Enkay India Rubber Co (P) Ltd, New Delhi V. Circle-8(1), New Delhi

ITA 5778/DEL/2019

AI Insights

The case involves Enkay India Rubber Co. (P) Ltd., the appellant, contesting the disallowance of certain expenditures by the Assessing Officer under the Income Tax Act, 1961, for the assessment year 2016-17. The primary issues were the disallowance of interest and administrative expenses under section 14A read with Rule 8D, and the disallowance of payments made to non-residents for patent charges under section 40(a)(i). The ITAT found that the assessee had sufficient interest-free funds to cover the investments, thus no disallowance for interest expenditure was warranted. However, the disallowance for administrative expenses was upheld as the assessee had earned exempt income and did not make any disallowance under section 14A. The issue of disallowance for patent charges was restored to the Assessing Officer due to conflicting interpretations of the nature of the payments.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 113361 (ITAT-DELHI)
• Duration Of Justice: 14 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 11-10-2022
• Assessment Year: misc
• Appeal Filed On: 01-12-2008
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Non-deduction of tax
• Section: 14A

Judgement Text

I.T.A.No.5778/Del/2019 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “D” NEW DELHI BEFORE SHRI G.S. PANNU, HON’BLE PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER आ .अ.स ं /.I.T.A No.5778/Del/2019 /Assessment Year: 2016-17 Enkay India Rubber Co. (P) Ltd., B-3, SMA Industrial Estate, New Delhi. ब म Vs. ACIT Circle 8(1), New Delhi. PAN No. AAACE0097Q अ Appellant /Respondent िनधा रतीक ओरसे /Assessee by Shri M.K. Madan, CA राज वक ओरसे /Revenue by Shri Sanjay Kumar, Sr. DR स ु नवाईक तारीख/ Date of hearing: 12.10.2022 उ ोषणाक तारीख/Pronouncement on 13.12.2022 आदेश /O R D E R PER SAKTIJIT DEY, J.M. This is an appeal by the assessee against order dated 11.06.2019 of learned Commissioner of Income Tax (Appeals)-3, New Delhi pertaining to AY 2016-17. 2. Ground no. 1 being a general ground does not require any adjudication. 3. In ground no. 2 assessee has challenged the disallowance of expenditure under section 14A of the Income Tax Act, 1961. I.T.A.No.5778/Del/2019 2 4. Briefly the facts are that the assessee is a resident corporate entity. For the assessment year under dispute the assessee filed its return of income on 16.10.2016 declaring income of Rs.2,29,26,410/-. In course of assessment proceedings the Assessing Officer noticed that in the year under consideration, though, the assessee had earned exempt income by way of dividend, however, it has not disallowed any expenditure under section 14A read with Rule 8D. He, therefore, called upon the assessee to explain why disallowance should not be made in terms with Rule 8D. Though, the assessee objected to the proposed disallowance, however, rejecting the explanation of the assessee the Assessing Officer disallowed an amount of Rs.87,147/- comprising of Rs.80,164/-, being interest disallowance under Rule 8D(2)(ii) and disallowance of administrative expenses under Rule 8D(2)(iii). The assessee contested the aforesaid disallowance before Learned Commissioner (Appeals). After considering the submissions of the assessee, Learned Commissioner (Appeals) restricted the disallowance to Rs.31,171/-, being the exempt income earned by the assessee during the year. 5. Before us, learned Counsel appearing for the assessee submitted that the assessee had sufficient interest fee fund I.T.A.No.5778/Del/2019 3 available with it to take care of the investment. Therefore, no disallowance of interest expenditure can be made. As regards the disallowance of administrative expenses, learned Counsel submitted that the Assessing Officer has failed to record proper satisfaction as required under section 14A(2) of the Act. 6. Learned Departmental Representative strongly relied upon the observations of Learned Commissioner (Appeals). 7. We have considered the rival submissions and perused the materials on record. 