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2022 (7) TMI 678 - AT - Income TaxDeduction u/s 80IB - undertaking not qualifying as an SSI (Small Scale Industry) unit as defined under the section,which is a necessary prerequisite for claiming the said deduction - HELD THAT - As we find, had nothing to state in justification of its claim of exclusion of items in the nature of Patterns, fixtures and Factory equipments which it had itself treated as Plant and Machinery but excluded as per IDRA notification and which the DRP noted did not qualify for exclusion as per the notification. Therefore we find merit in the finding of the DRP on this account. The value of these items and in itself makes the assessee ineligible for SSI status. The decision of the ITAT in the preceding year does not help the assessee since it clearly does not approve exclusion of these items but only those mentioned to be excluded in the notification - we agree with the DRP/AO that there is no justification for exclusion of product development cost and preoperative Revenue expenses capitalized,both added to the cost of Plant and Machinery by the assessee itself. The notification r.w section 11B of IDRA only talks of cost of Plant and Machinery as originally incurred. Once these costs are admittedly incurred for Plant and Machinery there is no scope for excluding them. Considering our finding above of inclusion of computers cost, patterns, fixtures and factory equipment and product development and preoperative cost, this alone makes the assessee ineligible to SSI status as per IDRA Act and it can be safely held accordingly therefore that the assessee is not eligible to deduction u/s 80IB of the Act. However we shall deal with the remaining exclusions also With respect to the remaining items disqualified ,we agree with the findings of the DRP that having not discharged its onus of physically verifying its claim of excluding these items as qualifying as Tools ,Jigs and Dyes ,that too on its own request and the financial records of the assessee belying this claim, the said claim also needed to be rejected. The Ld.Counsel for the assessee has been unable to controvert that as per its own financial statements the assessee had separately classified assets qualifying as Tools Jigs to the extent of only Rs.5,15,136/-.The act of the assessee therefore of splitting the admitted cost of Plant and Machinery of Rs.3,74,00,831 /-,we agree with the DRP, was only breaking down its machine to its components ,reducing the machine in turn to only its frame which surely does not qualify as Plant and Machinery. This is all the more relevant since the assessee has otherwise been unable to justify its claim by way of physical verification done on its own request. The decision of the ITAT also in the preceding years does not come to the assistance of the assessee since all these facts were not there before the ITAT. We uphold the findings of the DRP/AO that the assessee did not qualify as an SSI Unit and was therefore not eligible to deduction u/s 80IB - The order of the AO denying deduction u/s 80IB is accordingly upheld. Ground of appeal No.2 of the assessee is dismissed. TP Adjustment - Upward Revision and Royalty Payment being computation of arm s length price in relation to international transactions though fully explained - HELD THAT - Undeniably the AO has treated the ALP of the royalty transaction as Nil for the reason that the AE did not recover any such payment from its other AE s. Firstly it is basic and fundamental that ALP of an international transaction refers to the value at which the transaction would have been conducted at arm s length, ruling out any scope of manipulation in the same on account of relation between the two parties entering into it. Therefore there cannot be any determination of the ALP of the transaction by comparing it with an AE of the tested party. In the present case the AO has done exactly this by comparing the royalty charged by the AE of the assessee from its other associated entities. This comparison cannot result in determination of Arms Length Price of the transaction. For this reason alone the ALP determined by the AO at Nil in the present case needs to be rejected. Even otherwise we find that this issue has been adjudicated in the case of the assessee for A.Y 2004-05 wherein identically the ALP of royalty determined at Nil was rejected by the ITAT noting that similar Royalty consistently paid by the assessee in the past has been allowed, that the AO failed to bring on record the ordinary profits which the assessee could earn in such type of business and the expenditure having been incurred for the purpose of business could not be denied completely. We find that the Hon ble High Courts have categorically held in the said decisions that it is not part of the TPO s jurisdiction to consider whether or not expenditure incurred passed the test u/s 37(1) of the Act. It has been held that the only authority of the TPO is to conduct a Transfer Pricing analysis to determine ALP and not to determine whether there is a service or not from which assessee