DCIT (LTU), NEW DELHI vs. M/S SHARDA MOTOR INDUSTRIES LTD.,, NEW DELHI

order dated 28.2.2013 of Ld. CIT(A)-LTU, New Delhi pertaining to assessment year 2004-05. The grounds raised in the revenue’s appeal reads as under:-

of excess claim of deduction u/s. 80IB amounting to Rs. 3,56,046/- made by the AO. 3. 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. The brief facts of the case are that the assessee had filed the original Return of Income on 27.10.2006 on total income of Rs. 17,98,53,230/-. Later on, the AO issued notice under section 148 dated 21.3.2011 and in respect of which reasons were provided to the assessee on 4.10.2011. The objections raised by the assessee vide letter dated 15.10.2011 were disposed of by the AO vide his order dated 1.11.2011. Thereafter, the AO proceeded to complete the re-assessment proceedings and assessed the income of the assessee at Rs. 17,57,16,599/- and made the additions vide his order dated 22.12.2011 passed u/s. 147/143(3) of the I.T. Act, 1961.

3. Aggrieved with the aforesaid order, assessee preferred an appeal before the Ld. CIT(A), who vide his impugned order dated 22.12.2011 has statistically allowed the appeal of the assessee.

“6. I have carefully considered the facts of the case in light of the submission made by the appellant and applicable law in this regard. Accordingly, my decision on various grounds of appeal is as under:- Ground No. 1 to 3 : On careful consideration, I find that the AO has reopened the assessment proceedings by observing that the appellant had claimed excess deduction under section 80IB by an amount of Rs. 3,56,046/- and that the technical fee/ consultancy fee of Rs. 94,93,491/- for designing Exhaust System gave it a benefit of enduring nature and should have been capitalized. I find that the appellant had furnished explanation in respect of the above queries to the AO during the course of original assessment proceedings. to the Ld. AO during the course of the original assessment proceedings. I find that vide letter dated 21.09.2006 during. the course of original assessment proceedings, the appellant, in response to the Ld. AO's queries during the hearing, informed that all corporate office expenses including director's remuneration are allocated on the basis of the sale of the company. Further, the details of other manufacturing expenses were furnished vide letter dated 05.09.2006, in which the Annexure-X gave details of technical fee paid by the appellant company, in which were accepted by the Ld. AO as revenue in nature. In view of this, it is evident that the appellant had disclosed all material facts before the Ld. AO during the original assessment proceedings and therefore, it cannot be said that the appellant had failed to disclose all material facts fully and truly before the Ld. AO that should call for invoking the first proviso to section 147. In view of this, since the notice under section 148 was clearly beyond the period of 4 years, the re- assessment proceedings are held as bad in law, as the notice under section 148 was issued beyond the prescribed period. Moreover, clearly under these circumstances, such an action is held as 'change of opinion' by the A.O., Further, the issue whether a particular receipt is revenue or capital in nature, is not a simple and straightforward one and it requires appreciation of all relevant facts including various judicial decisions to arrive at a conclusion in this regard. The second issue of allocating head office expenses to various units requires decision as to whether the thumb-rule adopted by the appellant was correct or not. Like any thumb-rule, such computation is also subjective and in the absence of any specific legal provision in the statute, one could not state with accuracy that the computation of appellant was correct or not. Thus both issues are debatable and reopening assessment in respect of the same was therefore not justified. 6.2 Regarding the Ground No.4 of the appeal relating to treatment of the technical fees paid to M/s Mahindra & Mahindra for use of design, drawing production tooling for manufacturing of Independent front suspension for Scorpio Car as capital in nature, the appellant claims that the above expenses were revenue in nature, which were incurred for the purpose of developing prototype tooling by M/s Samlip. In this regard, my attention was drawn to the Tripartite agreement dated 21 March 1998 amongst the appellant {Then called as "Korin"), Mis Samlip and Mis Mahindra & Mahindra. The clause (is) of the same, reads as under:- 15. TOOLINGS Subject to the provisions of this Agreement, the prototype toolings developed and manufactured by Samlip and the Production Toofings developed and manufactured y Korin, for the purpose of this Agreement, shall become the sole and exclusive property of M&M. If so desired by M&M, Samlip shall deliver to M&M the prototype tooling developed and manufactured by Samlip. M&M shall bear the cost of transportation of such toolings. Further, immediately upon expiration or termination, whichever is earlier of this Agreement, Korin shall, at no cost to M&M, deliver to M&M, a complete set of Production Toofings required for the manufacture of the Products of the same quality, and related documentation and information. The cost of production Toolings