M/S. Lumax Industries Ltd., New Delhi V. DCIT, New Delhi

ITA 6212/DEL/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8165 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 18-02-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 20-11-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; International transaction; Rule of consistency; Earning of tax free income; Royalty expenses; Revenue expenditure
• Section: 92C; 43B; 143(3); 14A

Judgement Text

PAGE 1 OF 13 LUMAX INDUSTRIES LIMITED V DCIT ITA NO 6212/DEL/2013 A Y 2009 - 10 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 2 : NEW DELHI BEFORE SHRI RAJPAL YADAV , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI , ACCOUNTANT MEMBER I TA NO . 6212/DEL/2013 (ASSESSMENT YEAR: 2009 - 10 ) LUMAX INDUSTRIES LTD., B - 85/86, MAYAPURI INDUSTRIAL AREA, PHASE - 1, NEW DELHI PAN:AADCR6902J VS. DCIT, CIRCLE - 4(1), NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY : SH. PRADEEP DINODIA, ADV SH. R.K. KAPOOR, CA RESP ONDENT BY: SH . MANU CHAURASIA, SR. DR DATE OF HEARING 18/02/2016 DATE OF PRONOUNCEMENT 2 2 / 04 /2016 O R D E R PER PRASHANT MAHARISHI , A . M . 1. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER U/S 143(3) READ WITH SECTION 144C OF THE INCOME TAX ACT ( IN SHORT THE ACT) PASSED BY THE DCIT, NEW DELHI IN ACCORDANCE WITH DIRECTION U/S 144C(5) DATED 16.08.2013 BY THE DRP - 1, NEW DELHI FOR THE ASSESSMENT YEAR 2009 - 10. 2. THE BRIEF FACTS OF THE CASE ARE THAT A SSESSEE IS A MANUFACTURING CONCERN SPECIALIZING IN AUTOMOBILE LIGHTING B USINESS . IT DEALS IN VARIOUS HIGH QUALITY AUTOMOTIVE LIGHTING EQUIPMENT SUCH AS HEADLAMPS, TAIL LAMPS, SUNDRY LAMPS AND ACCESSORIES FOR TWO WHEELERS AND FOUR WHEELERS. DURING THE YEAR IT HAS ENTERED INTO SEVERAL INTERNATIONAL TRANSACTIONS INCLUDING PAYME NT OF ROYALTY OF RS.6 , 69 , 57 , 682/ - TO ITS ASSOCIATED CONCERN M/S. STANLEY JAPAN WHO BY VIRTUE OF HAVING APPOINTED AN EXECUTIVE DIRECTOR ON THE BOARD OF ASSESSEE IS AN ASSOCIATED ENTERPRISE OF THE ASSESSEE. 3. ASSESSEE FILED ITS RETURN OF INCOME ON 30.09.2009 AT A LOSS OF RS.18 , 96 , 07 , 791/ - WHICH WAS REVISED SUBSEQUENTLY TO RS.19 , 27 , 69 , 767/ - . A REFERENCE WAS MADE TO TPO TO DETERMINE ARMS LENGTH PRICE WITH RESPECT TO INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AE. LD. T PO VIDE ORDER DATED 29.01.2013 PAGE 2 OF 13 LUMAX INDUSTRIES LIMITED V DCIT ITA NO 6212/DEL/2013 A Y 2009 - 10 PASSED AN ORDER U/S 92CA(3) WHO DETERMINED ARMS LENGTH PRICE O F ROYALTY TRANSACTIONS APPLYING CUP METHOD AT RS.NIL AND THEREFORE PROPOSED AN ADJUSTMENT OF PAYMENT OF ROYALTY OF RS.6 , 69 , 57 , 682/ - . THE MAIN REASONS FOR ADOPTING NIL AMOUNT AS ALP FOR ROYALTY TRANSACTION ARE AS UNDER : - I. THE TAXPAYER DID NOT PRODUCE ANY EVIDENCE/ DOCUMENTATION ON HOW THE ROYALTY RATE FIXED. AT AN ARMS LENGTH, PARTY RECEIVING TECHNOLOGY WOULD LIKE TO SEE THE PROFITABILITY FROM FUTURE REVENUE STR EAMS BEFORE FIXING A ROYALTY RATE. II. THE TAXPAYER DID NOT PRODUCE ANY COST BENEFIT ANALYSIS AT THE TIME OF ENTERING INTO THE AGREEMENT WITH ITS AE SHOWING THAT THE ROYALTY RATE IS NOT FIXED BASED ON EXPECTED BENEFIT. III. THERE IS NO PROOF THAT THE OTHER GROUP CONCERNS OR THIRD PARTIES ARE ALSO CHARGED IDENTICAL ROYALTY. IV. THE TAXPAYER HAS ALSO NOT BEEN ABLE TO SHOW THAT IT DERIVED ANY ECONOMIC BENEFIT FROM THE ALLEGED KNOW HOW RECEIVED THE AE. V. THE PROFITABILITY IS BELOW THE ARITHMETICAL MEAN MARGIN OF THE COMPARABLE COMPANIES CONSIDERED BY THE TPO. VI. THE PROFIT THAT ACCRUES TO THE LICENSEE MAY NOT RAISE SOLELY THROUGH THE ENGINE OF THE TECHNOLOGY. THERE ARE RETURNS FROM THE MIX OF ASSETS IT EMPLOYS SUCH AS FIXED AND WORKING CA PITAL AND THE RETURNS FROM INTANGIBLE ASSETS SUCH AS DISTRIBUTION SYSTEMS, TRAINED WORKFORCE, ETC. ALLOWANCES NEED TO BE MADE FOR THEM. IN THE ABSENCE OF ANY DATA PROVIDED BY THE TAXPAYER, IT IS IMPOSSIBLE TO KNOW WHAT PERCENTAGE OF PROFITS THE LICENSEE WO ULD LIKE TO SHARE AT AN ARMS LENGTH AFTER REMOVING THE RETURNS FROM ASSETS EMPLOYED AND OTHER ECONOMIC FACTORS WHICH MAY NOT ARISE SOLELY THROUGH THE ENGINE OF THE TECHNOLOGY. 4. OTHER INTERNATIONAL TRANSACTIONS REMAIN UNDISPUTED AND ARE HELD TO BE AT ARM S LENGTH. 