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TMI Blog2017 (4) TMI 1006X X X X Extracts X X X X X X X X Extracts X X X X ..... ustified the arm's length price as under: Nature of International Transaction Amount(In Rupees Lacs) Most Appropriate Method Profit Level Indicator Tested Party's Operating Margin Comparables Operating Margin Availing of marketing support services from IDS-A 439.70 Transactional Net Margin Method ('TNMM') Operating Profit/Operating Cost ('OP/TC') 5.50% 10.03% Provision of IT/IT enabled Services to IDS-A for resale 336.67 TNMM Operating Profit/Sales ('OP/Sales') 1.50% 1.77% Availing of marketing support services from IDS-UK 16.21 TNMM OP/TC 5.75% 6.68% Reimbursement of expenses paid/received 3.82 Comparable Uncontrolled Price Method ('CUP') N.A Refer para 5.4.1 Refer para 5.4.1 4. On a reference from the Assessing Officer the TPO determined the arm's length price of the international transactions. While the arm's length price of international transactions pertaining to market support services from IDS-A and IDS-UK and reimbursement of expenses paid/received to/from IDS-A was accepted by the TPO, the international transactions pertaining to provision of IT/IT enabled services to IDS-A for resale wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one through the orders of the authorities below as also the documents referred to before us during the course of arguments. Though we find that the order of the TPO was detailed leading to the aforesaid transfer pricing adjustment, we shall be confining ourselves only to the arguments raised by the Ld. counsel for the assessee and the Revenue ,both for and against the order passed by the Ld. CIT (Appeals). 8. The first contention raised before us by the Ld. counsel for the assessee is that the TP study of the assessee has been rejected for the reason that the foreign AE was taken as a tested party. Arguments both for and against the action of the TPO were made before us. The impugned transaction relates to IT enabled services entered into with IDS-A amounting to Rs. 336.67 lacs. The assessee had justified the arm's length price of the said transaction by applying TNMM method taking OP/TC as the PLI and the associate enterprise(AE) i.e. IDS-A as the tested party. All these facts are not disputed. The TPO rejected IDS-A as a tested party for the reason that the tested party should be one who has the least complex functions, which does not own valuable intangibles property or uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h data in respect of comparable transactions is available. 3. It should be a party for which has the least complex functions 4. It should be a party for which does not own valuable intangible property or unique assets that distinguish it from comparables. 13.5 When the facts and circumstances of the case are tested on these factors following position emerges:- 1. In the show cause notice, assessee was asked to establish with evidence how the costs taken are without markup:- "Further, it has been stated that IDS Infotech has charged a markup on international transactions pertaining to provision of IT- Enabled services. However, no such segmental financials establishing the same have been given. Cost sheets given also do not provide any evidence to establish that the costs taken are without any markup." 13.6 It is seen that the comparables given are foreign comparables. Very little information in respect of the same has been provided except their P&L accounts. No description has been given in the TP report to establish whether the comparables are also involved in the same activity. Hence, no reliable date in respect of foreign comparables is available. Hence, on this factor, ID ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the Transfer Pricing Officer for the preceding year, i.e., assessment year 2009-10, placed at Paper Book page No. 133 in this regard. (b) The next contention raised by the assessee was that the foreign tested party i.e. IDS-A was the least complex amongst the parties to the transactions, the other party being the assessee itself. The Ld. counsel for the assessee stated that while the assessee was engaged in full-fledged product development and marketing/product selling covering a wide range of activities and other commercial or marketing intangibles and is the developer, owner and licensor of virtually all valuable intellectual property rights including proprietary products and processes, whereas it bears all significant business and entrepreneurial risks, product development, performance and financial risks and develops and sells products and services to unrelated parties across the globe, the IDS-A, on the other hand, indulged only in the activity of providing marketing support services to the assessee for the American market and took only routine risks associated with undertaking such activities without owning any intellectual property. Thus, the Ld. counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable. Thus as far as the foreign party being the least complex entity to the controlled transactions and not owning any valuable intangible or unique assets is concerned, there is no dispute that the foreign entity to the transactions i.e. IDS-A is the least complex and does not own any valuable intangible or unique assets. The only issue on which the acceptance or rejection of the foreign entity as a tested party rests is vis-à-vis availability of the appropriate foreign comparables. 