2017 (7) TMI 199 - AT - Income Tax

Treatment of the technical fees paid to M/s Mahindra & Mahindra for use of design, drawing production tooling for manufacturing of independent front suspension - nature of expenditure - revenue or capital - Held that - The assessee company, being auto part manufacturer for M/s Mahindra & Mahindra is solely dependent upon the business given to it by M/s Mahindra & Mahindra and in view of the required modernization in the IFS system, the said M/s Mahindra & Mahindra made payment to the Korean company, M/s Samlip for developing the prototype tooling and allowed the assessee to use the same for manufacturing the IFS components as per the requirement of M/s Mahindra & Mahindra on payment of technical fee. Clearly in such a case, M/s Mahindra & Mahindra got the ownership over the asset and the assessee was granted limited rights by Mahindra & Mahindra to use the same to Manufactur IFS System, in accordance with their requirement, on payment of Technica1 fee . In view of the same, the decision of the Ld. CIT(A) in treating the payment as held to be revenue in nature is correct one. Even otherwise, the assessee has been making such payment from AY 1999-2000 onwards, which have been accepted as revenue in nature by the Department in the earlier years - Decided in favour of assessee Disallowance u/s. 14A - Held that - Calculations / quantifications needs to be examined at the level of the AO, because Ld. CIT(A) has not given any chance to the AO for making such calculations/ quantifications which in the interest of justice is very essential. Accordingly, in the interest of justice, we set aside the issue in dispute to the file of the AO for fresh consideration and decide the same in view of the law laid down by the Hon ble Delhi High Court in its decision dated 2nd September, 2015 in the case of Cheminvest Ltd. vs. Commissioner of Income Tax (2015 (9) TMI 238 - DELHI HIGH COURT).

Summary

Issues:
1. Disallowance of Technical Fees as capital expenditure
2. Disallowance under section 14A

Issue 1: Disallowance of Technical Fees as capital expenditure
The Department filed an appeal against the order of Ld. CIT(A) deleting the addition of ?92,39,520 made by the AO on account of disallowance of Technical Fees as capital expenditure. The AO considered the expenditure for designing the Independent Front Suspension System as capital in nature. The assessee contended that the expenses were revenue in nature and were paid to M/s Mahindra & Mahindra for using prototype tooling, which was the sole property of M/s Mahindra & Mahindra. The Tripartite agreement highlighted that the design and drawing were the property of M/s Mahindra & Mahindra. The Ld. CIT(A) held that the payment was revenue in nature as the appellant was granted limited rights to use the tooling for manufacturing the IFS components. The Tribunal upheld the Ld. CIT(A)'s decision, emphasizing the appellant's dependency on M/s Mahindra & Mahindra and the revenue nature of the payment.

Issue 2: Disallowance under section 14A
Regarding the disallowance under section 14A, the AO made an addition of ?29,65,939, which Ld. CIT(A) restricted to ?6,56,227. The Ld. CIT(A) acknowledged that Rule 8D should be applied for the disallowance under section 14A. The dispute was about the calculation, particularly Rule 8D(2)(ii). The appellant argued that no interest should be charged for investments as there were adequate income and the debit balance was squared up promptly. The Ld. CIT(A) agreed with the appellant's contentions, reducing the disallowance to ?6,56,277 and granting relief of ?23,09,662. However, the Tribunal found that the calculations needed further examination by the AO and set aside the issue for fresh consideration based on the law laid down by the Delhi High Court. The appeal of the Revenue was partly allowed for statistical purposes.

In conclusion, the Tribunal upheld the Ld. CIT(A)'s decision on the disallowance of Technical Fees as revenue expenditure and referred the disallowance under section 14A back to the AO for reevaluation.