2012 (10) TMI 466 - AT - Income Tax

Appeal partly allowed with remittance on validation & testing charges, depreciation upheld, interest levy remanded

The appeal filed by the assessee was partly allowed for statistical purposes. The issues regarding disallowance of validation charges paid to Nicholas ... Disallowance under section 40(a)(ia) - reimbursement of costs versus payment for services - fees for technical services - TDS compliance and proviso to section 40(a)(ia) - remand to the assessing officer for verification - depreciation and block of assets - ownership and use for the purpose of business - interest under sections 234B and 234C - initiation of penalty proceedingsDisallowance under section 40(a)(ia) - reimbursement of costs versus payment for services - TDS compliance and proviso to section 40(a)(ia) - remand to the assessing officer for verification - Disallowance of validation charges paid to M/s Nicholas Piramal held subject to verification and remitted to AO - HELD THAT: - Following the Tribunal's earlier decision in the assessee's own case, the Tribunal found that the question whether validation/testing charges reimbursed to M/s Nicholas Piramal were liable to tax deduction and hence disallowable under section 40(a)(ia) could not be conclusively resolved on the record. The Bench recorded that where TDS has subsequently been paid in years open on appeal, deduction can be allowed under the proviso to section 40(a)(ia). In the interest of justice the matter is remitted to the assessing officer to verify the challans and other material tendered by the assessee and to determine whether tax in respect of those payments has been paid and whether any further tax liability exists; if the AO finds tax has been paid and no liability remains, the deduction claimed shall be allowed in the years of payment.Ground allowed for statistical purposes and remitted to the assessing officer for verification; deduction to be allowed if TDS paid and no further liability found.Disallowance under section 40(a)(ia) - fees for technical services - reimbursement of costs versus payment for services - remand to the assessing officer for verification - Disallowance of testing charges paid to European Testing Centre (ETC), Ireland held subject to verification and remitted to AO - HELD THAT: - The Tribunal, following its earlier order in the assessee's own case, observed that characterization of the testing charges (whether reimbursement of costs or taxable fees/FTS attracting TDS) was not amenable to final adjudication on the existing record. The assessee's alternative plea that appropriate deduction should be allowed in the year of remittance where TDS was in fact paid was accepted in principle. Accordingly the matter is remitted to the assessing officer to verify the TDS challans and related documentary evidence and to determine the assessee's tax liability; appropriate relief under the proviso to section 40(a)(ia) is to be granted if verification shows taxes were paid and no further liability exists.Ground allowed for statistical purposes and remitted to the assessing officer for verification; deduction to be allowed in the year of payment if TDS compliance established.Depreciation and block of assets - ownership and use for the purpose of business - Claim for depreciation on plant and machinery denied - appeal rejected and CIT(A)'s order confirmed - HELD THAT: - Applying the Tribunal's precedents, the Bench examined whether the machinery, though owned by the assessee and installed at the manufacturer's premises, retained a place in the block of assets for depreciation. While ownership and use for the assessee's business are preconditions, the Tribunal found that the assessee had written off the machinery in its books as obsolete and thus effectively discarded it; the correct course where an asset is discarded is to reduce the block by the written down value and claim depreciation on the balance. On these facts the claim was not allowable and the CIT(A)'s disallowance is sustained.Ground rejected; disallowance of depreciation confirmed.Interest under sections 234B and 234C - assessed income versus returned income for computation of interest - remand to the assessing officer for reconsideration - Levy of interest under sections 234B and 234C remitted to AO for fresh consideration - HELD THAT: - The assessee contested the computation and levy of interest under sections 234B and 234C, including the contention that interest under section 234C should be computed on returned income rather than assessed income. As these matters are consequential to the primary adjustments and require factual and computational reconsideration, the Tribunal remitted the issues to the assessing officer to examine the assessee's contentions and recompute interest as appropriate.Matters remitted to the assessing officer for reconsideration and computation.Initiation of penalty proceedings - Ground challenging initiation of penalty proceedings dismissed as premature/immature - HELD THAT: - The Tribunal recorded that the challenge to initiation of