DCIT, New Delhi V. M/s Metso Minerals Pvt. Ltd., Gurgaon

ITA 4402/DEL/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81896 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 28-10-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 14-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Keywords: Depreciation; Transfer pricing; Rule of consistency; Wholly owned subsidiary; Fair market value; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI GEORGE GEORGE K. JM ITA NO.4414/DEL/2012 ASSESSMENT YEAR : 2007-08 CO NO.406/DEL/2012 (ITA NO.4402/DEL/2012) ASSESSMENT YEAR : 2007-08 MESTO MINERALS (INDIA) PVT. LTD., 1 ST FLOOR, BUILDING NO.10, TOWER-A, DLF CYBER CITY, PHASE-II, GURGAON. PAN : AAACS3407L VS. ADDL. CIT, RANGE 6, CR BUILDING, NEW DELHI. ITA NO. 4402 /DEL/2012 ASSESSMENT YEAR : 2007-08 DCIT, CIRCLE 6(1), NEW DELHI. VS. MESTO MINERALS (INDIA) PVT. LTD., 1 ST FLOOR, BUILDING NO.10, TOWER-A, DLF CYBER CITY, PHASE-II, GURGAON. PAN : AAACS3407L (APPELLANT) (RESPONDENT) ASSESSEE BY : S MT. PREM LATA BANSAL, SR. ADVOCATE DEPARTMENT BY : SHRI N.K. CHAND, CIT, DR ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 2 ORDER PER R.S. SYAL, AM: THESE TWO APPEALS ONE BY THE ASSESSEE AND THE OT HER BY THE REVENUE AND ALSO A CROSS OBJECTION FILED BY THE ASSESSEE EMANATE FROM THE ORDER PASSED BY THE CIT(A) ON 31.0 5.2012 IN RELATION TO THE ASSESSMENT YEAR 2007-08. 2. THE ONLY ISSUE RAISED BY THE ASSESSEE IN ITS APPEAL THROUGH VARIOUS GROUNDS IS AGAINST THE CONFIRMATION OF DISA LLOWANCE UNDER SECTION 40A(2)(A) OF THE INCOME-TAX ACT, 1961 (HERE INAFTER ALSO CALLED THE ACT) AMOUNTING TO `24.16 LAC, BEING 5 0% OF TOTAL PROFESSIONAL FEES PAID TO THE SUBSIDIARY COMPANY. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGA GED IN THE BUSINESS OF SUPPLY OF EQUIPMENT AND RENDERING ENGIN EERING SERVICES. MESTO MINERAL MUMBAI PVT. LTD. (HEREINAF TER CALLED MM MUMBAI) IS A WHOLLY OWNED SUBSIDIARY OF THE ASSESS EE COMPANY, WHICH IS ENGAGED IN RENDERING ENGINEERING SERVICES. DURING THE YEAR IN QUESTION, THE ASSESSEE PROVIDED AND ALSO RE CEIVED ENGINEERING SERVICES TO/FROM THE PROJECT DIVISION O F MM MUMBAI. THE ASSESSEE PAID `48.31 LAC FOR PROFESSIONAL SERVI CES TO MM MUMBAI AND RECEIVED A SUM OF `9.01 LAC AS SERVICE I NCOME FROM ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 3 MM MUMBAI FOR RENDERING OF SERVICES. ON BEING CALL ED UPON TO JUSTIFY SUCH EXPENDITURE, THE ASSESSEE FURNISHED A CHART SHOWING DATES, NUMBER OF HOURS, RATE PER HOUR AND THE AMOUN T PAID TO AND RECEIVED FROM MM MUMBAI. IT WAS SUBMITTED THAT MM MUMBAI WAS PROVIDING DESIGN, DRAWINGS AND ENGINEERING SERV ICES FOR MECHANICAL STRUCTURE COMPONENT AND ASSEMBLY. THE A SSESSEE CLAIMED TO HAVE UTILIZED SUCH SERVICES IN EXECUTION OF BIG PROJECTS UNDERTAKEN BY IT FOR SUPPLY OF EQUIPMENTS AND ERECT ION AS WELL AS COMMISSIONING OF PLANT/PROJECTS. THE ASSESSEE ALSO CONTENDED