TMI Blog2018 (9) TMI 1629X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA 892/2016, ITA 893/2016, ITA 894/2016, ITA 895/2016 - - - Dated:- 6-9-2018 - MR. SANJIV KHANNA AND MR. CHANDER SHEKHAR JJ. Appellant Through: Mr. Ruchir Bhatia, Advocate Respondent Through: Mr. M. P. Rustogi and Mr. Manu K. Giri, Advocates SANJIV KHANNA, J. (ORAL): These appeals filed by the Revenue under Section 260A of the Income Tax Act, 1961 ( the Act for short) impugn the order dated 31.05.2016 of the Income Tax Appellate Tribunal ( Tribunal for short) in the case of Montage Enterprises Pvt. Ltd. ( respondent-assessee for short). The appeals pertain to the Assessment Years 2005- 06 and 2006-07. 2. The appeals were admitted for hearing vide order dated 06.11.2017 on the following substantial questions of law:- 1. Whether assessee was right in reallocating expenditure/income on account of royalty from Jammu Unit to Corporate Division? 2. If the answer t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ₹ 51,20,000/- (-) ₹ 3,56,63,581 10.3 Further, it is evident that the assessee has not only shifted the taxable income from Jammu unit to Corporate unit, but has also claimed unwarranted and ineligible expenses against this income. The assessee in his various replies and during the discussions in the course of assessment proceedings has stated that the licence fee/royalty received {from M/s Flex Industries 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain expenses from Jammu and planting them into the -Corporate unit is merely a simulated shifting of figures affecting the profit figures of the Jammu unit. Therefore, the assessee is not allowed to divert expenses of ₹ 4,25,00,000/- plus ₹ 77,21,000/- to the subsequently created Corporate unit because these expenses are directly attributable to the business activities at the Jammu unit which is evident from the sales figures of the Jammu unit and the assessee company as a whole. Further, 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 expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... increase/enhance the deduction under Section 80-IB of the Act in a return filed under Section 153A of the Act. Figure and the amount claimed in the return filed under Section 139 of the Act, would be the outer limit/figure on which deduction could be claimed. The reason being that Section 153A proceeding are for the benefit of the Revenue and not to grant additional benefit to the assesse beyond what was claimed in original return filed under Section 139 of the Act. 16. The return of income filed by respondent-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 Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to some unforeseen reasons the assessee could not use the technical know-how neither at Jammu unit nor at any other units. As submitted by the Ld.AR, the assessee has commercially exploited the same and has earned. ₹ 1.96 crores for the year under consideration, by subletting the technical know-how to an outside party. 19. Thereafter, the Tribunal referred the judgment passed by the Bombay High Court in Zandu Pharmaceuticals Works Ltd. vs. Commissioner of Income Tax, City-VII [2013] 350 ITR 366 (BOM) holding that 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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