2022 (3) TMI 1335 - AT - Income Tax

Deduction u/s. 80IC - claim of the assessee is that it was engaged in the manufacture of the Antivirus software at its Parwanoo unit and hence entitled to deduction of the full profit of that unit - AO found that the software development activity was done at the R D cost centre of the assessee in Pune and only the CD writing activity, of the software developed by the Pune R D Centre, was taking place at the Parwanoo unit thus deduction u/s.80IC could be allowed only with reference to the profit attributable to the CD writing activity at the Parwanoo unit and not the software development - as per CIT-A appellant s claim that it was not cost effective to dispatch goods from Parwanoo units to customers outside H.P. as credit for CDT paid was not available to customers outside H.P. against the local VAT liability cannot be appreciated for the simple reason that what was sold to Pune was CD after writing and not complete software and the cost of writing CD cannot be the amount claimed by the appellant shown in its invoice and confirming the addition - HELD THAT - On going through the above operative part of the impugned order, it is overt that the ld. CIT(A) has confined his decision precisely to the view point of the AO as incorporated in the assessment order. All the submissions made by the assessee beyond the assessment order, which have bearing on the ultimate decision, albeit recorded in the impugned order, remained unaddressed - impugned order does not deal with all the issues raised by the assessee. The ld. AR emphatically submitted, which we also endorse, that the ld. first appellate authority ought to have disposed of all the points raised by the assesee so that an effective challenge could be laid before the Tribunal against his decision, if warranted. In view of the fact that several issues raised by the assessee have not been adjudicated by the ld. CIT(A), we are of the considered opinion that it would be in the fitness of the things if the impugned order is set-aside and the matter is restored to his file for dealing with all such issues and then pass a speaking order thereon. We order accordingly. Needless to say, an adequate opportunity of hearing will be granted by the CIT(A) to the assessee in such proceedings. Disallowance u/s.14A - AO observed that the assessee earned exempt income from mutual funds - HELD THAT - The Hon'ble Delhi High Court in ACB India Ltd. 2015 (4) TMI 224 - DELHI HIGH COURT has held that the average value of investments, for the purposes of Rule 8D(2)(iii), should be confined to those securities in respect of which exempt income is earned and not the total investments. Similar view has been taken by the Special Bench of the Tribunal in the case of ACIT vs. Vireet Investments (P) Ltd. 2017 (6) TMI 1124 - ITAT DELHI . In view of the afore referred precedents, we set aside the impugned order to this extent and remit the matter to the file of the ld. CIT(A) for re-computing the disallowance under Rule 8D(2)(iii) by considering only such investments in calculating the average value of investments, which yielded exempt income during the year. The assessee will be allowed hearing opportunity in such fresh proceedings.

Summary

Issues Involved:

1. Partial rejection of the claim of deduction under Section 80IC of the Income-tax Act, 1961.
2. Confirmation of disallowance under Section 14A of the Act.
3. Jurisdiction of the Assessing Officer (AO) in making disallowance of deduction under Section 80IC in the light of the Transfer Pricing Officer's (TPO) order.
4. Scope of disallowance under Section 80IC concerning sales made by the Parwanoo unit.

Issue-wise Detailed Analysis:

1. Partial Rejection of the Claim of Deduction under Section 80IC of the Income-tax Act, 1961:

The assessee claimed a deduction under Section 80IC for its unit in Parwanoo, Himachal Pradesh, asserting that it was engaged in the manufacture of Antivirus software. The AO observed that the software development was undertaken at the R&D Centre in Pune, while only the CD writing process was conducted at the Parwanoo unit. Consequently, the AO allowed the deduction only for the profit attributable to the CD writing activity at Parwanoo, disallowing the excess profit claimed. The CIT(A) upheld the AO's decision, leading the assessee to appeal to the Tribunal.

The Tribunal noted that the deduction under Section 80IC applies to profits derived from eligible manufacturing activities in specified regions. The Tribunal agreed with the AO's assessment that only the profit from the CD writing activity at Parwanoo was eligible for deduction, as the software development was not conducted there. The Tribunal emphasized that the profit qualifying for deduction must be derived from the activity carried out at the eligible unit.

2. Confirmation of Disallowance under Section 14A of the Act:

The AO disallowed an amount under Section 14A, related to the exempt income earned from mutual funds, by applying Rule 8D(2)(iii). The assessee did not dispute the computation method but argued that only investments yielding exempt income during the year should be considered. The Tribunal referred to precedents, including the Delhi High Court's decision in ACB India Ltd. vs. CIT and the Special Bench of the Tribunal in ACIT vs. Vireet Investments (P) Ltd., which supported the assessee's view. Consequently, the Tribunal remitted the matter to the CIT(A) for re-computation, considering only investments that yielded exempt income during the year.

3. Jurisdiction of the AO in Making Disallowance of Deduction under Section 80IC in Light of the TPO's Order:

For the assessment year 2013-14, the assessee contended that the AO lacked jurisdiction to disallow the deduction under Section 80IC, as the TPO had accepted the Arm's Length Price (ALP) of the Specified Domestic Transactions (SDTs). The Tribunal clarified that the AO's disallowance was not related to the ALP determined by the TPO but to the over-pricing of the CD writing activity at the Parwanoo unit. Therefore, the AO's actions were not restricted by the TPO's order, and the CIT(A) was justified in rejecting the assessee's argument.

4. Scope of Disallowance under Section 80IC Concerning Sales Made by the Parwanoo Unit:

For the assessment year 2013-14, the AO extended the scope of disallowance under Section 80IC to include sales made by the Parwanoo unit to third parties, not just to the Pune unit. The Tribunal noted that Section 80IA(8) deals with inter-business transfers within the same entity, requiring market value adjustments for such transfers. The AO had determined the market value of the CD writing activity but applied it to all sales, including those to third parties. The Tribunal held that the AO should have restricted the disallowance to inter-business transfers only, as per Section 80IA(8). Consequently, the Tribunal remitted the matter to the CIT(A) for re-evaluation, limiting the disallowance to inter-business transfers.

Conclusion:

The Tribunal set aside the CIT(A)'s orders on the issues related to the partial rejection of the deduction under Section 80IC and the scope of disallowance concerning sales made by the Parwanoo unit. It remitted these matters for re-evaluation, ensuring that the CIT(A) addresses all contentions raised by the assessee. The Tribunal upheld the AO's disallowance under Section 14A but directed the CIT(A) to re-compute it considering only investments yielding exempt income. The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes.