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TMI Blog2019 (3) TMI 1612X X X X Extracts X X X X X X X X Extracts X X X X ..... lier years and decide the issue after affording reasonable opportunity of hearing to the assessee. Addition u/s 14A r.w.r. 8D - HELD THAT:- The issue arising in the present appeal is similar to the issue before the Tribunal in Capgemini Technology Services India Limited Vs. DCIT [ 2018 (3) TMI 540 - ITAT PUNE] and following the same parity of reasoning, where the Assessing Officer has failed to record satisfaction, having regard to the accounts of assessee, we hold that there is no merit in the order of Assessing Officer since there is no proper satisfaction being recorded by him. Disallowance of R D units purchased as per Technical License Agreement - whether it is mere case of purchase of equipment for R D projects or the payment is in the form of royalty paid by the assessee, licensee to the licensor? - disallowance u/s 40(a)(i) for non deduction of TDS - HELD THAT:- When the assessee has purchased a product in order to carry out improvements in its technology for future development and its sales thereafter, then such purchases cannot be said to be payment of royalty. It may be pointed out that additional purchase obligation for R D units was though as per terms of Technology Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issed. The grounds of appeal raised by Revenue are thus, dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... the case, the assessee had furnished return of income declaring total income of ₹ 1.29 crores. The assessee was engaged in the business of manufacturing of Engines, Generators, engine parts, generation of electricity and also trading in components, coke, oil, etc. During the course of scrutiny assessment proceedings, the Assessing Officer noted that the assessee had incurred expenditure on account of Late Delivery Fees, for which provision was made. A sum of ₹ 7,23,844/- was also included in provision made for an amount of ₹ 10,04,852/- for liquidated damages. Since an addition was made in the last assessment year on the issue, the assessee was requested to submit the details regarding actual utilization of provision in the subsequent year. The assessee could not provide necessary explanation and hence, the Assessing Officer made an addition of ₹ 10,04,852/- out of liquidated damages. Further, the assessee had claimed interest expenditure of ₹ 19.70 crores. The assessee had made investment in shares, mutual funds, etc. for sum of ₹ 476.33 crores. The assessee pointed out that it had earned dividend income of ₹ 4.76 crores on long term inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. The CIT(A) notes that though the assessee had provided details of customer names, invoice number and percentage of Late Delivery Charges but had not provided the copies of purchase orders showing Late Delivery Charges were payable. So, he upheld the disallowance made by the Assessing Officer. The CIT(A) has allowed the claim of assessee in respect of Civil construction and erection and commissioning, depreciation on printers, UPS and related items and commission paid to Directors. 9. Coming to the next issue of disallowance made under Rule 8D of the Rules, the CIT(A) noted that the assessee had filed rectification application before the Assessing Officer and after due verification, the Assessing Officer had restricted disallowance at ₹ 4,33,59,413/- as against original figure of ₹ 30,12,67,295/-. He upheld the aforesaid disallowance being reasonable. 10. Coming to the last issue of royalty payment, after considering submissions of assessee which are reproduced at pages 21 to 27 of appellate order, the CIT(A) went through clauses of Technology License Agreement, copy of which is reproduced at pages 28 to 35 of appellate order and also noted that there were certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ack to the file of Assessing Officer. The relevant findings are in para 9 of the order dated 12.02.2018. 15. Following the same parity of reasoning, we remit this issue also to the file of Assessing Officer to follow the directions of Tribunal in earlier years and decide the issue after affording reasonable opportunity of hearing to the assessee. The ground of appeal No.1 raised by assessee is thus, allowed for statistical purposes. 16. Now, coming to the next issue of disallowance made under section 14A of the Act, the learned Authorized Representative for the assessee pointed out that whole interest paid by the assessee could not be disallowed under Rule 8D(ii) of the Rules and only interest paid on loans which were directly attributable to any investments on which the assessee was earning dividend income, then could be disallowed. Another plea raised was that the Assessing Officer had failed to arrive at any satisfaction before invoking the provisions of Rule 8D of the Rules. 