TaxTMI 
TaxTMI 
2019 (3) TMI 1612
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.... provision is made on ad-hoc basis. He failed to appreciate that the company follows mercantile system of accounting and expenses relating the previous year have been properly provided to arrive the correct profit during the year. 2.0 Disallowance of Expenses u/s 14A - Rs.4,33,59,413/- The learned CIT(A) erred on facts and in law in disallowing Rs.4,33,59,413/- u/s 14A of the Act. The learned CIT(A) erred in considering the entire interest expenditure for the purpose of disallowance when the rule mandates that it is only the interest which is not directly attributable to any particular income or receipt, has to be considered. The assessee company did not incur any expenditure attributable for earning dividend. The CIT (A) could not point out any other expenditure directly attributable for earning the tax free income no nexus of the expenditure with the tax free income was established. The learned CIT(A) also failed to appreciate that the AO has not arrived at his satisfaction before invoking Rule 8D. 3.0 Disallowance of R & D units purchased as per Technical License Agreement- Rs.3,72,81,428/- The CIT (A) erred on facts and in law in disallowing a sum of Rs.3,72,81,428/....
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....p;Rs. 19.70 crores. The assessee had made investment in shares, mutual funds, etc. for sum of Rs. 476.33 crores. The assessee pointed out that it had earned dividend income of Rs. 4.76 crores on long term investments and also earned substantial income from mutual funds and UTI. The Assessing Officer asked the assessee to explain as to why the expenditure relatable to earning of exempt income should not be disallowed in view of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (in short 'the Rules'). The assessee pointed out that it had already made suo motu disallowance of Rs. 5 lakhs and no further disallowance was to be made in the hands of assessee. The Assessing Officer did not accept the explanation of assessee and observed that where interest bearing funds were utilized for investment in shares and mutual funds and because of huge number of transactions, the quantification could not be determined. Hence, applying the provisions of Rule 8D of the Rules, sum of Rs. 30,12,67,295/- was disallowed under Rule 8D of the Rules. Since the assessee had already disallowed Rs. 5 lakhs, balance sum of Rs. 30,07,67,295/- was disallowed under Rule 8D of the Rules. 6. ....
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....7 of appellate order, the CIT(A) went through clauses of Technology License Agreement, copy of which is reproduced at pages 28 to 35 of appellate order and also noted that there were certain negotiations and terms of Technology License Agreement were modified in 2009 and held that Technology License Agreement had to be considered as a whole i.e. WED granted to the assessee. As per Technology License Agreement, the assessee agreed to make royalty payments partly in the form of purchase of two R&D units and partly in the form of royalty fees. He further observed that R&D units were integral part of Technology License Agreement. Taking into account the said agreement in totality, he held that payments made by assessee to the licensor for R&D units were to be treated as 'royalty'. He further held that the said payments made by assessee to WED were 'royalty' under the domestic Income Tax Law and also under the Treaty between India and USA. Therefore, provisions of section 195 of the Act were attracted and since the assessee had failed to deduct tax at source, the said expenditure was required to be disallowed under section 40(a)(ia) of the Act. 11. Both the assessee and Revenue are in....
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....ef facts relating to the issue are that the Assessing Officer noted that the assessee had claimed interest expenditure of Rs. 19.70 crores. Further, the assessee had made investment in shares, mutual funds totaling Rs. 476.33 crores. The assessee had earned dividend income of Rs. 4.76 crores and also earned substantial income from mutual funds and UTI. The assessee was asked as to why expenditure relating to earning exempt income should not be disallowed under section 14A of the Act read with Rule 8D of the Rules. The assessee submitted that it had disallowed sum of Rs. 5 lakhs directly relating to the exempt income. The assessee also claimed that investment activity was only ancillary to its principal business and hence, no additional expenditure was incurred for earning exempt income. The Assessing Officer rejecting the plea of assessee, in view of huge amount of exempt income earned by it, applied the provisions of Rule 8D of the Rules and worked out the disallowance at Rs. 30,12,67,295/-. The same was reduced to Rs. 4,33,59,413/- by Assessing Officer on rectification. 18. The perusal of assessment order reflects the Assessing Officer to have noted that the assessee had earned....
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....tial. This is a clear case for application of Rule 8D. Hence, the contention of the assessee cannot be accepted. The disallowance u/s 14A is required to be made by applying Rule 8D. As per the working of disallowance u/s 14A as per Rule 8D, the amount of disallowance comes to Rs.5,68,32,323/-. The assessee has already disallowed Rs.50,00,000/- in the computation of income." 35. The requirement of section 14(2) of the Act is that the Assessing Officer is to record as to why the disallowance made by the assessee i.e. Rs.50 lakhs under section 14A of the Act is not correct. The Assessing Officer takes note of the disallowance, considers the explanation of assessee and holds that the contention of assessee cannot be accepted. The preliminary satisfaction to be recorded by Assessing Officer, before making disallowance under section 14A of the Act read with Rule 8D of the Rules, is missing in the case; in the absence of the same, there is no merit in the disallowance made by the Assessing Officer. We find support from the ratio laid down by the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC). "37. We do not see how in....