BEFORE THE ASSESSING OFFICER (AO) THAT THE PAYMENT WAS MADE TO MM MUMBAI @ `500 PER HOUR, BEING THE SAME RATE AT W HICH IT CHARGED FROM MM MUMBAI FOR THE SERVICES RENDERED BY IT. THE ASSESSEE FURTHER EXPLAINED THAT MM MUMBAI CHARGED H IGHER RATE FROM OTHER GROUP COMPANIES FOR RENDERING SIMILAR SE RVICES AS WERE PROVIDED TO THE ASSESSEE. THE RATE OF `500 PE R HOUR WAS STATED TO HAVE BEEN DETERMINED ON THE BASIS OF REAS ONABLE PROFIT MARGIN OF 30% TO 40% ON THE COSTS INCURRED BY MM MU MBAI. NOT CONVINCED, THE AO CAME TO HOLD THAT THERE WAS NO JU STIFICATION FOR THE PAYMENT @ `500 PER HOUR AND THE FURTHER FACT TH AT MM MUMBAI CHARGED HIGHER RATE FROM OTHER GROUP COMPANI ES WAS NO ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 4 BENCHMARK TO PROVE THAT THE RATE CHARGED FROM THE A SSESSEE WAS REASONABLE. IN THE ABSENCE OF THE ASSESSEE FURNISH ING ANY COMPARABLE CASE SHOWING THAT THE RATE SO CHARGED WA S IN CONFORMITY WITH THE PREVAILING MARKET RATE AND THE FURTHER FACT THAT MM MUMBAI WAS INCURRING LOSSES FOR THE LAST FE W YEARS, THE AO DISALLOWED 50% OF `48.31 LAC U/S 40A(2)(A) READ WITH SECTION 37(1) OF THE ACT. THIS RESULTED INTO DISALLOWANCE O F `24.16 LAC. THE LD. CIT(A) ECHOED THE ASSESSMENT ORDER ON THIS POINT. THE ASSESSEE IS AGGRIEVED AGAINST SUCH ADDITION 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL ON RECORD. IT IS MANIFEST THAT T HE ASSESSEE PAID A SUM OF `48.31 LAC ON ACCOUNT OF PROFESSIONAL SERV ICES TO MM MUMBAI, HALF OF WHICH HAS BEEN DISALLOWED BY INVOKI NG THE PROVISIONS OF SECTION 40A(2) OF THE ACT. THE LD. A R CONTENDED AT THE VERY OUTSET THAT THE PROVISIONS OF SECTION 40A( 2)(A) CANNOT BE APPLIED BECAUSE THE ASSESSEE IS A HOLDING COMPANY O F MM MUMBAI AND SUB-CLAUSE (IV) OF CLAUSE (B) OF SECTION 40A(2) CLEARLY STIPULATES THAT THE DISALLOWANCE IS CONFINED UNDER THIS PROVISION ONLY TO THE CASES WHERE PAYMENT IS MADE BY THE SUBS IDIARY COMPANY TO ITS HOLDING COMPANY AND NOT VICE VERSA . SINCE THE ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 5 ASSESSEE IN QUESTION IS A HOLDING COMPANY WHICH HAS MADE PAYMENT TO ITS SUBSIDIARY COMPANY, NAMELY, MM MUMBA I, THE LD. AR ARGUED THAT THE APPLICATION OF SECTION 40A(2) WA S OUSTED. 4. WE ARE NOT INCLINED TO ACCEPT THIS CONTENTIO N PUT FORTH BY THE LD. AR THAT SECTION 40A(2) IS INAPPLICABLE FOR THE REASON THAT THE PAYMENT HAS BEEN MADE IN THIS CASE BY A HOLDING CO MPANY TO A SUBSIDIARY COMPANY. SECTION 40A(2)(B) PROVIDES A LIST OF THE PERSONS AS REFERRED TO IN CLAUSE (A) [NAMELY, THE PAYEE]. SUB- CLAUSE (IV) REFERS TO : A COMPANY , FIRM, ASSOCIATION OF PERSONS OR HINDU UNDIVIDED FAMILY HAVING A SUBSTANTIAL INTEREST IN THE BUSINESS OR PROFESSION OF THE ASSESSEE OR ANY DIRECTOR, PARTNER OR MEMBER OF SUCH COMPANY, FIRM, ASSOCIATION OR FAMILY , OR ANY RELATIVE OF SUCH DIRECTOR, PARTNER OR MEMBER OR ANY OTHER COMPANY CARRYING ON BUSINESS OR PROFESSION IN WHICH THE FIRST MENTIONED COMPANY HAS SUBSTANTIAL INTEREST; THE E XPRESSION A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL INTERE ST IN A BUSINESS OR PROFESSION HAS BEEN DEFINED IN THE EXPLANATION IN THE CONTEXT OF A COMPANY, AS HOLDING AT ANY TIME DURIN G THE PREVIOUS YEAR THE BENEFICIAL OWNERSHIP OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 6 PARTICIPATE IN PROFITS) CARRYING NOT LESS THAN TWEN TY PER CENT OF THE VOTING POWER. HERE IT IS RELEVANT TO NOTE THE DEFIN ITION OF SUBSIDIARY AND HOLDING COMPANIES AS GIVEN IN SECTIO N 4 OF THE COMPANIES ACT, 1956. TO SIMPLY PUT, IT PROVIDES INTER ALIA, THAT A COMPANY SHALL, SUBJECT TO THE PROVISIONS OF SUB-SEC TION (3), BE DEEMED TO BE A SUBSIDIARY OF ANOTHER, IF THAT OTH ER HOLDS MORE THAN HALF IN NOMINAL VALUE OF ITS EQUITY SHARE CAPI TAL. ON A CONJOINT READING OF SECTION 4 OF THE COMPANIES ACT AND EXPLANATION TO SECTION 40A(2)(B) OF THE ACT, IT CL EARLY EMERGES THAT EVERY HOLDING COMPANY HAS A SUBSTANTIAL INTERE ST IN THE SUBSIDIARY COMPANY AS PER THIS PROVISION. 5. REVERTING TO THE CONTEXT, WE FIND THAT THERE IS NO DISPUTE ON THE FACT THAT SUB-CLAUSE (IV) OF SECTION 40A(2)(B) UNEQUIVOCALLY COVERS THE CASES WHERE A COMPANY, ETC., HAVING SUBS TANTIAL INTEREST IN THE BUSINESS OF THE ASSESSEE RECEIVES P AYMENT, FOR WHICH SUCH SUBSIDIARY COMPANY CLAIMS DEDUCTION FOR EXPENSES. WE ARE DEALING WITH A CASE IN WHICH THE ASSESSEE IS A HOLDING COMPANY AND MM MUMBAI IS A SUBSIDIARY COMPANY. SIN CE THE ASSESSEE, A HOLDING COMPANY, HAS MADE PAYMENT TO IT S SUBSIDIARY ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 7 COMPANY, SUCH PAYMENT CANNOT BE COVERED WITHIN THE PROVISIONS OF SUB-CLAUSE (IV) OF SECTION 40A(2)(B) OF THE ACT. 6. HOWEVER, IT IS PERTINENT TO NOTE THAT SUB-CLAUS E (IV) OF SECTION 40A(2)(B) IS NOT THE BEGINNING AND THE END OF THE L IST OF THE PERSONS REFERRED TO IN CLAUSE (A). THIS LIST CONTA INS SIX SUB- CLAUSES. IT MEANS THAT IF PAYEE IS COVERED IN ANY OF THESE SIX SUB- CLAUSES, THE PROVISIONS OF SECTION 40A(2) ARE TRIGG ERED. AT THIS JUNCTURE, IT IS SIGNIFICANT TO NOTE THE PRESCRIPTIO N OF SUB-CLAUSE (VI) OF SECTION 40A(2)(B), THE RELEVANT PART OF WHICH R EADS AS UNDER:- (VI) ANY PERSON WHO CARRIES ON A BUSINESS OR PROFE SSION, (A) (B) WHERE THE ASSESSEE WHERE THE ASSESSEE WHERE THE ASSESSEE WHERE THE ASSESSEE BEING A COMPANY, FIRM, ASSOCIATI ON OF PERSONS OR HINDU UNDIVIDED FAMILY, OR ANY DIRECTOR OF SUCH COMPANY, PARTNER OF SUCH FIRM OR MEMBER OF THE ASSO CIATION OR FAMILY, OR ANY RELATIVE OF SUCH DIRECTOR, PARTNE R OR MEMBER, HAS A SUBSTANTIAL INTEREST IN THE BUSINESS OR HAS A SUBSTANTIAL INTEREST IN THE BUSINESS OR HAS A SUBSTANTIAL INTEREST IN THE BUSINESS OR HAS A SUBSTANTIAL INTEREST IN THE BUSINESS OR PROFESSION OF THAT PERSON. PROFESSION OF THAT PERSON. PROFESSION OF THAT PERSON. PROFESSION OF THAT PERSON. (EMPHASIS SUPPLIED BY US) 7. A CURSORY GLANCE