged its Pondicherry unit for technical knowhow services - There was nothing brought to suggest that the Chennai/Trichy unit of the assessee has extended any know-how to the client of the assessee thus, there is no reason to interfere n the findings of CIT(A) Decided against Revenue. Apportionment of labour charges to Pondicherry unit Held that - The entire labour charges was incurred by the assessee at the work site Nagda - The assessee's Pondicherry unit was a specialized unit for manufacturing the critical items such as Saturator, Reactors, Clarifier, Filters, and Tanks & Pumps - Though the work undertaken by the assessee is a composite contract, the role of the assessee's Pondicherry unit was to supply only the above products - the assessee's Pondicherry unit did not have any role in the fabrication work undertaken by the assessee in the site also, no materials were brought to show that the assessee's Pondicherry unit had any role in the execution of the activities rendered at the assessee's clients' site thus, it is not necessity to allocate the expenses incurred by the assessee for the payment made to M/s.KRR Engineering Pvt. Ltd., by the Madras unit, to Pondicherry unit there is no infirmity in the order of the CIT (A) Decided against Revenue. Restriction of disallowance u/s 35AB of the Act Technical know-how Held that - Disallowance of technical know-how fees of ₹ 10 lakhs which is restricted to 1/6th in view of Sec.35AB of the Act - CIT (A) held that the amount paid by the assessee was only for rendering services for the manufacturing of specialized machinery parts for barium sulphet plant and since the appellant is a manufacturer of chemical equipments, the amount was paid for assisting the assessee in the manufacture of specialized machinery for Ashok Organics Industries Ltd. - the entire expenditure as allowable deduction by observing that Sec. 35AB of the Act is inapplicable considering the facts of the case - no further explanations were tendered by the Revenue to establish that the expenditure incurred by the assessee was a lump sum payment made for acquiring technical know-how - the assessee is a manufacturer of specialized equipments in chemical industry Decided in favour of Assessee.

Summary

Issues Involved:

1. Reduction of Rs.22,60,870/- while computing the deduction U/s. 80IA of the Act for A.Y. 1994-95.
2. Apportionment of labour charges to Pondicherry unit for Rs.51,11,940/- for A.Y. 1995-96.
3. Disallowance of technical know-how fees of Rs.10 lakhs, restricted to 1/6th in view of Sec.35AB of the Act for A.Y. 1995-96.

Detailed Analysis:

1. Reduction of Rs.22,60,870/- while computing the deduction U/s. 80IA of the Act for A.Y. 1994-95:

The Revenue contended that the Ld.CIT (A) erred in holding that the AO was incorrect in reducing Rs.22,60,870/- while computing the deduction U/s. 80IA by apportioning the conversion and service charges of Rs.1 crore received between Pondicherry and Chennai units. The Ld. Assessing Officer argued that the sum of Rs.1 crore was a consolidated payment for a composite contract executed by the company's various units, and therefore, it should be apportioned. However, on appeal, the Ld.CIT (A) found that the technical know-how fee of Rs.1 crore received by the Pondicherry unit was rightly accounted as income of the Pondicherry unit, and no portion should be apportioned to the Chennai unit. The Tribunal upheld the Ld.CIT (A)'s decision, confirming that the technical know-how fee was solely attributable to the Pondicherry unit and should not be apportioned.

2. Apportionment of labour charges to Pondicherry unit for Rs.51,11,940/- for A.Y. 1995-96:

The Ld. Assessing Officer, following the directions of the Ld.CIT under Sec. 263, sought to verify the allocation of expenses among the assessee's various units. The AO concluded that labour charges of Rs.1,27,79,870/- should be apportioned, allocating Rs.51,11,948/- to the Pondicherry unit. The AO believed that the work order was a composite contract, and the expenses should be distributed accordingly. However, the Ld.CIT (A) found that the fabrication work executed by M/s. KRR Engineering Pvt. Ltd. was site-specific and unrelated to the Pondicherry unit. The Tribunal agreed with the Ld.CIT (A), stating that the Pondicherry unit's role was limited to supplying specific products and had no involvement in the site fabrication work. Thus, the allocation of labour charges to the Pondicherry unit was deemed unnecessary, and the Tribunal upheld the Ld.CIT (A)'s decision.

3. Disallowance of technical know-how fees of Rs.10 lakhs, restricted to 1/6th in view of Sec.35AB of the Act for A.Y. 1995-96:

The Ld. Assessing Officer disallowed Rs.10 lakhs paid as technical know-how fees, allowing only one-sixth of the amount under Sec.35AB, considering it a lump sum payment for acquiring technical know-how. On appeal, the Ld.CIT (A) determined that the payment was for services rendered in manufacturing specialized machinery parts and not a lump sum for acquiring technical know-how. The Tribunal found no evidence to suggest the payment was for acquiring technical know-how and noted that the assessee was a manufacturer of specialized equipment. Consequently, the Tribunal upheld the Ld.CIT (A)'s decision, allowing the entire expenditure as a deduction.

Conclusion:

The Tribunal dismissed both appeals of the Revenue and allowed the Cross Objections of the assessee, upholding the orders of the Ld.CIT (A) on all issues. The decisions were pronounced on 25th February 2014 at Chennai.