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2014 (11) TMI 97 - AT - Income TaxDisallowance u/s 40A(2)(a) – 50% of Professional fees paid to the subsidiary company - Held that:- The assessee is a holding company, has made payment to its subsidiary company, such payment cannot be covered within the provisions of sub-clause (iv) of section 40A(2)(b) of the Act - section 40A(2)(a) refers to the disallowance of any expenditure incurred by the assessee in respect of which payment has been or is to be made to any person referred to in clause (b), if the AO is of the opinion that such expenditure is excessive or unreasonable - having regard to fair market value of the goods, services or facilities for which payment is made or the legitimate needs of the business or profession of the assessee, the benefit derived by or accruing to the assessee therefrom - The three situations, warranting disallowance u/s 40A(2), are joined by the word ‘or’ and are independent of each other - if a payment falls into any of these three situations, it is liable to be disallowed - the AO has not determined the fair market value of the professional services received by the assessee, 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 basis to the assessee and for a limited period - The assessee is not authorised to use or permit others to use such technology and the technical documentation, except as specifically permitted under the Agreement to the assessee - There is a confidentiality clause, which prohibits the assessee from making any disclosure to the others - the payment made by the assessee to its associated enterprises cannot be considered as a capital expenditure. It is further interesting to note that the assessee was consistently paying such royalty amount to its associated enterprises from the financial year 2003-04 onwards and no such disallowance has ever been made in the past – Decided in favour of assessee. Deletion u/s 14A – Held that:- The assessee earned exempt dividend income and also incurred expenses in relation to income - the application of section 14A cannot be ruled out – following the decision in Maxopp Investments Ltd. Vs. CIT [2011 (11) TMI 267 - Delhi High Court] - rule 8D is prospective and is applicable from the assessment year 2008-09 - no interference can be made in the order to the extent of non-applicability of rule 8D - CIT(A) is correct in sustaining the addition u/s 14A – Decided against revenue.
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