TMI Blog2018 (4) TMI 1971X X X X Extracts X X X X X X X X Extracts X X X X ..... ission of the form 10 CCB or the non-verification of the eligibility of the product to claim deduction under section 80 IC of the Act, in view of the fact that such a deduction was allowed for 5 years earlier, do not constitute valid grounds to exercise jurisdiction under section 263. We therefore find it difficult to sustain the order passed u/s 263 by the Commissioner of income tax, Delhi. Decided in favour of assessee. Deduction u/s 80IC - Manufacturing item or not? - manufacturing DGX and Pillar filler - assessee s case is that the Pillar filler is in an irregular shape, specific to the requirement of the motor vehicle manufactured has assumed the character of an automobile component and it cannot be used for any other purpose - As per AO Application of DGX need very high level of thixotropic properties so that it can be pumped and applied as stable bead and, therefore, the assessee company is manufacturing item which is included in the negative list of Schedule XIII which disentitle the assessee to claim deduction u/s 80IC - HELD THAT:- AO made the report of CIPET the sole basis for his conclusion that the assessee has been manufacturing plastic and plastic product and fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e other unit by 10% just to claim enhanced deduction u/s 80IC and the profit of the eligible unit need to be calculated and resultant disallowance on account of claim of deduction u/s 80IC need to be calculated - CIT(A) found that since the full details and figures were not available to examine the price at which the inputs are obtained or the output is transferred to the warehouse so to draw an appropriate conclusion, the AO may make further enquiry to arrive at a suitable conclusion - HELD THAT:- CIT(A) observed that basically if in market condition the goods could have been sold at the same prices at which these are transferred by the non-eligible unit to the eligible unit or vice versa, then there is no case of any addition u/s 80 IA(8) following the arm s-length principle. He considered the submissions advanced on behalf of the assessee that only to ensure timely delivery as per the requirement, the finished goods are first transferred to the warehouse of Gurgaon, Pune and Chennai units with warehouse facility only in order to provide proximity to the location of the customer to ensure immediate transfer as per requirement. CIT(A) further considered the submission on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT(A)-XVI, New Delhi (for short CIT(A) ) deleting the additions made by the learned AO in respect of the Asstt. Years 2009-10 to 2012-13, Cross Objection No.209/Del/2017 is preferred by the assessee challenging the observations of the learned CIT(A) in respect of Asstt. Year 2012-13 for the deduction claimed by the assessee u/s 80IC of the Act to be re-worked out as profit of the eligible unit at Parwanoo. 2. Brief facts of the case are that the assessee is a company engaged in the business of manufacture of all kinds of adhesive and Pillar Filler. They are manufacturing DGX and Piller filler at the business of the undertaking at Parwanoo in respect of which they are claiming deduction u/s 80IC of the Act. According to the assessee, they started manufacturing all these items from the Financial Year 2004-05 i.e. Assessment Year 2005-06 onwards and the audit of the excise officials confirms that the DGX adhesive is covered under 35069999 and Piller filler is covered under 87089900. Till the Asstt. Year 2009-10, exemption has been claimed by the assessee and was granted too. However, during the Asst. Year 2009-10, learned CIT on examination of record observed that Form 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at AO also did not call for any such certificate. Learned CIT further recorded that he found the learned AO not making any requisite enquiry regarding the allowability of deduction and the assessee company also failed to fulfill all the conditions as stipulated u/s 80IC of the Act. According the learned CIT(A), these two conditions made the assessment order erroneous in so far as it is pre judicial to the interest of revenue. 5. It is submitted by the learned AR that form No.10CCB was submitted during the assessment proceedings but, however, it was filed at least before the learned CIT as could be found from the record. It is argued by the learned AR that in the absence of any specific finding by the Commissioner as to how the order is erroneous as well as pre judicial to the interest of revenue, no revision u/s 263 of the Act is permissible. He further argued that allowability of deduction has to be tested in the first year of the claim and there cannot be any revision u/s 263 of the Act where the claim has been consistently accepted in earlier years. Further, when the view taken by the learned AO is also a plausible view, there cannot be any revision u/s 263 of the