2011 (2) TMI 1429 - AT - Income Tax

Windmill depreciation and unit deductions upheld, no TDS on non-resident commissions, and remand for disallowance review.

The Tribunal allowed additional depreciation on the windmill, confirmed the deduction under section 80-IA for the new unit at Plant-II, upheld separate ... Additional depreciation - deduction under section 80-IA - testing of machinery does not amount to manufacture - trial production - aggregation of results of separate units for 80-IA - tax deduction at source on payments to non-residents - disallowance under section 40(a)(ia) - disallowance under section 14A - remand for re-adjudication - quashing of orders passed under section 263Additional depreciation - Allowability of additional depreciation on windmill for the assessment year 2007-08 - HELD THAT: - The Tribunal confirmed the CIT(A)'s direction to allow additional depreciation on the windmill for the assessment year 2007-08. The Tribunal noted that the question was squarely covered by a co-ordinate Bench decision in the assessee's own case, which followed the jurisdictional High Court's ruling in Hi Tech Arai. Although that co-ordinate Bench decision was not yet final, the Tribunal accepted its application and accordingly upheld the CIT(A)'s finding. [Paras 4]The finding of the CIT(A) allowing additional depreciation on the windmill for AY 2007-08 is confirmed.Deduction under section 80-IA - testing of machinery does not amount to manufacture - trial production - Whether the first year of manufacture for the new unit (Plant-II) is to be taken as AY 1998-99, making the assessee eligible for deduction under section 80-IA for the relevant later years - HELD THAT: - On examination of directors' reports, balance-sheet notes and annual reports, the Tribunal found that imported machinery was materially used only in the year ended 31.3.1998 and that earlier arrivals of minor machinery were limited to testing (e.g., isolated use of a 2.5 ton press and a 6 ton hammer for very few items). The Tribunal accepted that testing independent machines does not equate to trial production or commencement of manufacture for a fully established unit and noted Customs endorsements showing arrival of major machinery in the first half of AY 1998-99. Consequently, the Tribunal held that the first year of manufacture for the new unit is AY 1998-99 and that the assessee's entitlement to deduction under section 80-IA begins from that year; the Revenue had not disputed quantification. [Paras 8, 9]The first year of eligibility for deduction under section 80-IA in respect of the new unit (Plant-II) is AY 1998-99; the CIT(A)'s allowance of the deduction for the relevant assessment year is confirmed.Aggregation of results of separate units for 80-IA - Whether profits and losses of separate power-generating units should be combined for computing deduction under section 80-IA - HELD THAT: - Following the co-ordinate Bench decision in Bannari Amman Sugars Ltd., the Tribunal held that independently functioning power-generating units, each with separate power purchase arrangements and operable without dependence on the others, constitute separate undertakings for the purposes of section 80-IA. The object of section 80-IA is served by confining deduction to the profit of the particular eligible unit; losses of one unit should not diminish the benefit due to another. [Paras 12]The CIT(A)'s holding that the Assessing Officer erred in clubbing results of all units for computation of deduction under section 80-IA is confirmed.Tax deduction at source on payments to non-residents - disallowance under section 40(a)(ia) - Whether the assessee was liable to disallow commission paid to a foreign agent under section 40(a)(ia) for failure to deduct tax at source - HELD THAT: - Applying the principles of the Hon'ble Supreme Court in GE India Technology Centre P. Ltd., the Tribunal accepted that the obligation to deduct tax at source in respect of payments to non-residents arises only where the payment is a 'sum chargeable under the provisions of the Act.' The Tribunal found that the foreign agent had no income taxable in India and did not render services in India; consequently the payments were not chargeable to tax in India. On that basis the CIT(A)'s deletion of the disallowance under section 40(a)(ia) was upheld. [Paras 15]The CIT(A)'s deletion of the addition under section 40(a)(ia) in respect of commission paid to the foreign agent is confirmed.Disallowance under section 14A - remand for re-adjudication - Treatment of disallowance under section 14A (restriction of disallowance at Rs. 10,000) in the Revenue's appeal - HELD THAT: - The Tribunal observed that the same issue had been restored to the file of the Assessing Officer for re-adjudication in the assessee's separate appeal (ITA No. 675/Mds/2010). Consequently, the Tribunal ordered identical treatment in the Revenue's appeal and restored