17. Brief facts relating to the issue are that the Assessing Officer noted that the assessee had claimed interest expenditure of ₹ 19.70 crores. Further, the assessee had made investment in shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as under:- "34. We have heard the rival contentions and perused the record. The Assessing Officer while passing the assessment order in para 10 had observed that the assessee had earned significant amount of tax free dividends and in the computation of income, the assessee has disallowed sum of Rs.50 lakhs under section 14A of the Act. Then, reference is made to the Note filed by the assessee on expenditure disallowable under section 14A of the Act. The Assessing Officer thereafter, takes note of the contents of said explanation and observed as under:- "I have gone through the submissions made by the assessee. It is observed that apart from investments in the overseas subsidiaries (where there is no tax-free income since the dividend is also taxable) the investments made by the assessee are in mutual funds. The entire investment in mutual fund is in non-equity scheme. In respect of investment in mutual funds, except for growth funds, the company receives tax free dividend. The amount of dividend received by the company is substantial. This is a clear case for application of Rule 8D. Hence, the contention of the assessee cannot be accepted. The disallowance u/s 14A is requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounts of assessee, we hold that there is no merit in the order of Assessing Officer since there is no proper satisfaction being recorded by him. 21. The last issue raised by the assessee relates to the claim of R&D expenditure. The assessee had entered into Technology License Agreement with Waukesha Engines, Dresser, Inc on 24.05.2007, under which it was paying royalty. The said royalty agreement was duly approved by Dept. of Science & Technology. The assessee had during the year under consideration purchased engines and claimed it to be R&D expenditure. The authorities below were of the view that where payment was made in connection with 'royalty' payment and where the agreement with Waukesha Engines was a composite agreement for royalty, in terms of which the assessee was obliged to purchase above engines, then the payment made by assessee fell within definition of 'royalty' and the assessee was obliged to deduct tax at source. In the absence of any deduction of tax at source, the said amount was disallowed under section 40(a)(i) of the Act. 22. The learned Authorized Representative for the assessee elaborately took us through terms of Technology License Agreement and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or right to use technology. He then stressed that purchase of engine was not payment of royalty. In this regard, he placed reliance on the decision of Ahmedabad Bench of Tribunal in Aatash Power Pvt. Ltd. Vs. ITO in ITA No.477/Ahd/2016, relating to assessment year 2011-12, order dated 30.01.2017. In alternate, on without prejudice basis, the learned Authorized Representative for the assessee pointed out that even if it is presumed that purchase of engine was transfer of technology, then such outright purchase was beyond the scope of 'royalty' as royalty is for use and right to use and not to purchase the equipment itself. The learned Authorized Representative for the assessee placed reliance on the following decisions:- i) CIT Vs. Gupta Bandhu (1998) 229 ITR 731 (MP) ii) DIT Vs. Ericsson A.B. (2012) 343 ITR 470 (Del) iii) CIT Vs. Creative Infocity Ltd. (2017) 397 ITR 165 (Guj) 23. The learned Departmental Representative for the Revenue referred to Explanation 2 under section 9(1)(vi) of the Act, which defines 'royalty' as (a) payments of any kind received as consideration for the use of or the right to use any copyright or a literary, artistic, or scientific work, incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties; (d) foster long term investment in the W200 diesel technology so as to keep the said engine current in the market place; (e) to utilize the existing sales / service network of each of the parties in order to gain share in both diesel and gas engine opportunities worldwide. The rights / obligations of the parties were also defined, as per which WED had to license to the assessee (a) for use of W200/W220 technology for the purpose of manufacturing and selling W200/W220 engines and their respective parts; (b) WED was to retain full ownership and sole rights to the platform for W220 gas engines i.e. including technology, design, technical data and related and / or embodied IP rights that relate to W220 gas engines and further includes all subsequently developed, by either parties, technology and IP rights, (c) WED would be responsible for W220 product development and it would have unilateral right to approve all changes to the main W200/220 engines platform, (d) WED was to provide assessee with access to improvement / upgrades of W200/220 products. As per sub-clause (h) of clause II, it was provided that WED would provide technical support when required regarding W220/200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actured and sold by it and also on the parts sold by it. The assessee was also to pay royalty on W220 gas engines and parts. The parties also agreed that in case the agreement was terminated before the end of term, then WED agreed that the assessee would retain its exclusive license in the W200 territory to manufacture and sell the W200 diesel in such territory. 