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Assistant CIT,Central Circle-II, Faridabad V/s. M/s Hindustan Syringes & Medical Devices Ltd., Ashoka Estate, Ground Floor, Loft No.3, 24, Barakhamba Road, New Delhi
July, 10th 2012
        IN THE INCOME TAX APPELLATE TRIBUNAL DELHI `C' BENCH
          BEFORE SHRI R.P. YADAV, JM & SHRI A.N. PAHUJA, AM

                           ITA nos.1934 & 1935 /Del/2012
                      Assessment years:2007-08 & 2008-09

Assistant CIT,                          M/s
                                    V/s .     Hindustan Syringes   &
Central Circle-II,                      Medical Devices Ltd., Ashoka
Faridabad                               Estate, Ground Floor, Loft
                                        No.3, 24, Barakhamba Road,
                                        New Delhi
                           [PAN : AAACH 0007 M)

(Appellant)                                            (Respondent)

               Assessee by            Shri V.K. Aggarwal,AR
               Revenue by             Shri Satpal Singh, DR


                 Date of hearing                  28-06-2012
                 Date of pronouncement            06-07-2012





                                    ORDER


  A.N.Pahuja:- These two appeals filed on 26.04.2012 by the Revenue against
 two separate orders dated 16.02.2012 of the ld. CIT(A)(Central)-Gurgaon, raise
 the following grounds:-


 I.T.A. no. 1934/D/2012[AY 2007-08]


                  1. Whether on the facts and in the circumstances of the
                     case, the learned CIT(A) was right in law in deleting
                     the addition of ``11,44,183/- made by the Assessing
                     Officer for earning dividend income of ``1,61,44,244/-
                     u/s 14A of the Income-tax Act.

                  2. Whether on the facts and in the circumstances of the
                     case, the learned CIT(A) was right in law in deleting
                     the addition of ``12,12,951/- on account of royalty in
                     view of Hon'ble Supreme Court's decision in the case
                     of Jonas Woodhead and Sons (India) Ltd. Vs. CIT in
                                         2          ITA nos.1934 & 1935/Del./2012


                    (224 ITR 342) and Southern Switch Gear Ltd. Vs. CIT
                    in (232 ITR 359), & Scientific Engineering House Ltd.,
                    Vs. CIT in (157 ITR 86,


I.T.A. no. 1935/D/2012[AY2008-09]

                 1. Whether on the facts and in the circumstances of the
                 case, the learned CIT(A) was right in law in deleting the
                 addition of ``11,85,916/- made by the Assessing Officer
                 for earning dividend income of ``2,11,15,548/- u/s 14A of
                 the Income-tax Act.

                 2. Whether on the facts and in the circumstances of the
                 case, the learned CIT(A) was right in law in deleting the
                 addition of ``63,60,981/- on account of royalty in view of
                 Hon'ble Supreme Court's decision in the case of Jonas
                 Woodhead and Sons (India) Ltd. Vs. CIT in (224 ITR
                 342).


2.           Adverting first to ground no.1 in these two appeals, facts, in brief,
as per relevant orders for the AY 2007-08 are that return declaring income of
``44,31,46,,834/- filed on 26.10.2007 by the assessee, engaged in the business
of manufacturing glass syringes, surgical blades, disposable syringes etc., after
being processed u/s 143(1) of the Income-tax Act, 1961[hereinafter referred to as
the `Act'], was taken up for scrutiny with the service of a notice u/s 143(2) of the
Act. During the course of assessment proceedings, on perusal of profit and loss
account, the Assessing Officer (A.O. in short) noticed that the assessee earned
dividend income of ``1,61,44,244/-, exempt in terms o the provisions of the Act.
To a query by the AO, seeking details of expenditure incurred in earning exempt
income, in terms of provisions of section 14A of the Act read with Rule 8D of the
I.T. Rules, 1962, the assessee replied as under:-


      i)     "The activity of investment/earning of dividend income does not
             entail incurring of any specific or substantial expenditure.
                                       3          ITA nos.1934 & 1935/Del./2012


      II)    There is no basis or justification for apportionment of composite
             expenditure being incurred for purpose of earning primarily taxable
             income.


      III)   Rule 8D of I.T. Rule has been notified w.e.f. 01.04.2007 and,
             therefore, cannot have retrospective operation.


