Deputy Commissioner of Income-tax, V. M/s. Alfa Laval India Ltd., Pune

ITA 1351/PUN/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9173 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 9 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-07-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 12-10-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: NIRUPAMA KOTRU
• Keywords: Depreciation; Transfer pricing; International transaction; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO. 1324 /P U N/201 5 / ASSESSMENT YEAR : 20 1 0 - 1 1 ALFA LAVAL (INDIA) LIMITED, MUMBAI PUNE ROAD, DAPODI, PUNE 411012 . / APPELLANT PAN: AAACA5899A VS. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 8, PUNE . / RESPONDENT . / ITA NO. 1351 /PUN/201 5 / ASSESSMENT YEAR : 20 1 0 - 11 THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 8, PUNE . / APPELLANT VS. ALFA LAVAL (INDIA) LIMITED, MUMBAI PUNE ROAD, DAPODI, PUNE 411012 . / RESPONDENT PAN: AAACA5899A APPELLANT BY : SHRI N IKHIL PATHAK RESPONDENT BY : SMT. NIRUPAMA K O TR U , CIT / DATE OF HEARING : 24 .0 7 . 201 7 / DATE OF PRONOUNCEMENT: 26 . 0 7 .201 7 ITA NO. 1324 /P U N/20 1 5 ITA NO.1351/PUN/2015 ALFA LAVAL (INDIA) LTD. , 2 / ORDER PER SUSHMA CHOWLA, J M : THE CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE ARE AGAINST THE ORDER OF T HE CIT(A) - 13, PUNE, DATED 31.07.2015 RELATING TO ASSESSMENT YEAR 20 1 0 - 1 1 AGAINST ORDER PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 196 1 (IN SHORT THE ACT). 2. THE CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 3. THE ASSESSEE IN ITA NO. 1324 /PUN/201 5 HAS RAISED THE FOLLOWING GROU NDS OF APPEAL : - ON THE FACTS OF THE CASE AND IN LAW 1.1 THE. LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 13 ERRED IN CONFIRMING DISALLOWANCE OF PRIME PROJECT EXPENSES AND OTHER SOFTWARE DEVELOPMENT CHARGES OF RS. 1,36,12,281/ - (RS.95,28,597/ - NET OF D EPRECIATION THEREON) BY HOLDING THAT THE ABOVE EXPENDITURE WAS IN THE NATURE OF CAPITAL EXPENDITURE. 1.2 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 13 ERRED IN NOT APPRECIATING THAT THE APPELLANT COMPANY HAD NOT ACQUIRED ANY SOFTWARE LICENSE OR ANY BENEFITS OF ENDURING NATURE. THE ABOVE EXPENDITURE ON PRIME PROJECT WAS INCURRED TO IMPROVISE THE EXISTING PROCESS AND TO EXPLORE THE EXISTING FUNCTIONALITIES OF THE MOVEX ERP SYSTEM ALREADY CAPITALIZED IN THE BOOKS OF APPELLANT COMPANY AND THE APPELLANT COMPANY DID NOT ACQUIRE ANY NEW SYSTEM AS A RESULT OF INCURRING THIS EXPENDITURE. 1.3 HE ERRED IN NOT APPRECIATING THAT, THE EXPENDITURE INCURRED BY THE APPELLANT COMPANY FOR PRIME PROJECT AND OTHER SOFTWARE DEVELOPMENT WAS TO IMPROVISE ITS EXISTING PRO CESSES AND TO BE MORE EFFICIENT AND PROFITABLE IN CARRYING OUT ITS MAIN BUSINESS ACTIVITY OF MANUFACTURING AND IT DID NOT ADD TO THE PROFIT EARNING APPARATUS OF THE APPELLANT COMPANY. 