Act. Basing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) we find that the facts are almost identical. In that case also form 10 CCB was not filed and the Assessing Officer allowed the claim made by the assessee for earlier nine years. While placing reliance on the decision of Hon ble Gujarat High Court in Zenith Processing Mills (219 ITR 721), the Mumbai tribunal held that the Audit Report in prescribed form no.10CCB could be filed even if revision jurisdiction is exercised by the CIT u/s 263 of the Act. Relevant portion of the decision of in Kewal Kishan Clothing (supra) is as follows:- Facts of the case were that while framing the assessment for the AY.1976-77 of the assessee- firm, the AO allowed the claim for deduction u/s. 80J of the Act, in respect of profit and loss arising from its newly established undertaking. With effect from 01.04.1976, sub-section (6A) was inserted in section 80J, vide the Finance Act, 1975, which required the assessee to file audited report of an accountant, as defined by the explanation below sub section 2 of the section 288 of the Act, along with the return of income. The CIT, exercising his powers u/s.263,considered the allowance of deduction under section 80J, inter alia, along with the allowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirement falls in the realm of procedure for furnishing evidence in support of the claim and which can be furnished at the time while allowance or disallowance under section 80J is being considered by the concerned authority. XXXXXXX In view of the aforesaid discussion, question No. 2 referred to above is to be answered in the negative by holding that the provision of section 80J(6A) to the extent it requires furnishing of the auditor's report in the prescribed form along with the return is directory in nature and not mandatory. Coming to the first question, we are of the opinion that as the provision of furnishing of the report in the prescribed form is held to be directory, the assessee can be permitted to produce such report at a later stage when the question for disallowance arises during the course of the proceedings in a given case, it will depend upon the facts and circumstances of each case and, therefore, the assessee may be permitted to produce such report, if it has not been produced earlier(emphasis supplied).The learned advocate for the Revenue vehemently contended on the basis of the observations made in Gujarat Oil and Allied Industries' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee requires production of evidence before the allowance made by the Income tax Officer under section 80J was withdrawn. In our opinion, that would have been sufficient compliance with the requirement and the assessee ought not to have been visited with the disallowance or withdrawal of the allowance already made without affording opportunity to do so. It may be noted that in a given case, the assessee's return having a claim of deduction under section 80J may be accepted by the Income tax Officer without holding an inquiry, though it may not have been accompanied with proof of accounts being audited in the manner prescribed. The question of furnishing proof of such audited accounts in the prescribed form at a later stage arises only when the matter is being actively considered for disallowance by the concerned authority. If the assessee does not offer to furnish proof even at the stage when it is pointed out to him that requirements of law are not fulfilled to sustain the claim made by him and he fails to fulfil the requirements of law at that stage, it can be said that the assessee had failed to rectify the defect at the earliest opportunity offered to him. It is an inhe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eedings. But, those principles are not applicable to the facts of the case under consideration. Here, the basic issue is validity of 263 proceeding. An issue deliberated upon by the CIT partially or fully, is out of preview of proceedings to be initiated u/s.263 of the Act. In our opinion, the order of the CIT fails on touchstone of the merger doctrine and therefore is not valid. We hold that the assessees are required to file audit reports, but filing it before the CIT would not disentitle it from claiming the deduction. The purpose behind filing the report is that no fictitious claim is made and the activities of the assessees are certified by a professional. Deductions, including 80IB of the Act are considered to be benevolent provisions. It is a fact that no fault has been pointed out by the CIT about correctness of the report, while passing the revisionary order. His whole emphasis is on not filing it before the AO. Considering the purpose behind the legislation the Hon'ble Courts have held that if the report is submitted at the time of active consideration of the claim it has to be taken as sufficient compliance of the provisions of the Act. Respectfully following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tle the assessee to claim deduction u/s 80IC of the Act. 13. Learned AO also did not allow the deduction of royalty paid by the assessee to Henkel KGaA, Germany stating that such an expenditure is towards the acquisition of assets by way of intangible assets of the nature provided u/s 32(1)(ii) of the Act and accordingly allowed depreciation @ 25% and made addition on that account. 14. Learned CIT(A), in turn, held that the assessee is entitled to the deduction u/s 80IC of the Act and also that the payment of royalty is revenue in nature. On that premise, learned CIT(A) deleted both the additions. Hence, challenging the deletion of these additions made by the learned AO on account of disallowance of deduction u/s 80IC and also on account of royalty, Revenue preferred the appeals whereas challenging the order u/s 263 in respect of Asstt. Year 2009-10 and the observations of the AO that deduction claimed by the assessee u/s 80C in respect of Assessment Year 2012-13 ought to be re-worked as profits of the eligible unit, assessee preferred Cross Objection No.209 of 2017. 15. Now coming to the disallowance of the claim of the assessee u/s 80IC is concerned, learned AO observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Excise wherein in unequivocal term it is stated that at the unit at Parwanoo, the assessee has been manufacturing prepared glue and other adhesives, parts and accessories of motor vehicles parts, Anti freezing preparations and Deicing fluid falling under Chapter 35069999, 87089900, 38200000 of the 1st schedule to the Central Excise Tariff Act, 1985. Nowhere this report reads that the assessee has been manufacturing any product falling within the excise classification of 39.09 to 39.15 as per Schedule XIII to the Act nor any product of Excise Classification 32 was found to have been manufactured there. We have gone through the entries in the Chapter 35 and 87 and found that entry relating to Series 3506 deal with prepared glues and other prepared adhesive etc. whereas Series 8708 dealt with the parts and accessories of motor vehicles. 19. Learned CIT(A) after having exhaustively dealt with technical details covered by the learned AO in the light of the submissions made on behalf of the assessee coupled with CIPET report opined that inasmuch as CIPET is a highly technical organizations and its findings can never be disputed but the matter does not end there. He submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey are made use of. The reasoning given by the learned CIT(A) is impeccable and we find ourselves in agreement with the same. Such findings of learned CIT(A) do not warrant any interference. We uphold the findings of learned CIT(A) and dismiss the ground of appeal relating to this aspect in ITA No 681/Del/2017 and ITA numbers 2496 and 1952/Del/2016 and ITA No. 5198/Del/2017. 22. Now coming to the next aspect of royalty, the deletion of which is challenged by the Revenue in ITA numbers 2496 and 1952/Del/2016 and ITA No. 5198/Del/2017 in respect of AY 2010-11 to 2012-13 learned CIT(A) in his order observed that in assessee s own case for Asstt. Year 2004-05 and 2008-09, a coordinate bench of this Tribunal allowed the royalty fee paid to the Henkel KGaA u/s 37(1) of the Act as revenue expenditure on the ground that such payment was only for right to use the technical knowhow and no benefit of enduring nature accrued to the assessee. Learned CIT(A) further recorded that in respect of Asstt. Year 2006-07 to 2008-09, such a finding was returned by the first appellate authority only. As rightly observed by the learned CIT(A), the AO has not brought on record any change in the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce and the same was subjected to the international transaction and TP rules, which was accepted by the revenue. As regards the finished products made at Parwanoo unit for the convenience of supply to the customers, who placed orders for material in a one or two days requirement, to ensure timely delivery as per requirement, the finished goods are first transferred to warehouse of Gurgaon, Pune and Chennai units with warehouse facility. This provides proximity to the location of the customer for immediate transfer as per their requirement. It is submitted that as per the Excise laws, the transfer of finished goods from the manufacturing plant to the warehouse is to be made at the final sale price to customers i.e. market price itself and therefore, question of adjustment u/s 80IA(8) does not arise. 25. As a matter of fact, learned CIT(A) observed that basically if in market condition the goods could have been sold at the same prices at which these are transferred by the non-eligible unit to the eligible unit or vice versa, then there is no case of any addition under section 80 IA(8) following the arm s-length principle. He considered the submissions advanced on behalf of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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