27. Pursuant to this agreement, parties entered into Technology License Agreement on 24.05.2007. As per recitals of agreement, it is provided that the assessee licensee desired to obtain license with right to sub-lease, and to enable it to use Proprietary Product Technology to the extent necessary in accordance with terms below to manufacture, and take other actions to sell and deliver the Proprietary Products in the Territory. As per clause 1.8 of the said Technology License Agreement, Proprietary Products shall mean the W200 Proprietary Products and / or the W220 Proprietary Products. Similarly, Proprietary Product Technology was in respect of W200 and W220. The W200 Territory shall be worldwide as per clause 1.10 and W220 Territory was the nation of India and such other countries as may be subsequently agreed between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was agreed between the parties that licensee would pay royalty at the prescribed rates for sale, transfer, rent, lease for W200 diesel engines and also its parts and similarly for W220 products. There are other terms agreed upon between the parties, which are not relevant to adjudicate the issue which is raised in the present appeal. 29. The assessee in line with the said Technology Agreement for R&D purpose, purchased one 12V200 engine and one 18V200 Genset with switchgear, copy of sale invoice is placed at page 168 of Paper Book. The total price of 12V200 engines is USD 3,00,000 and of 18V200 DG is USD 3,00,000 and with cost of spare parts and other levies. The total invoice value was USD 7,09,593 equivalent to ₹ 3,72,81,428/-. The description of products sold was R&D 12V200 engine on skid and R&D 18V200 DG on skid. The assessee has claimed the said payment as deductible being the expenditure incurred on R&D. However, the authorities below have held the said payment to be royalty paid to licensor as per Technology License Agreement entered into between the parties. 30. The question which arises is whether it is mere case of purchase of equipment for R&D projects or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the payment of royalty. We have already referred in the paras hereinabove that in respect of other engines i.e. W220 products, Proprietary Rights were with WED and those rights were not transferred and it was also agreed that all subsequent developments in W220 Territory by either party would be with WED. 32. When the assessee has purchased a product in order to carry out improvements in its technology for future development and its sales thereafter, then such purchases cannot be said to be payment of royalty. It may be pointed out that additional purchase obligation for R&D units was though as per terms of Technology Transfer Agreement but its procurement could not be held to be payment of royalty to WED. The grant of license to use existing technology for the manufacture of W200 and 220 engines by the assessee is an independent activity and the terms of agreement for payment of royalty are in that regard or for the same. The purchase of two R&D units though emanates from the same agreement cannot be held to be payment of 'royalty'. We may refer to the definition of 'royalty' under section 9(1)(vi) of the Act in this regard, which clearly lays down that the payment should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised by Revenue. 36. Now, coming to second issue raised by the Revenue i.e. depreciation on Printers, UPS and other allied items @ 60%. 37. We have perused the orders of authorities below, wherein the Assessing Officer was of the view that Printers, UPS and other allied items were not eligible for deduction @ 60% i.e. rate applicable to computers. However, the CIT(A) has allowed the claim of assessee. The issue stands settled by various decisions of Tribunal that the assessee is entitled to higher claim of depreciation at 60% on Printers, UPS and other allied items as in the case of computers. Consequently, there is no merit in the plea of Revenue and the ground of appeal No.2 raised by Revenue is thus, dismissed. 38. Now, coming to ground of appeal No.3 raised by Revenue, which is against commission paid to Directors at ₹ 46 lakhs by invoking provisions of section 40A(2) of the Act. 39. It is the case of assessee that the issue stands covered by the order of Tribunal in assessee's own case in earlier years. 40. We refer to the order of Tribunal dated 12.02.2018 relating to assessment year 2007-08, wherein vide para 25 at pages 19 and 20, the Tribunal has allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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