TMI Blog2021 (7) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in the case of Godrej Boyce Mfg Co. Ltd.[ 2010 (8) TMI 77 - BOMBAY HIGH COURT] wherein has held that since Rule 8D were notified on 24th March 2008, it would apply from A.Y. 2008-09. Following the aforesaid decision of Hon'ble Bombay High Court, we are of the view that no addition is called for in the present case. We therefore set aside the addition made by the AO thus the ground of the assessee is allowed. Disallowance of transportation is made for the reason that the transpiration was for the transportation of machinery and therefore required capitalization - HELD THAT:- We find that the disallowance has been made by AO on ad hoc basis without bringing any material on record to support his views. In such a situation, we are of the view that the addition made by AO was not justified. We therefore direct its deletion. Thus the ground of assessee is allowed. Depreciation of printers @ 60% - depreciation on computer accessories and peripherals - HELD THAT:- It is the claim of assessee that it being an integral part of computer system, depreciation @60% is allowable. On the other hand, it is the case of Revenue that it is eligible for depreciation @ 15% being the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e No. 7 - para 4, the AO mentioned that only 25% will be treated as capital expenditure i.e. ₹ 5,803,750/- after following the Hon'ble SC decision of Southern Switch Gear Ltd. vs CIT 232 ITR 359. However, while calculating total additions at page No. 14 of the order, total royalty amount of ₹ 23,215,000/- was disallowed. Ground No. 2 The Assessing Officer had erred both on the law as well as on the facts while making disallowance of ₹ 757,345/- under Section 14A of the Act in accordance with rule 8D as per notification no. 45/2008 dated 24.03.2008 by ignoring the fact that the notification is not applicable to the relevant assessment year under consideration. Ground No. 3 The Assessing Officer has erred in law and on the facts of the case while making addition of ₹ 9,237,617/- pertaining to royalty payment while determining the arm's length price in respect of International transaction without appreciating that the appellant has entered the International Transaction at arm's length principle. Ground No. 4 The AO has grossly erred in law by disallowing the same royalty expenditure under normal provisions of the Act as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration for earning the dividend income. Further the AO has ignored the fact that as per notification no. 45/2008 dated 24.03.2008 that the Rule 8D is not applicable to the relevant assessment year under consideration. Ground No. 3 The Assessing Officer has erred in law and on the facts of the case in initiating the penalty proceedings under Section 271(1)(c) of the Act. The above ground are independent and without prejudice to each other. The Appellant prays that it may be allowed to add, alter, or forego any of the ground at the time of hearing in the interest of principle of nature justice. 6. Ground No. 1 is with respect to the issue of treatment of royalty payment of ₹ 23,215,000/- as capital expenditure. 7. AO noticed that assessee had paid royalty of ₹ 23,215,000/- to Roulunds Fabriker, Denmark (RFDK) and the entire amount was debited to the Profit and Loss account and claimed as expenditure. The assessee was asked to explain as to why the amount should not be treated as capital expenditure to which assessee made the submissions and also relied upon certain case laws to support its contentions. The submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue. He further submitted that for A.Y. 2007-08 disallowance proposed to be made by the AO was deleted by the DRP and from A.Y. 2008-09 onwards, the AO has accepted the royalty expense claimed by the assessee and has not made any disallowance. He pointed to the copy of order placed in the paper book at Page 83 to 85 and the order of High Court upholding the order of Tribunal at Page 85A of the paper book. He therefore submitted that expenditure by way of license fee incurred by the assessee was allowable revenue deduction. He therefore submitted that the disallowance made by the AO is liable to be deleted. 9. Before us, Learned AR further submitted that the Ground No. 1 raised in A.Y. 2007-08 is identical to Ground No. 3 raised in A.Y. 2006-07. 10. Learned DR on the other hand supported the order of lower authorities. 11. We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to the disallowance made on license fee by holding it to be capital expenditure. We find that identical issue arose in assessee's own case in A.Y. 2001-02 2002-03 and the Co-ordinate Bench of Tribunal decided the issue in favou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms of the agreement, assessee was paying royalty at the rate of 1.8% of the net of selling price of the products sold by the company. The AO disallowed 25% of such royalty payment by observing that it was on capital account. Under similar facts and circumstances for the AY 2001-02 2002-03, against the deletion of disallowance of such 25% of royalty payment, the Tribunal affirmed the order of the CIT(A) after having the following observations:- 4. We have heard the parties and considered the rival submissions. It is not in dispute that it is running agreement under which the royalty of fixed rate of 1.8% of the total sale is made by the assessee. The case of the assessee, in our opinion, is directly covered by the decisions of the Hon'ble Supreme Court in the case of (1) CIT Vs. Ciba of India, 68 ITR 692 and Alembic Chemical Works Co. Ltd. Vs. CIT, 177 ITR 377 (SC); and the decision of the Hon'ble Andhra Pradesh High Court in the case of Praga Tools Ltd. Vs. CIT, 123 ITR 773 (AP). The payment is not for acquiring any asset of enduring nature nor any asset has been acquired by the assessee by making this payment. It had only transferred the right and exclusive license ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UM. S. B.) held that Rule 8D was applicable