5. BASED ON THIS ORDER LD . AO PASSED DRAFT ASSESSMENT ORDER WHICH WAS SERVED ON THE ASSESSEE ON 06.02.2013 WHEREIN FURTHER DISALLOWANCE U/S 14A OF RS.16 , 59 , 069/ - AND LEAVE ENCASHMENT OF RS.1 , 31 , 92 , 275/ - U/S 43B WAS MADE. ASSESSEE PREFERRED APPLICATION BEFORE DRP WHO UPHELD THE ACTION OF THE ASSESSING OFFICER WITH RESPECT TO ALP DETERMINATION OF ROYALTY AND DISALLOWANCE U/S 14A AND LEAVE ENCASHMENT U/S 43B OF THE ACT . PURSUANT TO THIS LD. ASSESSING OFFICER PASSED FINAL ORDER ON 09.10.2013 WHICH IS UNDER CHALLENGE BEFORE US. 6. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: - 1) THAT THE LEARNED ASSESSING OFFICER HAS ERRED IN LAW AND ON FAC TS IN MAKING AN ADDITION OF RS. 8,18,09,026 / - ON WHOLLY ILLEGAL, ERRONEOUS AND UNTENABLE GROUNDS. 2) THE ORDER OF ASSESSMENT IS BAD IN LAW. 3) THAT THE LEARNED AO HAS ERRED IN LAW. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN MAKING ADDITION ON ACCOUNT OF ARMS' PAGE 3 OF 13 LUMAX INDUSTRIES LIMITED V DCIT ITA NO 6212/DEL/2013 A Y 2009 - 10 LENGTH PRICE UNDER SECTION 92CA(3) OF THE INCOME - TAX ACT A MOUNTING TO RS. 6.69.57.682/ - ON WHOLLY ILLEGAL, ERRONEOUS AND UNTENABLE GROUNDS. 4) THE LEARNED AO'S ORDER BASED ON THE FINDINGS OF THE LEARNED TRANSFER PRICING OFFICER AND THE DIRECTIONS OF THE LEARNED DISPUTE RESOLUTION PANEL U/S.144C(5) OF THE INC OME - TAX, IS ERRONEOUS, UNTENABLE IN LAW AND ON FACTS FOR THE VARIOUS REASONS AND NOT LIMITED TO THE FOLLOWING: - A) THE TPO AS WELL AS THE DRP AND CONSEQUENTLY THE AO HAS ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN ERRONEOUSLY DETERMI NING THE ALP OF THE TRANSACTION ON ACCOUNT OF PAYMENT OF ROYALLY TO THE AE OF THE APPELLANT AS NIL. B) THE TPO AS WELL AS THE DRP AND CONSEQUENTLY THE AO HAS ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN ERRONEOUSLY HOLDING THAT THE AP PELLANT HAS NOT BEEN ABLE TO SHOW THAT IT DERIVED ECONOMIC BENEFIT FROM THE KNOW HOW LICENSED FROM THE AE. C) THE TPO AND DRP AND CONSEQUENTLY THE AO FAILED TO APPRECIATE THAT ROYALTY WAS ONE OF THE TWO ELEMENTS OF COST AND SALES AND COULD HAVE BEEN EVAL UATED UNDER SAME OVERALL METHOD AS HAD BEEN CORRECTLY DONE BY THE ASSESSEE UNDER TNMM METHOD AND ROYALTY PAYMENT IS NOT INDEPENDENT TO SALES AND COULD NOT BE EXAMINED ON STANDALONE BASIS. D) THE TPO AS WELL AS THE DRP AND CONSEQUENTLY THE AO HAS ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN ERRONEOUSLY EXCEEDING THEIR JURISDICTION BY JUDGING THE ROYALTY PAYMENTS MADE BY THE ASSESSEE THROUGH A 'BENEFIT TEST', WHICH IS NOT BASED ON ANY OF THE METHODS PRESCRIBED AS PER SECTION 92C OF THE IT ACT, E) THE DRP AND CONSEQUENTLY THE AO HAS ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN DRAWING THE CONCLUSION THAT THE ASSESSEE IS LARGELY APPLYING SOME HOME - GROWN TECHNOLOGY AND NO TECHNOLOGY WAS REQUIRED FROM AUTHORIZED REPR ESENTATIVE F) THE HON'BLE DRP AND CONSEQUENTLY THE AO HAS ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN NOT CONSIDERING THE JUDGMENT OF HON'BLE DELHI ITAT IN ASSESSEE'S OWN CASE IN EARLIER YEARS WHERE THE ISSUE OF PAYMENT OF ROYALTY HAS BEEN DECIDED IN FAVOR OF THE ASSESSEE ON IDENTICAL FACTS. 5) THE DRP AS WELL AS AO HAS ERRED IN LAW AND FACTS AND CIRCUMSTANCES OF THE CASE AND M ADE ADDITIONS, AMOUNTING TO RS. 1,31.92,275/ - ON ACCOUNT OF DISALLOWANCE OF PROVISIONS FOR LEAVE ENCASHMENT U / S 43B OF THE IT ACT. 6) THAT THE DISALLOWANCE U / S 14A OF THE ACT IS BAD IN LAW. 7) THE DRP AND CONSEQUENTLY AO HAS ERRED, IN LAW AND FACTS AND CIRCUMSTANCES OF THE CASE AND MADE ADDITIONS AMOUNTING TO RS.16,59,0697 - ON ACCOUNT OF DISALLOWANCE U / S 14A OF THE IT ACT R.W. RULE 8D OF I TAX RULES. 8. THAT EACH GROUND IS INDEPENDENT OF AND WITHOUT PREJUDICE TO THE OTHER GROUNDS RAISED HEREIN. PAGE 4 OF 13 LUMAX INDUSTRIES LIMITED V DCIT ITA NO 6212/DEL/2013 A Y 2009 - 10 7. LD. AR SUBMITTED THAT GROUND NOS. 1, 2 AND 8 ARE GENERAL IN NATURE AND THEREFORE ARE NOT PRESSED. HENCE, THESE GROUNDS ARE DISMISSED. 8. GROUND NOS.3 AND 4 ARE PERTAINING TO THE DETERMINATION OF ALP OF ROYALTY TRANSACTIONS AT NIL AGAINST TRANSACTION VALUE OF RS.6 , 69 , 57 , 682/ - . LD. AR SUBMITTED THAT LD. TPO HAS DETERMINED THE ALP HOLDING THAT T HE TAXPAYER DID NOT PRODUCE ANY COST BENEFIT ANALYSIS AT THE TIME OF ENTERING INTO THE AGREEMENT WITH ITS AE SHOWING THAT THE ROYALTY RATE IS NOT FIXED BASED ON EXPECTED BENEFIT . HE SUBMITTED THAT THE RE EXISTS A TECHNICAL ASSISTANCE AGREEMENT BETWEEN THE ASSESSEE AND ITS AE SINCE 1984 BEFORE THE PARTIES BECAME ASSOCIATED ENTERPRISES. HE FURTHER STATED THAT BENEFIT IS ARISING OUT OF ROYALTY EXPENSES IS EMBEDDED IN SALES PRICE OF GOODS SOLD THEREFORE THE BENEFIT ITSELF IS EXISTING AND DERIVED BY THE ASSESSEE . HE SUBMITTED THAT THE COST OF ROYALTY IS INCLUDED IN THE COST OF GOODS SOLD. HE FURTHER SUBMITTED THAT ROYALTY IS PAID TO AE @4% ON SALES WHICH IS WAY BELOW THE SPECIFIED RATE BY RESERVE BANK OF INDIA AND THE FOREIGN EXCHANGE MANAGEMENT ACT WHICH IS 5% AND 8% FOR TECHNOLO GY TRANSFER, THEREFORE IT IS PAID AT THE RATE WHICH HAS BEEN APPROVED BY TECHNICAL COLLABORATION AGREEMENT BY GOVT. OF INDIA. HE FURTHER SUBMITTED THAT THE ISSUE IS NOW SQUARELY COVERED IN FAVOR OF ASSESSEE IN ITS OWN CASE BY HONBLE DELHI HIGH COURT BY OR DER DATED 28 OCTOBER 2015 WHERE IN THE APPEAL OF THE REVENUE AGAINST THE ORDER OF ITAT DECIDED IN FAVOUR OF THE ASSESSEE HAS NOT BEEN ADMITTED. THEREFORE HE CONTENDED THAT NOW THE ISSUE IS REQUIRED TO BE DECIDED IN FAVOUR OF THE ASSESSEE. HE ALSO PLACED ON RECORD THE ORDER OF LD. TPO IN AY 2012 - 13 WHEREIN FOLLOWING THE DECISION OF HON'BLE DELHI HIGH COURT HAS HELD THAT INTERNATIONAL TRANSACTION OF ROYALTY IS AT ALP. 9. LD . DR RELIED ON THE ORDERS OF LOWER AUTHORITIES AND SUBMITTED THAT AS ASSES SEE COULD NOT SH OW THE BENEFIT ACCRUING OUT OF PAYMENT OF ROYALTY THE LD. TPO, DRP AND ASSESSING OFFICER ARE CORRECT IN DETERMINING ITS ALP AT RS. NIL . HE RELIED UP ON THE DECISION OF HONOURABLE PUNJAB AND HARAYAN A HIGH COURT IN CASE OF 2015 - TII - 51 - HC - P&H - TP COMMISSIONER OF INCOME TAX, FARIDABAD VS M/S KNORR - BREMSE INDIA PVT LTD . 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. THE ASSESSEE HAS ENTERED INTO TECHNICAL ASSISTANCE AGREEMENT WITH STANLEY ELECTRIC COMPANY PAGE 5 OF 13 LUMAX INDUSTRIES LIMITED V DCIT ITA NO 6212/DEL/2013 A Y 2009 - 10 JAPAN ON 01.04.2007 FOR GRANT OF NONEXCL USIVE AND NON TRANSFERABLE LICENSE WITHOUT A RIGHT TO SUB - LICENSE, TO MANUFACTURE AND SALE LICENSE PRODUCT IN INDIA USING THE TECHNICAL INFORMATION OF STANLEY ELECTRIC COMPANY. SINCE 1990 THE ROYALTY IS BEING PAID BY THE ASSESSEE TO STANLEY @3% OF SALES. DU RING THE PERIOD FROM 1990 TO 1994 THE TWO PARTIES WERE UNRELATED PARTY HENCE THE ROYALTY CONTRACT WAS MADE UNDER UNCONTROLLED CONDITIONS AND THE PAYMENT OF ROYALTY BY THE ASSESSEE TO AE CAN BE CONSIDERED AS COMPARABLE UNCONTROLLED PRICE FOR THE PURPOSE OF BENCH MARKING THE ROYALTY PAYMENT FOR THE YEAR. ACCORDINGLY, ASSESSEE IN ITS TP STUDY REPORT HAS SAID THAT THE PAYMENT OF ROYALTY IS AT ARMS LENGTH PRICE AS THE AGREEMENT IS IN ACCORDANCE WITH INDUSTRIAL POLICY OF THE GOVT. FURTHER IN ITS TP STUDY REPORT ASSESSEE APPLYING THE TNMM METHOD AND SUBMITTED THAT THE ABOVE TRANSACTION IS ALSO CONDUCTED AT AN ALP. ON THE IDENTICAL FACTS AND CIRCUMSTANCES IN THE CASE OF THE ASSESSEE IN ITA NO.102/2014 DATED 28.10.2015 HAS NOT ADMITTED THE APPEAL OF THE REVENUE WITH RESPECT TO THE DETERMINATION OF ALP OF ROYALTY RELYING ON THE DECISION OF CIT VS. EKL APPLIANCES LTD. 345 ITR 241 AND CIT VS. SONY ERICSON MOBILE COMMUNICATION 374 ITR 118. THE COORDINATE BENCH FOR AY 2008 - 09 IN ITA NO.4456/DEL/2012 IN ASSESSEES OWN CASE HAS HELD AS UNDER: - 19. IN THIS REGARD, IT IS SEEN THAT DURING THE YEAR, ROYALTY WAS PAID BYTHE ASSESSEE TO ITS AE ON SALES MADE USING THE TRADE MARK OF STANLEY;THAT THE ASSESSEE IS A WIDELY HELD LISTED COMPANY, A MARKET LEADER.THE PAYMENT OF ROYALTY WAS FOR TRADE MARK, PATENT AND TECHNOLOGY.THE CONTRACT, I.E., THE TECHNICAL COLLABORATION AGREEMENT, BETWEEN THEASSESSEE AND ITS AE STOOD APPROVED BY THE GOVERNMENT SINCE 1984. EVER SINCE, THE ASSESSEE HAD BEEN CARRYING OUT THE MANUFACTURE OFSOME OF ITS PR ODUCTS UNDER THE BRAND NAME OF STANLEY. FOR THIS, THEASSESSEE HAD BEEN PAYING ROYALTY. APPROVAL IN THIS REGARD HAD BEENPRE - OBTAINED FROM SIA, AS REQUIRED. THE RBI HAD ALSO GRANTED ITSAPPROVAL, WHICH WAS BEING RENEWED YEARLY. INITIALLY, THE ROYALTY HADBEE N PAID @ 4% ON THE SALE OF SOME OF THE PRODUCTS PRODUCED UNDERTHE BRAND NAME STANLEY. LATER, IT WAS REDUCED TO 3%. IN F.Y. 2003 - 04, STANLEY ELECTRIC COMPANY OF JAPAN ACQUIRED THE STATUS OF THE AE OFTHE ASSESSEE. THUS, IT WAS RIGHT FROM 1984, THAT TECHNIC AL ASSISTANCEGOT STARTED BEING GIVEN BY STANLEY ELECTRIC COMPANY, JAPAN TO THEASSESSEE, WITH REGARD TO THE MANUFACTURE OF AUTOMOTIVE LIGHTINGEQUIPMENT. AS