2.1          After considering the reply of the assessee, the AO while referring
to decisions in CIT Vs. Sharwan Kumar Swarup,210 ITR 886(SC); H.H. Sir Rama
Varma Vs. CIT, 205 ITR 433 (SC); CIT Vs. Podar Cement (P) Ltd., 226 ITR 625
(SC); CIT Vs. Shelly Products Ltd. 261 ITR 367(SC); CIT Vs. Shahzada Nand &
Sons,60 ITR 392(SC); and M/s Daga Capital Management Pvt. Ltd. in I.T.A.
no.8057/Mum/2003 and M/s Maxopp Investment Ltd. Vs. ACIT               in I.T.A.
no.1372/Del./2005, observed that in the instant case, the assessee continued
and maintained investments in terms of well informed and co0ordinated
management decisions which involved indirect expenditure           including in
collection of income, follow up and telephone etc...Accordingly, the AO
disallowed an amount of ``11,44,183/- being the 0.5% of the average value of
investment in terms of provisions of section 14A of the Act read with Rule 8D of
the IT Rules,1962.


2.2          Likewise, in the AY 2008-09, the AO disallowed an amount of
``11,85,916/- in terms of aforesaid provisions of section 14A read with Rule 8D
of I.T. Rules,1962.


3            On appeal, the ld. CIT(A) deleted the disallowance in the AY 2007-
08 while relying upon the decision dated 18.11.2011 of of the Hon'ble Delhi High
Court in M/s Maxopp Investment Ltd. vs. ITO in ITA no.687/2009 and the
decision dated 12.08.2010 of Hon'ble Bombay High Court in the case of M/s
Godrej Boyce Mfg. Co. Ltd. in I.T.A. no.626 of 2010 as also Minda Investment
Ltd. vs. DCIT ,2010-TIOL-699-ITAT-DEL, holding as under:-
                                  4           ITA nos.1934 & 1935/Del./2012



"14. From the aforesaid pronouncement of the Hon'ble High Courts
of Delhi and Mumbai, it is clear therefore that Rule 8D has no
retrospective applicability, so the invoking of the same by the Ld
AO for present year A Y 2007-08 therefore goes against him.
Furthermore, the Ld. AO was required to satisfy himself as to the
correctness of the claim of the assessee, in this case assessee had
contended that no expenditure had been incurred in relation to
earning of the exempt income. Even the Special Bench relied upon
by the Ld. AO mentions about "satisfaction" of the AO before
proceeding with the disallowance. This has not been done. On a
perusal of the audited accounts of the assessee for the year, it is
seen that investment during the year was made in prudential ICICI
FMA series 35 and the other in Prudential ICICI liquid plan
institutional plus- growth series-34 of 10,000,000 and 23,000,000
units respectively. Furthermore the assessee had contended that
the investments in these two plans were from the surplus fund of
the assessee company. A certificate was also filed from ICICI
prudential AMC Ltd. that no expenses were claimed to its clients's
account.. It is also not a case of one indivisible business giving rise
to taxable income as well as exempt income. Neither is this a case
of assessee company dealing in several shares, mutual funds or
securities. I find nothing contrary to rebut the contention of the
assessee as per its written submission furnished before me.
Needless to say, for making any disallowance which is not arbitrary
or artificial, it must be based on some real and substantial material.
The Courts including the jurisdictional High Court in the case of
Hero Cycles Ltd. (2010) 323 ITR 518 ( P&H) have held that no
disallowance can be made on estimate basis, that, there has to be
a categorical finding with regard to expenditure incurred on earning
the exempted income. In Wimco Seedlings Ltd. vs. DCIT (109 TTJ
9(Del)TM 462, the Hon'ble Tribunal inter-alia held that the section
14A cannot be extended to disallow even expenditure which is
assumed to have been incurred for the purpose of earning the tax
free income.

15. On query as to the position of appeal against the assessment
order u/s 143(3) on similar issue for A Y 2006-07, the AR of the
assessee informed that no second appeal was filed since there was
no judgment of any High Court on the subject at the time of
CIT(A)'s order, the judgment of the Special Bench of the ITAT
prevailed at that point of time. However, that the basis of
confirmation of the disallowance u/s 14A by CIT(A) did not survive
now with the binding decision of the Delhi High Court. Copy of the
appellate order was furnished. It is seen that the disallowance u/s
                                         5          ITA nos.1934 & 1935/Del./2012





      14A r/w Rule 8D by the Ld. AO relying on the decisions of the
      Special Benches of ITAT (supra) Delhi and Mumbai was confirmed
      by the Ld CIT(A) stating that in view of the latest decision of the
      Special Bench Mumbai IT AT (in the case of M/s Daga Capital
      Investment Pvt. Ltd) on this issue, categorically holding that being
      procedural in nature, Rule 8D is applicable with retrospective effect.
      (para 3.1 of the Appellate order dt.18.3.2010). - However, as stated
      in para 13 ante, this decision has been reversed by the Bombay
      High Court.