the matter to the Assessing Officer for fresh adjudication with the directions given in the related appeal. [Paras 16]The issue under section 14A is restored to the file of the Assessing Officer for re-adjudication.Quashing of orders under section 263 - deduction under section 80-IA - Validity of orders passed under section 263 which disallowed section 80-IA for assessment years 2005-06 and 2006-07 on the premise that manufacture began earlier - HELD THAT: - The Tribunal applied its earlier finding (in the Revenue's appeal) that AY 1998-99 is the first year of manufacture for the new unit and therefore the assessee remained within the eligible period for claiming deduction under section 80-IA for AYs 2005-06 and 2006-07. On that basis the Tribunal found the Commissioner's exercise of revision under section 263 to be without a proper foundation and thus not on a right footing. [Paras 20]The section 263 orders disallowing section 80-IA for AY 2005-06 and AY 2006-07 are quashed; the assessee's appeals are allowed.Final Conclusion: The Tribunal confirmed the CIT(A) on allowance of additional depreciation (AY 2007-08), held that AY 1998-99 is the first year of manufacture for Plant-II entitling the assessee to deduction under section 80-IA (thereby upholding claims for the relevant years including AYs 2005-06 and 2006-07 and quashing the section 263 revisions), affirmed that testing of machinery does not amount to manufacture, upheld deletion of the section 40(a)(ia) addition in respect of commission to a non-resident agent, and remanded the section 14A issue to the Assessing Officer for fresh adjudication. Issues Involved:1. Additional depreciation on windmill.2. Deduction under section 80-IA for the new unit at Plant-II.3. Combining profits and losses of all units for deduction under section 80-IA.4. Addition under section 40(a)(ia) for non-deduction of TDS on commission paid to non-resident agents.5. Disallowance under section 14A.Issue-wise Detailed Analysis:1. Additional Depreciation on Windmill:The Revenue challenged the CIT(A)'s direction to allow additional depreciation on the windmill. Both parties agreed that the issue was covered by the Tribunal's earlier decision in the assessee's own case, which followed the jurisdictional High Court's ruling in Hi Tech Arai (321 ITR 477). The Tribunal confirmed the CIT(A)'s finding, allowing the additional depreciation on the windmill installed during the relevant period.2. Deduction under Section 80-IA for the New Unit at Plant-II:The Revenue contended that the assessee started production in Plant-II for the year ending 31.3.1995, making the assessment year 2007-08 beyond the ten-year period for deduction under section 80-IA. The assessee argued that significant machinery was installed only by 31.3.1998, and production began in the assessment year 1998-99. The Tribunal reviewed the annual reports and found that the imported machinery essential for production was used only in the year ending 31.3.1998. It concluded that the first year of manufacture for Plant-II was the assessment year 1998-99, confirming the CIT(A)'s decision to allow the deduction under section 80-IA for the assessment year 2007-08.3. Combining Profits and Losses of All Units for Deduction under Section 80-IA:The Revenue argued that all units fed into a common power grid, and profits and losses should be combined for deduction purposes. The Tribunal referred to its decision in Bannari Amman Sugars Ltd., where it was held that each power generating unit should be treated independently for section 80-IA deductions. The Tribunal confirmed the CIT(A)'s decision, allowing separate deductions for each unit.4. Addition under Section 40(a)(ia) for Non-Deduction of TDS on Commission Paid to Non-Resident Agents:The Revenue argued that the assessee failed to deduct TDS on commission paid to non-resident agents, justifying the addition under section 40(a)(ia). The assessee contended that the agents had no income arising in India and relied on CBDT circulars and the Supreme Court's decision in GE India Technology Centre P. Ltd. (327 ITR 456). The Tribunal, following the Supreme Court's ruling, held that no TDS was required as the commission was not chargeable to tax in India, confirming the CIT(A)'s deletion of the addition.5. Disallowance under Section 14A:The Revenue challenged the CIT(A)'s restriction of disallowance under section 14A to Rs. 10,000. The Tribunal noted that this issue was already addressed in the assessee's appeal (ITA No. 675/Mds/2010), where it was remanded to the Assessing Officer for re-adjudication. Consequently, the Tribunal also remanded this issue in the Revenue's appeal for re-adjudication by the Assessing Officer.Conclusion:The appeal of the Revenue (ITA No. 722/Mds/2010) was partly allowed for statistical purposes, and the appeals of the assessee (ITA Nos. 731 and 1168/Mds/2010) were allowed. The order was pronounced on 04/02/2011.