AT THE ABOVE PROVISION MANIF ESTS THAT WHERE THE ASSESSEE (PAYER), BEING A COMPANY, MAKES PAYM ENT TO ANY PERSON IN WHICH IT HAS SUBSTANTIAL INTEREST, THE PR OVISIONS OF SECTION 40A(2) WILL BE ACTIVATED. AS THE ASSESSEE IN THE INSTANT ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 8 CASE, A HOLDING COMPANY HAVING SUBSTANTIAL INTEREST IN MM MUMBAI, HAS MADE PAYMENT ON ACCOUNT OF PROFESSIONA L FEES TO THE LATER, WHICH IS ITS SUBSIDIARY, IT WOULD BE CO VERED UNDER SUB- CLAUSE (VI)(B) OF SECTION 40A(2)(B). THE VIEW POINT OF THE LD. AR, BOLSTERING THE CONTENTION OF MAKING THE PROVISIONS OF SECTION 40A(2) INAPPLICABLE FOR THE REASON OF THE HOLDING C OMPANY PAYING TO ITS SUBSIDIARY COMPANY, IS LIABLE TO BE REJECTED AS BEREFT OF ANY FORCE. WE ORDER ACCORDINGLY. 8. COMING TO THE MERITS OF THE DISALLOWANCE, WE FI ND THAT SECTION 40A(2)(A) REFERS TO THE DISALLOWANCE OF ANY EXPENDI TURE INCURRED BY THE ASSESSEE IN RESPECT OF WHICH PAYMENT HAS BEE N OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CLAUSE (B), IF TH E AO IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREA SONABLE I. HAVING REGARD TO FAIR MARKET VALUE OF THE GOODS, SE RVICES OR FACILITIES FOR WHICH PAYMENT IS MADE; OR II. THE LE GITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE; OR III. THE BENEFIT DERIVED BY OR ACCRUING TO THE ASSESSEE THEREFROM. THESE THREE SITUATIONS, WARRANTING DISALLOWANCE U/S 40A(2), AR E JOINED BY THE WORD OR AND ARE HENCE INDEPENDENT OF EACH OTHER. IN OTHER ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 9 WORDS, IF A PAYMENT FALLS INTO ANY OF THESE THREE S ITUATIONS, IT IS LIABLE TO BE DISALLOWED. 9. IN SO FAR AS THE FIRST SITUATION IS CONCERNED , IT REFERS TO EXCESSIVE PAYMENT HAVING REGARD TO THE FAIR MARKET VALUE OF GOODS OR SERVICES. IT IS VIVID FROM THE FACTS OF T HE CASE THAT THE AO HAS NOT DETERMINED THE FAIR MARKET VALUE OF THE PROFESSIONAL SERVICES RECEIVED BY THE ASSESSEE, FOR WHICH THE SA ID PAYMENT OF `48.31 LAC WAS MADE. 10. NOW COMES TO THE SECOND SITUATION IN WHICH TH E EXCESSIVE OR UNREASONABLE PAYMENT IS TO BE DISALLOWED BY CONSIDE RING THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION CARR IED ON BY THE ASSESSEE. THE AO HAS MADE OUT A CASE THAT SINCE TH E ASSESSEE WAS ALSO RENDERING SERVICES TO MM MUMBAI, THERE WAS NO REASON FOR IT TO HAVE RECEIVED SERVICES FROM ITS ASSOCIATE D ENTERPRISE, FOR WHICH THE SAID PAYMENT OF `48.31 LAC WAS MADE. IN THIS REGARD, WE OBSERVE FROM THE REPLY DATED 15.11.10 TENDERED B Y THE ASSESSEE BEFORE THE AO, A COPY OF WHICH IS AVAILABL E ON PAGES 47 ONWARDS OF THE PAPER BOOK, THAT MM MUMBAI PROVIDED DESIGN, DRAWINGS AND ENGINEERING SERVICES FOR MECHANICAL, S TRUCTURAL ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 10 COMPONENTS AND ASSEMBLY WHICH WERE CARRIED OUT BY T HEIR ENGINEERS AND TECHNICAL PERSONNEL ALONE. IT WAS AL SO STATED THAT OUTSOURCING FROM MM MUMBAI