DCIT (LTU), NEW DELHI vs. M/S. AVTEC LTD., NEW DELHI

ORDER PER BENCH is the department’s appeal preferred against the order dated 19.05.2014 passed by the Ld. CIT (Appeals)-LTU for assessment year 2009-10 whereas the C.O. has been preferred by the assessee for assessment year 2009-10. & C.O. No. 105/D/2015 2.0 Brief facts of the case are that the assessee company, during the relevant year, was engaged in the business of manufacturing and selling of automobile power-trains and power- shift transmissions along with components of heavy duty power trains. The assessee has a unit in Chennai known as MEPZ unit which is situated in the SEZ. The return was filed declaring a loss of Rs. 1,01,47,052/- which was subsequently revised to a loss of Rs. 1,07,82,450/-. The assessment was completed u/s 143(3) of the Income Tax Act, 1961 (hereinafter called 'the Act') at an income of Rs. 47,64,694/- after making certain additions and disallowances which, inter alia, included addition of Rs. 25,05,972/- being allocation of head office expenses against the MEPZ unit, another amount of Rs. 2,68,251/- being allocation of bank and loan processing charges against MPEZ unit, addition of Rs. 73,54,190/- against goods transferred to MEPZ unit. Apart from this, the Assessing Officer also made a disallowance of Rs. 18,40,692/- out of research and development expenses and a disallowance of Rs. 1,46,892/- by partially disallowing depreciation on computer peripherals which had been claimed by the assessee @ 60% but the AO allowed the depreciation @ 15%.

The Assessing Officer also made a disallowance of Rs. 5,34,683/- & C.O. No. 105/D/2015 being customization charges paid for ERP by treating the same as capital expenditure. The assessee’s appeal before the Ld. Commissioner of Income Tax (Appeals) was partly allowed wherein the Ld. CIT (A) deleted the additions pertaining to the MEPZ unit and now the department has approached the ITAT challenging the deletion by the Ld. Commissioner of Income Tax (A) whereas the assessee has preferred cross objection challenging the upholding of customization charges to be capital in nature.

2.1 The grounds raised in the revenue’s appeal are as under:-

“1. On the facts and the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in holding that the assessee is eligible to set off the loss of MEPZ (10AA) unit against income of taxable units.

2. On the facts and the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in deleting the addition of Rs. 25,05,972/-, made by Assessing Officer on account of proportionate allocation of Head Office expenses to MPEZ (10AA) unit.

3. On the facts and the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in deleting the addition of Rs. 2,68,251/-, made by AO on account of allocation of bank and loan processing charges to MPEZ (10AA) unit.

4. On the facts and the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in deleting the addition of Rs. 73,54,190/-, made by AO on account of price difference in respect of goods transferred to MPEZ (10AA) unit from other units. 3 & C.O. No. 105/D/2015

5. On the facts and the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in deleting the addition of Rs. 18,40,690/-, by directing to treat the same as revenue expenditure instead of capital as treated by the AO, particularly when the addition on the same issue has been upheld by Ld. CIT (Appeals) in case of the same assessee for AY 2008-09.

6. On the facts and the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in deleting the addition of Rs. 76,708/-, made by the AO on account of disallowance of claim of depreciation @ 60% on UPS out of total addition of Rs. 1,46,892/-. 7. The appellant craves leave to, add to, alter, amend or vary from the above grounds of appeal at or before the time of hearing.” 2.2 The grounds raised in the CO are as under:

“1. That the CIT(Appeals) has grossly erred in law and on facts in upholding the customization charges for ERP of Rs 5,34,683/- to be capital expenditure. This expense is revenue expenditure and the lower authorities have grossly erred in holding this to be a capital expenditure.

& C.O. No. 105/D/2015

1, 2, 3 and 4 of the department’s appeal were identical and were covered by the order of the ITAT in assessee’s own case for assessment year 2008-09 in vide order dated 10.9.2009. A copy of the said order was placed on record.

With respect to ground no. 5 of the department’s appeal, reliance was placed on the findings of the Ld. Commissioner of Income Tax (Appeals). With respect to ground no. 6 of the department’s appeal, it was submitted that the issue stood covered by the judgment of the Hon’ble Delhi High Court in the case of BSES Yamuna Power Limited in ITA 1267/2010.

4.0 With respect to the Cross Objection filed by the assessee, the Ld. AR submitted that while holding the customization charges for ERP as capital expenditure, both the lower authorities had neither allowed depreciation on the same nor allowed the claim of expenditure as revenue expenditure.

With respect to ground nos. 2 and 3 of the cross objection, it was prayed that depreciation should be directed to be allowed @60%. & C.O. No. 105/D/2015 5.0 In response, the Ld. Sr. DR appearing on behalf of the revenue placed reliance on the observations and findings of the Assessing Officer but could not negate the fact that ground nos. 1 to 4 of the department’s appeal were covered in favour of the assessee in assessee’s own case by the order of the ITAT for the immediately preceding year.

5.1 On ground nos. 5 and 6, reliance was placed on the findings and observations of the Assessing Officer.

6.0 With respect to the C.O. of the assessee, the Ld. Sr. DR again placed reliance on the findings of both the lower authorities and argued that the concurrent findings of the lower authorities supported the department’s case. It was prayed that the C.O. of the assessee deserves to be dismissed.

7.0 We have heard the rival submissions and perused the material available on record. As far as ground nos. 1, 2, 3 and 4 of the department’s appeal are concerned, it is seen that the issue is squarely covered in favour of the assessee by the order of ITAT in assessee’s own case for assessment year 2008-09 (supra) and the relevant observations and findings are contained in & C.O. No. 105/D/2015 paragraphs 8 to 15 of the said order. The same are being reproduced here in under for ready reference:-

“8. Hon'ble Apex Court in CIT vs. Yokogawa India Ltd. (supra) has decided the issue in controversy in favour of the assessee after examining Circulars No.794 dated 09.08.2000, No.1 dated 17.01.2013 and Circular No.7 dated 16.07.2013 by framing the following questions :- "(i) Whether Section 10A of the Act is beyond the purview of the computation mechanism of total income as defined under the Act. Consequently, is the income of a Section 10A unit required to be excluded before arriving at the gross total income of the assessee? (ii) Whether the phrase "total income" in Section 10A of the Act is akin and pari materia with the said expression as appearing in Section 2(45) of the Act? (iii) Whether even after the amendment made with effect from 1.04.2001, Section 10A of the Act continues to remain an exemption section and not a deduction section? (iv) Whether losses of other 10A Units or non 10A Units can be set off against the profits of 10A Units before deductions under Section 10A are effected? (v) Whether brought forward business losses and unabsorbed depreciation of 10A Units or non 10A Units can be set off against the profits of another 10A Units of the assessee."

9. Hon'ble Apex Court decided the issue in favour of the assessee by returning following findings :- "17. If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No. 794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the & C.O. No. 105/D/2015 profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression "total income of the assessee" in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression "total income of the assessee" in Section 10A as 'total income of the undertaking'.

10. Even para 5.2 of Circular No.7 dated 16.07.2013 is also categoric enough to decide the issue in controversy and para 5.2 thereof is extracted as under for ready perusal :- "5.2 The income computed under various heads of income in accordance with the provisions of Chapter IV of the IT Act shall be aggregated in accordance with the provisions of Chapter VI of the IT Act, 1961. This means that first the income/loss from various sources i.e. eligible and ineligible units, under the same head are aggregated in accordance with the provisions of section 70 of the Act. Thereafter, the income from one ahead is aggregated with the income or loss of the other head in & C.O. No. 105/D/2015 accordance with the provisions of section 71 of the Act. If after giving effect to the provisions of sections 70 and 71 of the Act there is any income (where there is no brought forward loss to be set off in accordance with the provisions of section 72 of the Act) and the same is eligible for deduction in accordance with the provisions of Chapter VI-A or sections 10A, 10B etc. of the Act, the same shall be allowed in computing the total income of the assessee."

7.2 As far as ground no. 5 challenging the deletion of addition of Rs. 18,40,690/- pertaining to research and development expenses is concerned, it is seen that the Ld. Commissioner of Income Tax (Appeals) has stated that the assessee has furnished the details of the R&D expenses before him. The Ld. Commissioner of Income Tax (A) has also reproduced a chart furnished by the assessee in this regard which gives a detailed break-up of the R&D expenses and also & C.O. No. 105/D/2015 gives a brief note about the nature of each item along with the invoice. Thereafter, the Ld. Commissioner of Income Tax (A) has given a categorical finding that the training charges and annual subscription charges for CAD validation were revenue in nature.

It has further been categorically observed by the Ld. Commissioner of Income Tax (A) that the inventory movement for R&D expenditure was in the nature of ‘Destructive Testing’ wherein the item/s were consumed and no inventory having commercial value was left. It has also been noted by the Ld. Commissioner of Income Tax (A) that no new asset had come into existence. The Ld. Sr. DR could not point out any infirmity in the findings of the Ld. Commissioner of Income Tax (A). We also note that while reaching his decision, the Ld. Commissioner of Income Tax (A) has placed reliance on the judgment of the Hon’ble Apex Court in the case of Empire Jute Co. 124 ITR 1(SC). Accordingly, on overall view of facts of the case and in view of the findings of the Ld. Commissioner of Income Tax (A) remaining uncontroverted, we find no reason to interfere with the findings of the Ld. Commissioner of Income Tax (A) on this issue and we accordingly dismiss ground no. 5 of the revenue’s appeal. & C.O. No. 105/D/2015 7.3 As far as ground no. 6 is concerned which challenges the action of the Ld. Commissioner of Income Tax (A) in directing depreciation on computer peripherals to be allowed @60% as against 15% which had been allowed by the Assessing Officer, it is settled law that computer peripherals enjoy the same rate of depreciation as of computers because computer peripherals cannot be said to be used in isolation and they are intricately connected with the computer system. The Hon’ble High Court judgment in the case of BSES Yamuna Power Ltd. (supra) also supports the assessee’s case. Accordingly, we find no reason to interfere on this issue as well and we dismiss ground no. 6 of the department’s appeal.

Accordingly, we set aside the order of the Ld. Commissioner of Income Tax (Appeals) on the issue and direct the Assessing Officer to allow depreciation @60% on the customization charges for ERP amounting to Rs. 5,34,683/- and software for tool management amounting to Rs. 24,000/-. Accordingly, ground nos. 1, 2 and 3 of the assessee’s C.O. stand allowed.

9.1 Ground nos. 4, 5 and 6 of the assessee’s C.O. are general in nature and need no adjudication.

11. In the final result, the appeal of the department stands dismissed whereas the C.O. of the assessee stands allowed.

Order pronounced in the open court on 04.01.2019.