16. The only reason with the TPO for holding so, which emerges from the above discussion and arguments made before us and on the basis of the facts which were brought to our notice for rejection of the foreign entity as the tested party, is that the data in respect of comparable transactions was not available. At this juncture, we would like to point out that the I.T.A.T. in a number of decisions, pointed out by the Ld. Counsel for the assessee, held that if an assessee wishes to take a foreign entity as a tested party, it can do so provided a relevant data for comparison is either available in the public domain or is furnished to the tax department/administration. The Delhi Bench of the I.T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wning valuable intangibles, the data for comparability of GMDAT or the comparable is also not available. 11.5.2 This view of the DRP has been denied by the learned Sr. Counsel during the course of hearing which has not been contradicted by the Revenue with any documentary evidence. 11.6 To sum up, it was the argument of the assessee that if stringent comparability analysis as adopted by the TPO were to be adopted, and then M&M should also be put to such a stringent comparability test. It was, further, argued that M&M is also involved in the manufacture of multi utility vehicles, light commercial vehicles as well as three wheelers apart from passenger cars. It was, further, countered by the assessee if Force Motor Limited were to be rejected on the basis of different profit profile and then M&M should also be axed on the same logic. We find force in the above argument of the assessee. According to the assessee, GMDAT is only engaged in manufacturing and supply of certain components used in manufacturing of cars only. This has not been disputed by the revenue. 11.6.1 We are in disagreement with the revenue's argument that GMDAT should not be selected as a 'tested party' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also be treated as a tested party. Thus clearly, there is no bar as such in treating the foreign entity in a controlled transaction as a tested party merely for the reason that the data of the comparable companies was not available. What is essential in this regard is that the data should be available in the public domain which the Revenue with all its resources can have access to and or the assessee has furnished all relevant data to the tax administration. 19. In the present case, we find that both the conditions are being fulfilled. On perusal of the transfer pricing study conducted by the assessee placed at Paper Book page Nos. 709 to 771, we find that it has been categorically mentioned therein that Global Symposium, a search engine covering financial and business datas for companies operating across the globe was used and it has data from four public databases/sources: (i) Standard & Poor's Research Insight : Compustat North American data. (ii) Standard & Poor's Research Insight : Compustat Global Data. (iii) Primark Disclosure's SEC (iv) Primark Disclosure's Worldscope 20. It was also categorically mentioned that all the aforementioned sources of data w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnished by the assessee. Therefore, following the decisions of the I.T.A.T. as quoted above, we set aside the rejection of the foreign entity IDS-A as the tested party. 22. It is pertinent to point out that for determining the ALP of the international transactions relating to marketing services provided by IDS-A and IDS-UK also, we find, that the assessee had taken the foreign entities as the tested party. These were not rejected by the TPO. Clearly, therefore, there is inconsistency in the stand of the TPO rejecting the selection of foreign entity as a tested party for the purpose of IT enabled services while accepting the same for marketing support services. For this reason also, the rejection of the foreign entities as a tested party needs to be set aside. 23. Further as pointed out by the Ld. counsel for the assessee, in the preceding assessment year also the assessee had taken IDS-A as its tested party, which was duly examined by the TPO. Submissions in this regard were also placed before the TPO, placed before us at Paper Book page Nos. 455-483. The TPO in the preceding year had accepted the same and made no adjustment in this regard. Thus, having accepted foreign entity as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) has failed to appreciate that the provisions of Section 195 are not attracted in as much as payments were made to parties who are outside of India and have no permanent establishment in India and as such the order passed is illegal, arbitrary and unjustified. 4. That the Ld. Commissioner of Income Tax (Appeals) has erred in law as well as on facts in upholding that income of non resident has accrued and arisen in India which is contrary to the facts of the case and as such the order passed is illegal, arbitrary and unjustified. 29. The brief facts relating to the case are that the assessee is the supplier of software related services and had incurred expenses on account of commission, legal and professional charges, outsourcing expenses, market support fees to various companies/abroad some of which were its associated enterprises. During the course of assessment proceedings, the Assessing Officer noted that the assessee had made payments on account of above expenses amounting in all to Rs. 2,84,52,914/- without deducting tax at source. The details of the expenses are as follows : Nature of Expenditure Name of the recipients Amount paid Total amount under this head without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. CIT (Appeals), where the assessee submitted that the said expenditure had been incurred for services rendered outside India to parties outside India, the said parties had no permanent establishment in India, nor