WAS DONE BECAUSE THE ASS ESSEE DID NOT HAVE QUALIFIED STAFF FOR SUCH DESIGNING AND ENG INEERING OF PROJECTS. THESE SUBMISSIONS HAVE NOT BEEN REPELLED BY THE AO WITH ANY JUSTIFIABLE REASON. THESE FACTS INDICATE THAT THE NATURE OF SERVICES RECEIVED BY THE ASSESSEE FROM MM MUMBAI WE RE TECHNICAL IN NATURE WHICH WERE NECESSARY FOR THE CA RRYING ON OF ITS BUSINESS. THE LD. AR HAS ALSO INVITED OUR ATTENTIO N TO SOME MATERIAL ON RECORD WHICH INDICATES THAT THE ASSESSE E AVAILED THE SERVICES FROM MM MUMBAI FOR CONFIDENTIALITY REASON S BECAUSE SUCH SERVICES, IF OBTAINED FROM OTHERS, WOULD HAVE ADVERSELY IMPACTED ITS BUSINESS. THE FACT THAT THE ASSESSEE MADE THE PAYMENT TO MM MUMBAI FOR THE SERVICES WHICH WERE SINE QUA NON FOR THE CARRYING ON OF ITS BUSINESS, GOES TO AMPLY PROVE THAT SUCH PAYMENT WAS MADE ON ACCOUNT OF LEGITIMATE NEEDS OF THE ASSESSEES BUSINESS. 11. THE LAST SITUATION WHICH WARRANTS THE DISALL OWANCE OF EXCESSIVE OR UNREASONABLE AMOUNT PAID BY THE ASSESS EE IS THE PAYMENT VIS-A-VIS THE BENEFIT DERIVED BY OR ACCRUING TO THE ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 11 ASSESSEES BUSINESS. THE SUM AND SUBSTANCE OF THE THIRD SITUATION IS THE DISALLOWANCE U/S 40A(2) TO THE EXT ENT OF THE PAYMENT MADE TO THE PERSON SPECIFIED IN SECTION 40A (2)(B) IN EXCESS OF THE BENEFIT DERIVED BY THE ASSESSEE FROM THE RECEIPT OF SERVICES. IN THIS REGARD, IT IS NOTICED THAT THE AS SESSEE PAID @ `500/- PER HOUR FOR THE SERVICES PROVIDED BY MM MUM BAI. THE BASIS FOR DETERMINATION OF RATE OF ` 500/- IS AVAIL ABLE ON PAGE 63 OF THE PAPER BOOK. IT HAS BEEN DEMONSTRATED THAT AN ESTIMATION OF EXPENSES, SUCH AS, SALARY OF ENGINEERS, OFFICE RENT , DEPRECIATION, STAFF WELFARE, INSURANCE COST, PRINTING AND STATION ERY, ELECTRICITY, ETC. WAS MADE, WHICH WAS THEN DIVIDED WITH THE NUMB ER OF HOURS AVAILABLE DURING THE YEAR AND FURTHER INCREASED BY A REASONABLE PROFIT OF 30 TO 40%. IN OUR CONSIDERED OPINION, TH E RATE AT WHICH THE ASSESSEE PAID TO MM MUMBAI CANNOT BE CONSIDERED AS UNREASONABLE OR EXCESSIVE FOR THREE REASONS. FIRST , THE ASSESSEE NOT ONLY PAID TO MM MUMBAI @ `500/- PER HOUR BUT AL SO CHARGED AT THE SAME RATE IN RENDERING SERVICES TO MM MUMBAI . WHEREAS, THE PAYMENT IS TO THE TUNE OF `48.31 LAC, THE RECEI PT IS AMOUNTING TO `9.01 LAC. THE AO HAS ACCEPTED THE RECEIPT FROM MM MUMBAI @ `500/- PER HOUR AS REASONABLE, BUT DISPUTED THE P AYMENT AT THE ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 12 SAME RATE AND EX CONSEQUENTI DISALLOWED 50% OF THE SAME. THE SECOND REASON IS THAT MM MUMBAI CHARGED FROM THE OT HER GROUP COMPANIES AT THE RATES HIGHER THAN `500/- PER HOUR. THIS CONTENTION WAS SPECIFICALLY RAISED BEFORE THE AO, W HICH FINDS INCORPORATION ON PAGE 3 OF THE ASSESSMENT ORDER. T HE AO HAS NOT CONTROVERTED THIS CONTENTION. IT CAN BE SEEN FROM PAGE 65 OF THE PAPER BOOK READ WITH VARIOUS INVOICES RAISED BY MM MUMBAI ON OTHER