1.4 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 13 ERRED IN NOT RELYING ON THE FOLLOWING DECISIONS: I . AMWAY INDIA ENTERPRISES VS. DCIT (2008) 114 TTJ (DEL) (SB) 476 II . CIT VS. G E CAPITAL SERVICES LTD. (2008) 300 ITR 420 (DEL.) III . CIT VS. ASAHI INDIA SAFETY GLASS LTD (2011) 245 CTR 529 (DEL.) IV . CIT VS. RAYCHEM RPG LTD (2011) 24 5 CTR 515 (BOM.) ITA NO. 1324 /P U N/20 1 5 ITA NO.1351/PUN/2015 ALFA LAVAL (INDIA) LTD. , 3 4. THE REVENUE IN ITA NO.1351/PUN/2015 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) ERRED IN HOLDING THAT THE DOMESTIC MARKET SEGMENT AND THE EXPORT MARKET SEGMENT WERE DISTINCT AND NOT COMPARABLE AND THEREBY, THE APPLICATION OF THE COST PLUS METHOD ADOPTED BY THE TPO WAS INCORRECT? 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF IT SERVICE CHARGES OF RS.3.76 CRS BY HOLDING THAT THE ABOVE EXPENDITURE WAS IN THE NATURE OF REVENUE EXPENDITURE? 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION ON ACCOUNT OF IT SERVICE CHARGES OF RS.3.76 CRS. IGNORING THAT ON SIMILAR ISSUE FOR A.Y. 2008 - 09 THE HONBLE ITAT HAS RESTORED THE MATTER TO THE FILE OF AO FOR FRESH VERIFICATION? 4. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.36,65,694/ - U/S 14(A) IGNORING THAT AO HAS CLEARLY RECORDED IN HIS ORDER THAT HE IS NOT SATISFIED WITH THE QUANTUM OF EXPENSES ALLOCATED BY THE ASSESSEE AGAINST EXEMPT INCOME? 5. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE AT THE OUTSET POINTED OUT THAT THE ISSUE RAISED IN T HE APPEAL FILED BY THE ASSESSEE IS SQUARELY COVERED BY THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 2009 - 10 IN ITA NO.588/PUN/2014, ORDER DATED 30.06.2017. HE FURTHER POINTED OUT THAT THE EXPENDITURE WAS INCURRED FOR THE MAINTE NANCE AND UPGRADATION OF ERP SYSTEM, WHEREIN THE ASSESSEE WAS USING ERP SYSTEM IN THE EARLIER YEARS ALSO AND THE EXPENDITURE IN THE YEAR WAS INCURRED ON UPGRADATION OF SYSTEM. RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. UHDE INDIA P. LTD. (2013) 358 ITR 395 (BOM). 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE WHICH ARISES IN THE PRESENT APPEAL IS AGAINST THE DISALLOWANCE OF PRIME PROJECT EXPENSES AND OTHER SOFTWARE DEVELOPMENT CHARGES OF RS.1,36,12,281/ - I.E. ITA NO. 1324 /P U N/20 1 5 ITA NO.1351/PUN/2015 ALFA LAVAL (INDIA) LTD. , 4 RS.95,28,597/ - , NET OF DEPRECIATION. THE ASSESSING OFFICER HAD DISALLOWED THE SAID EXPENSES TO BE CAPITAL IN NATURE. THE CIT(A) UPHELD THE ORDER OF ASSESSING OFFICER. THE ASSESSEE IS IN APPEAL AGAINST THE SAME. THE ISSUE ARISING IN THE PRESENT APPEAL IS AGAINST THE ALLOWABILITY OF EXPENDITURE ON MAINTENANCE AND UPGRADATION OF ERP SYSTEMS, WHEREIN THE ASSESSEE WAS USING ERP SYSTEM AND EXPENDITURE WAS INCURRED ON UPGRADATION OF THE SAID SYSTEM, THEN EXPENDITURE IS TO BE ALLOWED AS REVENUE EXPENDITURE. WE FIND SUPPORT FROM THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. UHDE INDIA P. LTD. (SUPRA). SIMILAR ISSUE AROSE BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2009 - 10 AND THE TRIBUNAL VIDE PARA 27 HAD DIRECTED THE ASSESSING OFFICER TO VERIFY THE CLAIM OF ASSESSEE. FOLLOWING THE SAME PARITY OF REASONING, WE DIRECT THE ASSESSING OFFICER TO VERIFY THE CLAIM OF ASSESSEE IN THIS REGARD THAT THE EXPENDITURE HAS BEEN INCURRED ON UPGRADATION OF ERP SYSTEM AND ALLOW THE SAME IN ACCORDANCE WITH THE RATIO LAID DOWN BY THE JURISDICTIONAL HIGH COURT. THUS, THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE THUS, ALLOWED AS INDICATED ABOVE. 