2019 (1) TMI 401 - AT - Income Tax

Tribunal Upholds CIT(A) Decisions on MEPZ Unit Losses, Expense Additions, R&D Expenditure

The tribunal upheld the CIT(A)'s decisions on all contested issues, allowing the set-off of MEPZ unit losses against taxable unit income, deleting ... Depreciation on computer peripherals - @ 60% OR @ 15% - Held that:- The issue stood covered by the judgment of the Hon’ble Delhi High Court in the case of BSES Yamuna Power Limited [2010 (8) TMI 58 - DELHI HIGH COURT] Deduction u/s 10AA - computation mechanism of total income - Held that:- Deduction is to be allowed from the total income of the unit and not from the total income of the assessee under Chapter IV of the Act and not at the stage of total income under Chapter VI of the Act. Addition pertaining to research and development expenses - Revenue or capital expenditure - Held that:- Commissioner of Income Tax (A) has given a categorical finding that the training charges and annual subscription charges for CAD validation were revenue in nature. The inventory movement for R&D expenditure was in the nature of ‘Destructive Testing’ wherein the item/s were consumed and no inventory having commercial value was left. It has also been noted by the Ld. Commissioner of Income Tax (A) that no new asset had come into existence. The Ld. Sr. DR could not point out any infirmity in the findings of the Ld. Commissioner of Income Tax (A). We also note that while reaching his decision, the Ld. Commissioner of Income Tax (A) has placed reliance on the judgment of the Hon’ble Apex Court in the case of Empire Jute Co. (1980 (5) TMI 1 - SUPREME COURT). AO directed to allow depreciation @60% on the customization charges for ERP amounting to ₹ 5,34,683/- and software for tool management Issues Involved:1. Eligibility to set off the loss of MEPZ (10AA) unit against income of taxable units.2. Deletion of addition on account of proportionate allocation of Head Office expenses to MEPZ (10AA) unit.3. Deletion of addition on account of allocation of bank and loan processing charges to MEPZ (10AA) unit.4. Deletion of addition on account of price difference in respect of goods transferred to MEPZ (10AA) unit.5. Deletion of addition by treating research and development expenses as revenue expenditure instead of capital expenditure.6. Deletion of addition on account of disallowance of claim of depreciation @ 60% on UPS.7. Customization charges for ERP and software for tool management treated as capital expenditure.Detailed Analysis:1. Eligibility to Set Off the Loss of MEPZ (10AA) Unit:The tribunal observed that the issue of setting off the loss of the MEPZ (10AA) unit against the income of taxable units was covered by the order of ITAT in the assessee’s own case for the assessment year 2008-09. The Hon’ble Apex Court in CIT vs. Yokogawa India Ltd. had decided that the deduction under Section 10A should be allowed from the total income of the eligible undertaking before aggregating the incomes under other heads. Thus, the tribunal upheld the CIT(A)’s decision allowing the set-off.2. Deletion of Addition on Account of Allocation of Head Office Expenses:The tribunal noted that the issue was covered by the ITAT’s previous order in the assessee’s own case for the assessment year 2008-09. The CIT(A) had deleted the addition of Rs. 25,05,972/- made by the AO on account of proportionate allocation of Head Office expenses to the MEPZ unit. The tribunal found no reason to interfere with this finding.3. Deletion of Addition on Account of Allocation of Bank and Loan Processing Charges:Similarly, the tribunal found that the deletion of Rs. 2,68,251/- on account of allocation of bank and loan processing charges to the MEPZ unit was also covered by the previous ITAT order. The CIT(A) had rightly deleted this addition, and the tribunal upheld this decision.4. Deletion of Addition on Account of Price Difference in Goods Transferred to MEPZ Unit:The tribunal observed that the addition of Rs. 73,54,190/- made by the AO on account of price difference in goods transferred to the MEPZ unit was covered by the ITAT’s order for the previous year. The CIT(A) had deleted this addition, and the tribunal upheld this deletion.5. Deletion of Addition by Treating R&D Expenses as Revenue Expenditure:The tribunal noted that the CIT(A) had examined the details of the R&D expenses and found them to be revenue in nature. The CIT(A) had relied on the judgment of the Hon’ble Apex Court in the case of Empire Jute Co. and concluded that the expenses did not result in the creation of a new asset. The tribunal found no infirmity in the CIT(A)’s findings and upheld the deletion of Rs. 18,40,690/-.6. Deletion of Addition on Account of Depreciation on UPS:The tribunal observed that computer peripherals are eligible for depreciation at the same rate as computers. The CIT(A) had directed depreciation to be allowed at 60%, which was supported by the Hon’ble High Court judgment in the case of BSES Yamuna Power Ltd. The tribunal upheld the CIT(A)’s decision and dismissed the ground raised by the revenue.7. Customization Charges for ERP and Software for Tool Management:The tribunal agreed with the assessee’s contention that if the customization charges for ERP and software for tool management were treated as capital expenditure, depreciation should be allowed on the same. The tribunal directed the AO to allow depreciation at 60% on the customization charges amounting to Rs. 5,34,683/- and software for tool management amounting to Rs. 24,000/-. The tribunal allowed the assessee’s cross-objection on this issue.Conclusion:The appeal of the department was dismissed, and the cross-objection of the assessee was allowed. The tribunal upheld the CIT(A)’s decisions on all contested issues, finding them consistent with previous judgments and legal principles.