TMI Blog2019 (3) TMI 1612X X X X Extracts X X X X X X X X Extracts X X X X ..... w.r. 8D - HELD THAT:- The issue arising in the present appeal is similar to the issue before the Tribunal in Capgemini Technology Services India Limited Vs. DCIT [ 2018 (3) TMI 540 - ITAT PUNE] and following the same parity of reasoning, where the Assessing Officer has failed to record satisfaction, having regard to the accounts of assessee, we hold that there is no merit in the order of Assessing Officer since there is no proper satisfaction being recorded by him. Disallowance of R D units purchased as per Technical License Agreement - whether it is mere case of purchase of equipment for R D projects or the payment is in the form of royalty paid by the assessee, licensee to the licensor? - disallowance u/s 40(a)(i) for non deduction of TDS - HELD THAT:- When the assessee has purchased a product in order to carry out improvements in its technology for future development and its sales thereafter, then such purchases cannot be said to be payment of royalty. It may be pointed out that additional purchase obligation for R D units was though as per terms of Technology Transfer Agreement but its procurement could not be held to be payment of royalty to WED. The grant of license ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... N/2014 Assessment Year : 2008-09 - - - Dated:- 29-3-2019 - MS. Sushma Chowla, JM And Shri Anil Chaturvedi, AM Assessee by: S/Shri C.H.Naniwadekar and Prashant Bhosle Revenue by: Shri Rajeev Kumar, CIT ORDER Sushma Chowla, JM: The cross appeals filed by assessee and Revenue are against order of CIT(A)- 2 , Nashik, dated 18.03.2014 relating to assessment year 2008-09 against order passed under section 143(3) / 154 of the Income-tax Act, 1961 ( in short the Act ). 2. The cross appeals filed by assessee and Revenue were heard together and are being disposed of by this consolidated order for the sake of convenience. 3. The assessee in ITA No. 918/ PUN/ 2014 has raised the following grounds of appeal:- Following grounds are without prejudice to each other. 1.0 Disallowance of Late Delivery Fees - Rs. 10,04,852/- The learned CIT (A) erred on facts and in law in disallowing Late Delivery Charges of Rs. 10,04,852/- on the ground that the provision is made on ad-hoc basis. He failed to appreciate that the company fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efinition of computers? 3. Whether on the facts and circumstances of the case and in law the CIT(A) is justified in deleting the addition of Rs. 46 lakhs made u/s 40 A( 2) out of commission paid to Directors without justifying the reasonableness of the payment to Directors? 5. Briefly, in the facts of the case, the assessee had furnished return of income declaring total income of ₹ 1.29 crores. The assessee was engaged in the business of manufacturing of Engines, Generators, engine parts, generation of electricity and also trading in components, coke, oil, etc. During the course of scrutiny assessment proceedings, the Assessing Officer noted that the assessee had incurred expenditure on account of Late Delivery Fees, for which provision was made. A sum of ₹ 7,23,844/- was also included in provision made for an amount of ₹ 10,04,852/- for liquidated damages. Since an addition was made in the last assessment year on the issue, the assessee was requested to submit the details regarding actual utilization of provision in the subsequent year. The assessee could not provide necessary explanation and hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Civil construction and erection and commissioning were held to be not integral part of windmill, eligible for accelerated rate of depreciation; ( b) Depreciation on printers, UPS and related items were not eligible for higher rate of depreciation @ 60% ; ( c) Disallowance under section 40 A( 2) of the Act out of commission paid to Directors at ₹ 46 lakhs. 8. In appeal, the CIT(A) first decided the issue of Late Delivery Fees and pointed out that the issue in earlier year had been decided partly in favour of assessee. The CIT(A) notes that though the assessee had provided details of customer names, invoice number and percentage of Late Delivery Charges but had not provided the copies of purchase orders showing Late Delivery Charges were payable. So, he upheld the disallowance made by the Assessing Officer. The CIT(A) has allowed the claim of assessee in respect of Civil construction and erection and commissioning, depreciation on printers, UPS and related items and commission paid to Directors. 9. Coming to the next issue of disallowance made under Rule 8 D of the Rules, the CIT(A) noted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessee. 