8. NOW, COMING TO THE APPEAL FILED BY THE REVENUE. THE REVENUE VIDE GROUND OF APPEAL NO.1 IS AGGRIEVED BY THE FINDING OF CIT(A) THAT THE DOMESTIC MARKET SEGMENT AND THE EXPORT MARKET SEGMENT WERE DISTINCT AND NOT CO MPARABLE AND THEREBY THE APPLICATION OF CPM METHOD ADOPTED BY THE TPO WAS INCORRECT. 9. BRIEFLY, IN THE FACTS RELATING TO THE ISSUE, THE ASSESSEE IN THE EQUIPMENT DIVISION WAS MANUFACTURING THE ITEMS IN INDIA AND THE SAME WERE SOLD BOTH IN THE DOMESTIC MARKET AND WERE ALSO EXPORTED TO ASSOCIATED ENTERPRISES. THE TPO APPLIED CUP METHOD IN VIEW OF THE INTERNAL COMPARABLES AVAILABLE. THE ASSESSEE ON THE OTHER HAND, HAD IN ITS TP STUDY REPORT, HAD APPLIED TNNM METHOD AS THE MOST APPROPRIATE METHOD. THE TP O IN THE TP PROCEEDINGS ANALYZED THE FUNCTIONAL ITA NO. 1324 /P U N/20 1 5 ITA NO.1351/PUN/2015 ALFA LAVAL (INDIA) LTD. , 5 COMPARABILITY AND OTHER ASPECTS OF THE CONCERNS, WHICH WERE SELECTED BY THE ASSESSEE AS COMPARABLE. THE LIST OF COMPARABLES IS IN PARA 12 OF THE ORDER OF THE TPO. THE TPO IN LINE WITH THE OBSERVATIONS IN AS SESSMENT YEAR 2009 - 10, EXCLUDED CERTAIN CONCERNS BEING FUNCTIONALLY DIFFERENT AND CERTAIN CONCERNS WERE REJECTED BECAUSE OF FAILURE OF TURNOVER FILTER. THE TPO PROPOSED AN ADJUSTMENT OF RS. 23.26 CRORES TO THE VALUE OF EXPORT OF MANUFACTURED EQUIPMENTS TO ARRIVE AT THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS BY ADOPTING COST PLUS METHOD AS COMPARED TO THE TNNM METHOD ADOPTED BY THE ASSESSEE. 10. THE CIT(A) DELETED THE ADDITION MADE BY THE ASSESSING OFFICER / TPO IN TURN, RELYING ON THE DECISIO N OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008 - 09 ON SIMILAR ISSUE. 11. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF CIT(A) SINCE THE MATTER IS PENDING BEFORE THE HONBLE BOMBAY HIGH COURT IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 2008 - 09. 12. ADMITTEDLY, THE ISSUE RAISED VIDE GROUND OF APPEAL NO.1 BY THE REVENUE IN THE INSTANT APPEAL IS SIMILAR TO THE ISSUE RAISED IN ASSESSEES OWN CASE IN EARLIER YEARS I.E. ASSESSMENT YEARS 2008 - 09 AND 2009 - 10. THE PLEA OF ASSESSEE BEFORE US IS THAT TNNM METHOD SHOULD BE APPLIED AS THE MOST APPROPRIATE METHOD AFTER AGGREGATION APPROACH APPLIED BY THE ASSESSEE IN THE EQUIPMENT DIVISION. THE TRIBUNAL APPLIED THE SAME AND HELD AS UNDER: - 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED TH E RECORD. THE ISSUE RAISED VIDE ABRIDGED GROUNDS OF APPEAL NO.1 AND 2 IS AGAINST THE TP ADJUSTMENT OF RS.8,87,590/ - . THE ASSESSEE IN THE EQUIPMENT DIVISION HAD DECLARED TURNOVER OF RS.373 CRORES, WHEREIN IT WAS MANUFACTURING THE ITEMS IN INDIA AND WAS SE LLING THE SAME IN THE DOMESTIC MARKET AND ALSO EXPORTING