GROUP COMPANIES THAT THE RATE OF `500/- PER H OUR CHARGED FROM THE ASSESSEE IS LOWER IN COMPARISON WITH OTHER S. THE THIRD REASON FOR ACCEPTING THE RATE OF `500/- PER HOUR AS REASONABLE IS THAT THE ASSESSEE PAID PROFESSIONAL CHARGES TO MM M UMBAI IN THE EARLIER YEARS AS WELL, WHICH PAYMENT WAS ACCEPTED B Y THE AO AS GENUINE AND NOT EXCESSIVE. A COPY OF THE ASSESSMEN T ORDER FOR THE AY 2006-07 IS PLACED ON RECORD FROM WHICH IT CA N BE SEEN THAT NO DISALLOWANCE WAS MADE ON ACCOUNT OF PAYMENT TO E XCESSIVE PAYMENTS MADE TO MM MUMBAI. SIMILAR IS THE POSITIO N FOR THE AY 2005-06, IN WHICH AGAIN THE ASSESSEE PAID TO MM MU MBAI CERTAIN PROFESSIONAL CHARGES AND THE AO DID NOT MAKE ANY DI SALLOWANCE WHILE FINALIZING THE ASSESSMENT U/S 143(3) OF THE A CT. THE LD. AR WAS FAIR ENOUGH TO STATE THAT IN THESE PRECEDING YE ARS, THE HOURLY ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 13 RATE CHARGED FROM AND PAID TO MM MUMBAI WAS SOMEWHA T LESS THAN THAT OF THE CURRENT YEAR AND THE INCREASE WAS NECESSITATED BECAUSE OF THE INFLATIONARY REASONS. 12. IN VIEW OF THE FOREGOING REASONS, WE ARE OF THE CONSIDERED OPINION THAT THE CASE OF THE ASSESSEE DOES NOT FALL IN ANY OF THE THREE SITUATIONS CONTEMPLATED BY SECTION 40A(2)(A) OF THE ACT. ONCE A PAYMENT IS HELD TO BE NOT EXCESSIVE OR UNREA SONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVI CES OR THE LEGITIMATE NEEDS OF THE BUSINESS OR THE BENEFIT DER IVED BY OR ACCRUING TO THE ASSESSEE, THERE CAN BE NO QUESTION OF MAKING OR SUSTAINING ANY DISALLOWANCE U/S 40A(2) OF THE ACT. WE, THEREFORE, ORDER FOR THE DELETION OF THE ADDITION SUSTAINED IN THE FIRST APPEAL. 13. THE FIRST GROUND OF THE REVENUES APPEAL IS AGAINST THE DELETION OF ADDITION OF `2,26,97,568/- MADE ON ACCO UNT OF ROYALTY PAYMENT, WHICH WAS HELD BY THE AO TO BE FOR ENDURI NG BENEFIT AND HENCE OF CAPITAL NATURE. IT WAS DISALLOWED AFTE R ALLOWING DEPRECIATION @ 25% THEREOF. THE FACTS APROPOS THIS GROUND ARE THAT THE ASSESSEE PAID ROYALTY TO THREE OF ITS ASSO CIATED ENTERPRISES, NAMELY, METSO MINERALS (AUSTRALIA) - ` 23,99,512/-, ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 14 METSO MINERALS (TAMPERE) - `1,84,41,133/- AND METSO MINERALS (MACON), FRANCE - `18,56,923/-. THE AO NOTED THE C ONTENTION OF THE ASSESSEE THAT IT ENTERED INTO ENGINEERING AND TECHNOLOGY LICENCE AGREEMENTS AND THE ROYALTY AGREEMENTS WITH THESE ASSOCIATED COMPANIES EFFECTIVE FROM 1 ST APRIL, 2003, WHO WERE LICENCE HOLDERS OF THE PRODUCTS TO BE MANUFACTURED BY IT. THE ASSESSEE WAS GIVEN LICENCES FOR THE MANUFACTURE, AS SEMBLY, SOURCING, SUB-CONTRACTING, SUPPLY, DISTRIBUTION AND SALE, ETC. OF THESE PRODUCTS. IN LIEU OF SUCH USER OF LICENCES, T HE ASSESSEE PAID ROYALTY @ 5% OF NET SALES VALUE OF THE PRODUCTS AND 2.5% OF THE NET SALES VALUE OF THE WEAR PARTS FOR THE PRODUCTS. AFTER CONSIDERING ALL THE RELEVANT FACTS AND CIRCUMSTANCE S OF THE CASE, THE AO