2014 (10) TMI 695 - AT - Income Tax

Tribunal upholds CIT(A) decision on license fee payment disallowance, directs AO to reconsider Section 14A disallowance.

The Tribunal upheld the CIT(A)'s decision to delete the disallowance of 40% of license fee payment made to the parent company, citing consistent judicial ... Partial disallowance on license fee payment u/s 40 A - excessive or unreasonable payment of royalty – Held that:- The assessee paid royalty to the extent of ₹ 100,18,62,000/- on account of general license fee payable to SPN - The AO disallowed to the extent of 40% holding that the assessee has incurred huge expenditure on advertisement which had resulted in brand building for the parent company – following the decision in COMMISSIONER OF INCOME TAX Versus M/s NESTLE INDIA LTD. [2011 (5) TMI 566 - DELHI HIGH COURT] - Past history on the issue has been the reasoning for making the disallowance by the AO and thus apart from difference in the amounts the reasoning for making the disallowance has remained the same - the CIT(A) taking into consideration the past history as discussed in the earlier appeal has deleted the addition made by a disallowance – Decided against revenue. Disallowance u/s 14A – Held that:- The AO considering the facts that the assessee had earned dividend income which did not form part of the total income required the assessee to address why disallowance u/s 14A read with Rule 8D of I.T Rules 1962 should not be made - sub-sections (2) & (3) of section 14A and Rule 8D would operate prospectively does not mean that the AO is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure - If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further – relying upon CIT., Mumbai Versus M/s. Walfort Share & Stock Brokers P. Ltd. [2010 (7) TMI 15 - SUPREME COURT] - in this light of the departmental stand the assessee’s stand that detailed argument on facts are required to be addressed stands addressed by the issue accordingly after having the parties is restore, by the AO who shall adjudicated upon the issue denovo after giving the assessee a reasonable opportunity of being heard – thus, the matter is to be remitted back to the AO for fresh adjudication – Decided in favour of assessee. Issues Involved:1. Disallowance of License Fee Payment2. Disallowance under Section 14A of the Income-tax ActDetailed Analysis:Disallowance of License Fee Payment:The primary issue in both departmental appeals and the cross-objections filed by the assessee for the assessment years 2007-08 and 2008-09 revolves around the disallowance of 40% of the license fee paid to M/s Societes des Products Nestle, SA, Switzerland. The Assessing Officer (AO) had disallowed the payment on the grounds that the license fee paid by the assessee to its parent company was not entirely for the assessee's business purposes and partly benefited the parent company by enhancing its brand value in India.The AO's disallowance was based on the observation that the assessee incurred substantial advertisement expenses, which contributed to brand building for the parent company. The AO also noted that the payment of license fees was disproportionate to the net profits in several years, indicating that the arrangement was designed to siphon off profits to the parent company.However, the CIT(A) deleted the disallowance, relying on the consistent judicial precedents in the assessee's favor, including the Tribunal's orders for the earlier years and the Delhi High Court's judgment dated 11/5/2011, which upheld the Tribunal's decisions. The CIT(A) also noted that the Transfer Pricing Officer (TPO) had accepted the royalty payments as being at arm's length.The Tribunal upheld the CIT(A)'s decision, emphasizing that the issue had been consistently decided in favor of the assessee in the past, and there was no change in facts or law to warrant a different conclusion. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Department's appeals.Disallowance under Section 14A of the Income-tax Act:The cross-objections filed by the assessee for both assessment years challenged the disallowance of expenses under Section 14A of the Income-tax Act. The AO had disallowed Rs. 22,14,685 for the assessment year 2007-08 and Rs. 32,00,636 for the assessment year 2008-09, relying on Rule 8D of the Income-tax Rules, 1962.The CIT(A) upheld the disallowance, but the Tribunal noted that Rule 8D was applicable only from the assessment year 2008-09 onwards. For the assessment year 2007-08, the Tribunal directed the AO to re-examine the disallowance in light of the principles laid down by the Delhi High Court in Maxopp Investment Ltd. Vs. CIT, which required the AO to determine the expenditure based on a reasonable method if not satisfied with the assessee's claim.For the assessment year 2008-09, the Tribunal also directed the AO to reconsider the disallowance, taking into account the Delhi High Court's judgment in Maxopp Investment Ltd. Vs. CIT, and to provide the assessee with a reasonable opportunity of being heard.Conclusion:The Tribunal dismissed the Department's appeals and allowed the assessee's cross-objections for statistical purposes, directing the AO to re-examine the disallowance under Section 14A for both assessment years in light of the Delhi High Court's judgment in Maxopp Investment Ltd. Vs. CIT. The Tribunal's decision was pronounced in the open court on 3rd January 2014.