      16. To sum up, as discussed in the pre-pages, there has been a
      change in the law as regards the applicability of Rule 8D. The
      decisions of the Special Benches stands reversed by the higher
      judicial forum and though not jurisdictional High Court, an
      interpretation of law has been given which implicitly over rules the
      decision of Special Bench including jurisdictional Special Bench. It
      is also settled law that disallowance u/s 14A is to be on basis of a
      categorical finding that expenditure has been incurred for earning
      the exempted income. Consequently, after a careful consideration
      of the facts of the case and the legal position, I hold that application
      of the provisions of Section 14A r/w Rule 8D by the Ld. AO for
      making the disallowance is not acceptable. Furthermore, I am of
      the opinion that there is no material on record to substantiate any
      disallowance by the AO under Sec. 14A. I therefore have to differ
      from the order of the Ld. CIT(A) on the stand taken on the issue at
      hand for the A Y 2006-07. As such, the disallowance made by the
      Ld. AO is deleted. Assessee succeeds in grounds of appeal no. 3."

3.1          Likewise in assessment year 2008-09, the ld. CIT(A) deleted the
disallowance in the following terms:-


      "11. From the impugned order it is apparent that the Ld. AO has
      also not found any deficiency in the claim of having incurred
      Rs.2,13,610/- by the assessee towards earning of the income not
      chargeable to tax. The AR had submitted details of the expenditure
      incurred U/S 14A which is stated to have been furnished before the
      Ld AO, which is as below:
      Details of Expenses Incurred on Investments U/S 14 for the Year
      Ending 31st March 2008:
      S.No.        Particulars                                 Amounts (In `)
      1     Salary                                             103181.08
            Mr.Dushayant Kumar `.257952.70 of 40%                         .
      2     Telephone/Fax/E-mail@ - `.500/-P.M                   6000.00 .
                                   6          ITA nos.1934 & 1935/Del./2012


3      Printing & Stationary @                             2400.00
       .`.200/- P.M                                     .
       4      Supervision Charges                       102027.14
              Mr. S.K. Gandhi `.816217.12/305
       .     for 1 hour daily                                              .
       .                                                 213608.22

If the above details of expenditure were furnished before the Ld
AO, the same were not refuted as evident from the impugned order.
To reiterate, the Ld. AO was required to necessarily record his
dissatisfaction on the claim of the assessee u/s 14A(2), whether
details were filed or not, before taking recourse to Rule 8D. Even
the Special Bench relied upon by the Ld. AO mentions about
"satisfaction" of the AO before proceeding with the disallowance.
This has not been done. This is also not a case of one indivisible
business giving rise to taxable income as well as exempt income.
Neither is this a case of the assessee company dealing in several
shares, mutual funds or securities. As such, I find merit in the
contention raised by the appellant. Needless to say, for making any
disallowance which is not arbitrary or artificial, it must be based on
some real and substantial material. The Courts including the
jurisdictional High Court in the case of Hero Cycles Ltd. (2010) 323
ITR 518 ( P&H) have held that no disallowance can be made on
estimate basis, that, there has to be a categorical finding with
regard to expenditure incurred on earning the exempted income. In
Wimco Seedlings Ltd. Vs DCIT (109 TTJ 9(Del)TM 462, the Hon'ble
Tribunal inter-alia held that the section 14A cannot be extended to
disallow even expenditure which is assumed to have been incurred
for the purpose of earning the tax free income.

12.     Therefore, as discussed in the pre-pages, there has been a
change in the law as regards the applicability of Rule 8D. The
decisions of the Special Benches stands reversed by the higher
judicial forum and though not jurisdictional High Court, an
interpretation of law has been given which implicitly over rules the
decision of Special Bench including jurisdictional Special Bench. It
is also settled law that disallowance u/s 14A is to be on basis of a
categorical finding that expenditure has' been incurred for earning
the exempted income. Consequently, after a careful consideration
of the facts of the case and the legal position, I hold that application
of the provisions of Section 14A r/w Rule 8D by the Ld. AO for
making the disallowance is not acceptable. Furthermore, I am of
the opinion that there is no material on record to substantiate any
further disallowance under the provisions of Sec. 14A by the AO.
As such, the disallowance made by the Ld. AO is deleted.
Assessee succeeds in grounds of appeal no.3."
                                         7        ITA nos.1934 & 1935/Del./2012



