M/s. Fenner (India) Ltd., CHENNAI V. Addl.CIT, Madurai

ITA 1023/CHNY/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0719 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-02-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 25-02-2013
• Assessment Year: 2002-2003
• Appeal Filed On: 09-05-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S DASGUPTA
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Cost of acquisition
• Section: 80HHC

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI S.S. GODARA, JUDICIAL MEMBER I.T.A. NOS. 1023 & 1024/MDS/2012 (ASSESSMENT YEARS : 2002-03 & 2003-04) M/S FENNER (INDIA) LTD., 3, MADURAI MELAKKAL ROAD, MADURAI 625 016. PAN : AAACF 2348 D (APPELLANT) V. THE ADDL. COMMISSIONER OF INCOME TAX, RANGE I, MADURAI. (RESPONDENT) APPELLANT BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE RESPONDENT BY : SHRI S. DASGUPTA, SR. DR DATE OF HEARING : 25.02.2013 DATE OF PRONOUNCEMENT : 25.02.2013 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THESE APPEALS FILED BY THE ASSESSEE, FOR IMPUG NED ASSESSMENT YEARS, COMMON GRIEVANCE RAISED BY IT IS THAT LOWER AUTHORITIES HELD ROYALTY INCOME AS NOT ELIGIBLE FOR CLAIMING DEDUCTION UNDER SECTION 80HHC OF INCOME-TAX ACT, 1961 (IN SHO RT 'THE ACT'). I.T.A. NOS. 1023 & 1024/MDS/12 2 2. ASSESSEE, A COMPANY ENGAGED IN MANUFACTURING AND SALE OF V BELTS, OILSEALS, ETC., HAD RECEIVED CERTAIN SUMS AS ROYALTY FROM ITS SUBSIDIARY COMPANY IN INDIA. THE SAID SUBSIDIARY C ONCERN WAS MANUFACTURING FOR AND ON BEHALF OF ASSESSEE. ASSES SEE WAS SUPPLYING THE RAW MATERIAL AND RECEIVING BACK THE F INISHED GOODS FROM SUCH SUBSIDIARY CONCERN. ASSESSEE WAS GIVING TECHNICAL KNOWHOW FOR SUCH MANUFACTURING. FOR THIS, ASSESSEE RECEIVED SOME ROYALTY FROM THE SAID SUBSIDIARY CONCERN. SUCH ROY ALTY WAS WORKED OUT BASED ON THE VALUE OF INVOICES RAISED BY THE SU BSIDIARY CONCERN ON THE ASSESSEE. 3. SINCE ASSESSEE HAD CLAIMED DEDUCTION UNDER SECTI ON 80HHC ON THE EXPORTS, INCLUDING THE ROYALTY AMOUNTS RECEI VED FROM SUBSIDIARY CONCERN, ASSESSING OFFICER PUT THE ASSES SEE ON NOTICE AS TO HOW THE CLAIM COULD BE ALLOWED VIS--VIS THE ROY ALTY INCOME. REPLY OF THE ASSESSEE WAS THAT IT WAS PROVIDING KNOWHOW I NCLUDING SECRET FORMULA CONCERNING MANUFACTURING, TO THE SUBSIDIARY CONCERN AND THE SAID SUBSIDIARY CONCERN HAD MANUFACTURED THE GOODS BASED ON SUCH PROCESS. GOODS MANUFACTURED BY SUBSIDIARY CONCERN WERE RECEIVED BY THE ASSESSEE-COMPANY AND THEY FORMED PART OF THE PURCHASE COST OF ASSESSEE. ASSESSEE HAD EXPORTED SAME GOODS. TH E PAYMENTS I.T.A. NOS. 1023 & 1024/MDS/12 3 MADE BY THE SUBSIDIARY CONCERN TO ASSESSEE FOR THE KNOWHOW PROVIDED TO THEM WENT ONLY TO REDUCE THE COST OF PU RCHASE AND THEREFORE, IT HAD DIRECT NEXUS WITH EXPORT TURNOVER . 4. HOWEVER, ASSESSING OFFICER WAS OF THE OPINION TH AT ROYALTY INCOME HAD NO NEXUS WITH EXPORT ACTIVITY OF THE ASS ESSEE AND HELD THAT EXPLANATION (BAA) TO SECTION 80HHC WAS ATTRACT ED TO SUCH INCOME. FOR THIS, RELIANCE WAS PLACED ON THE DECIS ION OF HON'BLE APEX COURT IN THE CASE OF CIT V. K. RAVINDRANATHAN NAIR (295 ITR 228). ASSESSING OFFICER ALSO NOTED THAT THIS TRIBU NAL IN ASSESSEE'S OWN CASE, FOR ASSESSMENT YEAR 2004-05, IN I.T.A. NO . 1588/MDS/2007 DATED 31.3.2009, HAD DIRECTED THE ASSESSING OFFICER TO EXCLUDE ROYALTY RECEIPTS FROM BUSINESS PROFITS WHILE WORKIN G OUT DEDUCTION UNDER SECTION 80HHC OF THE ACT. HE, THEREFORE, REC OMPUTED THE DEDUCTION CLAIMED BY THE ASSESSEE UNDER SECTION 80H HC OF THE ACT BY EXCLUDING 90% OF SUCH RECEIPTS. 5. APPEALS OF THE ASSESSEE BEFORE THE CIT(APPEALS) WERE NOT SUCCESSFUL. CIT(APPEALS) HELD THAT THE MEMORANDUM OF UNDERSTANDING AND SUPPLEMENTARY MEMORANDUM OF UNDER STANDING ENTERED BY THE ASSESSEE WITH ITS SUBSIDIARY CONCERN CLEARLY SHOWED THAT THE ROYALTY PAYMENTS WERE RECEIVED FOR TECHNIC AL KNOWHOW I.T.A. NOS. 1023 & 1024/MDS/12 4 SUPPLIED BY THE ASSESSEE. AS PER CIT(APPEALS), JUS T BECAUSE THE GOODS EXPORTED BY THE ASSESSEE WERE PROCESSED AND D EVELOPED BY SUBSIDIARY CONCERN, IT COULD NOT BE CONSIDERED THAT ROYALTY WERE DERIVED FROM EXPORT BUSINESS. AS PER LD. CIT(APPEA LS), ROYALTY PAID HAD ONLY NEXUS WITH TECHNICAL KNOWHOW PROVIDED BY T HE ASSESSEE AND IT HAD NO NEXUS WITH EXPORT BUSINESS. IN THIS VIEW OF THE MATTER, HE CONFIRMED THE ORDER OF ASSESSING OFFICER. 6. NOW BEFORE US, LEARNED A.R., STRONGLY ASSAILING THE ORDERS OF AUTHORITIES BELOW, SUBMITTED THAT THE ROYALTY PAYME NTS RECEIVED BY THE ASSESSEE FROM ITS SUBSIDIARY CONCERN, NAMELY, B MF BELTINGS LIMITED, EFFECTIVELY REDUCED ITS PURCHASE COST. PU RCHASE EXPENSES INCURRED HAD DIRECT NEXUS WITH EXPORTS, SINCE WHAT ASSESSEE HAD PURCHASED FROM BMF BELTINGS LIMITED, WAS EXPORTED. THEREFORE, ACCORDING TO HIM, ROYALTY COULD NOT BE CONSIDERED D IVORCED OF SUCH CIRCUMSTANCES. ROYALTY INCOME HAD NEXUS WITH EXPOR TS AND WAS ELIGIBLE FOR CLAIMING DEDUCTION UNDER SECTION 80HHC OF THE ACT. 7. PER CONTRA, LEARNED D.R. STRONGLY SUPPORTED THE ORDER OF CIT(APPEALS). I.T.A. NOS. 1023 & 1024/MDS/12 5 8. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. UNDISPUTEDLY, ASSESSEE HAD RECEIVED ROYALTY FROM ON E M/S BMF BELTINGS LIMITED, WHICH WAS A SUBSIDIARY OF ASSESSE E. SUCH SUBSIDIARY CONCERN WAS LOCATED IN INDIA ITSELF. MA Y BE IT WAS TRUE THAT THE GOODS MANUFACTURED BY THE SUBSIDIARY CONCERN WE RE EXPORTED BY THE ASSESSEE. HOWEVER, ADMITTEDLY ROYALTY WAS RECE IVED BY THE ASSESSEE FOR THE TECHNICAL KNOWHOW PROVIDED TO THE SUBSIDIARY CONCERN. THEREFORE, THE NEXUS FOR ROYALTY INCOME W AS THE TECHNICAL KNOWHOW PROVIDED BY THE ASSESSEE. WHAT IS REQUIRED IS A FIRST DEGREE NEXUS AND NOT A REMOTE NEXUS. IN THE CASE O F LIBERTY INDIA V. CIT (317 ITR 218), HON'BLE APEX COURT HAS HELD THAT EVEN DUTY DRAWBACK AND DEPB LICENSE WOULD CONSTITUTE INDEPEND ENT SOURCE OF INCOME. IN SUCH A SITUATION, TO SAY THAT ROYALTY I NCOME RECEIVED BY THE ASSESSEE FROM ITS OWN SUBSIDIARY IN INDIA, HAD A NEXUS WITH ITS EXPORT BUSINESS, CANNOT BE ACCEPTED. EVEN IF THERE WAS NEXUS, IT WAS ONLY A VERY REMOTE NEXUS. LOWER AUTHORITIES WERE J USTIFIED IN RELYING ON THE DECISION OF HON'BLE APEX COURT IN THE CASE O F K. RAVINDRANATHAN NAIR (SUPRA) AND HOLDING THAT ROYALT Y INCOME COULD NOT BE CONSIDERED AS EXPORT INCOME AT ALL. WE DO N OT FIND ANY REASON TO INTERFERE WITH THE ORDER OF CIT(APPEALS). I.T.A. NOS. 1023 & 1024/MDS/12 6 9. IN THE RESULT, BOTH THE APPEALS FILED BY THE ASS ESSEE ARE DISMISSED. ORDER WAS PRONOUNCED IN THE COURT ON MONDAY, THE 25 TH OF FEBRUARY, 2013, AT CHENNAI. SD/- SD/- (S.S. GODARA) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 25 TH FEBRUARY, 2013. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-I, MADURAI (4) CIT-I, MADURAI (5) D.R. (6) GUARD FILE