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....section 40(a)(i) of the Act. 22. The learned Authorized Representative for the assessee elaborately took us through terms of Technology License Agreement and also the Memorandum of Understanding before the Technology License Agreement and pointed out that as per the agreement, the aim was to develop more cost effective engines and also to set up manufacturing base and to foster long term technology in W200 diesel engines. He stressed that purpose of agreement was to develop more cost effective diesel engines, in order to improve W200 diesel engines technology to make it market efficient i.e. to upgrade the product. In such scenario, he referred to rights and obligations of WED in this regard, wherein it was clearly mentioned that they would retain ownership of technology. It was further mentioned that WED was responsible for the development of W220 product. It was further agreed that WED would provide access to improvements, if any in W220 engines. He referred to further clauses of said agreement. In respect of rights and obligations of assessee, it was pointed out that the assessee was given non exclusive license for W220 / W200 engine technology. It was further agreed that impr....
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....es 'royalty' as (a) payments of any kind received as consideration for the use of or the right to use any copyright or a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of article 8. He then, referred to definition of 'royalty' and pointed out that in the light of definition, the terms of MOU and Technology Agreement have to be looked into. The learned Departmental Representative for the Revenue pointed out that in case the responsibilities of WED are looked....
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....improvement / upgrades of W200/220 products. As per sub-clause (h) of clause II, it was provided that WED would provide technical support when required regarding W220/200 engines. As per subclause (j) to clause II, WED would license to assessee on a non-exclusive basis the right to use the ESM platform on the W200 diesel, if such request was made by assessee but subject to the following:- a) The license fee details would be mutually agreed to at the time of request b) All improvements/modifications to controls platform for diesel application would be coordinated through and owned by WED, but would be paid by the assessee. 26. As per its rights and obligations, the assessee regarding W220/200 technology, under the terms of agreement, agreed to purchase two R&D units + parts for total price of USD 7,00,00 for one 12V200 bare engine and one 18v200 Genset with switchgear. The cost associated with relocating two purchased units was to be paid by the assessee in addition to R&D units. The assessee was to purchase certain specified support parts for two engines for the price of USD 60,000, for which payment was to be made on delivery of spare parts. As per understanding, the asses....
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....00 and W220. The W200 Territory shall be worldwide as per clause 1.10 and W220 Territory was the nation of India and such other countries as may be subsequently agreed between the parties. In respect of W200 Proprietary Products, W200 license was granted worldwide, non assignable, non transferrable and royalty bearing license, to enable the licensee to use W200 Proprietary Product Technology in order to manufacture and improve the W200 Proprietary Products. The licensee was also given exclusive license to market, sell, support and service the W200 Proprietary Products in W200 Territory. Then, clauses provided royalty calculation and its rate reduction in future. As per clause 2.1.3.3, there was additional purchase obligation under which, within 180 days of the agreement, licensee was to purchase one R&D unit + parts for total price of USD 3,00,000 and for one 12V200 bare engine, cost of relocating the purchased unit to the assessee's premises was to be paid by licensee. As per clause 2.2, W220 Proprietary Products License terms were agreed. Then, coming to the ownership of IP rights, it is clearly stated in clause 3.1.1 that the licensor shall own, solely and exclusively on w....
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....o licensor as per Technology License Agreement entered into between the parties. 30. The question which arises is whether it is mere case of purchase of equipment for R&D projects or the payment is in the form of royalty paid by the assessee, licensee to the licensor. The CIT(A) has reproduced the relevant parts of terms of Technology License Agreement at pages 28 to 35 of appellate order. We have already referred to the terms agreed upon between the parties. 31. Now, we have to look into the terms which have been agreed upon between the parties, for which, first we must refer to the Memorandum of Understanding between the parties. Admittedly, WED had agreed to license the assessee the use of W200/220 technology for the purpose of manufacturing and selling W200/220 engines and their respective parts in the defined Territory. The ownership of the said rights including all technology, design, technical data, IP rights, etc. belongs to and rested with WED. The technology was already with WED, which was shared with the assessee in order to enable it to manufacture and sell W200/220 engines. In the case of developing market, it is an endeavour of each manufacturer to keep on d....
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....agreement cannot be held to be payment of 'royalty'. We may refer to the definition of 'royalty' under section 9(1)(vi) of the Act in this regard, which clearly lays down that the payment should be for use or use of any technology. In the present case, the payment is made for purchase of equipment for R&D purpose. We thus, find no merit in the orders of authorities below in holding that the aforesaid payment is royalty under both domestic Income Tax Law and also under the Treaty between India and USA. Hence, we direct the Assessing Officer to allow the claim of assessee. 33. Before parting, we may refer to the reliance placed upon by the learned Departmental Representative for the Revenue on para 10.5 of order of CIT(A). We have already referred to the terms of agreement, which have been referred in the said para 10.5. Further, he has placed reliance on the ratio laid down by the Hon'ble High Court of Karnataka in CIT Vs. Samsung Electronics Co. Ltd. (supra), wherein the issue was grant of license to make use of software and whether the same is royalty both under Income Tax and DTAA. In this regard, we may refer to the recent decision in the case of John Deere India Pvt. Lt....