AVAILABLE FROM PARA 1.4 OF THE AGREEMENT IN THE YEAR UNDER CONSIDERATION (COPY AT APB - I, 340 - 359, RELE VANT PORTION AT PAGE 342), A NON - EXCLUSIVE LICENSE HAD BEEN GRANTED BY STANLEY, JAPAN TOTHE ASSESSEE, ONLY FOR INDIA. AS PER THE CONDITIONS THEREOF, THEASSESSEE PAGE 6 OF 13 LUMAX INDUSTRIES LIMITED V DCIT ITA NO 6212/DEL/2013 A Y 2009 - 10 WAS TO PAY ROYALTY ON ITS NET SALES, AFTER DEDUCTION FROM THENET SALE PRICE OF THE LICENSED PRO DUCTS SOLD BY LUMAX IN INDIA. THEBASIS OF CALCULATION OF PAYMENT OF ROYALTY, AS AGREED TO, IS CONTAINED INARTICLE 4 OF THE AGREEMENT (APB - I, PAGE 345). SUCH PAYMENT WAS TO BE@ 4% ON THE NET SALES. HOWEVER, DURING THE YEAR, ROYALTY WAS PAID @2.43% ON THE SA LE OF LICENSED PRODUCTS, AMOUNTING TO ` 218.08 CRORES,AS AVAILABLE AT APB - I, PAGE 385. THIS WAS SO, SINCE THE COST OF STANDARDIMPORTED COMPONENTS, STANDARD LOCAL COMPONENTS AND CERTAIN OTHERDEDUCTIONS HAD BEEN DEDUCTED FROM THE NET SALES OF ` 218.08 CRORES . 20. THE LD. DR HAS CONTENDED THAT JUST BECAUSE THE ASSESSEE AND ITSAE ARE PUBLICLY LISTED COMPANIES, THIS IS NO REASON FOR THE REQUIREMENTSOF ALP TO BE FLOUTED. HOWEVER, THE ASSESSEES CONTENTION REGARDINGBOTH THE ENTITIES BEING LISTED COMPANIES, IT IS S EEN, IS NOT AT ALL TOSUPPORT ANY VIOLATION OF THE ALP PROVISIO NS. THIS ARGUMENT, IN FACT, HAS BEEN TAKEN TO BOLSTER THE ASSERTION REGARDING BENEFITS OF THETRANSACTIONS AND THE GENUINENESS THEREOF. 21. THE NEXT CONTENTION OF THE DEPARTMENT HAS BEEN THAT THE RBIAPPROVAL SOUGHT TO BE RELIED ON BY THE ASSESSEE IS ONLY FOR THEPURPOSES OF FEMA/FERA AND IT DOES NOT STOP THE TRANSACTION FROM BEINGLOOKED INTO BY THE INCOME - TAX AUTHORITIES FOR THE PURPOSE OF THEINCOME - TAX ACT. HERE AGAIN, IT IS SEEN THAT THIS ARGUMEN T HAS BEENTAKEN BY THE ASSESSEE ONLY TO STRESS THAT THE AGREEMENT BETWEEN THEASSESSEE AND STANLEY WAS NOT MERELY A PAPER TRANSACTION, RATHER IT WASAPPROVED BY THE RBI AS WELL, BESIDES OTHER GOVERNMENTAL AUTHORITIES. ITHAS NOT BEEN SHOWN BY THE DEPARTMENT T O BE OTHERWISE. 22. THE LD. DR THEN CONTENDED THAT THE ROYALTY IN QUESTION WAS NOTBENCHMARKED BY THE ASSESSEE, AS HELD BY THE TPO AND THAT IT HAS NOTBEEN SHOWN THAT THE PAYMENT OF ROYALTY WAS AN ARMS LENGTHTRANSACTION. SINCE THE AVERAGE PLI OF THE COMPARA BLES TAKEN BY HIMRESULTING IN 7.05% - OP/SALES WAS WITHIN THE (+)/( - ) 5% RANGE OF THEASSESSEES PLI WORKED OUT BY HIM AT 4.09%, THE RANGE BETWEEN 2.05%TO 12.05%, AS PER THE PROVISO TO SECTION 92C (2) (2A) OF THE ACT. 23. THE LD. DR HAS FURTHER CONTENDED TH AT THE ASSESSEE DID NOTAPPLY THE CUP METHOD PROPERLY, SINCE SUCH METHOD HAS BEENSUPPORTED BY THE ASSESSEE, BASED ON THE APPROVAL BY THE RBI. IN THISREGARD, WE FIND THAT AS NOTED ABOVE, THE ARGUMENT REGARDING THE RBIAPPROVAL WAS RAISED BY THE ASSESSEE TO BU TTRESS THE CLAIM OFGENUINENESS OF ITS TRANSACTION. IN THE TPOS ORDER, THERE IS NOT EVEN ASMUCH AS A MENTION ABOUT RBI. SO FAR AS REGARDS THE DRS OBJECTIONTHAT THE PLEA OF EARLIER PAYMENT TO THE SAME PARTY, WHEN IT WAS NOT THEASSESSEES AE, HAS NOT BEEN A LLOWED, IS NOT MAINTAINABLE, IT IS TO BEREITERATED HERE, AS ABOVE, THAT THE ASSESSEE DID BENCHMARK ITS TRANSACTION BY TWO METHODS, I.E., CUP AND TNMM AND THIS WAS TAKENNOTE OF BY THE TPO HIMSELF. APROPOS THE RELIANCE BY THE DEPARTMENTON CGM GLOBAL (SUPRA ), IT IS CORRECT THAT THEREIN, THE INTERNAL CUP WASHELD TO BE NOT APPLICABLE, SINCE THE TRANSACTION WAS WITH AN AE HAVINGRELATED PARTY TRANSACTIONS AND IT WAS HELD THAT THERE WAS NO EXTERNAL CUP FOR MAKING ANY COMPARISON IN THE RELEVANT YEAR, AS THE EARLIE RAGENCY AGREEMENT WITH THE THIRD PARTY HAD EXPIRED AND RATESAPPLICABLE IN THE EARLIER YEARS COULD NOT BE MADE APPLICABLE DURING PAGE 7 OF 13 LUMAX INDUSTRIES LIMITED V DCIT ITA NO 6212/DEL/2013 A Y 2009 - 10 THERELEVANT YEAR. HOWEVER, THIS DECISION DOES NOT HAVE ANY ADVERSEEFFECT ON THE CASE OF THE ASSESSEE. THE FACTS HEREIN ARE ENTIR ELY ATVARIANCE WITH THOSE OF CGM GLOBAL. HEREIN, AS OPPOSED TO THE FACTS INCGM GLOBAL, THE SAME ROYALTY AGREEMENT AND THE SAME LICENSE HASBEEN IN CONTINUANCE FROM 1984 TILL THE YEAR UNDER CONSIDERATION, THE LICENSE BEING RENEWED FROM YEAR TO YEAR, ALBEI T ON THE SAME TERMS ANDCONDITIONS. MOREOVER, THE FOLLOWING DECISIONS ARE INSTANCES OF THEEXTERNAL CUP HAVING BEEN EMPLOYED AND THIS HAS NOT BEEN DISPUTED BYTHE DEPARTMENT: - 1. SONA OKEGAWA PRECISION FORGINGS LTD. VS. ACIT (ITANO.4781/DEL/2010) 2. ACIT V S. SONA OKEGAWA PRECISION FORGINGS LTD. (ITANO.260/DEL/2010. 