CAME TO HOLD THAT THE AMOUNT PAID AS ROYALTY WAS FOR OBTAINING ENDURING BENEFIT AND HENCE TREATED THE SA ME AS CAPITAL EXPENDITURE. AFTER ALLOWING DEPRECIATION @ 25%, HE MADE ADDITION OF `2.26 CRORE SUBJECT TO DEPRECIATION OF `56.74 LACS. THE ASSESSEES CONTENTION THAT THE ISSUE OF ROYALTY TO THE ASSOCIATED ENTERPRISES WAS EXAMINED BY THE TRANSFER PRICING OF FICER AND FOUND TO BE AT ARMS LENGTH IN THIS VERY YEAR, DID NOT WEIGH WITH THE AO. THE LD. CIT(A) ORDERED FOR THE DELETION OF ADDITION. ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 15 14. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, IT IS SEEN THAT THE AS SESSEE ENTERED INTO AGREEMENTS WITH ITS THREE ASSOCIATED ENTERPRIS ES W.E.F. 1 ST APRIL, 2003. A COPY OF THE AGREEMENT WITH METSO MI NERALS, AUSTRALIA, LTD. HAS BEEN PLACED ON PAGE 60 ONWARDS OF THE PAPER BOOK. FROM THIS AGREEMENT, IT CAN BE SEEN THAT THE ASSESSEE UNDERTOOK TO PAY ROYALTY @ 5% AND 2.5% OF THE NET S ALE VALUE OF THE PRODUCTS/WEAR PARTS OF THE PRODUCTS. IT IS FUR THER EVIDENT FROM THE AGREEMENT THAT THERE IS NO ASSIGNMENT OF THE IN TELLECTUAL PROPERTY RIGHTS OF SUCH PRODUCTS TO THE ASSESSEE. THE LICENSES HAVE BEEN GRANTED ON NON-EXCLUSIVE BASIS TO THE ASS ESSEE AND FOR A LIMITED PERIOD. THE ASSESSEE IS NOT AUTHORISED T O USE OR PERMIT OTHERS TO USE SUCH TECHNOLOGY AND THE TECHNICAL DOC UMENTATION, EXCEPT AS SPECIFICALLY PERMITTED UNDER THE AGREEMEN T TO THE ASSESSEE. THERE IS A CONFIDENTIALITY CLAUSE, WHICH PROHIBITS THE ASSESSEE FROM MAKING ANY DISCLOSURE TO THE OTHERS. THE HONBLE SUPREME COURT IN CIT VS. CIBA OF INDIA LTD. (1968) 69 ITR 692 (SC) HAS HELD THE PAYMENT MADE FOR NON-EXCLUSIVE RIGHTS TO BE OF THE REVENUE NATURE. IN CIT VS. INDIAN OXYGEN LTD. (1996) 218 ITR 337 (SC), THE HONBLE SUPREME COURT HAS HELD THAT WHERE THE ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 16 ASSESSEE CANNOT USE INFORMATION AFTER TERMINATION O F THE AGREEMENT AND THERE IS PROHIBITION ON DISCLOSING IT TO OTHERS, THE PAYMENT IS TO BE CONSIDERED AS REVENUE EXPENDITURE. SIMILAR VIEW HAS BEEN CANVASSED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. WAVIN (INDIA) LTD. (1999) 236 ITR 314 (SC). IN THIS CASE, THE HONBLE SUPREME COURT HAS HELD THAT THE PAYMENT OF TECHNICAL KNOW-HOW FEES ON ACCOUNT OF TECHNICAL INF ORMATION GIVEN TO THE ASSESSEE ON NON-EXCLUSIVE AND NON-TRAN SFERRABLE BASIS MERELY AMOUNTS TO GIVING RIGHT TO USE THE TEC HNICAL INFORMATION AND, HENCE, SUCH PAYMENT HAS TO BE ALLO WED AS A REVENUE EXPENDITURE. IT CAN BE SEEN THAT THE FACTS OF THE EXTANT CASE ARE ON ALL FOURS WITH THE ABOVE CASES, IN WHI CH PAYMENT HAS BEEN HELD TO BE OF REVENUE NATURE. RESPECTFULLY FOL LOWING THE PRECEDENTS, WE HOLD THAT THE PAYMENT MADE BY THE AS SESSEE TO ITS ASSOCIATED ENTERPRISES CANNOT BE CONSIDERED AS A CAPITAL EXPENDITURE. IT IS FURTHER INTERESTING TO NOTE THA T THE ASSESSEE WAS CONSISTENTLY PAYING SUCH ROYALTY AMOUNT TO ITS ASSOCIATED ENTERPRISES FROM THE FINANCIAL YEAR 2003-04 ONWARDS AND NO SUCH DISALLOWANCE HAS EVER BEEN MADE IN THE PAST. FOLLO WING THE ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 17 PRINCIPLE OF CONSISTENCY AS WELL, WE HOLD THAT THE LD. CIT(A) WAS FULLY JUSTIFIED IN DELETING THIS ADDITION. THIS GRO UND FAILS. 