8. In so far as disallowance of interest expenditure under Rule 8D(2)(ii), before the departmental authorities the assessee had specifically contended that the investments giving rise to the exempt income were continuing from earlier years and no fresh investments have been made. Further, the assessee had submitted that sufficient interest free fund in the form of reserve and surplus to the tune of Rs.40 crores was available. Though, this factual claim of the assessee was not controverted by the departmental authorities, at the same time, disallowance on account of interest expenditure was made. This, in our view, is unacceptable. When the assessee has factually demonstrated that it had sufficient I.T.A.No.5778/Del/2019 4 interest free fund available with it to take care of the investment, as per the settled legal principles, no disallowance of interest expenditure could have been made under Rule 8D(2)(ii). Accordingly, we delete the disallowance of interest expenditure made under Rule 8D(2)(ii). As regards the disallowance of administrative expenditure under Rule 8D(2)(iii), undisputedly in the year under consideration the assessee had earned exempt income of Rs.31,171/-. Whereas suo motu assessee has not made any disallowance under section 14A read with Rule 8D. In the course of assessment proceedings the Assessing Officer had called upon the assessee to explain the reason for not making any disallowance. Though, the assessee filed its explanation, however, the Assessing Officer after recording his satisfaction regarding claim of the assessee has proceeded to make the disallowance. Therefore, he has complied with the provisions of Section 14A(2) of the Act. 9. In view of the aforesaid, we uphold the disallowance of Rs.6,983/- made under Rule 8D(2)(iii). This ground is partly allowed. 10. In ground no. 3 the assessee has challenged the disallowance of Rs.15,98,755/- under section 40(a)(i) of the Act. I.T.A.No.5778/Del/2019 5 11. Briefly the facts are, while verifying the financial statements of the assessee the Assessing Officer noticed that the assessee had paid an amount of Rs.15,98,755/- to some non-residents towards patent charges. Noticing that while making such payment the assessee has not deducted tax at source, the Assessing Officer called upon the assessee to explain why the payment made, being in the nature of Royalty should not be disallowed under section 40(a)(c) of the Act for non-deduction of tax at source under section 195 of the Act. Though, the assessee objected to the proposed disallowance, however, the Assessing Officer made the disallowance under section 40(a)(c) of the Act. Assessee contested the aforesaid disallowance before Learned Commissioner(Appeals). However, Learned Commissioner(Appeals) upheld the disallowance made by the Assessing Officer, though, by treating the payment made as Fee for Technical Services (FTS) under section 9(i)(vii)(b) of the Act. 12. Before us Learned Counsel appearing for assessee submitted that the assessee exports certain products manufactured by it to foreign countries. He submitted, for protecting the products assessee has patented them for which the assessee had to renew the patent from time to time. He submitted, the payments made to the foreign parties are for patent renewal fee, hence, cannot be I.T.A.No.5778/Del/2019 6 treated as either Royalty or FTS. He submitted, since the departmental authorities have not properly verified the nature of payment, the issue may be restored back to the Assessing Officer to verify assessee’s claim. 13. Learned Departmental Representative agreed for restoration of the issue to the Assessing Officer. 14. We have considered rival submissions and perused the materials on record. 15. As per the submission of the assessee, the disputed payments represent foreign outward remittances for renewal/registration of patents in foreign countries. It is submitted, such payment made to non-resident legal firms are not in the nature of any technical or consultancy services to term them as FTS. According to the assessee, these payments were made for facilitating renewal/registration of patents outside India and no services were rendered in India. 16. On perusal of the respective orders of the departmental authorities, we find that assessee’s submissions have not been considered property in the context of facts and materials brought on record relating to the payment made. Further, the I.T.A.No.5778/Del/2019 7 departmental authorities have taken divergent views regarding the nature of payment. While the Assessing Officer has treated the payment as royalty, learned Commissioner (Appeals) has treated it as FTS. This shows lack of application of mind to the facts and materials on record to ascertain the exact nature of payment. In view of the aforesaid, we are inclined to restore the issue to the Assessing Officer for fresh adjudication after providing due opportunity of being heard to the assessee. Further, we make it clear, to establish its claim, if the assessee wants to furnish further evidences, the Assessing Officer must allow the assessee to do so. This ground is allowed for statistical purposes. 17. In the result, the appeal is partly allowed. Order pronounced in the open court on 13/12/2022 Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER Dated: 13.12.2022 *Kavita Arora, Sr. P.S. Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order Assistant Registrar, ITAT: Delhi Benches-Delhi