2018 (6) TMI 1455 - AT - Income Tax

Section 94(8) application - allotment of additional units without any payment on the basis of holding of such units on any particular date - Held that - As gone through the provisions of Section 94(8) of the Act and found that all the clauses under (a) to (c) have to be satisfied cumulatively for invoking the said provision. Clause (b) thereof speaks of allotment of additional units without any payment on the basis of holding of such units. In this matter such details as are furnished establish that there is always investment and redemption at very short durations and in such a situation it cannot be said that there is allotment of units without any payment merely on the basis of holding of the earlier units. We, therefore, hold that to the facts of the case on hand, Section 94(8) has no application and any addition made on that basis cannot be sustained.

Summary

Issues:
1. Transfer pricing issue
2. Treatment of expenditure on account of royalty and technical fee
3. Disallowance of expenditure under Section 14A of the Act
4. Disallowance of set off of short term capital losses under Section 94(8) of the Act

Detailed Analysis:
1. Transfer pricing issue:
The case involved determining the arm's length price of international transactions of royalty, technical services fee, and design and drawing fee. The Transfer Pricing Officer (TPO) initially reduced the arm's length price to nil, leading to additions in the assessment. However, the Tribunal referred to past decisions in favor of the assessee and remanded the case to the TPO for fresh consideration in line with earlier rulings, ultimately allowing the appeal on this issue.

2. Treatment of expenditure on account of royalty and technical fee:
The Tribunal considered past decisions and held that payments of royalty and technical fees did not result in enduring benefits to the assessee. Citing relevant judgments, the Tribunal concluded that such expenditures were allowable as revenue deductions. Consequently, the addition made on this account was deemed unsustainable, and the ground was allowed, leading to the deletion of the addition and a requirement to reverse depreciation.

3. Disallowance of expenditure under Section 14A of the Act:
Regarding the disallowance of expenditure under Section 14A, the Tribunal analyzed a tripartite agreement and the absence of a direct nexus between funds and investments. Relying on previous judgments and the absence of a determination by the Assessing Officer regarding the direct nexus, the Tribunal held that the disallowance made by the AO could not be sustained in law. Therefore, the disallowance under Section 14A was directed to be deleted.

4. Disallowance of set off of short term capital losses under Section 94(8) of the Act:
The Tribunal examined the conditions under Section 94(8) of the Act and found that all clauses needed to be cumulatively satisfied for its invocation. Considering the details provided and the nature of investments and redemptions, the Tribunal concluded that Section 94(8) did not apply in this case. As a result, the addition made on this basis was directed to be deleted, allowing the appeal on this ground.

In conclusion, the Tribunal partially allowed the appeal for statistical purposes, addressing each issue comprehensively and providing detailed reasoning based on legal precedents and factual analysis.