TO ASSOCIATED ENTERPRISES. THE TPO WAS OF THE VIEW THAT BECAUSE OF INTERNAL COMPARABLES AVAILABLE, CUP METHOD SHOULD BE APPLIED. THE ASSESSEE ON THE OTHER HAND, HAD APPLIED TNNM METHOD AS THE MOST APPROPRIATE METHOD, WHEREIN AS AGAINST THE MARGINS OF ASSESSEE AT 19.48%, THE MEAN MARGINS OF NINE CONCERNS SELECTED TO BE FUNCTIONALLY COMPARABLE ITA NO. 1324 /P U N/20 1 5 ITA NO.1351/PUN/2015 ALFA LAVAL (INDIA) LTD. , 6 WAS 10.74%; HENCE THE TRANSACTION WAS HELD TO BE AT ARM'S LENGTH. THE TPO DURING THE COURSE OF TP PROCEEDING S HAD ALSO ANALYZED THE FUNCTIONAL COMPARABILITY AND OTHER ASPECTS OF THE CONCERNS SELECTED AS COMPARABLES BY THE ASSESSEE. THE LIST OF THE COMPARABLES IS AT PAGE 7 OF THE TPOS ORDER, WHICH IS AS UNDER: - SR NO NAME OF THE COMPANY DATA SOURCE OM 1 AXTE L INDUSTRIES LTD. PROWESS 9.09% 2 G E I INDUSTRIAL SYSTEMS LTD PROWESS 13.56% 3 GANSONS LTD. PROWESS 8.30% 4 KILBURN ENGINEERING LTD. PROWESS 4.66% 5 THERMAX LTD. PROWESS 13.92% 6 WALCHANDNAGAR INDUSTRIES LTD. PROWESS 9.60% 7 ANUP ENGINEERING LTD. CA PITALINE 17.34% 8 GMM PFAUDLER LTD (CHEMICAL PROCESS EQUIPMENT SEGMENT) PROWESS - SEG 12.15% 9 BGR ENERGY SYSTEMS LTD (CAPITAL GOODS SEGMENT) CAPITALINE SEG 8.02% AVERAGE 10.74% 11. THE TPO OBSERVED THAT THE CONCERNS AT SERIAL NOS.5, 6 AND 8 WERE FUNCTIONALLY DIFFERENT FROM THE ASSESSEE AND THE CONCERNS AT SERIAL NOS.1 AND 7 HAD TO BE REJECTED BECAUSE OF THEIR TURNOVER. THE TOTAL TURNOVER OF THE CONCERNS AXTEL INDUSTRIES LTD. WAS ONLY RS.33 CRORES AND THAT OF ANUP ENGINEERING LTD. WAS RS.78 CRORES AS AGAINST THE TURNOVER OF ASSESSEE AT RS.373 CRORES. THERE IS MERIT IN THE STAND OF TPO IN REJECTING THE SAID TWO CONCERNS. THE SECOND ASPECT WAS THE REJECTION OF THERMAX LTD., WHICH WAS ENGAGED IN MANUFACTURE OF BOILERS AND POWER PLANT. THE TPO HELD THAT THERMAX LTD. WAS OPERATING IN TOTALLY DIVERSE SECTOR FROM THE OPERATIONS OF ASSESSEE AND IS NOT TO BE COMPARED. IN RESPECT OF WALCHANDNAGAR INDUSTRIES LTD., THE SAID CONCERN WAS REJECTED FOR ITS DIFFERENCE IN ACCOUNTING PERIOD, WHEREIN THE RESULTS OF ASSESSEE WERE CONSIDERED FOR 31 ST MARCH, 2009 AND OF WALCHANDNAGAR INDUSTRIES LTD., CLOSING WAS 30 TH SEPTEMBER, 2008. THE LAST CONCERN GMM PFAUDLER LTD. WAS ENGAGED IN ENAMELED ACID AND ALKALI AND CHEMICAL EQUIPMENT AND MILD STEEL AND STAINLESS STEEL EQU IPMENTS AND THE SAID EQUIPMENTS WERE NOT COMPARABLE TO THE PRODUCTS MANUFACTURED BY THE ASSESSEE. THE TPO AFTER OBSERVING THE ABOVE SAID HAD REJECTED TNNM METHOD TO BE APPLIED AND HAD SELECTED CUP METHOD AS THE MOST APPROPRIATE METHOD. 13. NOW, COMING TO THE FACTS OF THE PRESENT CASE, T HE TRANSFER PRICING OFFICER (TPO) IN PARA 12 OF ITS ORDER HAD REFERRED THE SAME LIST WHICH IS SIMILAR TO AS REPRODUCED IN PARA 10 AT PAGE 8 OF THE TRIBUNALS ORDER DATED 30.06.2017 (SUPRA). THE TPO IS DIRECTED TO APPLY T HE TNNM METHOD AS IN EARLIER YEARS TO EXCLUDE F IVE CONCERNS I.E. AXTEL INDUSTRIES LTD., ANUP ENGINEERING LTD., THERMAX LTD., WALCHANDNAGAR INDUSTRIES LTD. AND GMM PFAUDLER LTD . IT MAY