3. CIT VS. FEDERAL MOGUL TPR INDIA LTD. (ITA NO.398/2012) 4. CLIMATE SYSTEMS INDIA LTD. VS. CIT (2009) 319 ITR 113(DELHI) 5. CIT VS. EICHER MOTORS LTD. (2007) 293 ITR 464 (MP) 6. PRAGA TO OLS LTD. VS. CIT (1980) 123 ITR 773 (A&P) 7. EKL APPLIANCES (2012 - TII - 01 - HC - DEL - TP) 8. ERICSSON INDIA PVT. LTD. VS. DCIT (2012 - TII - 48 - ITAT - DEL - TP) 16 ITA NO.4456/DEL/2012 24. IN SONA OKEGAWA PRECISION FORGINGS LTD. (SUPRA), IT HAS BEENHELD THAT SINC E THE ROYALTY PAID BY THE INDIAN COMPANY WAS 3% OF NETSALES AND IT FALLS WITHIN THE RANGE OF @ 8% ON EXPORT SALES AND 5% ONDOMESTIC SALES AS PER DIRECTIONS OF THE RBI, THEREFORE, THE PAYMENTSTANDS JUSTIFIED UNDER THE CUP METHOD. 25. THIS VIEW WAS ACCEPTED BY THE TRIBUNAL IN SONA OKEGAWAS CASEFOR ASSESSMENT YEAR 2004 - 05 ALSO, AS WELL AS IN CLIMATE SYSTEMS(SUPRA), SWARAJ ENGINES LTD. (SUPRA) AND EICHER MOTORS (SUPRA). 26. IN FEDERAL MOGUL (SUPRA), PAYMENT OF ROYALTY @3% ON THE SALEPRICE, ON TRANSFER OF TECHNICAL KNOWLEDGE AND INFORMATION, WASACCEPTED. 27. IN CLIMATE SYSTEMS INDIA LTD. (SUPRA), AGAIN, PAYMENT OF ROYALTY@ 3% ON THE SALE PRICE ON TRANSFER OF TECHNICAL KNOWLEDGE ANDINFORMATION WAS ACCEPTED. 28. ALL THE ABOVE COMPANIES, LIKE THE ASSESSE E, WERE IN THE AUTOANCILLARY INDUSTRY. 29. IN PRAGA TOOLS LTD. (SUPRA), WHICH WAS ALSO IN AN AUTO ANCILLARYINDUSTRY, PAYMENT OF ROYALTY @ 5% ON THE SALE PRICE, ON TRANSFER OFTECHNICAL KNOWHOW AND ASSISTANCE WAS ACCEPTED. 30. THE ROYALTY PAYMENT BY THE AB OVE COMPANIES IS DIRECTLYCOMPARABLE WITH THAT MADE BY THE ASSESSEE COMPANY. THE ASSESSEE,AS OBSERVED, IS ALSO AN AUTO ANCILLARY, MANUFACTURING AUTOMOTIVE PARTSFOR OEMS. IN ALL THESE CASES, AS IN THAT OF THE ASSESSEE, THE PAYMENT OFROYALTY WAS RELATED TO TR ANSFER OF TECHNICAL ASSISTANCE AND KNOW - HOW IN THE AUTOMOTIVE INDUSTRY. THAT BEING SO, THE CUP METHOD IS AVAILABLEAPROPOS THE ISSUE OF ARMS LENGTH PRICE QUA THE PAYMENT OF ROYALTY. 31. SO FAR AS REGARDS OTHER CASE LAWS RELIED ON BY THE DEPARTMENT,THE SAME ARE ALSO DISTINGUISHABLE ON FACTS, BEING ON GENERALPROPOSITIONS OF LAW RELEVANT TO THE SPECIFIC FACTS PRESENT IN THOSE CASES.IN THE PRESENT PAGE 8 OF 13 LUMAX INDUSTRIES LIMITED V DCIT ITA NO 6212/DEL/2013 A Y 2009 - 10 CASE, AN ALP ANALYSIS HAD BEEN DONE BY THE ASSESSEE,AS ABOVE. THE ASSESSEE APPLIED THE CUP METHOD AND THE TNMM. THE TPO, HOWEVER, DESPITE BEING LEGALLY BOUND TO DO SO, DID NOT APPLY ANYMETHOD. 32. APROPOS THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THECASE OF INTERRA INFORMATION TECHNOLOGY (I) PVT. LTD. VS. DCIT, 2012 - TIOL - 142 - ITAT - DEL - TP (SUPRA), IT IS SEEN TH AT HERE ALSO, THE FACTS ARE ATA COMPLETE VARIANCE WITH THOSE OF THE ASSESSEES CASE, WHEREINPAYMENT OF ROYALTY FOR SUPPLY OF TECHNOLOGY AND KNOWHOW TOMANUFACTURE LICENSED PRODUCTS WAS HELD TO BE FOR THE BENEFIT OF THEASSESSEE AND THE SAME RATE OF ROYALTY P AYMENT WAS ALLOWED ASALLOWED IN THE YEARS WHEN THE PARTIES WERE NOT IN AN AE RELATIONSHIP,BUT WERE HAVING IDENTICAL TRANSACTIONS AS THOSE IN THE YEAR UNDERCONSIDERATION BEFORE THE TRIBUNAL. IT WAS HELD THAT THE ROYALTY PAYMENTWAS A REVENUE EXPENDITURE INCU RRED WHOLLY AND EXCLUSIVELY FOR THEBENEFIT OF THE ASSESSEE. THE PART OF THE PAYMENT DISALLOWED AS CAPITALEXPENDITURE WAS HELD BY THE HONBLE DELHI HIGH COURT TO BE REVENUEEXPENDITURE. IT IS AS SUCH THAT THE INVOCATION OF THE RULE OF CONSISTENCYHAS BEEN SOU GHT ON BEHALF OF THE ASSESSEE AND, IN OUR CONSIDEREDOPINION CORRECTLY SO, CONTENDING THAT SINCE THE CIRCUMSTANCES BEFOREAND AFTER THE COMING INTO EXISTENCE OF THE AE RELATIONSHIP BETWEEN THEASSESSEE AND STANLEY ARE IDENTICAL INTER SE, IT CANNOT AT ALL BE S AID THATTHOUGH IN THE EARLIER YEARS, THE ROYALTY PAYMENT WAS FOR THE BENEFIT OFTHE ASSESSEE, SINCE THE INCEPTION OF THE AE RELATIONSHIP, IT CEASED TO BE SO, DUE TO WHICH, THE APPLICATION OF THE BENEFIT TEST BY THE TPO ISENTIRELY UNCALLED FOR. PAYMENT OF RO YALTY WAS BEING CLAIMED ANDALLOWED RIGHT FROM 1984 TO ASSESSMENT YEAR 2003 - 04, AS BUSINESSEXPENDITURE OF THE ASSESSEE AND NO NEW CIRCUMSTANCE HAS BEENPOINTED OUT BY EITHER OF THE AUTHORITIES BELOW TO HOLD THAT IN THE YEARSTHEREAFTER, THE BENEFIT ACCRUED TO THE ASSESSEE BY THE PAYMENT OF SUCHROYALTY HAS DRIED