4.      The Revenue is now in appeal before us against the aforesaid findings of
the ld. CIT(A).The ld. DR supported the findings of the AO while contending that
the assessee did not furnish any cash flow statement in respect of investment in
the aforesaid funds in these two assessment years nor the relevant details of
expenditure incurred so as to enable the AO to record his satisfaction regarding
the working adopted by the assessee for ascertaining disallowance u/s 14A of
the Act. On the other hand, the ld. AR on behalf of the assessee supported the
impugned order while contending that investment of `10crores in Prudential ICICI
FMP series-35-3 months Plan C and `23 crores in Prudential ICICI Liquid Plan
Institutional Plus-Growth Series -34 was made in the period relevant to the AY
2007-08 besides investment of 13.93 crores in Prudential ICICI Floating Rate
Plan-C brought forward from the preceding year. In the period relevant to AY
2008-09, the assessee invested       `2 crores in Prudential ICICI Real Estate
Securities Fund & `105,752,496/- in Templeton Floating Rate Income Fund-long
term plan besides reinvestment as also subscription towards Prudential ICICI
Floating Rate Plan-C to the extent of `214,601,649/-. To a query by the Bench,
the ld. AR did not reply as to whether any cash flow statement or sources of
these investments were explained before the AO in the relevant years and
instead submitted that the assessee made oral submissions before the AO
besides reply in terms of a note ,a copy of which is placed on page 28 of the
paper book. However, after discussion, both the parties agreed that the issue
requires reconsideration by the AO in the light of various judgments including
those of the Hon'ble jurisdictional High Court.


5.            We have heard for both the parties and gone through the facts of
the case. Indisputably, the AO disallowed the aforesaid amount invoking
provisions of section 14A(2) of the Act read with Rule 8D of I.T. Rules,
1962,without even analyzing the nature of the expenditure nor it appears that
relevant details of expenditure and accounts were placed before the AO or the
ld. CIT(A). The ld.AR merely invited our attention to page 28 of the paper book
                                        8             ITA nos.1934 & 1935/Del./2012


in the AY 2007-08 wherein it is mentioned that no interest cost was involved
because only surplus funds were invested and neither any direct or indirect cost
were incurred for earning the exempt income to the tune of ``1,61,44,244/- from
ICICI Prudential mutual fund, liquid plan etc.. There is nothing to suggest as to
whether any cash flow statement or sources of the investments in the various
funds by the assessee in these two assessment years was placed before the AO
or the ld. CIT(A) and when questioned by us the ld. AR submitted that            the
matter be re-examined by the AO in the relevant years. Apparently, the assessee
did not furnish any details     of expenditure incurred for management and
supervision of aforesaid investments in the AY 2007-08 while in the AY 2008-09,
the assessee itself stated that an expenditure of `2,13,610/- alone was incurred.
In any case, no material was placed before the AO in order to enable him to
record his satisfaction while the ld.CIT(A) concluded that the AO was required
to record his satisfaction on the claim of the assessee u/s 14A(2) of the Act,
irrespective of the fact of filing of details or otherwise. Hon'ble Apex Court in
Kantamani Venkata Narayana and Sons v. First Addl. ITO [1967] 63 ITR 638
and again in Malegaon Electricity Co. P. Ltd. v. CIT [1970] 78 ITR 466 (SC)
observed that it is the duty of the assessee to bring to the notice of the Income
tax Officer particular items in the books of account or portions of documents
which are relevant. The law casts a duty on the assessee to disclose fully and
truly all material facts necessary for his assessment for that year. Not even a
whisper has been made before us as to whether or not relevant accounts were
placed before the AO or the ld. CIT(A) in order to enable them to examine the
claim of the assessee. The ld. CIT(A) merely referred to certain decisions in
relation to the disallowance without even examining the relevant accounts or
ascertaining the relevant facts and circumstances .


5.1.   Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing
Company Ltd. (supra) while adjudicating a similar issue in the context
of provisions of sec. 14A of the Act and Rule 8D of the IT
Rules,1962 concluded that            Rule 8D, inserted w.e.f 24.3.2008
                                        9         ITA nos.1934 & 1935/Del./2012


cannot be regarded as retrospective because it enacts an artificial
method of estimating expenditure relatable to tax-free income. It
applies only w.e.f AY 2008-09. For the assessment years where
Rule 8D does not apply, the AO will have to determine the quantum
of disallowable expenditure by a reasonable method having regard
to    all    the   facts   and   circumstances,   the   Hon'ble   High   Court
concluded.