BE POINTED OUT HEREIN ITSELF THAT THE TPO IN PARA 9 HAS ALSO REFERRED T O THE ORDER OF THE TRIBUNAL IN ASSESSMENT YEAR 2008 - 09. THE CIT(A) HAS ALSO GRANTED THE RELIEF TO THE ASSESSEE IN PARA 2.1.15 AT PAGE 24 IN TURN, RELYING ON THE ORDER OF TRIBUNAL IN ASSESSMENT ITA NO. 1324 /P U N/20 1 5 ITA NO.1351/PUN/2015 ALFA LAVAL (INDIA) LTD. , 7 YEAR 2008 - 09. WE FIND THAT THE TRIBUNAL FURTHER IN ASSESSMENT YEAR 2009 - 10 HAS APPLIED SIMILAR PRINCIPLE AND HELD AS UNDER: - 12. SIMILAR ISSUE OF SELECTION OF MOST APPROPRIATE METHOD AROSE BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2008 - 09 AND THE TRIBUNAL HELD THAT CPM METHOD SHOULD NOT BE APPLI ED AND TNNM METHOD IS TO BE APPLIED AS MOST APPROPRIATE METHOD. APPLYING THE SAID RATIO TO THE FACTS OF THE PRESENT CASE, WHERE THE TPO HIMSELF HAD APPLIED TNNM METHOD IN ALL THE EARLIER YEARS STARTING FROM ASSESSMENT YEARS 2002 - 03 TO 2007 - 08 AND THE TRIB UNAL HAD DIRECTED THE APPLICATION OF TNNM METHOD IN ASSESSMENT YEAR 2008 - 09, WE HOLD THAT FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS IN THE EQUIPMENT DIVISION, TNNM METHOD IS TO BE APPLIED. THE TPO HAS ALREADY CONSIDERED THE LIST OF COMPARABLES SELEC TED BY THE ASSESSEE. IN RESPECT OF COMPARABLES AT SERIAL NOS.1 AND 7 BEING REJECTED FOR NON - MATCHING ON TURNOVER, WE UPHOLD THE ORDER OF TPO. SIMILARLY, WALCHANDNAGAR INDUSTRIES LTD. CANNOT BE SELECTED AS COMPARABLE FOR DIFFERENT ACCOUNTING PERIOD. IN R ESPECT OF THERMAX LTD. AND GMM PFAUDLER LTD., THE TWO CONCERNS ARE NOT FUNCTIONALLY COMPARABLE. NOW, LOOKING AT THE MARGINS OF BALANCE FOUR CONCERNS WHICH WERE SELECTED BY THE ASSESSEE AND AS POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE AS SESSEE THAT THE MARGINS OF SAID CONCERNS ARE MUCH BELOW THE MARGINS SHOWN BY THE ASSESSEE AT 19.48% AND CONSEQUENTLY, NO ADJUSTMENT IS TO BE MADE IN THE HANDS OF ASSESSEE ON THIS ACCOUNT. WE ALSO ACCEPT THE AGGREGATION APPROACH APPLIED BY THE ASSESSEE UND ER THE SAID EQUIPMENT DIVISION AS SIMILAR AGGREGATION APPROACH HAS BEEN APPLIED BY THE TPO IN ALL THE EARLIER YEARS AND EVEN BY THE TRIBUNAL IN ASSESSMENT YEAR 2008 - 09. CONSEQUENTLY, WE DELETE THE ADDITION OF RS.8,87,590/ - MADE IN THE DIVISION OF EXPORT OF EQUIPMENTS. 1 4 . IN VIEW OF SIMILARITY OF THE ISSUE, WE APPLY THE PARITY OF REASONING AS IN ASSESSMENT YEAR 2009 - 10 TO DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. THE TPO IS THUS, DIRECTED TO EXCLUDE FIVE CONCERNS I.E. AXTEL INDUSTRIES LTD., ANUP ENGI NEERING LTD., THERMAX LTD., WALCHANDNAGAR INDUSTRIES LTD. AND GMM PFAUDLER LTD. AND AFTER EXCLUDING THE SAID COMPARABLES, THE AVERAGE MARGIN OF BALANCE COMPARABLES WORK TO 14.01% AGAINST WHICH, THE ASSESSEE HAS SHOWN THE MARGINS OF 25.27%. HENCE, NO ADJUS TMENT IS TO BE MADE ON ACCOUNT OF ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS. THE GROUND OF APPEAL NO.1 RAISED BY THE REVENUE IS THUS, DISMISSED. 