penalty proceedings was premature or immature at this stage of the appeal process and accordingly refused to entertain that ground.Ground rejected as immature.Final Conclusion: The appeal for AY 2006-07 is partly allowed for statistical purposes: disputes over validation/testing charges (and related TDS compliance) are remitted to the assessing officer for verification and grant of deduction if TDS was paid and no further liability exists; denial of depreciation is upheld; interest under sections 234B/234C is remitted for reconsideration; the challenge to initiation of penalty proceedings is dismissed as immature. Issues Involved:1. Validity of the order of the DCIT or AO.2. Disallowance of validation charges paid to Nicholas Piramal India Ltd.3. Disallowance of testing charges paid to European Testing Centre (ETC) Ireland.4. Denial of depreciation on plant and machinery acquired during the financial year 1997-98.5. Erroneous levy of interest under section 234B of the IT Act.6. Erroneous levy of interest under section 234C of the IT Act.7. Initiation of penalty proceedings.Detailed Analysis:Issue 1: Validity of the Order of the DCIT or AO- The CIT(A) did not hold that the order of the DCIT or AO was bad in law and on facts. This ground was general in nature and required no adjudication.Issue 2: Disallowance of Validation Charges Paid to Nicholas Piramal India Ltd.- The CIT(A) relied on his order pertaining to AY 2005-06, holding that validation charges paid to Nicholas Piramal were disallowable under section 40(a)(ia) of the IT Act.- The CIT(A) misunderstood the transaction as a provision of services and failed to appreciate that the testing activity was prior to the sale of products and directly linked to such sale.- The transaction was not in the nature of a works contract, and therefore, not liable for tax deduction at source under section 194C of the Act.- The CIT(A) did not take cognizance of CBDT circulars indicating that provisions of section 194C of the Act do not apply to contracts for the sale of goods.- The Tribunal remitted the issue back to the AO for reconsideration in light of the observations made, directing the assessee to produce relevant material to establish the liability to reimburse the expenditure to Nicholas Piramal.Issue 3: Disallowance of Testing Charges Paid to European Testing Centre (ETC) Ireland- The CIT(A) relied on his order for AY 2005-06, holding that testing charges paid to ETC were disallowable under section 40(a)(ia) of the IT Act.- The CIT(A) held that the testing charges were in the nature of fees for technical services under section 9(1)(vii) of the Act and that the product testing charges fell within the scope of tax deduction under section 195 of the Act.- The CIT(A) relied on the decision in the case of Samsung Electronics Co. Ltd., holding that a certificate for non-deduction of tax was mandatory.- The Tribunal found that the payments were reimbursement of costs and devoid of any element of income, thus not requiring tax deduction at source. The Tribunal remitted the issue to the AO to verify the tax liability of the assessee in light of the challans filed and allow the deduction under section 40(a)(ia) of the IT Act in the years of payment.Issue 4: Denial of Depreciation on Plant and Machinery Acquired During the Financial Year 1997-98- The CIT(A) relied on his order for AY 2005-06 and did not allow depreciation on machinery owned by the appellant because it had written off the value of assets in its books of account.- The CIT(A) held that writing off the assets amounted to discarding the machinery and relied on various decisions to support this view.- The Tribunal found that the machinery was used for the purpose of the assessee's business and that the assessee was entitled to depreciation. However, the Tribunal upheld the CIT(A)'s decision that the machinery, having been written off as obsolete, should have had its written down value reduced from the block of assets, and depreciation should have been claimed on the balance of the block of assets.Issue 5: Erroneous Levy of Interest Under Section 234B of the IT Act- The CIT(A) failed to appreciate that the advance tax remitted by the appellant was more than 90% of its income-tax liability, and hence the appellant was not liable to pay interest under section 234B of the IT Act.- The Tribunal remanded the issue to the AO for reconsideration.Issue 6: Erroneous Levy of Interest Under Section 234C of the IT Act- The CIT(A) held that interest under section 234C of the Act is to be levied on assessed income, not appreciating the appellant's submissions that there was an error in computation of interest under section 234C of the Act.- The Tribunal remanded the issue to the AO for reconsideration.Issue 7: Initiation of Penalty Proceedings- The CIT(A) erred in upholding the initiation of penalty proceedings by the AO. This ground was rejected as being premature.Conclusion:The appeal filed by the assessee was partly allowed for statistical purposes, with several issues remitted back to the AO for verification and reconsideration.