PCIT Vs Montage Enterprises Pvt. Ltd. (Delhi High Court)
The matter concerned Assessment Years 2005-2006 and 2006-2007. The Revenue raised questions regarding the assessee’s reallocation of royalty-related expenditure and income from its Jammu Unit to the Corporate Division, entitlement to deduction under Section 80IB of the Income Tax Act, 1961 in respect of sub-licence fee, findings relating to additions under Section 68, and reduction of the licence fee disallowance concerning the Malanpur Unit.
Read SC Judgment in this case: SC Dismisses Revenue SLP on Section 68 Addition & Licence Fee Dispute
The assessee manufactured and traded flexible packaging material and had acquired technical know-how for manufacturing an improved sachet pouch. It paid royalty of Rs. 4.25 crores and received sub-licence income of Rs. 1.96 crores. The assessee had manufacturing units at Malanpur, Jammu, and Noida. Following a search and seizure operation on 23.02.2006 in the case of M/s. Flex Group of Companies, notice under Section 153A of the Income Tax Act was issued.
During the search assessment proceedings, the Assessing Officer made an addition of Rs. 2,32,13,640 under Section 68 on account of trade credits. The Commissioner of Income Tax (Appeals) deleted the addition after examining the records, observing that the parties were regular customers, ledger accounts had been produced, goods were supplied in the ordinary course of business, payments were received through account payee cheques, and the trade advances were adjusted against sales in the subsequent year. The Commissioner also noted that the advances were not outstanding for several years and were adjusted immediately in the following year. The ITAT affirmed these findings.
The Court held that the issue relating to the Section 68 addition was purely factual. Since the findings of the CIT(A) and the ITAT were concurrent and established that the trade advances had been adjusted against subsequent sales, the Court held that no question of law arose.
Regarding the licence fee issue, the assessee had originally paid Rs. 50 lakhs per month to M/s. Flex Group of Companies, which was revised during the relevant assessment years to Rs. 2 crores per month. The Assessing Officer added Rs. 9 crores, treating the increase as arbitrary. The CIT(A) deleted the entire addition, while the Revenue’s appeal before the ITAT succeeded substantially to the extent of Rs. 6 crores. The Court found no justification to interfere with the ITAT’s findings, observing that they were also factual in nature.
The matter was directed to be listed on 21st February, 2018.
FULL TEXT OF THE CESTAT DELHI ORDER
1. Mr M.P.Rastogi, Advocate accepts notice.
2. The two questions of law, which the Revenue argues in the present appeal for the Assessment Years 2005-2006 & 2006-2007, are as follows:-
1. Whether assessee was right in reallocating expenditure/income on account of royalty from Jammu Unit to Corporate Division?
2. If the answer to the above is in the affirmative in favour of the Revenue, the further question which arises is whether the Assessee was entitled to deduction under Section 80IB of the Income Tax Act, 1961 in respect of sub-licence fee (ITA 892/2016 & 894/2016)?
3. The other questions of law urged are with respect to the findings, vis-a-vis-sums added under Section 68 of the Income Tax Act (hereinafter referred to as ‘the Act’) and the sums of Rs.6crores, which was reduced from the larger sum of Rs.9 crores (determined by the Commissioner of Income Tax (Appeals) towards the licence fee expenditure incurred by the Assessing Officer, with regard to its Malanpur Unit.
4. The Assessee manufactures and trades flexible packaging material in roll and pouch form. It had acquired technical know-how for manufacture of “improved sachet pouch with improved additional gusset on both sides of the sachet pouch with a scoring line in the form of laser cut”. The Assessee had paid royalty to the tune of Rs.4.25 crores and had received a sub-licence income of Rs.1.96 crores.
5. The Assessee has three manufacturing Units, i.e. Malanpur, Jammu and Noida. The original income declared was ‘Nil’ for the relevant Assessment Years. A search and seizure operation was conducted in respect of M/s. Flex Group of Companies on 23.02.2006, which led to the notice being issued under Section 153A of the Act to the Assessee. In the course of search assessment proceedings, the Assessing Officer added the sum of Rs.2.32 crores, which the Assessee claim towards trade credit. The CIT(Appeal) directed deletion of this amount after due verifications of the record by expressing his satisfaction that the credits claimed were genuine and in accord with the documents and the records produced by the Assessee. The CIT’s findings are as follows :-
“10.3 I have carefully considered the facts of the case, submissions made by the appellant and remand report submitted by the A.O. It is observed that the appellant could not file the confirmations from the trade customers from whom the advance against sale is received in this year and in the absence of confirmations, the A.O. treated the amount of Rs. 2,32,13,640/- as income of the appellant under Section 68 of the Act. It is observed from the details filed before the A.O. that the ledger accounts of the concerned parties were filed before the A.O. as well as during the remand proceedings. The trade customers as app0earing in the list are the regular customers making purchases from the appellant for the last many years. A perusal of the statement of accounts of the said parties for the current as well as subsequent year shows that the appellant had supplied the goods in the normal course of the business. The realization of proceeds thereof is an ongoing business activity. The only finding of the A.O. is that the appellant has been unable to produce the confirmations from few of the parties. It is observed from the submissions that the goods have been supplied under various invoices and the payments have been received by account payee cheques from time to time. In view of the totality of facts and circumstances, it is held that the parties from whom the appellant had received the advances are the regular customers of the appellant in the preceding as well as subsequent years. The trade advances received by the appellant have been adjusted against the sales made to them in the subsequent years. Few of the customers from whom substantial amount of advance is received are limited companies. It is not the case of the A.O. that the advance is outstanding in the books for the last many years. The advance is adjusted against the sale in the immediate next year. As such, the addition made by the A.O of Rs.2,32,13,640/- is deleted.”
6. The Income Tax Appellate Tribunal (ITAT) affirmed the above finding. The Court is of the opinion that the question urged is purely factual. Since the findings recorded by the CIT(A) and the ITAT are concurrent, they reflected that the trade advances received by the applicant were adjusted against the sales made to them in the subsequent years. As such, no question of law arises.
7. As far as the second issue, i.e. the enhancement of licence fee is concerned, the facts are that the Assessee was originally paying Rs.50 lakhs per months licence fee to M/s. Flex Group of Companies. During the Assessment Years in question, the fee was revised mid-term to Rs.2 crores per month. The A.O. add Rs.9 crores, upon an understanding that the licence fee increased was arbitrary. The CIT(Appeals), however, deleted this entire amount. The Revenue’s Appeal succeeded substantially to the extent of Rs.6 crores.
8. Having regard to these circumstances, the Court finds no justification to interfere with the ITAT’s findings, which are also factual as far as this issue goes.
9. List on 21st February, 2018.
