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TMI Blog2014 (11) TMI 97X X X X Extracts X X X X X X X X Extracts X X X X ..... see, for which the payment was made. The fact that the assessee made the payment to MM Mumbai for the services which were sine qua non for the carrying on of its business, goes to amply prove that such payment was made on account of legitimate needs of the assessee’s business - The sum and substance of the third situation is the disallowance u/s 40A(2) to the extent of the payment made to the person specified in section 40A(2)(b) in excess of the benefit derived by the assessee from the receipt of services - the rate at which the assessee paid to MM Mumbai cannot be considered as unreasonable or excessive for three reasons. The case of the assessee does not fall in any of the three situations contemplated by section 40A(2)(a) of the Act - once a payment is held to be not excessive or unreasonable having regard to the fair market value of the services or the legitimate needs of the business or the benefit derived by or accruing to the assessee, there can be no question of making or sustaining any disallowance u/s 40A(2) of the Act - there is no assignment of the intellectual property rights of such products to the assessee - The licenses have been granted on non-exclusive bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question, the assessee provided and also received engineering services to/from the Project Division of MM Mumbai. The assessee paid ₹ 48.31 lac for professional services to MM Mumbai and received a sum of ₹ 9.01 lac as service income from MM Mumbai for rendering of services. On being called upon to justify such expenditure, the assessee furnished a chart showing dates, number of hours, rate per hour and the amount paid to and received from MM Mumbai. It was submitted that MM Mumbai was providing design, drawings and engineering services for mechanical structure component and assembly. The assessee claimed to have utilized such services in execution of big projects undertaken by it for supply of equipments and erection as well as commissioning of plant/projects. The assessee also contended before the Assessing Officer (AO) that the payment was made to MM Mumbai @ ₹ 500 per hour, being the same rate at which it charged from MM Mumbai for the services rendered by it. The assessee further explained that MM Mumbai charged higher rate from other group companies for rendering similar services as were provided to the assessee. The rate of ₹ 500 per hour was state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or profession in which the first mentioned company has substantial interest; The expression a person shall be deemed to have a substantial interest in a business or profession has been defined in the Explanation in the context of a company, as holding at any time during the previous year the beneficial ownership of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power. Here it is relevant to note the definition of Subsidiary and Holding companies as given in section 4 of the Companies Act, 1956. To simply put, it provides inter alia, that a company shall, subject to the provisions of sub-section (3), be deemed to be a subsidiary of another, if that other holds more than half in nominal value of its equity share capital. On a conjoint reading of section 4 of the Companies Act and Explanation to section 40A(2)(b) of the Act, it clearly emerges that every holding company has a substantial interest in the subsidiary company as per this provision. 5. Reverting to the context, we find that there is no dispute on the fact that sub-clause (iv) of section 40A( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture is excessive or unreasonable i. having regard to fair market value of the goods, services or facilities for which payment is made; or ii. the legitimate needs of the business or profession of the assessee; or iii. the benefit derived by or accruing to the assessee therefrom. These three situations, warranting disallowance u/s 40A(2), are joined by the word or and are hence independent of each other. In other words, if a payment falls into any of these three situations, it is liable to be disallowed. 9. In so far as the first situation is concerned, it refers to excessive payment having regard to the fair market value of goods or services. It is vivid from the facts of the case that the AO has not determined the fair market value of the professional services received by the assessee, for which the said payment of ₹ 48.31 lac was made. 10. Now comes to the second situation in which the excessive or unreasonable payment is to be disallowed by considering the legitimate needs of the business or profession carried on by the assessee. The AO has made out a case that since the assessee was also rendering services to MM Mumbai, there was no reason for it to have receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee paid to MM Mumbai cannot be considered as unreasonable or excessive for three reasons. First, the assessee not only paid to MM Mumbai @ ₹ 500/- per hour but also charged at the same rate in rendering services to MM Mumbai. Whereas, the payment is to the tune of ₹ 48.31 lac, the receipt is amounting to ₹ 9.01 lac. The AO has accepted the receipt from MM Mumbai @ ₹ 500/- per hour as reasonable, but disputed the payment at the same rate and ex consequenti disallowed 50% of the same. The second reason is that MM Mumbai charged from the other group companies at the rates higher than ₹ 500/- per hour. This contention was specifically raised before the AO, which finds incorporation on page 3 of the assessment order. The AO has not controverted this contention. It can be seen from page 65 of the paper book read with various invoices raised by MM Mumbai on other group companies that the rate of ₹ 500/- per hour charged from the assessee is lower in comparison with others. The third reason for accepting the rate of ₹ 500/- per hour as reasonable is that the assessee paid professional charges to MM Mumbai in the earlier years as well, which pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the products. After considering all the relevant facts and circumstances of the case, the AO came to hold that the amount paid as royalty was for obtaining enduring benefit and hence treated the same as capital expenditure. After allowing depreciation @ 25%, he made addition of ₹ 2.26 crore subject to depreciation of ₹ 56.74 lacs. The assessee s contention that the issue of royalty to the associated enterprises was examined by the Transfer Pricing Officer and found to be at arm s length in this very year, did not weigh with the AO. The ld. CIT(A) ordered for the deletion of addition. 14. After considering the rival submissions and perusing the relevant material on record, it is seen that the assessee entered into Agreements with its three associated enterprises w.e.f. 1st April, 2003. A copy of the agreement with Metso Minerals, Australia, Ltd. has been placed on page 60 onwards of the paper book. From this Agreement, it can be seen that the assessee undertook to pay royalty @ 5% and 2.5% of the net sale value of the products/wear parts of the products. It is further evident from the Agreement that there is no assignment of the intellectual property rights of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /-. The ld. CIT(A) held that rule 8D cannot be applied to the year in question. Considering the totality of the facts and circumstances of the case, he reduced the disallowance by 50% to ₹ 3,59,429/-. The Revenue is aggrieved against the relief allowed by the ld. CIT(A). 17. After considering the rival submissions and perusing the relevant material on record, it is seen as an admitted fact that the assessee earned exempt dividend income and also incurred expenses in relation to such income. In such a situation, the application of section 14A cannot be ruled out. The Hon ble jurisdictional High Court in Maxopp Investments Ltd. Vs. CIT (2012) 347 ITR 272 (Del), has held that rule 8D is prospective and is applicable from the assessment year 2008-09. The Hon ble High Court has also held that in the years prior to AY 2008-09, the disallowance should be made on some reasonable basis. Adverting to the facts of the instant case, it is seen that the assessment year under consideration is 2007-08. In this view of the matter, no interference can be made in the impugned order to the extent of non-applicability of rule 8D. However, the question remains that some disallowance u/s 14A on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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