14. The learned Authorized Representative for the assessee first referred to the grounds of appeal raised in its appeal and pointed out that the first issue raised in the present appeal i.e. disallowance of Late Delivery Charges of ₹ 10,04,852/- is covered in favour of assessee by the order of Tribunal in assessee s own case in ITA No. 1641/ PUN/ 2011 in assessment years 2002-03 and in ITA No. 456/ PUN/ 2012 in assessment year 2003-04 , order dated 01.09.2017. He referred to the relevant portions of the order of Tribunal in this regard. The Tribunal further while deciding appeal of assessee for assessment year 2007-08 had also considered the said issue and applying the ratio laid down in earlier years, had remitted the issue back to the file of Assessing Officer. The relevant findings are in para 9 of the order dated 12.02.2018. 15. Following the same parity of reasoning, we remit this issue also to the file of Assessing Officer to follow the directions of Tribunal in earlier years and decide the issue after affording reasonable opportunity of hearing to the assessee. The g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture relatable to exempt income, in view of the provisions of section 14 A( 2) of the Act. The Assessing Officer has computed disallowance under section 14 A of the Act read with Rule 8 D of the Rules at ₹ 30,12,67,295/-. Since the assessee had already disallowed sum of ₹ 5 lakhs, the additional disallowance was worked out at ₹ 30,07,67,295/-. However, on filing of rectification application by the assessee, the Assessing Officer reworked the disallowance at ₹ 4,33,59,413/-. The said disallowance made by the Assessing Officer was upheld by the CIT(A), against which the assessee is in appeal before us. 19. We find that similar issue arose before the Tribunal in the case of Capgemini Technology Services India Limited Vs. DCIT in ITA No. 216/ PUN/ 2015 and cross appeal in ITA No. 360/ PUN/ 2015 , relating to assessment year 2010-11 , order dated 25.01.2018. The relevant findings of Tribunal are in paras 34 and 35 at pages 18 to 20 of the order of Tribunal, which read as under:- 34. We have heard the rival contentions and perused the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessment year 2002-03. Sub-sections (2) and ( 3) of section 14 A of the Act read with rule 8 D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under rule 8 D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of section 14 A( 2) and ( 3) read with rule 8 D of the Rules or a best judgment determination, as earlier prevailing, would become applicable. ( underline provided by us for emphasis) 20. The issue arising in the present appeal is similar to the issue before the Tribunal in Capgemini Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusive license for W 220 / W 200 engine technology. It was further agreed that improvements, if any in W 200 technology would be owned by assessee, for which exclusive license of W 200 engine technology was given to the assessee. The learned Authorized Representative for the assessee explained that royalty was paid on the engines sold, which were manufactured with the help of aforesaid technology. So, royalty was one part of agreement. However, purchase of engines was another part of agreement. He again took us through clauses of said agreement in this regard and stressed that the assessee was obliged to purchase aircraft in USA and relocate at its own cost. He further reiterated that all improvements of W 200 engine technology belong to the assessee and hence was R D expenditure. Since subsequent developments, if any, would be owned by licensee in respect of W 200 engine technology, there was need to purchase the said engine and carry out R D on the said engine. He then referred to provisions of Explanation 2( iva) of section 9(1)( vi) of the Act and pointed out that outright project purchase of the equipment was beyond the scope of righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He then, referred to definition of royalty and pointed out that in the light of definition, the terms of MOU and Technology Agreement have to be looked into. The learned Departmental Representative for the Revenue pointed out that in case the responsibilities of WED are looked into, it was nothing but obligation of payment of royalty. He referred to different paras of royalty agreement. He then, referred to page 35 para 2.1 onwards of order of CIT(A). He also placed reliance on the ratio laid down by the Hon ble High Court of Karnataka in CIT Vs. Samsung Electronics Co. Ltd. ( 2012) 345 ITR 494 ( Kar). 24. The learned Authorized Representative for the assessee in rejoinder pointed out that the CIT(A) says unless assessee purchases R D unit, the assessee is not entitled to claim deduction, which was not correct proposition. 