1 5 . THE ISSUE IN GROUNDS OF APPEAL NO.2 AND 3 IS IN RESPECT OF IT SERVICE CHARGES OF RS.3.76 CRORES. ITA NO. 1324 /P U N/20 1 5 ITA NO.1351/PUN/2015 ALFA LAVAL (INDIA) LTD. , 8 16. IN THE FACTS RELATING TO THE ISSUE, THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD CLAIMED EXPENDITURE INCURRED TOWARDS ACQUISITION AND USE OF SOFTWARE AT RS.5.38 CRORES. THE ASSESSING OFFICER ON EXAMINATION OF THE DETAILS OF EXPENDITURE HAD F OUND THE SAID EXPENDITURE TO BE CAPITAL IN NATURE AND ALLOWED DEPRECIATION AT RS.1.61 CRORES ON IT. THE ASSESSING OFFICER DISALLOWED NET EXPENDITURE OF RS.3.76 CRORES. 17. THE CIT(A) HAD DELETED THE ENTIRE DISALLOWANCE WITH DIRECTION TO REVERSE THE DEP RECIATION ALLOWED ON THE SAID DISALLOWANCE. 18. THE REVENUE IS AGGRIEVED BY THE ORDER OF CIT(A) AS SIMILAR ISSUE OF SOFTWARE EXPENSES HAD BEEN RESTORED BACK TO THE FILE OF ASSESSING OFFICER FOR FRESH VERIFICATION BY THE TRIBUNAL. 19. WE FIND THAT THE TRI BUNAL IN ASSESSMENT YEAR 2008 - 09 HAD SET ASIDE THE SAID ISSUE FOR VERIFICATION AS PER PARA 10 AT PAGE 53 OF THE SAID ORDER. WE ARE RELYING ON THE FINDING OF TRIBUNAL IN THIS REGARD. HOWEVER, FOR THE SAKE OF BREVITY, THE SAME IS NOT BEING REPRODUCED. IN LINE WITH THE SAID DIRECTIONS, WE REMIT THIS ISSUE BACK TO THE FILE OF ASSESSING OFFICER FOR VERIFICATION , AS PER DIRECTIONS OF TRIBUNAL IN ASSESSMENT YEAR 2008 - 09. THE GROUNDS OF APPEAL NO.2 AND 3 RAISED BY THE REVENUE ARE ALLOWED FOR STATISTICAL PURPOSE S . 20 . THE GROUND OF APPEAL NO.4 RAISED BY THE REVENUE IS AGAINST THE ORDER OF CIT(A) IN DELETING THE ADDITION UNDER SECTION 14A OF THE ACT. 2 1. BRIEFLY, IN THE FACTS OF THE CASE, T HE ASSESSEE FOR THE YEAR UNDER CONSIDERATION HAD RECEIVED DIVIDEND INCO ME OF RS.3.46 CRORES, AGAINST WHICH THE ASSESSEE HAD COMPUTED THE DISALLOWANCE UNDER SECTION 14A OF THE ACT AT RS.3 ITA NO. 1324 /P U N/20 1 5 ITA NO.1351/PUN/2015 ALFA LAVAL (INDIA) LTD. , 9 LAKHS. HOWEVER, THE ASSESSING OFFICER IN TURN, WORKED OUT THE DISALLOWANCE AS PER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TA X RULES, 1962 (IN SHORT THE RULES) ON ACCOUNT OF BOTH INTEREST AND EXPENDITURE EXPENSES AT RS.36.65 LAKHS. 22. THE CIT(A) DELETED THE SAID ADDITION ACCEPTING THE PLEA OF ASSESSEE THAT NO SATISFACTION WAS RECORDED BY THE ASSESSING OFFICER BEFORE MAKING THE AFORESAID ADDITION, AS PER PARAS 2.6.3 AND 2.6.4 AT PAGE 38 OF THE APPELLATE ORDER. THE RELEVANT PARAS READ AS UNDER: - 2.6.3 I HAVE CONSIDERED THE FACTS AND RELEVANT PROVISIONS OF THE LAW. I FIND THAT THE LEARNED AO HAS INVOKED THE PROVISIONS OF TH E RULE 8D WITHOUT DISCUSSING AS TO WHY HE IS NOT SATISFIED ON THE CORRECTNESS OF THE CLAIM OF THE DEDUCTION OF RS. 36,65,594/ - . IT IS SETTLED THAT INVOKING OF THE PROVISIONS OF THE RULE 8D IS NOT AUTOMATIC AND SECTION 14A(2) REQUIRE THE AO TO RECORD HIS SA TISFACTION FOR INVOKING THE RULE 8D. FURTHER, THE SATISFACTION OF THE AO HAS TO BE AN OBJECTIVE SATISFACTION AND CANNOT BE HIS SUBJECTIVE SATISFACTION. THERE SHOULD BE SOME MATERIAL WITH THE AO ON THE BASIS OF WHICH, HE HAS DERIVED SATISFACTION. ACCORDI NG TO ME, THE AO'S SATISFACTION NEED NOT BE EXPRESS AS THERE IS NO PROVISION IN THE ACT FOR RECORDING EXPRESS SATISFACTION IN THE ASSESSMENT ORDER. HOWEVER, IF THE AO'S SATISFACTION CANNOT EVEN BE GATHERED FROM THE ASSESSMENT ORDER, THEN THE RULE 8D CANNO T BE INVOKED. 