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TMI Blog2018 (9) TMI 1629X X X X Extracts X X X X X X X X Extracts X X X X ..... tion by the Tribunal on the question, whether the Jammu Unit had utilized the technical know-how provided to the respondent-assessee company under the MoUs. Till this core and important aspect and question is decided, we cannot proceed and decide, the other question whether the expenditure on royalty was incurred by the Jammu Unit or the Corporate Office. - Decided partly in favour of revenue for statistical purposes. X X X X Extracts X X X X X X X X Extracts X X X X ..... he cases of M/s Flex Group including the case of the respondent-assessee, were centralised. Subsequently, notice dated 23.08.2006 under Section 153A of the Act was issued to the respondent-assessee to file their returns of income. 10. In the return of income for Assessment Year 2005-06 under Section 153A of the Act filed on 06.10.2006, the respondent-assessee had revised and enhanced the deduction claimed under Section 80-IB of the Act in respect of Jammu Unit, by not treating royalty of ₹ 4.25 crores as payment made by Jammu Unit, but as expenditure incurred by the Corporate Office. A revised Form 10CCB by the chartered accountant with respect to the Jammu Unit was enclosed. 11. During the course of the proceedings for the Assessment Year 2005-06 pursuant to notice under Section 153A of the Act, the respondent-assessee had claimed that as they could not use the technical know-how under the MoUs, they had sub-licensed the same to their sister company, M/s Flex Industries Ltd. for consideration of ₹ 1.96 crores per annum. It was claimed that the pouches manufactured at the Jammu Unit had not used and utilized the knownhow and rights acquired under the MoUs. Respondent-a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries ltd., FIL) and paid {to Sh. Ashok Chaturvedi) pertain to the know how and technology for the production of improved sachet pouch with additional gusset either on one or both sides. It has also been found that this improved sachet pouch is being produced only at the Jammu unit of the assessee company. Further, on perusal of the agreements in respect of licence fee received and royalty paid, it is noticed that these agreements are clearly directly linked with the plant located at Bari Brahman, Jammu of the assessee company. Thus, both the receipt and income components of licence fee/royalty undoubtedly pertain to the Jammu unit. 10-.4 The assessee has shifted the income from licence fee received from M/s FIL pertaining to the Jammu unit to the Corporate unit merely to increase the eligible deduction. This income of Jammu unit is liable to be considered in the P & L account of the Jammu unit and is to be considered as income not derived from the industrial undertaking on which deduction u/s 80-18 is not allowable. 10.5 The assessee company has manufactured and sold improved sachet pouches only at its ·Jammu unit and there is no rationale for shifting the expenses of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remaining expenses of ₹ 51,20,000/- as shown above has also no co-relation with the royalty income and the same will be divided amongst Malanpur, Noida and Jammu units in the ratio of turnover. The assessee is liable to initiation of penalty proceedings u/s 271(1)(c) on this count as the assessee company has deliberately concealed his income and furnished inaccurate particulars of such income by manipulation of the profit of Jammu unit." 13. Perusal of the Assessment Order dated 28.12.2007 for the Assessment Year 2005-06 would show that as per the Assessing Officer expenditure in the form of salary/wages, administration/selling expenditure and other manufacturing expenditure amounting to ₹ 3.56 crores attributable to the Jammu Unit, had been transferred as expenditure payable to the Corporate Office. Further, the Assessing Officer held that the service tax liability on licence fee/royalty was expenditure incurred by the Jammu Unit and should be taken into consideration for computing deduction under Section 80-IB of the Act for Jammu Unit. 14. The Commissioner of Income Tax (Appeals) vide order dated 16.02.2010, substantially affirmed the finding of the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -assessee for the Assessment Year 2006-07 was also taken up for scrutiny assessment. By the Assessment Order dated 31.12.2007 for similar reasons, the Assessing Officer held that the royalty of ₹ 6 crores paid to Ashok Chaturvedi should be treated as expenditure incurred by the Jammu Unit and not by the Corporate Office. The Assessing Officer also disallowed netting of ₹ 2.25 crores received as licence/royalty fee from M/s Flex Industries Limited observing that this was not income derived from and covered under Section 80-IB of the Act. Service tax liability on royalty was accordingly treated as expenditure attributable to the Jammu Unit. 17. The Commissioner of Income Tax (Appeals) vide order dated 16.02.2010 for identical reasons as in the order passed for Assessment Year 2005-06, held that royalty of ₹ 6 crores paid to Ashok Chaturvedi was expenditure incurred by the Jammu Unit, albeit allowed set off/netting of ₹ 2.25 crores paid by M/s Flex Industries Limited for computation of deduction for the Jammu Unit under Section 80-IB of the Act. 18. Cross appeals by the Revenue and the respondent-assessee in respect of deduction under Section 80-IB of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the expression "derived from" has been explained by the Supreme Court in Commissioner of Income Tax, Karnataka vs. Sterling Foods, Mangalore (1999) 237 ITR 579 (SC) to mean that there should be a direct nexus between the profits and gains for an industrial undertaking to justify and claim deduction. Secondly, there must be a direct nexus between an industrial undertaking and that the expenses which are sought to be apportioned/attributed to the said undertaking. Expenses which relate to another unit or a sister company cannot be taken for consideration for computing the deduction. 20. We note that the Tribunal in paragraph 5.2 of the impugned order has observed and held that "however due to some unforeseen reasons the assessee could not use the technical know-how neither at Jammu Unit nor at any other units." This finding of the Tribunal is without considering the findings recorded by the Assessing Officer. The Assessing Officer with reference to the nature of the sachet pouches manufactured at the Jammu Unit had held that the respondent-assessee had manufactured and produced the sachet pouches using the technical know-how provided in terms of the MoUs. The Tribunal reversed t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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