UP. THEREFORE, WE FIND THAT THE RELIANCE BY THEDEPARTMENT ON INTERRA (SUPRA), TO SUPPORT THE CONTENTION THAT THE RULEOF CONSISTENCY SHOULD NOT BE APPLIED, IS WHOLLY MISPLACED. IT CANNOT BEGAINSAID THA T A JUDGMENT HAS TO BE, IN ITS ENTIRETY, CONSIDERED IN THEBACKDROP OF AND WITH REFERENCE TO THE PECULIAR FACTS AND CIRCUMSTANCESDOING THE ROUNDS THEREIN. IN INTERRA (SUPRA), THE ASSESSEE RAISED ANARGUMENT THAT TRANSFER PRICING ADJUSTMENT AT BEST CANNOT E XCEED THEAMOUNT OF THE MARGIN RETAINED BY THE ASSESSEE AS WELL AS THE AE. THISARGUMENT DID NOT FIND FAVOUR WITH THE TRIBUNAL. IT WAS ALSO CONTENDEDTHAT THE TPO HAD NOT MADE ANY ADJUSTMENT IN THE EARLIER YEARS AND ASSUCH, NO ADJUSTMENT WAS CALLED FOR IN THE YEAR BEFORE THE TRIBUNAL ASWELL, ON THE PRINCIPLE OF CONSISTENCY. THE TRIBUNAL OBSERVED THAT THEASSESSEE HAD NOT BEEN ABLE TO DEMONSTRATE AS TO WHICH PARTICULARCONCLUSION OF THE PREVIOUS TPO OR ASSESSING OFFICER HAD BEEN REVIEWEDIN AN OPPOSITE MANNER BY T HE CURRENT TPO AND THAT IT WAS A CASE OFNON - APPLICATION OF MIND BY THE PREVIOUS TPO ON SOME ISSUES. IT WASTHEREFORE, THAT THE TRIBUNAL REJECTED THIS ARGUMENT RAISED BY THEASSESSEE. THIS IS THE BACKGROUND FOR THE TRIBUNAL NOT HAVING ALLOWEDTHE PRINCIPLE OF CONSISTENCY TO BE INVOKED IN THAT CASE. IN THE PRESENTCASE, HOWEVER, IT IS PATENT ON RECORD THAT THE FACTS REMAIN IDENTICALPRE - AE RELATIONSHIP AND THEREAFTER, AS ALSO THAT THE RELATED PAYMENTHAS BEEN CONSISTENTLY ALLOWED BY THE DEPARTMENT PAGE 9 OF 13 LUMAX INDUSTRIES LIMITED V DCIT ITA NO 6212/DEL/2013 A Y 2009 - 10 ITSELF IN THENUME ROUS EARLIER YEARS, WHERE THE ARGUMENTS WERE AT AN EXACTLYSIMILAR, NAY IDENTICAL FOOTING. 33. THE TPO HAS MADE THE DISALLOWANCE IN QUESTION MAINLY ON THEBASIS OF THE BENEFIT TEST. IN THIS REGARD, IT IS SEEN THAT THE PAYMENT OFROYALTY CANNOT BE EXAMINED DI VORCED FROM THE PRODUCTION AND SALES.ROYALTY IS INEXTRICABLY LINKED WITH THESE ACTIVITIES. IN THE ABSENCE OFPRODUCTION AND SALE OF PRODUCTS, THERE WOULD BE NO QUESTION ARISINGREGARDING PAYMENT OF ANY ROYALTY. RULE 10A(D) OF THE ITAT RULESDEFINES TRANSACTI ON AS A NUMBER OF CLOSELY LINKED TRANSACTIONS.ROYALTY, THEN, IS A TRANSACTION CLOSELY LINKED WITH PRODUCTION AND SALES.IT CANNOT BE SEGREGATED FROM THESE ACTIVITIES OF AN ENTERPRISE, BEINGEMBEDDED THEREIN. THAT BEING SO, ROYALTY CANNOT BE CONSIDERED ANDEX AMINED IN ISOLATION ON A STANDALONE BASIS. ROYALTY IS TO BECALCULATED ON A SPECIFIED AGREED BASIS, ON DETERMINING THE NET SALESWHICH, IN THE PRESENT CASE, ARE REQUIRED TO BE DETERMINED AFTEREXCLUDING THE AMOUNTS OF STANDARD BOUGHT OUT COMPONENTS, ETC., SIN CESUCH NET SALES DO NOT STAND RECORDED BY THE ASSESSEE IN ITS BOOKS OFACCOUNT. THEREFORE, IT IS OUR CONSIDERED OPINION THAT THE ASSESSEE WASCORRECT IN EMPLOYING AN OVERALL TNMM FOR EXAMINING THE ROYALTY. THETPO WORKED OUT THE DIFFERENCE IN THE PLI OF THE O UTSIDE PARTY (THEASSESSEE) AT 4.09% AND THE COMPARABLES AT 7.05%. THIS HAS NOT BEENSHOWN TO FALL OUTSIDE THE PERMISSIBLE RANGE. 34. THE DECISION OF THE TRIBUNAL IN EKLA APPLIANCES, 2012 - TII - 01 - HCDEL - TP, HAS BEEN SOUGHT TO BE DISTINGUISHED BY THE TPO, OBS ERVING THATTHE FACTS IN THAT CASE ARE NOT IN PARI MATERIA WITH THOSE OF THEASSESSEES CASE. HOWEVER, THEREIN ALSO, THE BENEFIT TEST HAD BEENAPPLIED BY THE TPO, AS IN THE PRESENT CASE. THE MATTER WAS CARRIED INAPPEAL BEFORE THE HONBLE HIGH COURT. THE HONB LE DELHI HIGH COURTHAS HELD THAT THE SO - CALLED BENEFIT TEST CANNOT BE APPLIED TO DETERMINETHE ALP OF ROYALTY PAYMENT AT NIL AND THAT THE TPO COULD APPLY ONLYONE OF THE METHODS PRESCRIBED UNDER THE LAW. A SIMILAR VIEW HAS BEEN TAKEN IN SONA OKEGAWA PRECISI ON FORGINGS LTD. (SUPRA) AND IN KHSMACHINERY PVT. LTD. VS. ITO, 53 SOT 100 (AHM) (URO). 