any business connection in India and therefore the assessee stated that no TDS was required to be deducted on the aforesaid payments and, thus no disallowance was warranted on account of non-deduction of tax at source on the said payment as per the provisions of section 40(a)(ia) of the Act. The Ld. CIT (Appeals) after considering assessee's submission held that the source of income for the entities was the agreement with the assessee company and by virtue of the same, there was direct benefit to the assessee company. Ld .CIT (A) held that the source of income, therefore, for the services rendered by the non-resident entities was in India, since the Indian companies gave directions for the work abroad and therefore, the said income of the non-resident accrued and arose in India. Ld. CIT (Appeals) held that the services of the non-resident entities were directly utilized by the assessee company in India to boost its business abroad and, therefore, also the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of agreement between the assessee which was an Indian company. The I.T.A.T. in the said case we find, deleted the disallowance made, by holding that the Assessing Officer nor the CIT (Appeals) given any finding whether the nature of income in the hands of the non-residents is that of income accrued in India or income deemed to have accrued in India. The Hon'ble I.T.A.T. also held that there is no finding on record by any of the lower authorities that non-resident payees had any business connection in India or even any permanent establishment in India. 35. The I.T.A.T. exhaustively dealt with the issue at hand and went through various pertinent sections involved. It first dealt with section 40(a)(ia), invoking which disallowance had been made and pointed out that as per the said section, only those payments made to non-residents on which tax is required to be deducted as provided under the relevant Chapter and if not deducted, the provisions of the said section could be invoked and disallowance made. Thereafter the I.T.A.T. pointed out that the relevant Chapter for deduction of tax at source is Chapter-XVII and analyzed the same and pointed out that as per the relevant sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties, perused the findings of the authorities below and considered the material available on record. The facts as culled out by us from the perusal of the orders of the lower authorities as well as submissions oral and written filed by both the parties before us, are that the issue is with regard to the disallowance made by the Assessing Officer invoking the provisions of section 40(a)(i) of the Act, whereby on certain payments made to non-resident entities, the assessee failed to deduct tax at source. The impugned payments made to the respective non-resident entities are as follows : Communication expenses Commission Legal & professional Marketing & selling Business Development Outsourcing B.V. Design Products, Netherland 1,26,794 5,63,949 Movates, Netherland 1,33,661 Dilenbech Finley, USA 28,06.949 Steven Intl. USA 9,57,088 7,95,603 1,80,054 Van Memm & Wisselink, Netherland 31,82,154 IDS Infotech, UK 21,29,762 IDS Infotech, USA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also, his submission was that in the absence of any such nature coming out of record, it is to be presumed that the services have been 'made available' to the assessee. Therefore, the same is exigible to the provisions of tax deduction at source. 24. Now the issues for adjudication, coming in this background, before us are as follows : (i) Whether the impugned payments are of the nature, whereby the provisions of TDS are applicable, in the absence of which the disallowance is called for under section 40(a)(i) of the Act. (ii) With respect to payments made to IMCS, whether the Explanation to section 37(1) of the Act is applicable to the said payments. (iii) With respect to payment made to IMCS, whether the same is unreasonable in comparison to payment of same nature made to other entities. (iv) If the payments, as such, are not exigible to the provisions of TDS, whether these are in the nature of 'fees for technical services'. As such, the tax is to be deducted out of these payments. 25. The basic issue is whether the tax is to be deducted while making these impugned payments. The Assessing Officer has invoked the provisions of section 40(a)(i) of the Act i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgeable under the provisions of this Act (not being income chargeable under the head" Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force: " 27. The most important terms in this section are "chargeable under the provisions of this Act". From this, it is very clear that only if an amount is chargeable under the Income Tax Act, the liability to deduct tax on the payment of such amount arises. Charge of income tax is provided under section 4 of the Act, while scope of total income is provided in section 5 of the Act. The provisions of section 5 of the Act relating to scope of total income in respect of a non-resident are provided in sub-section (2) of said section, which read as under : "5(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export; [(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India;] [(d) in the case of a non-resident, being- (1) an individual who is not a citizen of India; or (2) a firm which does not have any partner who is a citizen of India or who is resident in India; or (3) a company which does not have any shareholder who is a citizen of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words. Further, section 195 uses the word 'payer' and not the word 'assessees'. The payer is not assessee. The payer becomes an assessee in default only when he fails to fulfill statutory obligation under section 195(1) of the Act. If the payment does not have the element of the income, the payer cannot be made liable. The Hon'ble Supreme Court thus rejected the contention of the Department by holding that if the sum paid is not chargeable to tax, then no tax is required to be deducted. 31. From the reading of the A.O.'s order, we do not understand his case. Nowhere in the entire order he has given any finding as to whether the nature of income in the hands of the non resident is that of 'income accrued in India' or 'income deemed to have accrued' in India. He just kept on harping the fact that the ultimate beneficiary of the services is the assessee in India. Even the CIT (A) while adjudicating the issue could not give any appropriate finding in this regard. The relevant portion of the CIT (A)'s findings are recorded at page 12 para 10.3, in later part of this paragraph, he states as under: "The payment are made by the appellant comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... branch office in India for purchase or sale of goods or transacting other business. (ii) Appointing an agent in India for systematic and regular purchase of raw material or other commodities, or for sale of non-resident goods or for other business purposes. (iii) Erecting a factory in India where raw produce purchased locally is worked into a firm suitable for sending abroad. (iv) Forming local company to sale products of non-resident parent company. (v) Having financial association between the resident and non-resident company. These activities have been culled out from the judgement by the CBDT itself in its circular No. 23 [F.NO. 7A/38/69-IT (A-11)], dated 23.07.1969. 33. In the present case, no finding has been brought on record by any of the lower authorities that non-resident entities have any such connection with India as illustrated above. All along the assessee has been maintaining that the non-resident entities to whom it has made the payments do not have any business connection with India. The Assessing Officer as well as the learned CIT (Appeals) had nowhere in their orders recorded any such finding though we must add that they have not even intended to make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be given the benefit of the treaty provisions. On the other hand, if the assessee is not taxable under the domestic law itself, there is no need to look into the provisions of the DTAA, even if one exists, to find out if there is any provision under which the non-resident can be brought to tax. In other words, the treaty cannot be used as a taxing statute. The principle is that where the non-resident is taxable under the domestic law but there is a provision in the treaty to exempt the transaction or reduce the rigor of taxation to the benefit of the non-resident, the provisions of the treaty override the provisions of the domestic law. These fundamental principles are well-settled by the judgments of the Supreme Court in P.V.A.L. Kulandagan Chettiar (2008) 267 ITR 654 (SC) and Azadi Bachao Andalon (2003) 263 ITR 706 (SC). 38. On going through the relevant article provided in the DTAA, we observe that invariably in all the DTAAs to which we are concerned, the income is taxable in India only if that foreign entity carries on business in India through a permanent establishment situated in India. We again observe that no such finding with regard to existence of any permanent esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss the way he wants. The Assessing Officer for the purpose of Income Tax Act cannot question the reasonableness of any such payment made by the assessee. Therefore, we do not find this allegation of the Assessing Officer backed by any legal provision. Incidentally, we would like to mention here that even if the Assessing Officer wants to assess the reasonableness of any payment made to any sister concern of the assessee, there is no doubt to the fact that the assessee has done detailed transfer pricing study in the relevant assessment year, which was subject to the reference under section 92CA(1) of the Act to the Transfer Pricing Officer and the Transfer Pricing Officer has suggested no adjustment with respect to the Arm's Length Price on the transaction between the assessee and its associate enterprises. 40. Now the question arises whether the payment made by the assessee can be held to be in the nature of 'fee for technical services'. There is no dispute with respect to the fact that the issue of 'fees technical services' was never raised by the Assessing Officer. In his order running into 22 pages he has nowhere mentioned and even nowhere showed his suspici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of rendering services becomes irrelevant in view of the provisions of section 9(1)(vii) of the Act. However, even if the argument of the learned D.R. is accepted that the learned CIT (Appeals) has given a finding that these payments are 'fees for technical services', nowhere from the order of the learned CIT (Appeals) we see any effort being made by him to come to such a conclusion. It is not to be forgotten that the learned CIT (Appeals) assumes coterminus powers with that the Assessing Officer. In fact, he enjoys the powers of enhancement also. Therefore, in case he had any apprehension as to the real nature of the payment, who stopped him to carry out further investigations in this regard? In the absence of any finding given by the Assessing Officer or the CIT (Appeals) in this regard, we are not inclined to examine the case of the assessee with a view whether the payments are in the nature of 'fees for technical services' or not. It is not a case where certain queries were put either by the Assessing Officer or by the learned CIT (Appeals) to the assessee with respect to the payments being 'fees for technical services', which the assessee failed to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the present case also we find that there is no finding of the lower authorities with regard to the fact that the income to the payees of the said expenses arose or was deemed to arise in India as per the provisions of section 9 of the Act. There is no finding regarding the existence of any business connection, as defined, under section 9(1) of the Act nor of any permanent establishment of the payees in India. Moreover in the present case also there is no finding that the payments in question were "fees for technical services". Therefore the decision laid down in the preceding year will squarely apply to the present case also, following which we delete the disallowance made u/s. 40(a)(ia) of the Act amounting to Rs. .2,84,52,914/-. 37. The grounds of appeal Nos. 2,3 & 4 raised by the assessee are, therefore, allowed. 38. Ground No. 5 raised by the assessee reads as under : 5. That the Ld. Commissioner of Income Tax (Appeals) further erred in upholding the addition of Rs. 18,09,790/- for non deduction of tax u/s. 194-I applying the provisions of Section 40a(ia) in utter disregard of the explanations rendered which is arbitrary and unjustified. 39. In the said ground, the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer to examine the issue in the light of the contentions made and thereafter re-work/re-determine the disallowance to be made u/s. 40(a)(ia) of the Act. 44. We have heard the contentions of both the parties. We find merit in the contentions of the Ld. counsel for the assessee that the rent had been paid to one person on behalf of various co-owners of the said property. The lease agreement placed at Paper Book page No. 242 is the lease deed entered into between the co-owners of the property SCO 142 to 145, Sector 34, Chandigarh and the assessee for leasing the said premises to the assessee. At page No. 2 of the said agreement, it has been specifically stated that the said agreement has been entered between the following parties: "R.S. Sandhu, M.s. Sandhu, advocate for self and as attorney of Shri Gurbrinder Kaur and Navdeep Kaur his daughters and as guardian of Amrita Kaur (Minor), Amar Singh Chahal, Surjit Kaur, Daljit Kaur, Manpreet Singh and Harpree Kaur, Brig. Swaran Singh (Retd.) for self and on behalf of Gurmeet Kaur, his wife, Major C.S. Lehal, his daughter Kanwal Lehal and Dr. Serbmeet Singh who are the owners and landlords of SCO 140 to 145, Sector 34, (City Centre), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter only if the rental income in the case of any co-owners exceeds the prescribed limit for the purpose of deduction of tax u/s. 194-I of the Act, the tax is to be deducted at source. 48. In the light of the above, we, therefore, restore the matter back to the Assessing Officer to apportion the rental income in the hands of the co-owners as per legally permissible, determine the rental income attributable to each co-owner and thereafter apply the provisions of section 194(I) of the Act to the same as also the provisions of section 40(a)(ia) of the Act for non deduction of tax, if found in any case. This ground of appeal No. 5 of the assessee is, therefore, allowed for statistical purposes. 49. The ground No. 6 raised by the assessee reads as under : "6. That the Ld. Commissioner of Income Tax(Appeals) further erred in upholding the addition of Rs. 39,73,746/- for non deduction of tax on salaries paid outside India applying the provisions of Section 40a(iii) in utter disregard of the explanations rendered which is arbitrary and unjustified." 50. In the said ground, the assessee has challenged the action of the Ld. CIT (Appeals) in upholding the disallowance made of Rs. 39,73,746 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable to TDS and same having not been deducted, disallowance u/s. 40(a)(iii) had been rightly made. 56. We have considered the contentions of both the parties. The issue in the present ground is relates to invoking the provisions of section 40(a)(iii) of the Act, which deals with disallowance of payment which is chargeable under the head "salary" and is payable outside India or to a non-resident and on which tax has not been paid, nor deducted therefrom as per the provisions of Chapter-XVII-B of the Act. The undisputed and unchallenged facts relating to the present issue are that the salary amounting to Rs. 39,73,746/- was paid to two persons outside India as per the detail already reproduced above. The fact that the payment was in the nature of salary is not disputed, as also the fact that the said payment was made to non-residents and has been made outside India. The issue in this ground relates to disallowance made u/s. 40(a)(iii) of the Act. The said section is being reproduced hereunder for a better understanding: '(iii) any payment which is chargeable under the head "Salaries", if it is payable outside India and if the tax has not been paid thereon nor deducted therefr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be chargeable to tax as such in India. Chargeability to tax and the scope of total income is dealt with in sections 4 and 5 of the Act which have already been discussed above in ground Nos.2, 3 and 4 dealt with above by us. As per the said sections in the case of non-residents income which is either received or deemed to have been received in India or which accrues or arises or deemed to accrues or arises in India is chargeable to tax in India. In the present case, the salary undisputedly has been paid outside India and thus not received or deemed to have been received in India to be chargeable to tax in India. Therefore, it has to be seen whether the salary accrued or arose or deemed to have been arisen or accrued in India. Section 9(ii) of the Act deals with the situation or condition in which salary is deemed to accrues or arises in India. The said section is reproduced hereunder: "9. (1) The following incomes shall be deemed to accrue or arise in India :- (ii) income which falls under the head "Salaries", if it is earned in India. [Explanation.-For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for- (a) s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,206/- made by the Assessing officer whereby she disallowed the interest paid up by applying the provisions of section 36(1)(iii) which is allowable arbitrarily and unjustified." 63. The issue raised in the present ground relates to disallowance of interest made by invoking the provisions of section 36(1)(iii) of the Act. 64. Brief facts related to the issue are that during the course of assessment proceedings the Assessing officer noted that the assessee had debited financial charges of Rs. 93,51,000/- on secured loans which consisted of term loan from bank, car and packing credit. The Assessing officer observed that the assessee had substantially invested amount of Rs. 1,59,90,000/- in wholly owned subsidiaries of the appellant companies in U.S. and U.K. The Assessing officer further noted that in assessment year 2004-05, proportionate interest had been disallowed against which the assessee had not preferred an appeal. In view of the aforesaid facts the Assessing officer made disallowance u/s. 36(1)(iii) and worked the same at Rs. 28,42,206/-. Further, he reduced the notional interest already disallowed by the assessee u/s. 36(1)(iii) amounting to Rs. 25,02,206/- and added back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se concerns effect the financial health of the assessee companies also and therefore, the investment made in the subsidiaries companies are for commercially expedient purposes. The ITAT relied upon the decision of the Apex court in the case of S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 in this regard. The ITAT held that since no fact had been brought on record by the lower authorities, that the amount used by the subsidiaries companies were for purposes other than business, the said investments were commercially expedient. The ITAT, therefore, held that no disallowance under the provisions of section 36(i)(iii) could, therefore, be made. Reliance was placed on the judgement of the Apex Court in the case of Hero Cycles (P.) Ltd. v. CIT [2015] 379 ITR 347 in this regard. The relevant findings of the ITAT at para 7 & 8 of the order are as follows:- 7. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. We are in total agreement with the submissions made by the learned D.R. that the assessee has to demonstrate that the loan advances fulfills the criteria of commercial ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r authorities that the amounts have been used by these subsidiary companies for any purpose other than their business purposes. In view of this, we are inclined to hold that the amounts given to subsidiary companies were on account of commercial expediency. Therefore, no disallowance invoking the provisions of section 36(1)(iii) of the Act can be made in this case. The ground No. 1 raised by the assessee is allowed.' 69. The facts in the present case, we find are identical to that in assessment year 2009-10, wherein, disallowance has been made on account of investment made by the assessee company in wholly owned subsidiary. Since the ITAT in the preceding year has held the said investment to be for business purposes, being commercially expedient, following the same, we hold the identical investment in the impugned year also to be commercial expedient for the assessee company and having held so, there can be no case for making any disallowance u/s. 36(1)(iii) on account of making the aforesaid investment. In view of the same, the disallowance made u/s. 36(1)(iii) amounting to Rs. 3,40,000/- is therefore, deleted and the order of the CIT (A) on this ground is therefore, set asid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 385, in the ledger account of software purchased placed at Paper Book page No. 693 and in the ledger account of depreciation for the year placed at Paper Book page No. 695. The Ld. counsel for the assessee stated that all the above duly reflected the receipt of the said amount in the books of the assessee for the year and, therefore, there was no reason to make any disallowance of the same on account of not recording receipt of the same in the books of the assessee. 75. The Ld. DR, on the other hand, supported the orders of the lower authorities. 76. We have heard the contentions of both the parties. We find merit in the contention the Ld. counsel for the assessee. On perusal of the above documents produced before us, we find that the sale of Catia V5 licence of M/s. Aeromatrix Info Solutions Pvt. has been duly reflected in the ledger account of M/s. Aeromatrix Info Solutions Pvt., the software account, in the fixed asset chart shown by the assessee and depreciation on account of sale of the said asset has been also duly reversed in the ledger of depreciation. All books of account were produced before the lower authorities and it can, therefore, be safely concluded that all ..... X X X X Extracts X X X X X X X X Extracts X X X X
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