TMI Blog2017 (11) TMI 1472X X X X Extracts X X X X X X X X Extracts X X X X ..... uct within the specified territory, it falls in the category of technical support and is not of enduring benefit of any kind to the taxpayer, so the addition made on account of royalty and technical fee is not sustainable, hence Grounds No.3 & 3.1 ordered to be determined in favour of the assessee. Addition u/s 14A - Held that:- When the entire working has been brought on record by the taxpayer during assessment proceedings as to availability of the surplus funds with the taxpayer and there has always been a credit balance in the bank of the taxpayer on every day, it goes to prove that taxpayer has used its own funds to purchase the mutual funds to earn interest free income and the taxpayer has not used loan or overdraft funds to make investment. Aforesaid facts have not been controverted by the AO by recording objective satisfaction that the taxpayer has used borrowed funds to purchase mutual funds. In these circumstances, contention of ld. DR that, “in case of huge circulatory fund, some disallowance should be there as there must be some expenditure” is not tenable. This contention is also not tenable in the face of the fact that AO has not invoked Rule 8D of the Act. So, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, technical fees and drawing and design fees, and hence, the arm's length price of aforesaid payment is determined at Nil. 2.4 The assessing officer / DRP erred on facts and in law in determining the arm's length price of international transaction of royalty / technical fee and drawing and design fee to be NIL without applying any of the methods prescribed in Transfer Pricing regulations under the Act. 2.5 Without prejudice that the assessing officer/DRP erred on facts and in law, in not appreciating that the international transaction of payment of technical fees and drawing and design fees was appropriately established to be at arm's 'length applying Transactional Net Margin Method (TNMM). 2.6 That the assessing officer / DRP erred on facts and in not appreciating the comparables placed on record by the appellant for benchmarking the international transactions of royalty and technical fees, applying CUP method. 3 That the assessing officer erred on facts and in law in treating expenditure incurred on account of royalty of ₹ 22,02,48,509 and technical fees of ₹ 20,71,357 as capital expenditure. 3.1 Without prejud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch CUP was available then the taxpayer should have benchmarked the transaction by following the well accepted valuation method like income approach viz. Discounted Cash Flow method which could be taken up as CUP. However, on failure of the taxpayer to provide requisite information, TPO proceeded to benchmark the transaction by applying the benefit test and consequently determined the Arm s Length Price (ALP) of royalty at nil and made adjustment u/s 92CA of the Act to the tune of ₹ 23,01,95,810/-. 6. AO made disallowance of expenses u/s 14A read with Rule 8D of the Income-tax Rules, 1962 (for short the Rules ) to the tune of ₹ 52,16,745/- for earning dividend income. 7. The taxpayer carried the matter by way of filing objections before the ld. DRP, which have been rejected. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal. 8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUND NO.1 9. Ground No.1 is general in nature an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rning the following findings:- 27. Ground 4 to.4:3 relates to the disallowance of royalty and technical fee. 28. The assessee's case is that it had limited right to Use the technology of Showa Japan. The ownership / property rights in technical know how continue to be vested in Showa and the appellant has no authorized approval of company to transfer the know how or any technical information to any third party. There is no explicit or implicit authority to transfer or create ownership in the technology, know how/technical information in the appellant. The expenditure of royalty or technical fee did not result with capital asset or a benefit of enduring nature much less in the capital field. The Appellate Tribunal in the case of the assessee for the asstt. Year 1993-94 to 1995-96 and for Asstt. Yea, 2002-03 and 2004-05 have deleted the similar disallowance. Revenue appeal for asstt. Year 2Q02-03 and 2004-05 stands dismissed by the Delhi High Court vide its order dated 6.9.2010 in ITA No. 94, 95 96/Del/2014. 29. Heard parties. In the peculiar fact-situation and the judgment of the Hon'ble Delhi High Court in the earlier years in assessee's own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deciding the issue in controversy in favour of the taxpayer returned the following findings :- 12. In the case at hand, the know-how was granted by the foreign company solely for the purpose of manufacture, assembly and sale of products during the term of the contract and the licensee was to pay royalty to the licensor. The drawings and designs which were supplied by the licensor only enabled the assessee to manufacture the goods, namely, the shock absorbers. The assessee was required to change the design of such shock absorbers from time to time for which new drawings and designs were required. For the aforesaid purpose, the training of the personnel of the assessee was imperative. If the agreement is read in entirety in a purposeful manner, there can be no trace of doubt that the know-how acquired relates to the process of manufacturing and for a tenure and the documents, designs and specifications which have been supplied by the licensor are only for facilitating the said purpose of manufacturing. This is basically in the realm of technical support and thus, the decisions in T.E.I. Technologies P. Ltd., (supra) and Shriram Pistons And Rings Ltd. (supra) get squarely a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 1,57,29,81,001/- as on March 31, 2009. 26. Now, the next question arises for determination in this case is :- as to whether the surplus funds have been used to make investment ? 27. Assessee has provided details of making investment, available at pages 201 to 211 of the paper book. From the details, it is apparent that there has always been a credit balance with the taxpayer in the bank out of surplus money which shows that the taxpayer has used its own money to purchase the mutual fund. Moreover, when there is no closing and opening balance, Rule 8D cannot be applied. Furthermore when AO has not invoked Rule 8D, the Revenue cannot challenge the findings of the AO before the Tribunal. 28. Perusal of page 24 of the assessment order shows that the AO has made categoric observation that, The assessee controlled its investment activities in such a way that the opening and closing balance of investment was ZERO though there were total transactions of ₹ 384,15,00,000/- during the whole year. The onus lies upon the assessee to come forward with the source of fund arranged and if any interest has been paid on such funds, the same should have been disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra). 33. Hon ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. - (2009) 313 ITR 340 (Bom.) held that in case the assessee has mixed pool of funds and investment has been made to earn interest free income then a presumption would arise that the investment has been made out of interest free funds generated or available with the company by making following observations :- Held, dismissing the appeal, that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption was established considering the finding of fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible. 34. Hon ble Supreme Court in case of CIT vs. Walfort Share Stock Brokers (P.) Ltd. [2010] 326 ITR 1 ( SC) held that basic principle of taxation is to tax net income and this principle applies for the purpose of section 14A and expenses towards non-taxable income must be excluded. 35. In Godrej an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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