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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 ..... itled to deduction under Section 80-IB of the Income Tax Act, 1961 in respect of sub-licence fee (ITA 892/2016 &894/2016)?" 3. The respondent-assessee is part of the M/s Flex Group of companies and was engaged in the business of manufacturing, trading and sale of flexible packaging material. 4. The respondent-assessee had three manufacturing units situated at Jammu, Malanpur and Noida. The income of the Jammu Unit was exempted under Section 80-IB of the Act. However the income from units at Malanpur and Noida was not exempted. 5. The respondent-assessee and Ashok Chaturvedi, Managing Director, had entered into two Memorandum of Understandings dated 14.07.2004 and 05.08.2004 (hereinafter called 'MoU' for short) for payment of royalty at the rate of Rs. 50 lakhs per month to latter for licensing rights regarding "improved sachet pouch with improved additional gusset either on one or both sides of the sachet pouch with a scoring line in the form of laser cut". 6. For the Assessment Year 2005-06, royalty of Rs. 4.25 crores paid to Ashok Chaturvedi at the rate of Rs. 50 lakhs per month from July, 2004 to March, 2005 was treated as expenditure incurred by the Jammu Unit. This had the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haturvedi of Rs. 2.28 crores was declared and shown as expenditure incurred by the Corporate Office. 12. The Assessing Officer vide order dated 28.12.2007 rejected the change/alteration while computing the deduction under Section 80-IB of the Act with respect to the Jammu Unit, recording the following reasons and grounds:- "10. On perusal of the details, it is noticed that the figure of payment of Rs. 228.22 lacs which has been shifted from Jammu to Corporate unit under the head other manufacturing expenses, has been arrived at as under:- Royalty paid (to Sh. Ashok Chaturvedi) @ Rs. 50 lacs per month for the period 15-7-2004 to 31-3-2005 Rs.4,25,00,000/- Less: Royalty received (from M/s Flex Industries Ltd.) Rs.1,96,77,419/- @ Rs. 25 lacs per month for the period 5-8-2004 to 31-3-2005 Net amount Rs. 2,28,22,581/- 10.1 The assessee has debited the net figure of royalty expenses of Rs. 2.28 crores to Corporate unit by shifting it from Jammu unit. However, he has completely ignored the corresponding income component and not a single income has been credited to the Corporate unit. It is to be seen from above that Rs. 2.28 crores is only a netted amount. Thus, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not manufacture the kind of pouch for which royalty payment agreement has been made with Sh. Ashok Chaturvedi at any other unit except at Jammu. Jammu unit has shown total sales of Rs. 101.50 crores during the year under consideration. Yet, nothing has been debited to the unit on account of royalty expenses despite the fact that the very production and existence of this unit depends upon the technology received in lieu of the payment of royalty to Sh. Ashok Chaturvedi. Hence, the reply of the assessee that payment of royalty may also relate to the Corporate unit is merely conjectural or notional in nature and devoid of any merit. The ploy of the assessee in diverting the expenses directly pertaining to the Jammu unit to the Corporate unit is with the sole motive of enhancing the quantum of eligible profits of Jammu unit. Therefore, the amount of royalty paid of Rs. 4,25,00,000/- shifted to the Corporate unit is to be considered as the actual expenditure incurred at the Jammu unit. The licence fees paid by the Jammu unit of the assessee is basically for utilizing the technical know how for manufacturing. Any sub-licencing income earned is merely incidental in nature and no port ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g given by the Commissioner of Income Tax (Appeals) reads as under:- "5.4 In view of the decision of Hon'ble ITAT, it is clear that the provisions of section 153A of the Act are for the benefit of the Revenue. The appellant cannot be permitted to convert the reassessment proceedings into an appeal or revision in disguise and seek relief in respect of items not claimed in the original assessment proceedings. The perusal of the regular return of income filed for this year makes it clear that the royalty is claimed as the income and expense of the Jammu unit whereas in the return filed in pursuance to notice u/s 153A of the Act, the income, expenditure and other expenses of Rs. 77,21 ,000/- have been shifted to the Corporate unit. The action of the appellant is contrary to the provisions* of the Act and not allowable as discussed in the aforesaid decision. In view of the decision of the Hon'ble ITAT as discussed, the ground raised by the appellant is dismissed. 5.5. It is further observed from the assessment order that the A.O. had not considered the royalty income as part of the gross total income to be taken into consideration while working out the deduction u/s 80-IB of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l has raised that the netting of royalty income as directed by the Ld. CIT( A) is not proper. As both these grounds of assessee as well as revenue are interlinked with each other, they are disposed of together for the sake of convenience. 5.1. There is no dispute that the assessee is entitled to the benefit of the provisions of section 80 IB of the act which provides that, where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, there shall be allowed, in computing the total income of the assessee, a deduction from such profits and gruns, an amount specified *therein. Further while computing the profits and gains of the concemed undertaking, only expenses relating thereto can be deducted. In other words the expenses must be incurred, for and on behalf of the concerned undertaking. The expenses attributable to any other unit or the head office expenses which have no relevance to the industrial undertaking, cannot be deducted in respect of the said undertaking while computing the profits and gains of the undertaking. 5.2 It is not the case of the revenue that the technical know-how obtained by the assessee by way of licence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or wrong. 21. Accordingly, we are of the opinion that the matter requires reexamination 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. 22. In view of the aforesaid finding in the appeal filed by the Assessee, the Tribunal did not decide the cross appeal filed by the Revenue challenging order passed by Commissioner of Income Tax (Appeals), allowing netting of royalty received from royalty paid for computation of deduction under Section 80-IB of the Act. As we have remanded the issue of deduction under Section 80-IB, it will be open to the Assessee to press their cross appeal before the Tribunal in case of an adverse finding against the assessee on the first issue. 23. The substantial questions of law are accordingly answered partly in favour of the Revenue and against the respondent-assessee. We have not given and expressed any firm opinion on merits as an order of remand to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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