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TMI Blog2017 (11) TMI 1472X X X X Extracts X X X X X X X X Extracts X X X X ..... ferable 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 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... urred on account of royalty of ₹ 22,02,48,509 and technical fees of ₹ 20,71,357 as capital expenditure. 3.1 Without prejudice, the assessing officer / DRP erred on facts and in law in disallowing 100% expenditure incurred on account of royalty and technical fees, as opposed to 25% thereof being treated as capital expenditure in earlier years, which was, in any case, excessive. 4. That the assessing officer erred on facts and in law in disallowing expenses to the extent of ₹ 52,16,745 invoking section 14A of the Act, alleging the same to be attributable towards earning the exempt dividend income. 4.1 That the assessing officer erred on facts and in law in not appreciating that only expenditure incurred having direct relation to the earning of exempt income could be disallowed under section 14A of the Act. 4.2 Without Prejudice, that the assessing officer erred on facts and in law in not appreciating that no part of expenditure was disallowable in terms of subsection (2) of section 14A of the Act, even applying Rule 8D of the Rules." 4. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Munjal Showa Limited, the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight of the facts and circumstances of the case. GROUND NO.1 9. Ground No.1 is general in nature and does not require any adjudication. GROUND NO.2 TO 2.6 10. Undisputedly, the assessee has made payment on account of royalty for technical collaboration as per agreement dated 11.03.2002 to the tune of ₹ 22,02,48,509/- to its AE. The taxpayer benchmarked its transaction qua payment of royalty to the tune of ₹ 22,02,48,509/- for use of technical know-how, design and drawing fee with regard to comparable uncontrolled transactions and found its transactions qua payment of royalty at arm's length by applying CUP method. The taxpayer further adjusted the payment of ₹ 23,01,95,810/- on account of payment of royalty, payment of technical fees and payment of design & drawing fee by aggregating transactions along with international transactions based on TNMM and selected 4 comparables whose arithmetic mean OP/Sales comes at 2.90% vis-à-vis OP/Sales margin of the taxpayer at 4.48%. 11. However, TNMM used by the taxpayer for benchmarking international transactions qua payment of royalty after aggregating the same with other transactions has been rejected by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Delhi High Court in the earlier years in assessee's own case of which, the AO did not have benefit at the time when he passed the order, we consider it appropriate to remit the matter back to him and take decision afresh, in accordance with law by having regard to the aforesaid judgment. Needless to say the assessee may be granted effective opportunity of being heard." 14. Pursuant to the decision rendered by the Tribunal, TPO accepted the international transactions relating to royalty and technical fees by the taxpayer to its AE at arm's length and adjustment made in the original order for AYs 2007-08 and 2008- 09 has been deleted. 15. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s And Rings Ltd. (supra) get squarely attracted to the case at hand." 20. So, following the decision rendered by the Tribunal and affirmed by Hon'ble High Court in taxpayer's own case for AYs 1993-94 to 1995-96 which has further been followed in AYs 2002- 03, 2003-04, 2004-05, 2006-07, 2007-08 and 2008-09, we are of the considered view 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. GROUND NO.4 21. Undisputedly, the taxpayer has earned exempt dividend income to the tune of ₹ 14,092/- from its investment made in mutual fund. AO made disallowance on account of expenses to the amount of ₹ 52,16,745/- by invoking the provisions contained u/s 14A by applying ad hoc rate of 12% on the investment purchased and sold during the year. Undispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowed u/s 14A of the Act. However, the assessee deliberately tried to mislead the department and failed to furnish any working in this regard." 29. Aforesaid observation made by the AO shows that the entire working otherwise, available at pages 201 to 211 of the paper book, showing investment by the taxpayer was with AO and in these circumstances, it was imperative for the AO to prove that the investment was not made out of the surplus fund or interest free borrowed fund. Nor the AO has established any nexus between borrowed funds and investment made. 30. From the working available at pages 201 to 211 of the paper book given by the taxpayer, it is proved that the taxpayer was having mixed pool of funds and in such situation, onus is on the Revenue to establish direct nexus between borrowed funds and investment. Reliance in this regard is placed on the judgment of Hon'ble Delhi High Court in case of HT Media Ltd. vs. Pr. CITIV, New Delhi - (2017) 85 taxmann.com 113 (Delhi) wherein the Hon'ble High Court has decided the identical issue in favour of the taxpayer by making following observations :- "51. In the present case, the Assessee has been able to demonstrate that the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bombay High Court also held that in case the assessee has sufficient surplus fund and the AO has failed to determine any direct nexus between the borrowed funds and investment, there is no question of invoking the provisions contained u/s 14A of the Act. 36. AO has failed to record his objective dissatisfaction as required u/s 14A(2) as to the facts demonstrated by the taxpayer that the taxpayer has sufficient surplus funds and there is no direct nexus of borrowed funds with investments. 37. So, in the given circumstances, 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. 38. 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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