TMI Blog2011 (6) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... ening stock - In this case after making adjustment to opening stock, there is no addition required to be made - Decided in favour of assessee. disallowed under the provisions of section 40(a)(i) - the assessee placing reliance on the judgment of Hon'ble Punjab and Haryana High Court in the case of Ess Ess Kay Engg. (supra) has argued that once the expenditure was disallowed by Assessing Officer under section 40(a)(i) the assessee had passed the test of allowability of claim as revenue expenditure and no disallowance can be made as capital expenditure - The Assessing Officer in this case disallowed the claim u/s 40(a)(i) and held that alternatively it was also disallowable as capital expenditure - Thus once the Assessing Officer held that the expenditure was capital in nature and also held that even if revenue in nature it had to be disallowed u/s 40(a)(i), the Appellate Authorities are required to consider both aspects and give a clear finding as to the real treatment of expenditure - In this case, CIT(A) has not considered the capital nature of the expenditure - The other aspect also, as pointed out earlier has not been examined properly - Since the issue has not been examined pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all stages as under :- Trading and P L A/c. Dr. Cr. Purchases [10711094] Sales [29782036] ( i ) Add: Excise duty paid 790036 790036 Add: Excise duty payable 4620793 4620793 Balance excise duty 82575 ( ii ) Excise duty paid 4620793 Less: Modvat credit utilized for payment of excise duty 904771 ( iii ) Net Excise duty 3716022 Net Income on account of modvat 197310 TOTAL 4703368 TOTAL 4703368 2.1 The Assessing Officer observed that net addition of Rs. 1,97,310 was required to be made on account of excise duty. It was also observed by him that no adjustment was required to be made on account of opening stock as provisions of section 145A required the value as on the closing date of valuation. He also referred to the judgment of Hon'ble Bombay High Court in the case of Molmould Corpn. v. CIT [1993] 202 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts were not rooted through trading account. The Assessing Officer worked out the adjustment on account of excise duty by following inclusive method and thus came to the conclusion that addition of Rs. 1,97,310 was required to be made to total income. The difference found by Assessing Officer was on account of modvat adjustment to opening stock which has not been made by the Assessing Officer. In view of the judgment of Hon'ble Delhi High Court in the case of Mahavir Aluminium Ltd. (supra) which has also been affirmed by the Hon'ble Bombay High Court in Mahalaxmi Glass Works Ltd. (supra), adjustment on account of unutilized modvat credit under the provisions of section 145A is also required to be made in opening stock. In this case after making adjustment to opening stock, there is no addition required to be made. In view of this position we see no infirmity in the order of the CIT(A) in deleting the addition and the same is, therefore, upheld. 3. The second dispute is regarding addition of Rs. 36,37,679 made by the Assessing Officer on account of payment made to M/s. Kunkel Wagner Progress Technologies, GmbH, Germany (in short, KWPT). The assessee company is a joint venture with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , designs etc. used for manufacture of articles has to be treated as capital in nature. The Assessing Officer therefore, disallowed the sum of Rs. 36,37,679 and added to the total income. 3.1 The assessee disputed the decision of the Assessing Officer and submitted before the CIT(A) that the drawings and designs were imported on outright purchase basis to be utilized in executing of the order in case of customer i.e., Nelcast Ltd. It was pointed that at the time of purchase, the bank had asked for Form Al which was applicable in case of import and it showed that it was a case of import of drawing and not use of any technical know how. Therefore, the payment was not for any royalty or fees for technical services. It was also argued that the payment on account of outright purchase of drawing did not constitute any income under the Act. The assessee referred to the judgment of Hon'ble Kerala High Court in the case of CIT v. Fertilisers Chemicals (Travancore) Ltd. [1987] 34 Taxman 346 in which it was held that while considering whether payment to a foreign party can be taxed in India, it was required to be seen whether foreign party had rendered any services in India. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had imported drawings for the purpose of its business and the necessary invoices had been filed before the Assessing Officer which were available at page 69 and 74 of the paper book. The assessee had also filled up Form A-1 which is required to be filled in case of import, a copy of which was placed on record. As regards nature of business of the assessee, it was submitted that the assessee in addition to being associated with the activity of the parent company in the area of handling and conveying equipment, was also doing his own business for which drawings had been imported. These drawings had been imported by the assessee for manufacture of moulds for its client Nelcast Ltd. which was duly mentioned in the invoice. There was no agreement required for import of drawings and designs. The assessee was a manufacturer of equipments which is also clear from the fact that the assessee was paying excise duty. As regards nature of expenditure, the ld. AR submitted that once the Assessing Officer had applied the provisions of section 40(a)(i) the nature of expenditure as revenue was admitted and the Assessing Officer could not raise the issue of capital expenditure. Once expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not upheld the view taken by the Assessing Officer. He has held that it was a case of outright import of drawings and not use of any technical know-how. There were no services involved in the outright purchase. Accordingly he held that no income had accrued to the appellant company on the said payment. He thus deleted the addition made by the Assessing Officer. 3.5 We have carefully considered the various aspects of the matter. In our view the matter has not been examined properly. The CIT(A) has not passed a reasoned and speaking order. He has not given any reasons as to how in case of outright purchase there was no income accruing to the parent company. The assessee was not only procuring material from parent company but had also exported software to the parent company. There is obviously a territorial nexus of the parent company in India. It has not been examined whether the assessee which is a subsidiary company of parent company and with which there are transactions during the year would constitute a PE. It has also not been examined whether the parent company had other transactions and activities also in India. The taxability of the impugned amount in India in the hands of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot considered the capital nature of the expenditure. The other aspect also, as pointed out earlier has not been examined properly. Since the issue has not been examined properly we set aside the order of the CIT(A) and restore the issue back to him for passing fresh order after necessary examination in the light of the observation made above and after allowing opportunity of hearing to the assessee. 4. The third dispute is regarding the disallowance of claim of deduction under section 80 HHE of the Income-tax Act. The assessee had claimed deduction of Rs. 48,794 under section 80HHE in respect of export of design and drawings in electronic media amounting to Rs. 8,91,879 to M/s. KWPT, the parent company. The Assessing Officer observed that deduction under section 80HHE was available to the assessee only in case of business of export of software. The business of the assessee was manufacturing and supply of plants and part of its business consisted of designing of plants and documenting the same as per specification of the clients. Therefore, the preparation of design was actually part of the job of manufacturing. The assessee had not developed any software programme or related dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce on the order of the Assessing Officer. 4.2 We have perused the records and considered the rival contentions carefully. The dispute regarding allowability of deduction under section 80HHE in respect of export of design and drawings. The assessee during the year had exported design and drawings in electronic media amounting to Rs. 8,71,879 in respect of which deduction under section 80HHE had been claimed at Rs. 48,794. Deduction under section 80HHE is allowed in respect of export of computer software which has been defined in the Explanation (b) to section 80HHE which includes any customized electronic data or any product or service of similar nature as may be notified by the Board. It is thus clear that computer software also includes customized electronic data. Further CBDT have also issued notification No. SO 1031(E) dated 13-10-1999 in which information technology enabled products or services have been identified under section 10A/10B/80HHE which includes engineering and design. In the present case the assessee had exported design and drawing in electronic media. Therefore, in our view considering the definition of the term computer software and Board notification it has t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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