benefits. Determination of the ALP of the Royalty transaction at Nil by the AO is held to be not in accordance with law. The adjustment therefore made to the income of the assessee is therefore directed to be deleted. TP adjustment made to the cost of the purchases made by the assessee from its associated enterprise - only contention of the assessee before us was that it had objected to the adoption of the PBIT of the assessee company @7.03% pointing out that none of the data as regards revenue or cost were matching with the profit and loss account of the assessee and had submitted summary of the financial information also to the ACIT TPO-2 - HELD THAT - As this issue of arm s length price of the purchase transaction entered into by the assessee with its associate enterprise is restored back to the TPO to rework the arm s length price of the transaction after considering the anomaly pointed out by the assessee in its original calculation. Ground of appeal No.3 is therefore allowed for statistical purposes. Non considering Service Income as Business Income for the purpose of Deduction u/s 80IB - A.O./DRP denied the same noting that it could not be said to be derived from the industrial undertaking which was the essential prerequisite for claiming deduction under the said section - HELD THAT - This denial of deduction was made without prejudice to the denial of claim of the assessee to deduction u/s. 80IB of the Act on account of the finding by the revenue authorities that the assessee did not classify as SSI unit to be eligible to claim the deduction. Since we have held the assessee ineligible to claim deduction u/s 80IB. Disallowing Foreign Exchange Loss - HELD THAT - Disallowance of foreign exchange loss relating to loss availed for capital work is upheld - A.O. is directed to grant depreciation as per law on the same. Ground of appeal of the Assessee is accordingly dismissed.
Issues Involved:
1. Denial of deduction under Section 80IB of the Income Tax Act, 1961. 2. Transfer pricing adjustment related to the payment of royalty to the Associate Enterprise (AE). 3. Transfer pricing adjustment related to purchases from AE. 4. Classification of service income for deduction under Section 80IB. 5. Disallowance of foreign exchange loss. Detailed Analysis: 1. Denial of Deduction Under Section 80IB: The primary issue was whether the assessee qualified as a Small Scale Industry (SSI) unit to claim deduction under Section 80IB. The controversy revolved around the inclusion of certain items in plant and machinery, specifically tools, jigs, dyes, moulds, and computer hardware/software. The assessee argued these should be excluded based on a notification under the Industrial (Development and Regulation) Act (IDR Act). The Revenue included these items, arguing they were integral to the manufacturing process, thus exceeding the Rs. 1 crore limit for SSI status. The Tribunal upheld the Revenue's view, noting that the assessee's own financial records contradicted its claims and failed to provide physical verification. Consequently, the assessee did not qualify as an SSI unit and was ineligible for the deduction. 2. Transfer Pricing Adjustment Related to Royalty Payment: The assessee challenged the determination of the arm's length price (ALP) of royalty payment to its AE at nil. The Tribunal found that the ALP should not be determined by comparing it with other AEs of the tested party. The Tribunal noted that similar royalty payments had been allowed in previous years and that the TPO's jurisdiction was limited to Transfer Pricing analysis, not determining the necessity of the service. The Tribunal directed the deletion of the adjustment, aligning with previous ITAT decisions and High Court rulings. 3. Transfer Pricing Adjustment Related to Purchases from AE: The issue concerned the upward adjustment of profits related to purchases from AE. The TPO adopted the TNMM method, and the DRP directed using PBIT to sales ratio, leading to an adjustment. The assessee contested the data used by the TPO, claiming discrepancies. The Tribunal restored the issue to the TPO for reworking the adjustment after considering the assessee's objections. 4. Classification of Service Income for Deduction Under Section 80IB: The assessee's claim for deduction on service income was denied by the AO/DRP, stating it was not derived from the industrial undertaking. The Tribunal noted that since the assessee did not qualify as an SSI unit, this ground was inconsequential and dismissed it. 5. Disallowance of Foreign Exchange Loss: The AO disallowed foreign exchange loss related to loans for capital work, treating it as capital expenditure. The assessee requested depreciation on the disallowed amount. The Tribunal upheld the disallowance but directed the AO to grant depreciation as per law. Combined Results: 1. Assessee's appeal for AY 2006-07 was partly allowed for statistical purposes. 2. Remaining appeals of the assessee were allowed. 3. Both appeals of the Revenue were dismissed. Order pronounced on 13th July 2022 at Ahmedabad.
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