retrospectively and accordingly upheld the order of AO. Aggrieved by the order of AO pursuant to the direction of DRP, assessee is now before us. 17. Before us, Learned AR reiterated the submissions made before the AO and DRP and further submitted that majority of the dividend yielding investments had been brought forward from earlier years and no fresh investments which yielded dividend was made in the year under consideration. He further submitted that investment made in Mutual Funds in the preceding years and during the relevant previous year were made out of own surplus fund. He further submitted that assessee had sufficient own funds in the form of Share Capital and Reserves Surplus and therefore in such a situation no disallowance of interest is called for. 18. As far as the income from Mutual Funds is concerned, he submitted that Mutual Funds charges fund management charges, as permitted by SEBI under the scheme and out of the income earned by the Fund, fund management charges are deducted and net income is available for distribution to unit holders and only the net income of ₹ 40,91,269/- was received by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /S Denmark and other AEs and it was paying royalty to Roulunds Rubber A/S Denmark for the export to its other AEs. TPO was of the view that the payment of Royalty to the AE for the exports made to AEs was in the nature of price reduction for the products sold to AEs. He was further of the view that assessee was in fact working as a contract manufacture for the limited purpose of export made to the AEs. He also noted that the technology was taken by the assessee from the AEs, the raw material was purchased from the AEs, the goods were sold to the AEs and on such sale of goods to AEs royalty was also paid by the assessee to the AEs. The assessee was therefore asked to justify the payment of royalty. On the basis of submissions made by the assessee, TPO concluded that the royalty paid as a percentage of sales to its associated enterprise was not at arm's length because it amounts to collecting royalty on the sales to itself. He further noted that thought it appears that the technical know-how is commercially exploited in India, in reality the price for these activities were not fixed by market forces and that the risk and reward are like a contract manufacturer and according to hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Co-ordinate Bench of Tribunal while deciding the issue in ITA No. 455/Del/2014 held as under: 8. We have heard the rival submissions and perused the relevant material on record. It is observed that the TPO has computed ALP of the international transaction of 'Payment of Royalty' at Nil by holding that the assessee did not avail any benefit and the services provided by the foreign AEs were unwarranted. In doing so, he rejected the assessee's adoption of TNMM as the most appropriate method and followed the CUP method. That is how, he computed ALP of this international transaction at Nil. The AO in his order has simply incorporated the conclusion of the TPO in determining the ALP of this international transaction at Nil without carrying out any independent analysis or evaluation as to whether or not such use of technical know-how was required/availed by the assessee in terms of section 37(1) of the Act. The ld. AR fairly admitted that there is no independent discussion in the assessment order about the disallowance of royalty payment, except for reproduction of the relevant parts from the order of the TPO. 9. The Hon'ble Delhi High Court in CIT v. Cushm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing with this issue, we want to clarify that we have desisted from examining the correctness of any aspect of this international transaction, be it the calculation of the amount paid as royalty or determination of ALP of this international transaction, such as, the most appropriate method and comparables etc. because the matter is being sent to the AO/TPO for redoing in accordance with the judgment in the case of Cushman Wakefield (India) (P.) Ltd. (supra). It is further seen that the TPO has also recommended the transfer pricing adjustment of the full amount of royalty payment, without checking the veracity of the calculation of royalty payment in terms of rate(s) as given in the Agreements with both the AEs. Now the ball is in the court of the lower authorities to independently do the needful. 26. We further find that the Co-ordinate Bench of Tribunal while deciding the appeal for A.Y. 2010-11 (ITA No. 370/Del/2015 order dated 17.10.2016) following the ITAT order for A.Y. 2009-10, had remitted the issue to AO/TPO. We further find that Tribunal while deciding the issue in 2011-12 2013-14 had also remitted the matter to the AO to decide the issue afresh by following the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the transportation of machinery and therefore required capitalization. 31. We find that the disallowance has been made by AO on ad hoc basis without bringing any material on record to support his views. In such a situation, we are of the view that the addition made by AO was not justified. We therefore direct its deletion. Thus the ground of assessee is allowed. 32. Ground No. 6 is with respect to denying the claim of depreciation of printers @ 60%. 33. AO noted that during the year under consideration, assessee had made purchase of computer accessories and peripherals amounting to ₹ 3,15,259/- and had claimed depreciation of the same @ 60%. The assessee was asked to show-cause as to why the depreciation not be restricted to 15%. Assessee inter alia submitted that the amount spent was towards the purchase of printers and it being output devise of the computer system, it was an integral part of computer and therefore eligible for 60% depreciation. The submission of the assessee was not found acceptable to AO. AO was of the view that 60% depreciation could be claimed only for computers and computer software. He accordingly treated it to be normal plant and machine ..... 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