2.6.4 IN THIS CASE, I FIND THAT THE LEARNED AO IN THE PARA 11.1 OF THE ASSESSMENT ORDER HAS MERELY STATED THAT WITH REGARD TO THE APPELLANTS ACCOUNTS, HE IS NOT SATISFIED WITH THE CORRECTNESS OF DISALLOWANCE OF RS.3,00,000/ - MADE BY THE APP ELLANT U/S 14A. HOWEVER, HE HAS NOT MENTIONED THE GROUNDS ON WHICH, HE HAS CONCLUDED THAT THE APPELLANTS CLAIM OF THE DISALLOWANCE OF RS.3,00,000/ - IS NOT CORRECT. THE NATURE OF THE SATISFACTION RECORDED BY THE LEARNED AO IS A SUBJECTIVE SATISFACTION WI THOUT DISCUSSING THE MATERIAL ON THE BASIS OF WHICH, HE HAS ARRIVED AT THE SATISFACTION. THEREFORE, ACCORDING TO ME, THE LEARNED AO CANNOT INVOKE THE RULE 8D. I CONSIDER THAT HE WAS NOT CORRECT IN INVOKING THE RULE 8D AND MAKING THE DISALLOWANCE. THEREF ORE, I DELETE THE DISALLOWANCE OF RS.36,65,594/ - MADE BY THE LEARNED AO. 23 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDER OF ASSESSING OFFICER. 24 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OU T THAT THE ISSUE IS SQUARELY COVERED BY THE ORDER OF TRIBUNAL IN KALYANI STEELS LTD. VS. ITA NO. 1324 /P U N/20 1 5 ITA NO.1351/PUN/2015 ALFA LAVAL (INDIA) LTD. , 10 ADDL.CIT IN ITA NO.1733/PN/2012, RELATING TO ASSESSMENT YEAR 2008 - 09, ORDER DATED 30.01.2014. 25 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISS UE WHICH ARISES IN THE PRESENT APPEAL IS THE PRELIMINARY ISSUE OF RECORDING OF SATISFACTION BY THE ASSESSING OFFICER BEFORE APPLYING PROVISIONS OF RULE 8D OF THE RULES IN LINE WITH SECTION 14A OF THE ACT. WE FIND THAT SIMILAR ISSUE OF EXERCISE OF JURISDIC TION BY THE ASSESSING OFFICER IN RECORDING THE SATISFACTION WHILE APPLYING THE PROVISIONS OF SECTION 14A OF THE ACT AROSE BEFORE THE TRIBUNAL IN KALYANI STEELS LTD. VS. ADDL.CIT (SUPRA) , WHEREIN IT WAS HELD AS UNDER: - 10. IN THE AFORESAID BACKGROUND, NOW, WE MAY EXAMINE THE FACTS OF THE PRESENT CASE. IN THIS CASE, ASSESSEE HAS EARNED BY WAY OF DIVIDENDS A SUM OF RS.5,45,58,685/ - , WHICH IS EXEMPT U/S 10(38) OF THE ACT AND THUS THE SAME DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN THE COMPUTATION OF INCOME, ASSESSEE HAVING REGARD TO SECTION 14A OF THE ACT, DETERMINED THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME AT RS.5,00,000/ - . THE ASSESSING OFFICER HAS NOT FOUND IT ACCEPTABLE AND HAS INSTEAD DETERMINED THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME BY APPLYING RULE 8D OF THE RULES. OSTENSIBLY, THE ACTION OF THE ASSESSING OFFICER CANNOT BE UPHELD UNLESS HE HAS COMPLIED WITH THE PRE - REQUISITE OF INVOKING RULE 8D OF THE RULES, NAMELY, RECORDING OF AN OBJECTIVE SATISFACTION WIT H REGARD TO THE CLAIM OF THE ASSESSEE THAT AN EXPENDITURE OF RS.5,00,000/ - HAS BEEN INCURRED IN RELATION TO THE EXEMPT INCOME, IS INCORRECT. IN ORDER TO EXAMINE THE AFORESAID COMPLIANCE