5.2         Hon'ble Supreme Court in their decision dated 6.7.2010 in
CIT v. W alfort Share & Stock Brokers (P.) Ltd.,326 ITR 1, inter alia,
observed that for attracting section 14A of the Act there has to be
a proximate cause for disallowance, which is its relationship with the
tax exempt income. The theory of apportionment of expenditure between
taxable and non-taxable has, in principle, been now widened under section 14A,
Hon'ble Apex Court concluded.


5.3         Hon'ble Punjab & Haryana High Court in their decision in CIT
vs. Hero Cycles Ltd.,323 ITR 518 have observed that disallowance
under section 14A requires finding of incurring of expenditure and
where it is found that for earning exempted income no expenditure
has been incurred, disallowance under section 14A cannot stand.


5.4 In Cheminvest Ltd. v. Income-tax Officer,317ITR(AT)86,Special Bench held
that when the expenditure is incurred in relation to income which does not form
part of total income, it has to suffer the disallowance irrespective of the fact
whether any income is earned by the assessee or not and the provisions of sec.
14A of the Act do not envisage any such exception.
                                           10          ITA nos.1934 & 1935/Del./2012


5.5      Hon'ble jurisdictional High Court in a recent decision dated 18.11.2011 in
Maxopp Investment Ltd. vs. CIT,[2011] 15 taxmann.com 390 (Delhi) held as
under:

        "41. Sub-section (2) of section 14A, as we have seen, stipulates that the
      Assessing Officer shall determine the amount of expenditure incurred in
      relation to income which does not form part of the total income "in
      accordance with such method as may be prescribed". Of course, this
      determination can only be undertaken if the Assessing Officer is not satisfied
      with the correctness of the claim of the assessee in respect of such
      expenditure. This part of section 14A(2) which explicitly requires the
      fulfillment of a condition precedent is also implicit in section 14A(1) [as it now
      stands] as also in its initial avatar as section 14A. It is only the prescription
      with regard to the method of determining such expenditure which is new and
      which will operate prospectively. In other words, section 14A, even prior to
      the introduction of sub-sections (2) & (3) would require the assessing officer
      to first reject the claim of the assessee with regard to the extent of such
      expenditure and such rejection must be for disclosed cogent reasons. It is
      then that the question of determination of such expenditure by the assessing
      officer would arise. The requirement of adopting a specific method of
      determining such expenditure has been introduced by virtue of sub-section
      (2) of section 14A. Prior to that, the assessing officer was free to adopt any
      reasonable and acceptable method.
      42. Thus, the fact that we have held that sub-sections (2) & (3) of section
      14A and Rule 8D would operate prospectively (and, not retrospectively) does
      not mean that the assessing officer is not to satisfy himself with the
      correctness of the claim of the assessee with regard to such expenditure. If
      he is satisfied that the assessee has correctly reflected the amount of such
      expenditure, he has to do nothing further. On the other hand, if he is satisfied
      on an objective analysis and for cogent reasons that the amount of such
      expenditure as claimed by the assessee is not correct, he is required to
      determine the amount of such expenditure on the basis of a reasonable and
      acceptable method of apportionment. It would be appropriate to recall the
      words of the Supreme Court in Walfort (supra) to the following effect:-
      "The theory of apportionment of expenditure between taxable and non-taxable has,
      in principle, been now widened under section 14A."
      So, even for the pre-Rule 8D period, whenever the issue of section 14A
      arises before an Assessing Officer, he has, first of all, to ascertain the
      correctness of the claim of the assessee in respect of the expenditure
      incurred in relation to income which does not form part of the total income
      under the said Act. Even where the assessee claims that no expenditure has
      been incurred in relation to income which does not form part of total income,
      the assessing officer will have to verify the correctness of such claim. In
      case, the assessing officer is satisfied with the claim of the assessee with
      regard to the expenditure or no expenditure, as the case may be, the
                                           11         ITA nos.1934 & 1935/Del./2012


      assessing officer is to accept the claim of the assessee insofar as the
      quantum of disallowance under section 14A is concerned. In such
      eventuality, the assessing officer cannot embark upon a determination of the
      amount of expenditure for the purposes of section 14A(1). In case, the
      assessing officer is not, on the basis of objective criteria and after giving the
      assessee a reasonable opportunity, satisfied with the correctness of the
      claim of the assessee, he shall have to reject the claim and state the reasons
      for doing so. Having done so, the assessing officer will have to determine the
      amount of expenditure incurred in relation to income which does not form
      part of the total income under the said Act. He is required to do so on the
      basis of a reasonable and acceptable method of apportionment."
.
5.6        As already observed, in the instant case, the assessee denied
incurring any expenditure for earning income, which does not form total income
during the course of assessment proceedings even when huge investments
were made by the assessee in securities . In terms of the aforesaid decision of
the Hon'ble jurisdictional High Court in Maxopp Investment Ltd.(supra), even
where the assessee claims that no expenditure has been incurred in relation to
income which does not form part of total income, the AO is required to verify the
correctness of such claim. In case, the AO is not, on the basis of objective criteria
and after giving the assessee a reasonable opportunity, satisfied with the
correctness of the claim of the assessee, he shall have to reject the claim and
state the reasons for doing so. Having done so, the AO has to determine the
amount of expenditure incurred in relation to income which does not form part of
the total income under the said Act, Hon'ble High Court concluded. Following the
view taken in this decision, Hon'ble jurisdictional High Court in CIT vs. Machino
Plastic Ltd in their decision dated 28.2.2012 in ITA no. 92 of 2011, restored the
matter to the file of the AO, being handicapped because of failure of the
assessee to furnish relevant details and particulars .In the instant case also, the
AO was handicapped, because of failure of the assessee to furnish relevant
details/particulars and accounts while making the disallowance in terms of
provisions of sec. 14A of the Act. There is nothing in the assessment order or
impugned order as to whether the          assessee placed the      relevant details &
accounts before      the AO nor the ld. CIT(A) seems to have undertook any
exercise to ascertain the details of expenditure objectively in managing and
                                         12         ITA nos.1934 & 1935/Del./2012


supervising the aforesaid huge investments in various funds & securities. Even
when ,a query was raised by us in that respect, the ld. AR sought
that matter be restored to the file of the AO. In view of the
foregoing, we consider it fair and appropriate to set aside the order
of the ld. CIT(A) and restore the matter to the file of the AO for
deciding the issue, afresh in accordance with law in the light of our
aforesaid      observations     and      various   judicial       pronouncements,
including      those   referred     to   above,    after        allowing   sufficient
opportunity to     the assessee Needless to say that while redeciding
the issue, the AO. shall pass a speaking order,                  giving reasons for
his satisfaction       or otherwise, as pointed out by the Hon'ble
jurisdictional High Court in their decision in Maxopp Investment Ltd
(supra). The assessee is also directed to furnish all the relevant
details   of    expenditure       actually    incurred     in       managing     and
supervising the aforesaid huge investments in funds & securities
along with relevant accounts and cash flow statement. W ith these
observations, ground no 1 in these two appeals is disposed of.


6.             Ground no.2 in these appeals relate to disallowance on account of
royalty. On perusal of details, the AO noticed that the assessee paid royalty of
``16,17,267/- in assessment year 2007-08 and ``84,81,307/- in assessment year
2008-09. The assessee is stated to have entered into technical collaboration
agreement with Star Syringe Ltd., UK, First Line Medical Supplies Income, USA
and Estar Technologies Ltd., Israel. To a query by the AO, the assessee replied
that the entire amount was revenue in nature. It was further submitted that


      i) the royalty was paid in lieu of only right of usage for limited
      period of technical know how;
      ii) no ownership rights passed on to assessee; and.
                                           13      ITA nos.1934 & 1935/Del./2012


      iii) no right of enduring nature or advantage of enduring nature
      arose to    the assessee.while the payment was        determined on
      basis of sales of units of product


Inter alia, the assessee relied upon decisions in CIT Vs. Cipla India Ltd.
,69 ITR 692;CIT Vs. British India Corpn. Ltd. 165 ITR 51;Alembic
Chemical Works Co. Ltd. Vs. CIT 177 ITR 377;CIT Vs. India Oxygen Ltd.
218 ITR 337;CIT Vs. IAEC (Pumps) Ltd. 232 ITR 316 and CIT Vs. Wavin
(India) Ltd. 236 ITR 314.


6.1          However, the AO did not accept the submissions of the assessee
and while referring the decisions in the case of CIT Vs. British India Corporation
Ltd., 165 ITR 51 (SC); CIT Vs. Indian Oxygen Ltd., 218 ITR 337 (SC); CIT Vs.
IAEC (pumps) Ltd., 232 ITR 316 (SC); Southern Switch Gear Ltd. Vs. CIT,232
ITR 359;Jonas Woodhead and Sons (India) Ltd. Vs. CIT,224 ITR 342(SC);
Transformer & Switchgear Ltd. Vs. CIT (1976) 103 ITR 352 (Madras); Fenner
Woodroffe & Co. Ltd. Vs. CIT (1976) 102 ITR 665 and M.R. Electronic
Components Ltd. Vs. CIT (1982) 136 ITR 305, disallowed the entire amount of
``16,17,267/- on account of royalty, treating the same as capital in nature, having
been incurred towards acquisition of intangible assets under the         aforesaid
collaboration agreement and allowed depreciation on the said amount


6.2          Similarly, in assessment year 2008-09 disallowed an amount of
``84,81,307/- while allowing depreciation @25% thereon.


7.           On appeal, the ld. CIT(A) allowed the claim while following the
decision of the ITAT in the assessee's own case for the AYs 2005-06 and 2006-
07, holding as under in the AY 2007-08:-


      "18. The Authorized Representative informed that similar
      disallowances had been deleted by the Hon'ble ITAT New Delhi for
      A.Y 2005-06 and A.Y 2006-07 while reiterating its submission as to
                                  14          ITA nos.1934 & 1935/Del./2012


the nature of the expenditure towards royalty. The copies of orders
of the Hon'ble ITAT for A.Y 05-06 and 06-07 were furnished. Para 4
& 5 of the order for A.Y 06-07 is reproduced below:-

"We have heard the rival submissions and we found that similar
disallowance was deleted by the Tribunal in respect of A. Y 2005-06 vide
aforementioned order dated 8th May, 2009 the relevant portion of which
is reproduced below:-
        "Ground NO.3 is against disallowance of Rs.
        1,62,770/- being 25% of the royalty payable
        considering it as a capital expenditure.


The facts are that the assessee company entered into
technical collaboration of agreement with Star Syringes Ltd
(Licensor). Under the agreement, the licensor gave technical
assistance in relation to assembly manufacture, distribution
and sale of products. The assessee was required to pay
royalty @ 5% of sale product. The AO held that the
agreement is for 10 years which can be renewed further.
The assessee has acquired know-how which gives an
advantage of enduring nature. Applying the decisions of
Hon'ble Supreme Court in the case of Southern Switchgears
Ltd., 148 ITR 272, 25% of the total royalty expenses were
considered as capital expenditure. The same was confirmed
by the learned CIT(A).


The ld. counsel for the assessee submitted that the assessee
is an old established company. On 12.3.2001 it entered into
agreement with Star Syringes Ltd. owns and possesses
know-how technology for the manufacturing of the product
produced by the assessee namely syringes. Originally the
assessee was manufacturing disposable syringes but now the
assessee wanted to manufacture self-destructing syringes.
The royalty is payable because the licensor has granted right
in license under the agreement of know-how to manufacture,
distribute and sell the product in the territory.           The
agreement is for the period of 7 years. As per clause 12.3 of
the agreement, upon the termination of the agreement, the
licensee shall forthwith return to the licensor, all designs and
drawings data material other documents etc. in its possession,
whether or not containing know-how.Therefore, the assessee
                              15        ITA nos.1934 & 1935/Del./2012


cannot be considered to be the owner of such know-how
made available but was merely granted licence for using the
know-how . In such a situation the amount payable by way of
royalty cannot be considered as capital expenditure but even
part thereof cannot be considered as expenditure.        The
decision of Hon'ble Supreme Court in the case of Southern
Switchgear Ltd. (supra) is not applicable.


The learned DR on the other hand, relied upon the appellate
order. She submitted that the Hon'ble Supreme Court in the
case of Southern Switchgear Ltd. (supra) has upheld the order
of the Madras High Court wherein 25% technical know-how
fees was considered as capital expenditure. She also relied
upon the decision of the Hon'ble Supreme Court in the case of
Scientific Engineering House P. Ltd. Vs. CIT 157 ITR 86.


In reply, the learned counsel for the assessee submitted that
the decision of Hon'ble Supreme Court in the case of
Scientific Engineering House P. Ltd. (supra) was in reference
to a controversy as to whether the depreciation is allowable
on the drawings and designs to be treated as plant and
machinery or not. This fact has been considered by the
Hon'ble Delhi High Court in the case of Sriram Pistons &
Rings Ltd. Vs. CIT, 171 Taxman 81.


We have considered the rival submissions. We find that the
assessee was granted a licence for using the know-how to be
applied in the manufacturing process. The assessee was
required to pay royalty for using such know-how. However,
the assessee never became the owner of such know-how but
was merely granted a licence to use the same in
manufacturing process.      The know-how at all the time
remains the property of the licensor. At the end of the
licence period the assessee was to forthwith return all the
plates and drawings, data material and other documents
supplied by the licensor to it. Therefore, in view of the ratio
laid down by the Hon'ble Supreme Court in the case of CIT
Vs. Ciba of India Ltd., 69 ITR 692 and that by the Hon'ble
Delhi High Court in the case of Sriram Pistons & Rings Ltd.
(supra), the payment is to be considered as revenue
                                16         ITA nos.1934 & 1935/Del./2012


expenditure and no part thereof can be considered as capital
expenditure. As rightly contended by the learned counsel for
the assessee, the decision of Hon'ble Supreme Court in the
case Southern Switchgears Ltd. (supra) is distinguishable on
facts. In the said case under the collaboration agreement, the
assessee obtained technical knowledge which was available
for its manufacturing and industrial processes even after the
termination of the agreement.       The technical assistance
covers the establishment of the factory and the operation
thereof for the manufacture of transformers of all kinds. The
foreign company also makes available to the assessee its
procedures, designs, experience and technical know-how for
the same. Even after the expiry of the agreement, the
assessee could use the method of production which had been
made available to it in pursuance of the agreement. In terms
of the said facts Hon'ble Madras High Court treated part of
the expenditure namely 25% as capital expenditure which was
upheld by the Hon'ble Supreme Court. However, the facts in
the present case are different. Similarly in the case of
Scientific Engineering House P. Ltd. (supra), the dispute was
not with regard to capital or revenue nature of the
expenditure but was whether the assessee is entitled to
depreciation on the technical know-how obtained. Thus, the
case laws relied upon by the learned CIT(A) and the learned
DR are distinguishable on facts. We, therefore, delete the
disallowance of ``1,62,770/-."


As the royalty expenses pertained to the same agreement,
therefore, the aforementioned order of the Tribunal will fully
apply to the present year also. Respectfully following the
said order, the relevant portion of which has already been
reproduced, we find no merit in departmental appeal which
raises only one issue regarding deletion of disallowance made
on account of royalty."

As similar issue has already been duly considered by the Hon'ble
ITAT,New Delhi in assessee's own case and since facts and
circumstances and basis of the addition for the relevant year made
by the AO are identical, respectfully following the decision of the
jurisdictional Tribunal , the addition made by the AO on account of
                                        17          ITA nos.1934 & 1935/Del./2012


       royalty payment is deleted. Accordingly, the assessee succeeds in
       his ground of appeal."

7.1           Similarly in the AY 2008-09, the ld. CIT(A) following his aforesaid
decision in the AY 2007-08, deleted the disallowance.


8.    The Revenue is now in appeal before us against the aforesaid findings of
the ld. CIT(A). At the outset, both the parties agreed that issue is squarely
covered by the aforesaid decision dated 8.5.2009         of the ITAT    in ITA no.
1866/Del./2008 for the AY 2005-06 & dated 13.8.2010 in ITA no.2609/Del./2010
for the AY 2006-07.


9.            We have heard both the parties and gone through the facts of the
case as also the aforesaid decisions of the ITAT. The issue before us is as to
whether or not the amount on account of royalty paid by the assessee in terms
of collaboration agreements, is capital in nature. Co-ordinate Benches have
already taken a view in this respect in the preceding years. Indisputably, the facts
and circumstances in relation to the royalty payment are similar to the facts and
circumstances obtaining in the AYs 2005-06 and 2006-07 wherein the ITAT in
their order dated 8th May, 2009 for the AY 2005-06 and dated 13.8.2010 for the
AY 2006-07 deleted the disallowance. In the light of view taken by co-ordinate
Benches in the preceding years, especially when the Revenue did not place
before us any material controverting the aforesaid findings of learned CIT(A) nor
brought to our notice any contrary decision, we are not inclined to interfere.
Therefore, ground no.2 in these two appeals is dismissed.


10. No other plea or argument was made before us,
                                         18          ITA nos.1934 & 1935/Del./2012


11. In the result, these two appeals are partly allowed but for statistical purposes.
                   Order pronounced in open Court

            Sd/-                                             Sd/-
     (RAJPAL YADAV)                                   (A.N. PAHUJA)
     (Judicial Member)                             (Accountant Member)

NS

Copy of the Order forwarded to:-

1.   Assessee
2.   Assistant CIT,Central Circle-II,Faridabad
3.   CIT concerned
4.   CIT (A)(Central),Gurgaon
5.   DR, ITAT,'C' Bench, New Delhi
6.   Guard File.
                                              By Order,

                                                Deputy/Asstt.Registrar
                                                     ITAT, Delhi
 
 
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