25. We have heard the rival contentions and perused the record. In order to adjudicate the present issue, we need to refer the understanding between the parties. The assessee and Waukesha Engines, Dresser, Inc, USA (WED) had entered into Memorandum of Understanding on 09.10.2006. The purpose of alli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of agreement, agreed to purchase two R D units + parts for total price of USD 7,00,00 for one 12 V 200 bare engine and one 18 v 200 Genset with switchgear. The cost associated with relocating two purchased units was to be paid by the assessee in addition to R D units. The assessee was to purchase certain specified support parts for two engines for the price of USD 60,000 , for which payment was to be made on delivery of spare parts. As per understanding, the assessee would be granted non exclusive license by WED to W 220/200 technology and it was also agreed that improvements made by the assessee to W 200 technology would be owned by the assessee, but would be licensed to WED by assessee on non-exclusive, fully paid up, world-wide basis. Further, the assessee would be granted exclusive, worldwide license to manufacture W 200 diesels for the term of agreement; initial term being 10 years and exclusive license to sell W 200 diesel for the term of agreement in the defined territory. The assessee then was responsible for W 200 diesel engine technology development and deployment and the development was to include certain c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et, sell, support and service the W 200 Proprietary Products in W 200 Territory. Then, clauses provided royalty calculation and its rate reduction in future. As per clause 2.1.3.3 , there was additional purchase obligation under which, within 180 days of the agreement, licensee was to purchase one R D unit + parts for total price of USD 3,00,000 and for one 12 V 200 bare engine, cost of relocating the purchased unit to the assessee s premises was to be paid by licensee. As per clause 2.2 , W 220 Proprietary Products License terms were agreed. Then, coming to the ownership of IP rights, it is clearly stated in clause 3.1.1 that the licensor shall own, solely and exclusively on worldwide basis, any and all intellectual property and the rights related thereto of W 200 Proprietary Product Technology but with exception that any patentable or proprietary improvements made solely by licensee to W 200 Proprietary Products would be owned by the licensee. It is further provided that the improvements would be disclosed to and licensed to the licensor by licensee on non exclusive, worldwide, fully paid up and royalty free basis. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee, licensee to the licensor. The CIT(A) has reproduced the relevant parts of terms of Technology License Agreement at pages 28 to 35 of appellate order. We have already referred to the terms agreed upon between the parties. 31. Now, we have to look into the terms which have been agreed upon between the parties, for which, first we must refer to the Memorandum of Understanding between the parties. Admittedly, WED had agreed to license the assessee the use of W 200/220 technology for the purpose of manufacturing and selling W 200/220 engines and their respective parts in the defined Territory. The ownership of the said rights including all technology, design, technical data, IP rights, etc. belongs to and rested with WED. The technology was already with WED, which was shared with the assessee in order to enable it to manufacture and sell W 200/220 engines. In the case of developing market, it is an endeavour of each manufacturer to keep on developing its product by way of upgrades / improvements. Undoubtedly, as per MOU, WED was to provide assessee with access to improvements and upgrades of W 200/220 products and also to provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 9(1)( vi) of the Act in this regard, which clearly lays down that the payment should be for use or use of any technology. In the present case, the payment is made for purchase of equipment for R D purpose. We thus, find no merit in the orders of authorities below in holding that the aforesaid payment is royalty under both domestic Income Tax Law and also under the Treaty between India and USA. Hence, we direct the Assessing Officer to allow the claim of assessee. 33. Before parting, we may refer to the reliance placed upon by the learned Departmental Representative for the Revenue on para 10.5 of order of CIT(A). We have already referred to the terms of agreement, which have been referred in the said para 10.5. Further, he has placed reliance on the ratio laid down by the Hon ble High Court of Karnataka in CIT Vs. Samsung Electronics Co. Ltd. ( supra), wherein the issue was grant of license to make use of software and whether the same is royalty both under Income Tax and DTAA. In this regard, we may refer to the recent decision in the case of John Deere India Pvt. Ltd. Vs DDIT (International Taxation) in ITA Nos. 905 to 908/ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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