35. IT IS, THUS, SEEN THAT THE ROYALTY PAYMENT @ 3% BY THE ASSESSEEIS AT ARMS LENGTH. THE TECHNICAL COLLABORATION AGREEMENT STANDSAPPROVED BY THE GOVERNMENT OF INDI A. THE ROYALTY PAYMENT HAS BEENACCEPTED BY THE DEPARTMENT AS HAVING BEEN MADE BY THE ASSESSEEWHOLLY AND EXCLUSIVELY FOR ITS BUSINESS PURPOSES. FOR ASSESSMENTYEARS 2004 - 05 AND 2005 - 06, SUCH PAYMENT OF ROYALTY HAS BEEN ALLOWEDBY THE CIT (A). AS PER THE FEMA REGULATIONS, ROYALTY CAN BE PAID ONNET SALES @ 5% ON DOMESTIC SALES AND @ 8% ON EXPORT SALES. THEROYALTY PAYMENT BY THE ASSESSEE FALLS WITHIN THESE LIMITS. IT ALSO FALLSWITHIN THE LIMITS OF PAYMENT OF ROYALTY IN THE AUTOMOBILE SECTOR, AS PERTHE MARKET TREN D. THIS PAYMENT OF ROYALTY IS AT THE SAME PERCENTAGEAS THAT PAID BY OTHER AUTO ANCILLARIES IN THE AUTOMOTIVE INDUSTRY. THEN,IN EKLA APPLIANCES (SUPRA) AND IN ERICSSON INDIA PVT. LTD. VS. DCIT, 2012 - TII - 48 - ITAT - DEL - TP, IT HAS BEEN HELD THAT ROYALTY PAYM ENT CANNOTBE DISALLOWED ON THE BASIS OF THE SO - CALLED BENEFIT TEST AND THE DOMAINOF THE TPO IS ONLY TO EXAMINE AS TO WHETHER THE PAYMENT BASED PAGE 10 OF 13 LUMAX INDUSTRIES LIMITED V DCIT ITA NO 6212/DEL/2013 A Y 2009 - 10 ON THEAGREEMENT ADHERES TO THE ARMS LENGTH PRINCIPLE OR NOT. THAT BEING SO,THE ACTION OF THE TPO IN THE PRESENT CASE, TO MAKE THE DISALLOWANCEMAINLY ON THE GROUND OF THE BENEFIT TEST, IS UNSUSTAINABLE IN LAW. 36. KEEPING IN VIEW ALL THE ABOVE FACTORS, THE DISALLOWANCE MADE ONACCOUNT OF ROYALTY IS FOUND TO BE TOTALLY UNCALLED FOR AND IT IS DELETED ASSUCH. ACCORDINGLY , GROUND NOS.3 AND 4 RAISED BY THE ASSESSEE AREACCEPTED. 11. IN VIEW OF THE OF HONORABLE JURISDICTIONAL HIGH COURT IN ASSESSES OWN CASE WE INCLINE TO FOLLOW THAT DECISION OVER THE DECISION CITED BY THE LD. DR IN CASE OF COMMISSIONER OF INCOME TAX, FARIDABAD VS M/S KNORR - BREMSE INDIA PVT LTD. HOWEVER WE WOULD LIKE TO QUOTE PARA NO 29 OF THE DECISION WHERE IN HONOURABLE COURT HAS HELD AS UNDER : - 29. WE HASTEN TO ADD THAT IN THE CASE BEFORE US THE ASSESSEE HAS, IN FACT, CONTENDED THAT IT HAS BENEFI TED FROM THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY IT WITH ITS AES. HOWEVER, EVEN ASSUMING THAT THIS HAS NOT BEEN ESTABLISHED, IT WOULD MAKE NO DIFFERENCE . 12. IN VIEW OF THE ABOVE FACTS AND RESPECTFULLY FOLLOWING THE DECISION OF HON'BLE DELHI HIGH COURT IN CASE OF ASSESSEE FOR EARLIER YEARS WHEREIN THE DECISION COORDINATE BENCH OF ITAT IN ASSESSEES OWN CASE IS UPHELD WE DIRECT THE LD. TPO /AO TO DELETE THE ADJUS TMENT OF RS.66957682/ - MADE ON ACCOUNT OF ALP OF ROYALTY PAYMENTS. 13. IN THE RESULT GROUND NOS. 3 AND 4 OF THE APPEAL OF THE ASSESSEE ARE ALLOWED. 14. GROUND NO.5 OF THE APPEAL OF THE ASSESSEE IS AGAINST THE ADDITION OF RS.13192275/ - ONACCOUNT OF DISALLOWANCE O F PROVISION FOR LEAVE ENCASHMENT U/S 43B OF THE INCOME TAX ACT. LD. AR SUBMITTED BEFORE US THAT THIS GROUND IS NOT PRESSED AND HENCE IT IS DISMISSED. 15. THE NEXT GROUND NO.6 AND 7 ARE AGAINST DISALLOWANCE AMOUNTING TO RS.1659069/ - U/S 14A OF THE ACT. 16. ASSESS EE HAS DISALLOWED A SUM OF RS.1266 6 05/ - SUO MOTTO U/S 14A OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS VIDE ORDER SHEET ENTRY DATED 29.11.2012 ASSESSEE WAS ASKED TO EXPLAIN THAT WHY DISALLOWANCE U/S 14A READ WITH RULE 8D SHOULD NOT BE MADE WITH RESPECT TO EXEMPT INCOME. THE ASSESSEE HAS MADE TOTAL INVESTMENT OF RS.36689144/ - AS AT 31.03.2009 OUT OF THIS AN AMOUNT OF RS.35474204/ - WAS MADE IN SL LUMAX LTD. AND PAGE 11 OF 13 LUMAX INDUSTRIES LIMITED V DCIT ITA NO 6212/DEL/2013 A Y 2009 - 10 RS.603000/ - IN INAPEX LTD. FURTHER RS.611940/ - IS INVESTED IN PNB GILTS LTD. ASSESSEE HAS MADE FRESH INVESTMENT OF RS.3974204/ - IN SL LUMAX LTD. DURING THE YEAR WHEREAS ALL OTHER INVESTMENTS ARE CARRIED FORWARD FROM PREVIOUS YEAR. APPLYING THE PROVISION OF RULE 8D LD. AO , AS ASSESSEE HAS ALREADY MADE DISALLOWANCE OF RS 1266605/ - MADE FURTHER DISALLOWANCE OF RS. 1659069/ - . AGAINST THIS ASSESSEE IS IN APPEAL. 17. LD. AR SUBMITTED BEFORE US AS UNDER: - A. AO HAS STRAIGHTWAY APPLIED RULE 8D WITHOUT RECORDING THE REASONS FOR NON - SATISFACTION TO THE DISALLOWANCE OFFERED BY THE ASSESSEE. B. THERE IS N O DIRECT NEXUS ESTABLISHED BY THE ASSESSING OFFICER THAT BORROWED FUNDS ARE USED FOR INVESTMENTS AND THEREFORE THERE CANNOT BE ANY DISALLOWANCE OF INTEREST C. INTEREST RECEIVED AND INTEREST PAID SHOULD BE NETTED OFF WITH INTEREST INCOME AND ONLY NET INTERES T SHOULD BE CONSIDERED FOR DISALLOWANCE. D. STRATEGIC INVESTMENT MADE BY THE ASSESSEES WHICH ARE DRIVEN BY BUSINESS STRATEGIES SHOULD NOT BE CONSIDERED FOR DISALLOWANCE AND THEREFORE INVESTMENT MADE IN SL LUMAX LTD. SHOULD BE EXCLUDED FOR WORKING OUT DISALLO WANCE. LD. AR RELIED UPON SEVERAL DECISIONS OF VARIOUS COURTS FOR ADVANCING THE ABOVE ARGUMENT. 