15. THE ONLY OTHER GROUND WHICH SURVIVES IN THE REVENUES APPEAL IS AGAINST THE DELETION OF ADDITION OF `3,59 ,429/- MADE BY THE AO U/S 14A OF THE ACT. 16. BRIEFLY STATED, THE FACTS OF THIS GROUND AR E THAT THE ASSESSEE EARNED DIVIDEND INCOME OF `9,64,274/-, WHICH WAS E XEMPT U/S 10(34) OF THE ACT. INVOKING THE PROVISIONS OF SECT ION 14A READ WITH RULE 8D, THE AO COMPUTED DISALLOWANCE AT `7,18 ,857/-. THE LD. CIT(A) HELD THAT RULE 8D CANNOT BE APPLIED TO T HE YEAR IN QUESTION. CONSIDERING THE TOTALITY OF THE FACTS AN D CIRCUMSTANCES OF THE CASE, HE REDUCED THE DISALLOWANCE BY 50% TO `3,59,429/-. THE REVENUE IS AGGRIEVED AGAINST THE RELIEF ALLOWED BY THE LD. CIT(A). 17. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D PERUSING THE RELEVANT MATERIAL ON RECORD, IT IS SEEN AS AN ADMIT TED FACT THAT THE ASSESSEE EARNED EXEMPT DIVIDEND INCOME AND ALSO INC URRED EXPENSES IN RELATION TO SUCH INCOME. IN SUCH A SIT UATION, THE APPLICATION OF SECTION 14A CANNOT BE RULED OUT. TH E HONBLE ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 18 JURISDICTIONAL HIGH COURT IN MAXOPP INVESTMENTS LTD. VS. CIT (2012) 347 ITR 272 (DEL) , HAS HELD THAT RULE 8D IS PROSPECTIVE AND IS APPLICABLE FROM THE ASSESSMENT YEAR 2008-09. TH E HONBLE HIGH COURT HAS ALSO HELD THAT IN THE YEARS PRIOR TO AY 2008-09, THE DISALLOWANCE SHOULD BE MADE ON SOME REASONABLE BASI S. ADVERTING TO THE FACTS OF THE INSTANT CASE, IT IS S EEN THAT THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2007-08. IN THIS VIEW OF THE MATTER, NO INTERFERENCE CAN BE MADE IN THE IMPU GNED ORDER TO THE EXTENT OF NON-APPLICABILITY OF RULE 8D. HOWEVE R, THE QUESTION REMAINS THAT SOME DISALLOWANCE U/S 14A ON A REASON ABLE BASIS IS DEFINITELY CALLED FOR. TAKING A HOLISTIC VIEW OF T HE ENTIRE FACTUAL MATRIX PREVAILING BEFORE US, WE ARE SATISFIED WITH THE LD. CIT(A) SUSTAINING THE ADDITION U/S 14A TO `3,59,429/-. WE , THEREFORE, UPHOLD THE IMPUGNED ORDER ON THIS ISSUE. THIS GROU ND OF THE REVENUE FAILS. 18. THE LD. AR DID NOT PRESS THE CROSS OBJECTION FILED BY THE ASSESSEE, WHICH IS FOR THE FURTHER REDUCTION IN THE DISALLOWANCE SUSTAINED U/S 14A OF THE ACT. ITA NOS.4414 & 4402/DEL/2012 CO NO.406/DEL/2012 19 19. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED AND THE APPEAL OF THE REVENUE AS WELL AS THE CO OF THE ASSE SSEE ARE DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 30.10.201 4. SD/- SD/- [ GEORGE GEORGE K. ] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 30 TH OCTOBER, 2014. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.