required for the manufacture of the Products is estimated at Rs.4,OO,OO,OOO/- (Rupees Four Crore only). M&M shall pay to Korin as an advance, at the time of the placement of the order for such Production Toolinqs. Rs.4,OO,OO,OOO/-or the actual cost, whichever is lower. Korin shall manufacture oc arrange to manufacture the Production Toolings. It is agreed between the Parties that the full amount paid by M&M towards such Development drawing shall be recoverable by M&M from Kerin, and for the purpose, Korin shall deduct an amount arrived at by dividing the total amount actually paid by M&M by 500,OOO from the supply price of each IFS System in respect of the first 500,OOO numbers of IFS System supplied to M&MJ pursuant to this Agreement." The Clause (21) of the said agreement relating to intellectual property right arising from said agreement reads as under: "21. INTELLECTUAL PROPERTY TITTLE The design data, drawings and other technical information generated/developed/ obtained by Samlip pursuant to this Agreement shall become the sole and exclusive property of Samlip till payment by M&M of KWO 3,521,00O,000/-. On payment of full amount of KWO 3,521,OOO,OOO/- by M&M to Sarnlip, Samlip's rights and title in such design data, drawings and other technical information shall automatically stand transferred to M&M solely and exclusively. Samlip and Korin shall not use/transfer to any third party, such design, data, drawings and other technical information at any time for any purpose other than the purpose of this agreement." I find that the appellant has been making such payments from AY 1999-2000 onwards which have been accepted as revenue in nature by the department except during the assessment proceedings for the A.Y. 2009-10, when such payment was treated as capital in nature by the Ld. AO. On the same ground, the re- assessment proceeding was initiated in the current year as well. Perusal of the Agreement dated 21 March, 1998 clearly shows that. development of drawing, which is main product of the prototype agreement is clearly held to be property of M/s Mahindra & Mahindra (M&M). Further, the agreement clearly provides that in terms of the agreement, design and drawing taken into manufacturing of the products, and the related documents shall be handed over to M/s Mahindra & Mahindra on termination of the agreement. Keeping in view the same, it is evident that the appellant company was given only limited rights to use the prototype tooling and drawing developed by M/s Samlip by M&M (for which purpose the payment was paid by M/s M&M to the said MIs Samlip) in lieu of which payment of technical fee to M/s Mahindra & Mahindra was made for the purpose of manufacturing the IFS system for MIs Mahindra & Mahindra. It is obvious that the appellant company, being auto part manufacturer for MIs Mahindra & Mahindra is solely dependent upon the business given to it by M/s Mahindra & Mahindra. In view of the required modernization in the IFS system, the said MIs Mahindra & Mahindra made payment to the Korean company, M/s Samlip for developing the prototype tooling and allowed the appellant to use the same for manufacturing the IFS components as per the requirement of M/s Mahindra & Mahindra on payment of technical fee. Clearly in such a case, M/s Mahindra & Mahindra got the ownership over the asset and the appellant was granted limited rights to use the same by Mahindra & Mahindra to Manufacture IFS System, in accordance with their requirement, on payment of Technical fees. In view of the same, the payment is held to be revenue in nature, which was rightly claimed by the appellant and rightly allowed by the AO in original assessment proceedings. Accordingly, this ground is decided in favour of the appellant. 6.3 Regarding the Ground No.5 of the appeal relating to reducing the amount of deduction under section 80lB, I find the explanation of the appellant on merit as well, satisfactory. Various undertaking of the appellant had aggregate turnover of Rs.1,83,44,93,675/-, however, out of this, an amount of Rs.7,55,38,858/- relating to inter-unit transfer, was excluded for calculating the 'total turnover' of the appellant in view of the provision of Companies Act, 1956. However, it is understandable that the actual manufacturing resulted into turnover of Rs.183.44 crores and the appellant reduced an amount of Rs.7,55,38,858/- from its turnover, relating to inter- unit transfer in view of the provision of Companies Act 1956. There ore, the basis of allocation of head office expenses by taking actual amount of turnover was justified and which has been followed by the appellant consistently in earlier years and has not been challenged by the Department either. Moreover, allocation of "head office expenses" for the purpose of computation of deduction 80lB on the basis of ratio of eligible sale to total sales, is only in the nature of a thumb-Rule for practical ease for such allocation.

However, there is no specific provision in the Income

Tax Act, 1961, to provide that head office expense should be apportioned in a particular ratio and in a particular manner only. Therefore, merely for invoking the thumb-Rule, proceeding under section 147 should not have been initiated, since there will always be more than one opinion while adopting any thumb-Rule.

Furthermore, the principle of consistency is also an important one for the purpose of computation of taxable income as was held by Supreme Court in the case of M/s Radhasoamy Satsang vs. (IT 193 ITR 321 (SC). On the other hand, the appellant's claim under section 80lB is duly supported by the Auditors and which also, on examination, was found acceptable by the Ld. AO in the original assessment proceedings. In view thereof, the addition made on this ground is liable to be deleted.

7.1 After going through the findings of the Ld.CIT(A), as aforesaid, with regard to deletion of addition of Rs. 65,14,891/- on account of disallowance of Technical Fees being Capital Expenditure is concerned, we find that the assessee has been making such payments from AY 1999-2000 onwards which have been accepted as revenue in nature by the Department except during the assessment proceedings for the A.Y. 2009-10, when such payment was treated as capital in nature by the Ld. AO. On the same ground, the re-assessment proceeding was initiated in the current year as well. Perusal of the Agreement dated 21 March, 1998 clearly shows that development of drawing, which is main product of the prototype agreement is clearly held to be property of M/s Mahindra & Mahindra (M&M). Further, the agreement clearly provides that in terms of the agreement, design and drawing taken into manufacturing of the products, and the related documents shall be handed over to M/s Mahindra & Mahindra on termination of the agreement. Keeping in view the same, it is evident that the assessee company was given only limited rights to use the prototype tooling and drawing developed by M/s Samlip by M&M (for which purpose the payment was paid by M/s M&M to the said MIs Samlip) in lieu of which payment of technical fee to M/s Mahindra & Mahindra was made for the purpose of manufacturing the IFS system for MIs Mahindra & Mahindra. It is obvious that the assessee company, being auto part manufacturer for M/s Mahindra & Mahindra is solely dependent upon the business given to it by M/s Mahindra & Mahindra. In view of the required modernization in the IFS system, the said M/s Mahindra & Mahindra made payment to the Korean company, M/s Samlip for developing the prototype tooling and allowed the assessee to use the same for manufacturing the IFS components as per the requirement of M/s Mahindra & Mahindra on payment of technical fee. Clearly in such a case, M/s Mahindra & Mahindra got the ownership over the asset and the assessee was granted limited rights to use the same by Mahindra & Mahindra to Manufacture IFS System, in accordance with their requirement, on payment of Technical fees. In view of the same, the payment was rightly held to be revenue in nature by the Ld. CIT(A), which was rightly claimed by the assessee and also rightly allowed by the AO in original assessment proceedings. Accordingly, we are of the view that the Ld. CIT(A) has passed a well reasoned order, which does not need any interference on our part, hence, we uphold the order of the Ld. CIT(A) on the issue in dispute.

Accordingly, the issue in dispute is decided against the Revenue.

7.2 With regard to deletion of addition of Rs. 65,14,891/- on account of excess claim of deduction u/s. 80IB amounting to Rs. 3,56,046/- is concerned, we find that Various undertaking of the assessee had aggregated turnover of Rs.1,83,44,93,675/-, however, out of this, an amount of Rs.7,55,38,858/- relating to inter-unit transfer, was excluded for calculating the 'total turnover' of the assessee in view of the provision of Companies Act, 1956.

However, it is understandable that the actual manufacturing resulted into turnover of Rs.183.44 crores and the assessee reduced an amount of Rs.7,55,38,858/- from its turnover, relating to inter-unit transfer in view of the provision of Companies Act 1956. Therefore, the basis of allocation of head office expenses by taking actual amount of turnover was justified and which has been followed by the assessee consistently in earlier years and has not been challenged by the Department either. Moreover, allocation of "head office expenses" for the purpose of computation of deduction 80lB on the basis of ratio of eligible sale to total sales, is only in the nature of a thumb-Rule for practical ease for such allocation.

However, there is no specific provision in the Income Tax Act, 1961, to provide that head office expense should be apportioned in a particular ratio and in a particular manner only. Therefore, merely for invoking the thumb-Rule, proceeding under section 147 should not have been initiated, since there will always be more than one opinion while adopting any thumb-Rule. Furthermore, we find that the principle of consistency is also an important one for the purpose of computation of taxable income as was held by Supreme Court in the case of M/s Radhasoamy Satsang vs. (IT 193 ITR 321 (SC). On the other hand, the assessee’s claim under section 80lB is duly supported by the Auditors and which also, on examination, was found acceptable by the AO in the original assessment proceedings.

In view thereof, the addition made on this ground was rightly deleted by the Ld. CIT(A). In view of the above, we are of the view that the Ld. CIT(A) has passed a well reasoned order on the issue in dispute, which does not need any interference on our part, hence, we uphold the order of the Ld. CIT(A) on the issue in dispute. Accordingly, the issue in dispute is decided against the Revenue.

Order pronounced in the Open Court on 03/10/2016.