2017 (11) TMI 1472 - AT - Income Tax

Payment on account of royalty for technical collaboration as per agreement to its AE - Held that - When the issue as to payment or royalty and technical fee by the taxpayer to its AE has already been decided in its favour in AYs 2002-03 and 2004-05 by the Tribunal, an appeal preferred by the Revenue before the Hon ble Delhi High Court has already been dismissed, we are of the considered view that the ld. TPO is to decide the issue qua payment of royalty and technical fees qua AY 2009-10 in accordance with the decision taken in earlier years in taxpayer s own case. So, we remit the case to the TPO to decide afresh after providing an opportunity of being heard to the taxpayer. So grounds no.2 to 2.6 are determined in favour of the taxpayer for statistical purposes. Payment of royalty and technical fees - AO treating as intangible assets and capital expenditure and made disallowance- Held that - When the agreement between the taxpayer and its AE is to grant indivisible and non-transferable nonexclusive right and licence to manufacture and assemble sale land distribute the product within the specified territory, it falls in the category of technical support and is not of enduring benefit of any kind to the taxpayer, so the addition made on account of royalty and technical fee is not sustainable, hence Grounds No.3 & 3.1 ordered to be determined in favour of the assessee. Addition u/s 14A - Held that - When the entire working has been brought on record by the taxpayer during assessment proceedings as to availability of the surplus funds with the taxpayer and there has always been a credit balance in the bank of the taxpayer on every day, it goes to prove that taxpayer has used its own funds to purchase the mutual funds to earn interest free income and the taxpayer has not used loan or overdraft funds to make investment. Aforesaid facts have not been controverted by the AO by recording objective satisfaction that the taxpayer has used borrowed funds to purchase mutual funds. In these circumstances, contention of ld. DR that, in case of huge circulatory fund, some disallowance should be there as there must be some expenditure is not tenable. This contention is also not tenable in the face of the fact that AO has not invoked Rule 8D of the Act. So, we are of the considered view that disallowance made by the AO to the tune of ₹ 52,16,745/- is not sustainable in the eyes of law, hence ordered to be deleted. Ground No.4 is determined in favour of the assessee.

Summary

Issues Involved:

1. Completion of assessment under section 144C/143(3) of the Income-tax Act, 1961.
2. Addition on account of the alleged difference in the arm's length price of international transactions of payment of royalty and technical fees.
3. Treatment of expenditure on account of royalty and technical fees as capital expenditure.
4. Disallowance of expenses under section 14A of the Income-tax Act.

Issue-Wise Detailed Analysis:

1. Completion of Assessment under Section 144C/143(3):

The taxpayer challenged the assessment completed at an income of ?58,11,30,568 against the returned income of ?35,35,93,957. This issue was considered general and did not require specific adjudication.

2. Addition on Account of Alleged Difference in Arm's Length Price:

The taxpayer made payments totaling ?23,01,95,810 for royalty, technical fees, and design & drawing fees to its Associated Enterprises (AE). The taxpayer benchmarked these transactions using the Transactional Net Margin Method (TNMM) and found them at arm's length. However, the Transfer Pricing Officer (TPO) rejected TNMM for royalty payments, arguing that they should be benchmarked separately using the Comparable Uncontrolled Price (CUP) method. The TPO determined the Arm's Length Price (ALP) of royalty at nil and made adjustments under section 92CA of the Act.

The taxpayer argued that similar issues had been decided in its favor in previous years by the Tribunal and the Delhi High Court. The Tribunal remitted the case back to the TPO to decide afresh in accordance with earlier decisions, providing an opportunity for the taxpayer to be heard.

3. Treatment of Expenditure on Account of Royalty and Technical Fees as Capital Expenditure:

The Assessing Officer (AO) treated payments of ?22,02,48,509 and ?20,71,357 as intangible assets and capital expenditure, providing depreciation at 25% under section 32. The taxpayer contended that the agreement with Showa, Japan, granted a non-transferable, non-exclusive right to manufacture and sell products, which did not result in a capital asset or enduring benefit.

The Tribunal, following earlier decisions affirmed by the Delhi High Court, held that the agreement provided technical support rather than an enduring benefit. Consequently, the addition on account of royalty and technical fees was not sustainable, and the issue was decided in favor of the taxpayer.

4. Disallowance of Expenses under Section 14A:

The AO disallowed ?52,16,745 by invoking section 14A, alleging it was attributable to earning exempt dividend income. The taxpayer argued that it used surplus funds for investment and that no direct relation between expenses incurred and exempt income was established.

The Tribunal noted that the taxpayer had sufficient surplus funds and that the AO failed to establish a direct nexus between borrowed funds and investment. The Tribunal referred to judgments from the Delhi High Court and the Supreme Court, which supported the taxpayer's position. The disallowance made by the AO was found unsustainable and was ordered to be deleted.

Conclusion:

The appeal filed by the taxpayer was partly allowed for statistical purposes, with the Tribunal remitting certain issues back to the TPO for fresh consideration and deciding others in favor of the taxpayer based on previous judicial precedents. The order was pronounced on November 22, 2017.