WITH THE PRE - CONDITION, WE HAVE PERUSED THE PARA 4 TO 4.2 OF THE ASSES SMENT ORDER AND FIND THAT NO REASONS HAVE BEEN ADVANCED AS TO WHY THE DISALLOWANCE DETERMINED BY THE ASSESSEE WAS FOUND TO BE INCORRECT, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THE ONLY POINT MADE BY THE ASSESSING OFFICER IS TO THE EFFECT THAT THE SAID DISALLOWANCE WAS NOT ACCEPTABLE. IN - FACT, WE FIND THAT THE ASSESSEE MADE DETAILED SUBMISSIONS TO THE ASSESSING OFFICER, WHICH HAVE BEEN REPRODUCED BY THE CIT(A) IN PARA 3.2.1 OF HIS ORDER. AS PER THE ASSESSEE, THE DETERMINATION OF DISALLOWANCE U/S 14 A OF THE ACT OF RS.5,00,000/ - WAS BASED ON THE EMPLOYEE COSTS AND OTHER COSTS INVOLVED IN CARRYING OUT THIS ACTIVITY. FURTHER, ASSESSEE ALSO EXPLAINED THAT THE SHARES WHICH HAVE YIELDED EXEMPT INCOME WERE ACQUIRED LONG BACK OUT OF OWN FUNDS AND NO BORROWIN GS WERE UTILIZED. THE MUTUAL FUND INVESTMENTS WERE CLAIMED TO BE ALSO MADE OUT OF SURPLUS FUNDS. IT WAS SPECIFICALLY CLAIMED THAT NO FRESH INVESTMENTS HAVE BEEN MADE DURING THE YEAR UNDER CONSIDERATION IN SHARES YIELDING EXEMPT INCOME. ALL THE AFORESAID PO INTS RAISED BY THE ASSESSEE HAVE NOT BEEN ADDRESSED BY THE ASSESSING OFFICER AND THE SAME HAVE BEEN BRUSHED ASIDE BY MAKING A BLAND STATEMENT THAT THE DISALLOWANCE IS NOT ACCEPTABLE. THEREFORE, IN OUR VIEW, IN THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT RECORDED ANY OBJECTIVE SATISFACTION IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, WHICH IS MANDATORILY REQUIRED IN TERMS OF SECTION 14A(2) OF THE ACT AND THEREFORE HIS ACTION OF INVOKING RULE 8D OF THE RULES TO COMPUTE THE IMPUGNED DISALLO WANCE IS UNTENABLE. ACCORDINGLY, THE ORDERS OF THE AUTHORITIES BELOW ARE SET - ASIDE ON THIS ASPECT AND THE ASSESSING OFFICER IS DIRECTED TO RETAIN THE DISALLOWANCE U/S 14A OF THE ACT TO THE EXTENT OF RS.5,00,000/ - , AS RETURNED BY THE ASSESSEE. ITA NO. 1324 /P U N/20 1 5 ITA NO.1351/PUN/2015 ALFA LAVAL (INDIA) LTD. , 11 26 . IN THE F ACTS OF THE PRESENT CASE, THE ASSESSING OFFICER HAS FAILED TO RECORD ANY SATISFACTION BEFORE MAKING THE AFORESAID DISALLOWANCE AND IN THE ABSENCE OF RECORDING OF SATISFACTION, THE PROVISIONS OF SECTION 14A OF THE ACT CANNOT BE INVOKED AS THE ASSESSING OFFI CER HAS FAILED TO COME TO A FINDING AS TO WHY THE DISALLOWANCE MADE BY THE ASSESSEE UNDER SECTION 14A OF THE ACT AT RS.3 LAKHS IS INCORRECT. ACCORDINGLY, WE UPHOLD THE ORDER OF CIT(A). THE GROUND OF APPEAL NO.4 RAISED BY THE REVENUE IS THUS, DISMISSED. 27 . IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL OF REVENUE IS PARTLY ALLOWED . ORDER PRONOUNCED ON THIS 26 TH DAY OF JU LY , 201 7 . SD/ - SD/ - ( ANIL CHATURVEDI ) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 26 TH JU LY , 201 7 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPE LLANT ; 2. / THE RESPONDENT; 3. ( ) / THE CIT (A) - 13, PUNE ; 4. / THE PR. CIT - 5 / THE CIT (IT - TP) , PUNE ; 5. , , / DR B , ITAT, PUNE; 6. / GUARD FILE . / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE