Home Case Index All Cases Income Tax Income Tax + HC Income Tax - 2011 (3) TMI HC This
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2011 (3) TMI 1613 - HC - Income TaxDisallowance u/s 92 read with Section 37(1) - Royalty paid to Holding Co. for duplicating and Sub-Licencing of Software - AO's Jurisdiction to determine amount of Profits - AO disallowed royalty paid by the assessee to its holding company beyond 30% of the sub-licensing fees earned by the assessee - As per Tribunal, assessee would be entitled to get the deduction in respect of entire amount paid by way of royalty. Also, Section 92 would have no application to the facts of this case. HELD THAT:- If the conditions mentioned in provision of Sec. 92 are satisfied, the section empowers the AO to determine the amount of profits which is reasonably deemed to have been derived from there. The first two conditions mentioned in provision of section 92 i.e. Business is carried between a resident and a non-resident and Close connection between resident and a non-resident are undoubtedly satisfied. It is, thus, to be examined as to whether it is a case where the transaction between the assessee and its parent company has resulted in no profit or less than the ordinary profits which might be expected to arise in the business. As assessee declared a certain amount of income, it is not a case of 'no profits'. Next question regarding, how to determine whether the profits are less than the ordinary profits which might be expected to arise in the business? This can be found only when exercise is undertaken comparing the income of the assessee with other comparable business enterprises in India. However, the AO did not do this exercise at all. Definitely, onus in this behalf u/s 92 lays on the AO. This pertinent aspect coupled with the fact that price fixed is acceptable as Arm's Length Price by the TPO u/s 92 itself is sufficient to clinch the issue in favour of the assessee. In this backdrop, we have to examine whether such an expenditure could still be disallowed and the opinion of the AO was correct that the payment made cannot be treated to be wholly and exclusively for business purpose of the assessee to enable it to cover the same u/s 37(1). Once it is held that the payment of royalty by the assessee to its parent company is not hit by the provisions of section 92 and the price fixed is ALP as determined by the TPO himself, there is no reason to hold that the expenses would not be allowed u/s 37(1) It is, thus, clear that what is to be seen is that the expenditure was incurred by the assessee in the course of business and had nexus with the business of the assessee. It could not be disputed that the payment of royalty is a business expenditure, which was expended wholly and exclusively for the purpose of business of the assessee. The nature of the expenses is also not such which would fall in any of the exceptions carved out under sections 30 and 36. Once these conditions are satisfied, the expense is to be allowed in toto as business expenditure, and the Revenue cannot sit in the arm's chair of the assessee and decide as to how affairs of the business are to be run and wasteful or excessive expenditure is to be curtailed. The question of commercial expediency is to be judged by the assessee and not by the AO. It is well-settled that it is not open to the Department to adopt a subjective standard of reasonableness and disallow a part of business expenditure as being unreasonably large, or decide what type of expenditure the assessee should incur and in what circumstances. This was so held by the Supreme Court in the case of COMMISSIONER OF INCOME-TAX, BOMBAY VERSUS WALCHAND AND COMPANY PVT. LIMITED. [1967 (3) TMI 2 - SUPREME COURT], which principle has thereafter been often repeated and remains the bedrock of section 37 of the Act till date. Thus, the jurisdiction of the AO is only confined to deicide "Profits and gains of business or profession", i.e., whether the expenditure claimed was actually and factually expended or not and whether it was wholly and exclusive for the purposes of business. Reasonableness of the expenditure can be considered only from this limited angle for the purpose of determining whether in fact amount was spent or not. Ld. Senior Counsel was right in his submission that AO committed serious error in mixing the provisions of section 92 and section 37. Thus, Tribunal was justified in law in allowing the deduction disallowed by the AO.
|