18. LD. DR ON THE OTHER HAND SUBMITTED THAT REGARDING SATISFACTION OF THE AO SAME CAN BE VERIFIED NOW BY THE TRIBUNAL AND FOR THIS HE RELIED ON DECISION OF HON'BL E DELHI HIGH COURT IN CASE OF CIT VS. JAN SAMPARAK ADVERTISING AND MARKETING PVT. LTD., AND DECISION OF HONBLE SUPREME COURT IN CASE M/S DEEPAK AGRO FOODS VS. STATE OF RAJASTHAN. ON THE OTHER ISSUES HE SUBMITTED THAT THE ASSESSEE HAS ONLY DISALLOWED THE H ALF PERCENT AVERAGE INVESTMENT AMOUNTING TO RS.1266605/ - AND OMITTED ANY DISALLOWANCE ON ACCOUNT OF INTEREST EXPENDITURE. HE FURTHER SUBMITTED THAT STRATEGIC INVESTMENT HAVE ALREADY BEEN INCLUDED BY THE ASSESSEE WHILE WORKING OUT DISALLOWANCE OF EXPENDITUR E THEN THE ARGUMENT TO EXCLUDE IT FOR THE PURPOSE OF INTEREST IS CONTRADICTORY. HE FURTHER STATED THAT THE MOMENT AO ISSUED SHOW CAUSE NOTICE VIDE ORDER SHEET ENTRY IT AMOUNTS TO SATISFACTION OF THE ASSESSING OFFICER. THEREFORE HE CONTENDED THAT THE DISALL OWANCE U/S 14A BY INVOKING RULE 8D HAS RIGHTLY BEEN MADE BY THE AO. PAGE 12 OF 13 LUMAX INDUSTRIES LIMITED V DCIT ITA NO 6212/DEL/2013 A Y 2009 - 10 19. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS .ASSESSEE HAS VOLUNTARILY OFFERED DISALLOWANCE OF RS.1266605/ - WHICH IS OUT OF EXPENSES, HOWEVER, NO DISALLOWANCE HAS BEEN MADE ON ACCOUN T OF INTEREST EXPENDITURE. LD. ASSESSING OFFICER WITHOUT EXAMINING THE CORRECTNESS THE CLAIM OF THE ASSESSEE ABOUT DISALLOWANCE OF RS.126 6 605/ - HAS ASKED ASSESSEE VIDE SHEET ENTRY DATED 29.11.2012 STRAIGHTWAY TO EXPLAIN THAT WHY DISALLOWANCE U/S 14A READ WITH RULE 8D SHOULD NOT BE MADE IN RESPECT OF TAX FREE INCOME . ON READING OF THE ASSESSMENT ORDER WE DO NOT FIND ANY FINDING ABOUT THE VERIFICATION OF CORRECTNESS OF THE CLAIM OF THE ASSESSEE THAT IT HAS INCURRED AN AMOUNT OFR S . 1266605/ - ONLY TOWARDS EXPENSE WHICH CAN BE DISALLOWED. 20. HONBLE DELHI HIGH COURT HELD IN THE CASE OF I.P. SUPPORT SERVICES INDIA (P) LTD VS CIT [TS - 573 - HC - 2015 - DEL] THAT AO CANNOT INVOKE SECTION 14A READ WITH RULE 8D (2) WITHOUT RECORDING HIS SATISFACTION AND NOTED THAT THE RECORDING OF SATISFACTION AS TO WHY 'THE VOLU NTARY DISALLOWANCE MADE BY THE ASSESSEE WAS UNREASONABLE AND UNSATISFACTORY' IS A MANDATORY REQUIREMENT OF THE LAW. LD AR ALSO PLACED RE LIANCE ON DECISION OF HONBLE DELHI HIGH COURT IN MAXOPP INVESTMENT (P) LTD. /TS - 668 - HC - 2011 - DEL] & CIT' V. TAIKISHA EN GINEERING INDIA LTD.[2015J 229TAXMAN 143 (DELHI)] WHERE SA ME VIEWHA SBEEN EXPRESSED THAT RECORDING OF SATISFACTION ON THE CORRECTNESS OF CLAIM OF THE ASSESSEE ON DISALLOWANCE U/S 14A BEFORE INVOKING RULE 8 D OF THE INCOME TAX RULES 1962 IS MANDATORY . T HE LANGUAGE OF SECTION 14A PROVIDES THAT AO MUST RECORD A SATISFACTION IF HE WAS UNSATISFIED WITH ANY INCORRECT CLAIM OF THE ASSESSEE. IF HE FAILED TO RECORD SUCH A FINDING THEN IT CANNOT BE SAID THAT HE RIGHTLY INVOKED PROVISION OF SECTION 14A OF THE ACT FOR APPLICATION OF RULE 8D . 21. FURTHER NOTICE D THAT AS AGAINST THE OPENING INVESTMENT OF ABOUT RS.46.99CR ON 31.03.2008 THERE WAS OWN CAPITAL, FREE RESERVES AND SURPLUS OF RS. 143.35 CR. A S AGAINST CLOSING INVESTMENT OF ABOUT RS.3.67 CR . THERFORE IT IS APPARENT THAT ASSESSEE HAD OWN FUNDS FAR IN EXCESS OF THE AMOUNT INVESTED IN INVESTMENTS EARNING TAX FREE INCOME.I N SUCH A CASE PRESUMPTION IS THAT OWN FUNDS HAVE BEEN USED TO FINANCE THE INVESTMENT ACTIVITIES. HONBLE BOMBAY HIGH COURT IN CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. HAS HELD THAT WHEN INTEREST FREE FUNDS ARE AVAILABLE THEN THE PRESUMPTION WOULD BE THAT SUCH INTEREST FREE FUNDS ARE INVESTED OR ADVANCED AS INTEREST FREE PAGE 13 OF 13 LUMAX INDUSTRIES LIMITED V DCIT ITA NO 6212/DEL/2013 A Y 2009 - 10 LOAN. IF THE PRESUMPTION IS APPLIED TO THE FACTS OF THIS CA SE THEN THERE CANNOT BE ANY DISALLOWANCE ON ACCOUNT OF INTEREST EXPENDITURE. THEREFORE ON TWO COUNTS I.E. NON - RECORDING OF SATISFACTION AND INTEREST FREE FUND FAR IN EXCESS OF INVESTMENTS, WE DO NOT INCLIN E TO UPHOLD DISALLOWANCE MADE THE LD. ASSESSING OF FICER OF RS.1659069/ - OVER AND ABOVE DISALLOWANCE ALREADY OFFERED BY THE ASSESSEE OF RS.1266605/ - U/S 14A OF THE ACT. THEREFORE GROUNDS NO.6 AND 7 OF THE APPEAL OF THE ASSESSEE ARE ALLOWED AND WE DIRECT AO TO DELETE THE FURTHER DISALLOWANCE OF RS.1659069/ - U/S 14A OF THE ACT. 22. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 2 / 04 /2016 . - S D / - - S D / - ( RAJPAL YADAV ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 2 2 / 04 / 2016 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI