Kirloskar Oil Engines Ltd., Pune V. Additional Commissioner of Income-tax,

ITA 918/PUN/2014

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 0354 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-03-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 21-02-2019
• Assessment Year: 2008-2009
• Appeal Filed On: 05-05-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: PRASHANT BHOSLE
• Keywords: Depreciation; Double taxation relief; Earning of tax free income; Capital expenditure; TDS; Rule 8D
• Section: 143(3); 14A; 40(a)(ia); 195

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO. 918 /P U N/201 4 / ASSESSMENT YEAR : 20 08 - 09 KIRLOSKAR OIL ENGINES LIMITED, LAXMANRAO KIRLOSKAR ROAD, KHADKI, PUNE 411003 . / APPELLANT PAN: A AACP3590P VS. THE ADDL. COMMISSIONER OF INCOME TAX, RANGE 9, PUN E . / RESPONDENT . / ITA NO. 1 153 /P U N/201 4 / ASSESSMENT YEAR : 20 08 - 09 THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 9, PUNE . / APPELLANT VS. KIRLOSKAR OIL ENGINES LIMITED, LAXMANRAO KIRLOSK AR ROAD, KHADKI, PUNE 411003 . / RESPONDENT PAN: AAACP3590P ASSESSEE BY : S /S HRI C.H.NANIWADEKAR AND PRASHANT BHOSLE REVENUE BY : S HRI RAJEEV KUMAR, CIT / DATE OF HEARING : 21.02.2019 / DATE OF PRONOUNCEMENT: 29 . 0 3 .201 9 ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 2 / ORDER PER SUSHMA CHOWLA, J M : THE CROSS APPEAL S FILED BY ASSESSEE AND REVENUE ARE AGAINST ORDER OF CIT (A) - 2 , NASHIK , DATED 1 8 . 0 3 .201 4 RELATING TO ASSESSMENT YEAR 20 08 - 09 AGAINST ORDER PASSED UNDER SECTION 143(3) / 154 OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT) . 2. THE CROSS APPEALS FILED BY ASSESSEE AND REVENUE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 3. THE ASSESSEE IN ITA NO. 918 /PUN/201 4 HAS RAISED THE FOLLOWING GROUND S OF APPEAL: - FOLLOWING GROUNDS ARE WITHOUT PREJUDICE TO EACH OTHER. 1.0 DISALLOWANCE OF LATE DELIVERY FEES - RS.10,04,852/ - THE LEARNED CIT (A) ERRED ON FACTS AND IN LAW IN DISALLOWING LATE DELIVERY CHARGES OF RS.10,04,8 52/ - ON THE GROUND THAT THE PROVISION IS MADE ON AD - HOC BASIS. HE FAILED TO APPRECIATE THAT THE COMPANY FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING AND EXPENSES RELATING THE PREVIOUS YEAR HAVE BEEN PROPERLY PROVIDED TO ARRIVE THE CORRECT PROFIT DURING THE YEAR . 2.0 DISALLOWANCE OF EXPENSES U/S 14A - RS.4,33,59,413/ - THE LEARNED CIT(A) ERRED ON FACTS AND IN LAW IN DISALLOWING RS.4,33,59,413/ - U/S 14A OF THE ACT. THE LEARNED CIT(A) ERRED IN CONSIDERING THE ENTIRE INTEREST EXPENDITURE FOR THE PURPOSE OF DISALLOW ANCE WHEN THE RULE MANDATES THAT IT IS ONLY THE INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, HAS TO BE CONSIDERED. THE ASSESSEE COMPANY DID NOT INCUR ANY EXPENDITURE ATTRIBUTABLE FOR EARNING DIVIDEND. THE CIT (A) COULD N OT POINT OUT ANY OTHER EXPENDITURE DIRECTLY ATTRIBUTABLE FOR EARNING THE TAX FREE INCOME NO NEXUS OF THE EXPENDITURE WITH THE TAX FREE INCOME WAS ESTABLISHED. THE LEARNED CIT(A) ALSO FAILED TO APPRECIATE THAT THE AO HAS NOT ARRIVED AT HIS SATISFACTION BEFO RE INVOKING RULE 8D. 3.0 DISALLOWANCE OF R & D UNITS PURCHASED AS PER TECHNICAL LICENSE AGREEMENT - RS.3,72,81,428/ - ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 3 THE CIT (A) ERRED ON FACTS AND IN LAW IN DISALLOWING A SUM OF RS . 3,72,81,428/ - U/S 40(A)(I) OF THE INCOME TAX ACT, TOWARDS PURCHASE OF ENGI NES BY CONFUSING IT AS PAYMENT FOR ROYALTY AND HOLDING THAT THE PROVISIONS OF SECTION 195 OF THE INCOME TAX ACT ARE APPLICABLE AND WITHHOLDING TAX SHOULD HAVE BEEN DEDUCTED FROM THE PAYMENT. THE CIT(A) FAILED TO APPRECIATE THE FACTS IN ITS PROPER PERSPECTI VE. 4. THE REVENUE IN ITA NO.1 153 /PUN/201 4 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1 . WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) IS JUST I FIED IN HOLDING THAT ALLIED CIVIL CONSTRUCTION AND ERECTION AND C OMMISSIONING WERE INTEGRAL PART OF WINDMILL WHICH WILL BE ELIGIBLE FOR THE ACCELERATED RATE OF DEPRECIATION AS APPLICABLE FOR WINDMILL WITHOUT APPRECIATING THAT THESE ARE NOT THE INTEGRAL PART OF THE WINDMILL, BUT ARE LIKE BUILDINGS, WIRES, ETC FOR ANY FACTORY OR PLANT? 2 . WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) IS JUSTIFIED IN HOLDING THAT DEPRECIATION ON PRINTERS, UPS AND OTHER ALLIED ITEMS ARE ALLOWABLE HIGHER RATE OF 60 % I .E. THE RATE APPLICABLE TO COMPUTERS, WITHOUT APPREC I ATING THA T T HESE ITEMS DO NOT FALL WITHIN THE DEFIN I TION OF COMPUTERS? 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) IS JUSTIFIED IN DELETING THE ADDITION OF RS.46 LAKHS MADE U/S 40A(2) OUT OF COMMIS S ION PAID TO DIRECTORS WITHOUT JUSTIFY ING THE REASONABLENESS OF THE PAYMENT TO DIRECTORS? 5. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE HAD FURNISHED RETURN OF INCOME DECLARING TOTAL INCOME OF 1.29 CRORES. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF ENGINES, GENERATOR S, ENGINE PARTS, GENERATION OF ELECTRICITY AND ALSO TRADING IN COMPONENTS, COKE, OIL, ETC. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD INCURRED EXPENDITURE ON ACCOUNT OF LATE DELIVERY FEES, FOR W HICH PROVISION WAS MADE. A SUM OF 7,23,844/ - WAS ALSO INCLUDED IN PROVISION MADE FOR AN AMOUNT OF 10,04,852/ - FOR LIQUIDATED DAMAGES. SINCE AN ADDITION WAS MADE IN THE LAST ASSESSMENT YEAR ON THE ISSUE, THE ASSESSEE WAS REQUESTED TO SUBMIT THE DETAIL S REGARDING ACTUAL UTILIZATION OF PROVISION IN THE SUBSEQUENT YEAR. THE ASSESSEE COULD NOT PROVIDE NECESSARY EXPLANATION AND HENCE, THE ASSESSING OFFICER MADE AN ADDITION OF 10,04,852/ - OUT OF LIQUIDATED DAMAGES. FURTHER, THE ASSESSEE HAD CLAIMED INTER EST EXPENDITURE OF ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 4 19.70 CRORES. THE ASSESSEE HAD MADE INVESTMENT IN SHARES, MUTUAL FUNDS, ETC. FOR SUM OF 476.33 CRORES. THE ASSESSEE POINTED OUT THAT IT HAD EARNED DIVIDEND INCOME OF 4.76 CRORES ON LONG TERM INVESTMENTS AND ALSO EARNED SUBSTANTIA L INCOME FROM MUTUAL FUNDS AND UTI. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE EXPENDITURE RELATABLE TO EARNING OF EXEMPT INCOME SHOULD NOT BE DISALLOWED IN VIEW OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1 962 (IN SHORT THE RULES). THE ASSESSEE POINTED OUT THAT IT HAD ALREADY MADE SUO MOTU DISALLOWANCE OF 5 LAKHS AND NO FURTHER DISALLOWANCE WAS TO BE MADE IN THE HANDS OF ASSESSEE. THE ASSESSING OFFICER DID NOT ACCEPT THE EXPLANATION OF ASSESSEE AND OBS ERVED THAT WHERE INTEREST BEARING FUNDS WERE UTILIZED FOR INVESTMENT IN SHARES AND MUTUAL FUNDS AND BECAUSE OF HUGE NUMBER OF TRANSACTIONS, THE QUANTIFICATION COULD NOT BE DETERMINED. HENCE, APPLYING THE PROVISIONS OF RULE 8D OF THE RULES, SUM OF 30,12, 67,295/ - WAS DISALLOWED UNDER RULE 8D OF THE RULES. SINCE THE ASSESSEE HAD ALREADY DISALLOWED 5 LAKHS, BALANCE SUM OF 30,07,67,295/ - WAS DISALLOWED UNDER RULE 8D OF THE RULES. 6. THE NEXT ASPECT CONSIDERED BY THE ASSESSING OFFICER WAS THE TECHNOLOGY LICENSE AGREEMENT DATED 24.05.2007 ENTERED INTO BY THE ASSESSEE WITH WAUKESHA ENGINES PVT. LTD., UNDER WHICH EXPENSES HAD BEEN CLAIMED AS R & D EXPENDITURE. THE ASSESSEE HAD PURCHASED ENGINE , IN TERMS OF ROYALTY AGREEMENT WHICH WAS APPROVED BY THE DEPART MENT OF SCIENCE & TECHNOLOGY. THE ASSESSING OFFICER WAS OF THE VIEW THAT AS PER EXPLANATION 2 TO SECTION 9(1)(VI) OF THE ACT, WHICH DEFINES THE SCOPE OF ROYALTY PAYMENT AND THE AMOUNT PAID BY ASSESSEE WAS AKIN TO ROYALTY. IT WAS FURTHER HELD THAT SIN CE THE ASSESSEE HAD FAILED TO DEDUCT TDS ON SUCH PAYMENTS UNDER SECTION 195 OF THE ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 5 ACT, AN AMOUNT OF 3,72,81,428/ - WAS TO BE DISALLOWED UNDER SECTION 40(A)(IA) OF THE ACT. 7. THE ASSESSING OFFICER ALSO MADE OTHER ADDITIONS IN THE HANDS OF ASSESSEE WHICH ARE AS UNDER: - ( A ) CIVIL CONSTRUCTION AND ERECTION AND COMMISSIONING WERE HELD TO BE NOT INTEGRAL PART OF WINDMILL, ELIGIBLE FOR ACCELERATED RATE OF DEPRECIATION; ( B ) DEPRECIATION ON PRINTERS, UPS AND RELATED ITEMS WERE NOT ELIGIBLE FOR HIGHER RATE OF DEPRECIATIO N @ 60%; ( C ) DISALLOWANCE UNDER SECTION 40A(2) OF THE ACT OUT OF COMMISSION PAID TO DIRECTORS AT 46 LAKHS. 8 . IN APPEAL, THE CIT(A) FIRST DECIDED THE ISSUE OF LATE DELIVERY FEES AND POINTED OUT THAT THE ISSUE IN EARLIER YEAR HAD BEEN DECIDED PARTLY IN FAVOUR OF ASSESSEE. THE CIT(A) NOTES THAT THOUGH THE ASSESSEE HAD PROVIDED DETAILS OF CUSTOME R NAMES, INVOICE NUMBER AND PERCENTAGE OF LATE DELIVERY CHARGES BUT HAD NOT PROVIDED THE COPIES OF PURCHASE ORDERS SHOWING LATE DELIVERY CHARGES WERE PAYABLE. SO, HE UPHELD THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. THE CIT(A) HAS ALLOWED THE CLAIM OF ASSESSEE IN RESPECT OF CIVIL CONSTRUCTION AND ERECTION AND COMMISSIONING, DEPRECIATION ON PRINTERS, UPS AND RELATED ITEMS AND COMMISSION PAID TO DIRECTORS. 9 . COMING TO THE NEXT ISSUE OF DISALLOWANCE MADE UNDER RULE 8D OF THE RULES, THE CIT(A) NOTED TH AT THE ASSESSEE HAD FILED RECTIFICATION APPLICATION BEFORE THE ASSESSING OFFICER AND AFTER DUE VERIFICATION, THE ASSESSING OFFICER ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 6 HAD RESTRICTED DISALLOWANCE AT 4,33,59,413/ - AS AGAINST ORIGINAL FIGURE OF 30,12,67,295/ - . HE UPHELD THE AFORESAID DISA LLOWANCE BEING REASONABLE. 10 . COMING TO THE LAST ISSUE OF ROYALTY PAYMENT, AFTER CONSIDERING SUBMISSIONS OF ASSESSEE WHICH ARE REPRODUCED AT PAGES 21 TO 27 OF APPELLATE ORDER, THE CIT(A) WENT THROUGH CLAUSES OF TECHNOLOGY LICENSE AGREEMENT, COPY OF WHICH IS REPRODUCED AT PAGES 28 TO 35 OF APPELLATE ORDER AND ALSO NOTED THAT THERE WERE CERTAIN NEGOTIATIONS AND TERMS OF TECHNOLOGY LICENSE AGREEMENT WERE MODIFIED IN 2009 AND HELD THAT TECHNOLOGY LICENSE AGREEMENT HAD TO BE CONSIDERED AS A WHOLE I.E. WED GRAN TED TO THE ASSESSEE. AS PER TECHNOLOGY LICENSE A GREEMENT, THE ASSESSEE AGREED TO MAKE ROYALTY PAYMENTS PARTLY IN THE FORM OF PURCHASE OF TWO R&D UNITS AND PARTLY IN THE FORM OF ROYALTY FEES. HE FURTHER OBSERVED THAT R&D UNITS WERE INTEGRAL PART OF TECHNO LOGY LICENSE AGREEMENT. TAKING INTO ACCOUNT THE SAID AGREEMENT IN TOTALITY, HE HELD THAT PAYMENTS MADE BY ASSESSEE TO THE LICENSOR FOR R&D UNITS WERE TO BE TREATED AS ROYALTY. HE FURTHER HELD THAT THE SAID PAYMENTS MADE BY ASSESSEE TO WED WERE ROYALTY UNDER THE DOMESTIC INCOME TAX LAW AND ALSO UNDER THE TREATY BETWEEN INDIA AND USA. THEREFORE, PROVISIONS OF SECTION 195 OF THE ACT WERE ATTRACTED AND SINCE THE ASSESSEE HAD FAILED TO DEDUCT TAX AT SOURCE, THE SAID EXPENDITURE WAS REQUIRED TO BE DISALLOW ED UNDER SECTION 40(A)(IA) OF THE ACT. 1 1 . BOTH THE ASSESSEE AND REVENUE ARE IN APPEAL AGAINST RESPECTIVE PARTS OF ORDER OF CIT(A) . 1 2 . THE REVENUE IS IN APPEAL AGAINST THE ORDER OF CIT(A) IN HOLDING THAT ALLIED CIVIL CONSTRUCTION AND ERECTION AND COMMIS SIONING WERE INTEGRAL PART OF WINDMILL ELIGIBLE FOR ACCELERATED RATE OF DEPRECIATION. THE SECOND ISSUE WHICH IS ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 7 RAISED BY THE REVENUE IS AGAINST DEPRECIATION ALLOWED ON PRINTERS, UPS AND RELATED ITEMS ON HIGHER RATE OF 60%. THE OTHER ISSUE WHICH IS RAISE D BY THE REVENUE IS AGAINST THE ORDER OF CIT(A) IN DELETING THE ADDITION OF 46 LAKHS MADE UNDER SECTION 40A(2) OF THE ACT OUT OF COMMISSION PAID TO DIRECTORS. 1 3 . FIRST, WE SHALL TAKE UP THE APPEAL OF ASSESSEE. 1 4 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FIRST REFERRED TO THE GROUNDS OF APPEAL RAISED IN ITS APPEAL AND POINTED OUT THAT THE FIRST ISSUE RAISED IN THE PRESENT APPEAL I.E. DISALLOWANCE OF LATE DELIVERY CHARGES OF 10,04,852/ - IS COVERED IN FAVOUR OF ASSESSEE BY THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.1641/PUN/2011 IN ASSESS MENT YEARS 2002 - 03 AND IN ITA NO.456/PUN/2012 IN ASSESSMENT YEAR 2003 - 04 , ORDER DATED 01.09.2017. HE REFERRED TO THE RELEVANT PORTIONS OF THE ORDER OF TRIBUNAL IN THIS REGARD. THE TRIBUNAL FURTHER WHILE DECIDING APPEAL OF ASSESSEE FOR ASSESSMENT YEAR 200 7 - 08 HAD ALSO CONSIDERED THE SAID ISSUE AND APPLYING THE RATIO LAID DOWN IN EARLIER YEARS, HAD REMITTED THE ISSUE BACK TO THE FILE OF ASSESSING OFFICER. THE RELEVANT FINDINGS ARE IN PARA 9 OF THE ORDER DATED 12.02.2018. 1 5 . FOLLOWING THE SAME PARITY OF R EASONING, WE REMIT THIS ISSUE ALSO TO THE FILE OF ASSESSING OFFICER TO FOLLOW THE DIRECTIONS OF TRIBUNAL IN EARLIER YEARS AND DECIDE THE ISSUE AFTER AFFORDING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. THE GROUND OF APPEAL NO.1 RAISED BY ASSESSEE IS THUS, ALLOWED FOR STATISTICAL PURPOSES. 1 6 . NOW, COMING TO THE NEXT ISSUE OF DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 8 THAT WHOLE INTEREST PAID BY THE ASSESSEE COULD NOT BE DISALL OWED UNDER RULE 8D(II) OF THE RULES AND ONLY INTEREST PAID ON LOANS WHICH WERE DIRECTLY ATTRIBUTABLE TO ANY INVESTMENTS ON WHICH THE ASSESSEE WAS EARNING DIVIDEND INCOME, THEN COULD BE DISALLOWED. ANOTHER PLEA RAISED WAS THAT THE ASSESSING OFFICER HAD FAI LED TO ARRIVE AT ANY SATISFACTION BEFORE INVOKING THE PROVISIONS OF RULE 8D OF THE RULES. 1 7 . BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD CLAIMED INTEREST EXPENDITURE OF 19.70 CRORES. FURTHER, THE ASSESSEE HAD MADE INVESTMENT IN SHARES, MUTUAL FUNDS TOTALING 476.33 CRORES. THE ASSESSEE HAD EARNED DIVIDEND INCOME OF 4.76 CRORES AND ALSO EARNED SUBSTANTIAL INCOME FROM MUTUAL FUNDS AND UTI. THE ASSESSEE WAS ASKED AS TO WHY EXPENDITURE RELATING TO EARNING EXEMPT INCOME SHOULD NOT BE DISALLOWED UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES. THE ASSESSEE SUBMITTED THAT IT HAD DISALLOWED SUM OF 5 LAKHS DIRECTLY RELATING TO THE EXEMPT INCOME. THE ASSESSEE ALSO CLAIMED THAT INVESTMENT ACTIVITY WAS ONLY ANCILLARY TO ITS PRINCIPAL BUSINESS AND HENCE, NO ADDITIONAL EXPENDITURE WAS INCURRED FOR EARNING EXEMPT INCOME. THE ASSESSING OFFICER REJECTING THE PLEA OF ASSESSEE, IN VIEW OF HUGE AMOUNT OF EXEMPT INCOME EARNED BY IT, APPLIED THE PROVISIONS OF RULE 8D OF THE RULES AND WORKED OUT THE DISALLOWANCE AT 30,12,67,295/ - . THE SAME WAS REDUCED TO 4,33,59,413/ - BY ASSESSING OFFICER ON RECTIFICATION. 1 8 . THE PERUSAL OF ASSESSMENT ORDER REFLECTS THE ASSESSING OFFICER TO HAVE NOTED THAT THE ASSESSEE HAD EARNED TAX FREE DIVIDEND INCOME OF 4.76 CRORES. THE ASSESSEE IN COMPUTATION OF INCOME HAD DISALLOWED SUM OF 5 LAKHS UNDER SECTION 14A OF THE ACT. THE PERUSAL OF ASSESSMENT ORDER DOES NOT REFLECT THE ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 9 ASSESSING OFFICER TO HAVE RECORDED SATISFACTION AS TO WHY SUO MOTU DISALLOWANCE MADE BY THE ASSESSEE AT 5 LAKHS IS NOT SUFFICIENT TO COVER DISALLOWANCE OF EXPENDITURE RELATABLE TO EXEMPT INCOME, IN VIEW OF THE PROVISIONS OF SECTION 14A(2) OF THE ACT. THE ASSESSING OFFICER HAS COMPUTED DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES AT 30 , 1 2, 6 7,2 95 / - . SINCE THE ASSESSEE HAD ALREADY DISALLOWED SUM OF 5 LAKHS, THE ADDITIONAL DISALLOWANCE WAS WORKED OUT AT 30 , 07 , 6 7,2 95 / - . HOWEVER, ON FILING OF RECTIFICATION APPLICATION BY THE ASSESSEE, THE ASSESSING OFFICER RE - WORKED THE DISALL OWANCE AT 4,33,59,413/ - . THE SAID DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS UPHELD BY THE CIT(A), AGAINST WHICH THE ASSESSEE IS IN APPEAL BEFORE US . 1 9 . WE FIND THAT SIMILAR ISSUE AROSE BEFORE THE TRIBUNAL IN THE CASE OF CAPGEMINI TECHNOLOGY SERV ICES INDIA LIMITED VS . DCIT IN ITA NO.216/PUN/2015 AND CROSS APPEAL IN ITA NO.360/PUN/2015, RELATING TO ASSESSMENT YEAR 2010 - 11, ORDER DATED 25.01.2018. THE RELEVANT FINDINGS OF TRIBUNAL ARE IN PARAS 34 AND 35 AT PAGES 18 TO 20 OF THE ORDER OF TRIBUNAL, W HICH READ AS UNDER: - 34. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSING OFFICER WHILE PASSING THE ASSESSMENT ORDER IN PARA 10 HAD OBSERVED THAT THE ASSESSEE HAD EARNED SIGNIFICANT AMOUNT OF TAX FREE DIVIDENDS AND IN THE COMPUTA TION OF INCOME, THE ASSESSEE HAS DISALLOWED SUM OF RS.50 LAKHS UNDER SECTION 14A OF THE ACT. THEN, REFERENCE IS MADE TO THE NOTE FILED BY THE ASSESSEE ON EXPENDITURE DISALLOWABLE UNDER SECTION 14A OF THE ACT. THE ASSESSING OFFICER THEREAFTER, TAKES NOTE OF THE CONTENTS OF SAID EXPLANATION AND OBSERVED AS UNDER: - I HAVE GONE THROUGH THE SUBMISSIONS MADE BY THE ASSESSEE. IT IS OBSERVED THAT APART FROM INVESTMENTS IN THE OVERSEAS SUBSIDIARIES (WHERE THERE IS NO TAX - FREE INCOME SINCE THE DIVIDEND IS ALSO T AXABLE) THE INVESTMENTS MADE BY THE ASSESSEE ARE IN MUTUAL FUNDS. THE ENTIRE INVESTMENT IN MUTUAL FUND IS IN NON - EQUITY SCHEME. IN RESPECT OF INVESTMENT IN MUTUAL FUNDS, EXCEPT FOR GROWTH FUNDS, THE COMPANY RECEIVES TAX FREE DIVIDEND. THE AMOUNT OF DIVI DEND RECEIVED BY THE COMPANY IS SUBSTANTIAL. THIS IS A CLEAR CASE FOR APPLICATION OF RULE 8D. HENCE, THE CONTENTION OF THE ASSESSEE CANNOT BE ACCEPTED. THE DISALLOWANCE U/S 14A IS REQUIRED TO BE MADE BY APPLYING RULE 8D. AS PER THE WORKING OF DISALLOWA NCE U/S 14A AS PER RULE 8D, THE AMOUNT OF ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 10 DISALLOWANCE COMES TO RS.5,68,32,323/ - . THE ASSESSEE HAS ALREADY DISALLOWED RS.50,00,000/ - IN THE COMPUTATION OF INCOME. 35. THE REQUIREMENT OF SECTION 14(2) OF THE ACT IS THAT THE ASSESSING OFFICER IS TO RECORD AS TO WHY THE DISALLOWANCE MADE BY THE ASSESSEE I.E. RS.50 LAKHS UNDER SECTION 14A OF THE ACT IS NOT CORRECT. THE ASSESSING OFFICER TAKES NOTE OF THE DISALLOWANCE, CONSIDERS THE EXPLANATION OF ASSESSEE AND HOLDS THAT THE CONTENTION OF ASSESSEE CANNOT BE ACCEPTED. THE PRELIMINARY SATISFACTION TO BE RECORDED BY ASSESSING OFFICER, BEFORE MAKING DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES, IS MISSING IN THE CASE; IN THE ABSENCE OF THE SAME, THERE IS NO MERIT IN THE DISALLOWANCE M ADE BY THE ASSESSING OFFICER. WE FIND SUPPORT FROM THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT & ANR. (2017) 394 ITR 449 (SC). 37. WE DO NOT SEE HOW IN THE AFORESAID FACT SITUATION A DIFFERENT VIE W COULD HAVE BEEN TAKEN FOR THE ASSESSMENT YEAR 2002 - 03. SUB - SECTIONS (2) AND (3) OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES MERELY PRESCRIBE A FORMULA FOR DETERMINATION OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN A SITUATION WHERE THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE. WHETHER SUCH DETERMINATION IS TO BE MADE ON APPLICATION OF THE FORMULA PRESCRIBED UNDER RULE 8D OR IN THE BEST JUDGMENT OF THE AS SESSING OFFICER, WHAT THE LAW POSTULATES IS THE REQUIREMENT OF A SATISFACTION IN THE ASSESSING OFFICER THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, AS PLACED BEFORE HIM, IT IS NOT POSSIBLE TO GENERATE THE REQUISITE SATISFACTION WITH REGARD TO THE CO RRECTNESS OF THE CLAIM OF THE ASSESSEE . IT IS ONLY THEREAFTER THAT THE PROVISIONS OF SECTION 14A(2) AND (3) READ WITH RULE 8D OF THE RULES OR A BEST JUDGMENT DETERMINATION, AS EARLIER PREVAILING, WOULD BECOME APPLICABLE. (UNDERLINE PROVIDED BY US FOR EM PHASIS) 20 . THE ISSUE ARISING IN THE PRESENT APPEAL IS SIMILAR TO THE ISSUE BEFORE THE TRIBUNAL IN CAPGEMINI TECHNOLOGY SERVICES INDIA LIMITED VS . DCIT (SUPRA) AND FOLLOWING THE SAME PARITY OF REASONING, WHERE THE ASSESSING OFFICER HAS FAILED TO RECORD S ATISFACTION, HAVING REGARD TO THE ACCOUNTS OF ASSESSEE, WE HOLD THAT THERE IS NO MERIT IN THE ORDER OF ASSESSING OFFICER SINCE THERE IS NO PROPER SATISFACTION BEING RECORDED BY HIM. 2 1 . THE LAST ISSUE RAISED BY THE ASSESSEE RELATES TO THE CLAIM OF R&D E XPENDITURE. THE ASSESSEE HAD ENTERED INTO TECHNOLOGY LICENSE AGREEMENT WITH WAUKESHA ENGINES, DRESSER, INC ON 24.05.2007, UNDER WHICH IT WAS PAYING ROYALTY. THE SAID ROYALTY AGREEMENT WAS DULY APPROVED BY DEPT. OF SCIENCE & TECHNOLOGY. THE ASSESSEE HAD DURING THE YEAR UNDER CONSIDERATION ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 11 PURCHASED ENGINES AND CLAIMED IT TO BE R&D EXPENDITURE. THE AUTHORITIES BELOW WERE OF THE VIEW THAT WHERE PAYMENT WAS MADE IN CONNECTION WITH ROYALTY PAYMENT AND WHERE THE AGREEMENT WITH WAUKESHA ENGINES WAS A COMPOSI TE AGREEMENT FOR ROYALTY, IN TERMS OF WHICH THE ASSESSEE WAS OBLIGED TO PURCHASE ABOVE ENGINES, THEN THE PAYMENT MADE BY ASSESSEE FELL WITHIN DEFINITION OF ROYALTY AND THE ASSESSEE WAS OBLIGED TO DEDUCT TAX AT SOURCE. IN THE ABSENCE OF ANY DEDUCTION OF TAX AT SOURCE, THE SAID AMOUNT WAS DISALLOWED UNDER SECTION 40(A)(I) OF THE ACT. 2 2 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ELABORATELY TOOK US THROUGH TERMS OF TECHNOLOGY LICENSE AGREEMENT AND ALSO THE MEMORANDUM OF UNDERSTANDING BEFORE T HE TECHNOLOGY LICENSE AGREEMENT AND POINTED OUT THAT AS PER THE AGREEMENT, THE AIM WAS TO DEVELOP MORE COST EFFECTIVE ENGINES AND ALSO TO SET UP MANUFACTURING BASE AND TO FOSTER LONG TERM TECHNOLOGY IN W200 DIESEL ENGINES. HE STRESSED THAT PURPOSE OF AGRE EMENT WAS TO DEVELOP MORE COST EFFECTIVE DIESEL ENGINES , IN ORDER TO IMPROVE W200 DIESEL ENGINES TECHNOLOGY TO MAKE IT MARKET EFFICIENT I.E. TO UPGRADE THE PRODUCT. IN SUCH SCENARIO, HE REFERRED TO RIGHTS AND OBLIGATIONS OF WED IN THIS REGARD, WHEREIN IT WAS CLEARLY MENTIONED THAT THEY WOULD RETAIN OWNERSHIP OF TECHNOLOGY. IT WAS FURTHER MENTIONED THAT WED WAS RESPONSIBLE FOR THE DEVELOPMENT OF W220 PRODUCT. IT WAS FURTHER AGREED THAT WED WOULD PROVIDE ACCESS TO IMPROVEMENTS, IF ANY IN W220 ENGINES. HE REFERRED TO FURTHER CLAUSES OF SAID AGREEMENT. IN RESPECT OF RIGHTS AND OBLIGATIONS OF ASSESSEE, IT WAS POINTED OUT THAT THE ASSESSEE WAS GIVEN NON EXCLUSIVE LICENSE FOR W220 / W200 ENGINE TECHNOLOGY. IT WAS FURTHER AGREED THAT IMPROVEMENTS, IF ANY IN W2 00 TECHNOLOGY WOULD BE OWNED BY ASSESSEE, FOR WHICH EXCLUSIVE LICENSE OF W200 ENGINE TECHNOLOGY WAS GIVEN TO THE ASSESSEE. THE LEARNED AUTHORIZED ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 12 REPRESENTATIVE FOR THE ASSESSEE EXPLAINED THAT ROYALTY WAS PAID ON THE ENGINES SOLD, WHICH WERE MANUFACTURED WITH THE HELP OF AFORESAID TECHNOLOGY. SO, ROYALTY WAS ONE PART OF AGREEMENT. HOWEVER, PURCHASE OF ENGINES WAS ANOTHER PART OF AGREEMENT. HE AGAIN TOOK US THROUGH CLAUSES OF SAID AGREEMENT IN THIS REGARD AND STRESSED THAT THE ASSESSEE WAS OBLIGED TO PUR CHASE AIRCRAFT IN USA AND RELOCATE AT ITS OWN COST. HE FURTHER REITERATED THAT ALL IMPROVEMENTS OF W200 ENGINE TECHNOLOGY BELONG TO THE ASSESSEE AND HENCE WAS R&D EXPENDITURE . SINCE SUBSEQUENT DEVELOPMENTS, IF ANY, WOULD BE OWNED BY LICENSEE IN RESPECT O F W200 ENGINE TECHNOLOGY, THERE WAS NEED TO PURCHASE THE SAID ENGINE AND CARRY OUT R&D ON THE SAID ENGINE. HE THEN REFERRED TO PROVISIONS OF EXPLANATION 2(IVA) OF SECTION 9(1)(VI) OF THE ACT AND POINTED OUT THAT OUTRIGHT PROJECT PURCHASE OF THE EQUIPMENT WAS BEYOND THE SCOPE OF RIGHT TO USE TECHNOLOGY . W HERE THE ASSESSEE HAD PURCHASED ENGINE ON AS IS WHERE IS BASIS , THEN IT WA S BEYOND THE USE OR RIGHT TO USE TECHNOLOGY. HE THEN REFERRED TO THE DEFINITION OF ROYALTY IN CLAUSE 3A AND 3B OF ARTICLE 12 O F DTAA, WHEREIN ROYALTY WAS DEFINED AS CONSIDERATION PAID FOR USE OR RIGHT TO USE TECHNOLOGY. HE THEN STRESSED THAT PURCHASE OF ENGINE WAS NOT PAYMENT OF ROYALTY. IN THIS REGARD, HE PLACED RELIANCE ON THE DECISION OF AHMEDABAD BENCH OF TRIBUNAL IN AATA SH POWER PVT. LTD. VS. ITO IN ITA NO.477/AHD/2016, RELATING TO ASSESSMENT YEAR 2011 - 12, ORDER DATED 30.01.2017. IN ALTERNATE, ON WITHOUT PREJUDICE BASIS, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT EVEN IF IT IS PRESUMED THAT P URCHASE OF ENGINE WAS TRANSFER OF TECHNOLOGY, THEN SUCH OUTRIGHT PURCHASE WAS BEYOND THE SCOPE OF ROYALTY AS ROYALTY IS FOR USE AND RIGHT TO USE AND NOT TO PURCHASE THE EQUIPMENT ITSELF. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE PLACED RELI ANCE ON THE FOLLOWING DECISIONS: - ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 13 I ) CIT VS. GUPTA BANDHU (1998) 229 ITR 731 (MP) II ) DIT VS. ERICSSON A.B. (2012) 343 ITR 470 (DEL) III ) CIT VS. CREATIVE INFOCITY LTD. (2017) 397 ITR 165 (GUJ) 2 3 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE REFERRED TO EXPLANATION 2 UNDER SECTION 9(1)(VI) OF THE ACT, WHICH DEFINES ROYALTY AS (A) PAYMENTS OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE OF OR THE RIGHT TO USE ANY COPYRIGHT OR A LITERARY, ARTISTIC, OR SCIENTIFIC WORK, INCLUDING CINEMATOGRAPH FILMS OR WO RK ON FILM, TAPE OR OTHER MEANS OF REPRODUCTION FOR USE IN CONNECTION WITH RADIO OR TELEVISION BROADCASTING, ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, OR FOR INFOR MATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERI ENCE, INCLUDING GAINS DERIVED FROM THE ALIENATION OF ANY SUCH RIGHT OR PROPERTY WHICH ARE CONTINGENT ON THE PRODUCTIVITY, USE OR DISPOSITION THEREOF; AND (B) PAYMENTS OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY INDUSTRIAL , COMMERCIAL OR SCIENTIFIC EQUIPMENT, OTHER THAN PAYMENTS DERIVED BY AN ENTERPRISE DESCRIBED IN PARAGRAPH 1 OF ARTICLE 8 (SHIPPING AND AIR TRANSPORT) FROM ACTIVITIES DESCRIBED IN PARAGRAPH 2(C) OR 3 OF ARTICLE 8. HE THEN, REFERRED TO DEFINITION OF ROYALT Y AND POINTED OUT THAT IN THE LIGHT OF DEFINITION, THE TERMS OF MOU AND TECHNOLOGY AGREEMENT HAVE TO BE LOOKED INTO. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT IN CASE THE RESPONSIBILITIES OF WED ARE LOOKED INTO, IT WAS NOTH ING BUT OBLIGATION OF PAYMENT OF ROYALTY. HE REFERRED TO DIFFERENT PARAS OF ROYALTY AGREEMENT. HE THEN, REFERRED TO PAGE 35 PARA 2.1 ONWARDS OF ORDER OF CIT(A). HE ALSO PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HONBLE HIGH COURT OF KARNATAKA IN CIT VS. SAMSUNG ELECTRONICS CO. LTD. (2012) 345 ITR 494 (KAR). ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 14 2 4 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN REJOINDER POINTED OUT THAT THE CIT(A) SAYS UNLESS ASSESSEE PURCHASES R&D UNIT, THE ASSESSEE IS NOT ENTITLED TO CLAIM DEDUCTION, WHICH WAS NOT CORRECT PROPOSITION. 2 5 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. IN ORDER TO ADJUDICATE THE PRESENT ISSUE, WE NEED TO REFER THE UNDERSTANDING BETWEEN THE PARTIES. THE ASSESSEE AND WAUKESHA ENGINES, DRESSER, INC, USA (WED) HA D ENTERED INTO MEMORANDUM OF UNDERSTANDING ON 09.10.2006. THE PURPOSE OF ALLIANCE BETWEEN THE ASSESSEE AND WED WAS THAT WED HAD ACQUIRED CERTAIN W200 DIESELS AND W220 GAS ENGINE TECHNOLOGY FROM WARTSILA AND WISHED TO ENTER INTO AN ALLIANCE WITH ASSESSEE I N ORDER TO (A) DEVELOP MORE COST EFFECTIVE PRODUCTS THROUGH JOINT RE - ENGINEERING, MANUFACTURING AND LOW COST SOURCING; (B) TO INCREASE OPPORTUNITY FOR THE PARTIES BOTH IN INDIA AND REST OF THE WORLD BY LEVERAGING MANUFACTURING COSTS, WHICH WAS BASED ON W20 0 / 220 TECHNOLOGY; (C) TO ACHIEVE EFFICIENT CAPEX UTILIZATION BETWEEN THE PARTIES; (D) FOSTER LONG TERM INVESTMENT IN THE W200 DIESEL TECHNOLOGY SO AS TO KEEP THE SAID ENGINE CURRENT IN THE MARKET PLACE; (E) TO UTILIZE THE EXISTING SALES / SERVICE NETWORK OF EACH OF THE PARTIES IN ORDER TO GAIN SHARE IN BOTH DIESEL AND GAS ENGINE OPPORTUNITIES WORLDWIDE. THE RIGHTS / OBLIGATIONS OF THE PARTIES WERE ALSO DEFINED, AS PER WHICH WED HAD TO LICENSE TO THE ASSESSEE (A) FOR USE OF W200/W220 TECHNOLOGY FOR THE PU RPOSE OF MANUFACTURING AND SELLING W200/W220 ENGINES AND THEIR RESPECTIVE PARTS; (B) WED WAS TO RETAIN FULL OWNERSHIP AND S OLE RIGHTS TO THE PLATFORM FOR W220 GAS ENGINES I.E. INCLUDING TECHNOLOGY , DESIGN, TECHNICAL DATA AND RELATED AND / OR EMBODIED IP RI GHTS THAT RELATE TO W220 GAS ENGINES AND FURTHER INCLUDES ALL SUBSEQUENTLY DEVELOPED , BY EITHER PARTIES , TECHNOLOGY AND IP RIGHTS, (C) WED WOULD BE RESPONSIBLE FOR W220 PRODUCT DEVELOPMENT AND IT WOULD HAVE UNILATERAL RIGHT TO APPROVE ALL ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 15 CHANGES TO THE MA IN W200/220 ENGINES PLATFORM, (D) WED WAS TO PROVIDE ASSESSEE WITH ACCESS TO IMPROVEMENT / UPGRADES OF W200/220 PRODUCTS. AS PER SUB - CLAUSE (H) OF CLAUSE II , IT WAS PROVIDED THAT WED WOULD PROVIDE TECHNICAL S UPPORT WHEN REQUIRED REGARDING W220/200 ENGINES . AS PER SUB - CLAUSE (J) TO CLAUSE II, WED WOULD LICENSE TO ASSESSEE ON A NON - EXCLUSIVE BASIS THE RIGHT TO USE THE ESM PLATFORM ON THE W200 DIESEL, IF SUCH REQUEST WAS MADE BY ASSESSEE BUT SUBJECT TO THE FOLLOWING: - A ) THE LICENSE FEE DETAILS WOULD BE MUTUALL Y AGREED TO AT THE TIME OF REQUEST B ) ALL IMPROVEMENTS/MODIFICATIONS TO CONTROLS PLATFORM FOR DIESEL APPLICATION WOULD BE COORDINATED THROUGH AND OWNED BY WED, BUT WOULD BE PAID BY THE ASSESSEE. 2 6 . AS PER ITS RIGHTS AND OBLIGATIONS, THE ASSESSEE REGARDING W 220/200 TECHNOLOGY, UNDER THE TERMS OF AGREEMENT, AGREED TO PURCHASE TWO R&D UNITS + PARTS FOR TOTAL PRICE OF USD 7,00,00 FOR ONE 12V200 BARE ENGINE AND ONE 18V200 GENSET WITH SWITCHGEAR. THE COST ASSOCIATED WITH RELOCATING TWO PURCHASED UNITS WAS TO BE P AID BY THE ASSESSEE IN ADDITION TO R&D UNITS. THE ASSESSEE WAS TO PURCHASE CERTAIN SPECIFIED SUPPORT PARTS FOR TWO ENGINES FOR THE PRICE OF USD 60,000, FOR WHICH PAYMENT WAS TO BE MADE ON DELIVERY OF SPARE PARTS. AS PER UNDERSTANDING, THE ASSESSEE WOULD BE GRANTED NON EXCLUSIVE LICENSE BY WED TO W220/200 TECHNOLOGY AND IT WAS ALSO AGREED THAT IMPROVEMENTS MADE BY THE ASSESSEE TO W200 TECHNOLOGY WOULD BE OWNED BY THE ASSESSEE, BUT WOULD BE LICENSED TO WED BY ASSESSEE ON NON - EXCLUSIVE, FULLY PAID UP, WORLD - WIDE BASIS. FURTHER, THE ASSESSEE WOULD BE GRANTED EXCLUSIVE, WORLDWIDE LICENSE TO MANUFACTURE W200 DIESELS FOR THE TERM OF AGREEMENT ; INITIAL TERM BEING 10 YEARS AND EXCLUSIVE LICENSE TO SELL W200 DIESEL ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 16 FOR THE TERM OF AGREEMENT IN THE DEFINED TERRITORY . THE ASSESSEE THEN WAS RESPONSIBLE FOR W200 DIESEL ENGINE TECHNOLOGY DEVELOPMENT AND DEPLOYMENT AND THE DEVELOPMENT WAS TO INCLUDE CERTAIN COST REDUCTIONS. IN CONNECTION WITH THAT DEVELOPMENT AND DEPLOYMENT, THE ASSESSEE IN THE AGREEMENT WAS TO AGREE TO INVEST IN THE PLANT CAPABILITY REQUIRED TO PERFORM ASSEMBLY AND PRODUCTION TESTS ON BOTH W200 DIESEL AND W220 GAS ENGINES, AND TO PERFORM R&D ON W200 DIESEL ENGINES, SO AS TO DEVELOP W200 DIESEL TECHNOLOGY AND TO MAINTAIN SUCH TECHNOLOGY DURING THE TERM(S ) OF AGREEMENT. THE ASSESSEE IN THIS REGARD WAS TO PAY WED FOR TECHNOLOGY TRANSFER COST AT WEDS ACTUAL BURDENED COST. AS PER SUB - CLAUSE (VII) OF CLAUSE III, THE ASSESSEE WAS TO SELL W200 DIESELS UNDER THE KIRLOSKAR NAME. AS PER SUB - CLAUSE (IX) OF CLA USE III, THE ASSESSEE WAS TO PAY WED ROYALTY FEE OF 5 US$/KW FOR THE W200 ENGINES MANUFACTURED AND SOLD BY IT AND ALSO ON THE PARTS SOLD BY IT. THE ASSESSEE WAS ALSO TO PAY ROYALTY ON W220 GAS ENGINES AND PARTS. THE PARTIES ALSO AGREED THAT IN CASE THE A GREEMENT WAS TERMINATED BEFORE THE END OF TERM, THEN WED AGREED THAT THE ASSESSEE WOULD RETAIN ITS EXCLUSIVE LICENSE IN THE W200 TERRITORY TO MANUFACTURE AND S ELL THE W200 DIESEL IN SUCH TERRITORY. 27. PURSUANT TO THIS AGREEMENT, PARTIES ENTERED INTO TE CHNOLOGY LICENSE AGREEMENT ON 24.05.2007. AS PER RECITALS OF AGREEMENT, IT IS PROVIDED THAT THE ASSESSEE LICENSEE DESIRED TO OBTAIN LICENSE WITH RIGHT TO SUB - LEASE, AND TO ENABLE IT TO USE PROPRIETARY PRODUCT TECHNOLOGY TO THE EXTENT NECESSARY I N ACCORDAN CE WITH TERMS BELOW TO MANUFACTURE, AND TAKE OTHER ACTIONS TO SELL AND DELIVER THE PROPRIETARY PRODUCTS IN THE TERRITORY. AS PER CLAUSE 1.8 OF THE SAID TECHNOLOGY LICENSE AGREEMENT, PROPRIETARY PRODUCTS SHALL MEAN THE W200 PROPRIETARY PRODUCTS AND / OR TH E W220 PROPRIETARY PRODUCTS. SIMILARLY, PROPRIETARY PRODUCT TECHNOLOGY WAS IN RESPECT OF W200 AND W220. THE W200 ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 17 TERRITORY SHALL BE WORLDWIDE AS PER CLAUSE 1.10 AND W220 TERRITORY WAS THE NATION OF INDIA AND SUCH OTHER COUNTRIES AS MAY BE SUBSEQUENTLY AG REED BETWEEN THE PARTIES . IN RESPECT OF W200 PROPRIETARY PRODUCTS, W200 LICENSE WAS GRANTED WORLDWIDE, NON ASSIGNABLE, NON TRANSFERRABLE AND ROYALTY BEARING LICENSE, TO ENABLE THE LICENSEE TO USE W200 PROPRIETARY PRODUCT TECHNOLOGY IN ORDER TO MANUFACTURE AND IMPROVE THE W200 PROPRIETARY PRODUCTS. THE LICENSEE WAS ALSO GIVEN EXCLUSIVE LICENSE TO MARKET, SELL, SUPPORT AND SERVICE THE W200 PROPRIETARY PRODUCTS IN W200 TERRITORY. THEN, CLAUSES PROVIDED ROYALTY CALCULATION AND ITS RATE REDUCTION IN FUTURE. A S PER CLAUSE 2.1.3.3 , THERE WAS ADDITIONAL PURCHASE OBLIGATION UNDER WHICH, WITHIN 180 DAYS OF THE AGREEMENT, LICENSEE WAS TO PURCHASE ONE R&D UNIT + PARTS FOR TOTAL PRICE OF USD 3,00,000 AND FOR ONE 12V200 BARE ENGINE, COST OF RELOCATING THE PURCHASED UN IT TO THE ASSESSEES PREMISES WAS TO BE PAID BY LICENSEE. AS PER CLAUSE 2.2, W220 PROPRIETARY PRODUCTS LICENSE TERMS WERE AGREED. THEN, COMING TO THE OWNERSHIP OF IP RIGHTS, IT IS CLEARLY STATED IN CLAUSE 3.1.1 THAT THE LICENSOR SHALL OWN , SOLELY AND EXC LUSIVELY ON WORLDWIDE BASIS , ANY AND ALL INTELLECTUAL PROPERTY AND THE RIGHTS RELATED THERETO OF W200 PROPRIETARY PRODUCT TECHNOLOGY BUT WITH EXCEPTION THAT ANY PATENTABLE OR PROPRIETARY IMPROVEMENTS MADE SOLELY BY LICENSEE TO W200 PROPRIETARY PRODUCTS WOU LD BE OWNED BY THE LICENSEE. IT IS FURTHER PROVIDED THAT THE IMPROVEMENTS WOULD BE DISCLOSED TO AND LICENSED TO THE LICENSOR BY LICENSEE ON NON EXCLUSIVE , WORLDWIDE, FULLY PAID UP AND ROYALTY FREE BASIS. IN RESPECT OF W220 PROPRIETARY PRODUCTS, LICENSOR SHALL OWN, SOLELY AND EXCLUSIVELY THE SAID TECHNOLOGY AND INCLUDING ALL SUBSEQUENTLY DEVELOPED BY EITHER PARTY TECHNOLOGY. 28. UNDER CLAUSE 3.2, IT IS MENTIONED THAT LICENSEE SHALL ENGAGE IN ONGOING RESEARCH AND DEVELOPMENT ACTIVITIES REGARDING THE W200 PROPRIETARY PRODUCT ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 18 TECHNOLOGY, IN ORDER TO KEEP THE SAID TECHNOLOGY CURRENT IN THE MARKET PLACE. THE LICENSOR WOULD BE RESPONSIBLE FOR FUTURE DEVELOPMENT OF W220 PRODUCTS. THE LICENSEE MAY ALSO ENGAGE IN THE SAID DEVELOPMENT OF W220 PRODUCTS. FURTHER, IT WAS AGREED THAT IN CONNECTION WITH W200 DIESEL ENGINES, RESEARCH AND DEVELOPMENT ACTIVITIES WOULD BE BY THE LICENSEE WHO WOULD INVEST IN THE PLANT CAPABILITY REQUIRED TO PERFORM ASSEMBLY AND PRODUCTION TESTS , IN ORDER TO UPGRADE THE TECHNOLOGY. WE MAY ALSO REFER TO THE BASIS OF ROYALTY CALCULATION, WHICH IS PROVIDED UNDER CLAUSE 2.1.3 FOR W200 AND 2.2.3 FOR W220 PRODUCTS. IT WAS AGREED BETWEEN THE PARTIES THAT LICENSEE WOULD PAY ROYALTY AT THE PRESCRIBED RATES FOR SALE, TRANSFER, RENT, LEASE FOR W200 DIESEL ENGINES AND ALSO ITS PARTS AND SIMILARLY FOR W220 PRODUCTS. THERE ARE OTHER TERMS AGREED UPON BETWEEN THE PARTIES, WHICH ARE NOT RELEVANT TO ADJUDICATE THE ISSUE WHICH IS RAISED IN THE PRESENT APPEAL. 29. THE ASSESSEE IN LINE WITH THE SAID TECHN OLOGY AGREEMENT FOR R&D PURPOSE, PURCHASED ONE 12V200 ENGINE AND ONE 18V200 GENSET WITH SWITCHGEAR , COPY OF SALE INVOICE IS PLACED AT PAGE 168 OF PAPER BOOK. THE TOTAL PRICE OF 12V200 ENGINES IS USD 3,00,000 AND OF 18V200 DG IS USD 3,00,000 AND WITH COST OF SPARE PARTS AND OTHER LEVIES. THE TOTAL INVOICE VALUE WAS USD 7,09,593 EQUIVALENT TO 3,72,81,428/ - . THE DESCRIPTION OF PRODUCTS SOLD WAS R&D 12V200 ENGINE ON SKID AND R&D 18V200 DG ON SKID. THE ASSESSEE HAS CLAIMED THE SAID PAYMENT AS DEDUCTIBLE BE ING THE EXPENDITURE INCURRED ON R&D. HOWEVER, THE AUTHORITIES BELOW HAVE HELD THE SAID PAYMENT TO BE ROYALTY PAID TO LICENSOR AS PER TECHNOLOGY LICENSE AGREEMENT ENTERED INTO BETWEEN THE PARTIES. ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 19 30 . THE QUESTION WHICH ARISES IS WHETHER IT IS MERE CASE OF PURCHASE OF EQUIPMENT FOR R&D PROJECTS OR THE PAYMENT IS IN THE FORM OF ROYALTY PAID BY THE ASSESSEE, LICENSEE TO THE LICENSOR. THE CIT(A) HAS REPRODUCED THE RELEVANT PARTS OF TERMS OF TECHNOLOGY LICENSE AGREEMENT AT PAGES 28 TO 35 OF APPELLATE ORDER. WE HAVE ALREADY REFERRED TO THE TERMS AGREED UPON BETWEEN THE PARTIES. 31 . NOW, WE HAVE TO LOOK INTO THE TERMS WHICH HAVE BEEN AGREED UPON BETWEEN THE PARTIES, FOR WHICH, FIRST WE MUST REFER TO THE MEMORANDUM OF UNDERSTANDING BETWEEN THE PARTIES. ADMIT TEDLY, WED HAD AGREED TO LICENSE THE ASSESSEE THE USE OF W200/220 TECHNOLOGY FOR THE PURPOSE OF MANUFACTURING AND SELLING W200/220 ENGINES AND THEIR RESPECTIVE PARTS IN THE DEFINED TERRITORY. THE OWNERSHIP OF THE SAID RIGHTS INCLUDING ALL TECHNOLOGY, DESI GN, TECHNICAL DATA, IP RIGHTS, ETC. BELONGS TO AND RESTED WITH WED. THE TECHNOLOGY WAS ALREADY WITH WED , WHICH WAS SHARED WITH THE ASSESSEE IN ORDER TO ENABLE IT TO MANUFACTURE AND SELL W200/220 ENGINES. IN THE CASE OF DEVELOPING MARKET, IT IS AN ENDEAVO UR OF EACH MANUFAC TURER TO KEEP ON DEVELOPING ITS PRODUCT BY WAY OF UPGRADES / IMPROVEMENTS. UNDOUBTEDLY, AS PER MOU, WED WAS TO PROVIDE ASSESSEE WITH ACCESS TO IMPROVEMENTS AND UPGRADES OF W200/220 PRODUCTS AND ALSO TO PROVIDE TECHNICAL SUPPORT. FOR SUCH TECHNOLOGY TRANS FER, THERE WAS AN AGREEMENT FOR PAYMENT OF ROYALTY FEES, WHICH HAS BEEN PAID BY THE ASSESSEE AND THERE IS NO DISPUTE VIS - - VIS THE SAME. HOWEVER, IN ADDITION, THERE WAS AN UNDERSTANDING BETWEEN THE PARTIES WHICH IS CLEAR FROM THE TECHNOLOGY LICENSE AGREEM ENT DATED 24.05.2007 THAT THOUGH THE INTELLECTUAL PROPERTY RIGHTS RELATING TO W200 PRODUCTS WERE OWNED, SOLELY AND EXCLUSIVELY BY THE LICENSOR , BUT THERE WAS AN UNDERSTANDING THAT THE LICENSEE WOULD IMPROVE W200 PRODUCTS AND SUCH TECHNOLOGY OF THE IMPROVEM ENTS MADE SOLELY BY THE LICENSEE I.E. ASSESSEE , TO W200 PRODUCTS TECHNOLOGY , WOULD BE ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 20 OWNED BY LICENSEE. UNDOUBTEDLY, SUCH IMPROVEMENTS IN THE TECHNOLOGY HAD TO BE SHARED BETWEEN THE PARTIES IN ORDER TO MAINTAIN STANDARDS OF PRODUCT WORLDWIDE. THE ASSESS EE IN ORDER TO DISCHARGE ITS OBLIGATION OF IMPROVEMENT OF W200 PRODUCT TECHNOLOGY HAD PURCHASED TWO R&D UNITS + SPARE PARTS I.E. ONE 12V200 BARE ENGINE AND ONE 18V200 GENSET. THE SAID PRODUCTS WERE FOR CARRYING OUT R&D OF W200 PRODUCTS TECHNOLOGY. SO, IN ORDER TO ENABLE IT TO IMPROVE TECHNOLOGY OF THE PRODUCTS , IT HAD PURCHASED THE PRODUCTS AND SUCH EXPENDITURE CANNOT BE EQUATED WITH THE PAYMENT OF ROYALTY. WE HAVE ALREADY REFERRED IN THE PARAS HEREINABOVE THAT IN RESPECT OF OTHER ENGINES I.E. W220 PRODU CTS, PROPRIETARY RIGHTS WERE WITH WED AND THOSE RIGHTS WERE NOT TRANSFERRED AND IT WAS ALSO AGREED THAT ALL SUBSEQUENT DEVELOPMENTS IN W220 TERRITORY BY EITHER PARTY WOULD BE WITH WED. 32. WHEN THE ASSESSEE HAS PURCHASED A PRODUCT IN ORDER TO CARRY OUT IMPROVEMENTS IN ITS TECHNOLOGY FOR FUTURE DEVELOPMENT AND ITS SALES THEREAFTER, THEN SUCH PURCHASES CANNOT BE SAID TO BE PAYMENT OF ROYALTY. IT MAY BE POINTED OUT THAT ADDITIONAL PURCHASE OBLIGATION FOR R&D UNITS WAS THOUGH AS PER TERMS OF TECHNOLOGY TRAN SFER AGREEMENT BUT ITS PROCUREMENT COULD NOT BE HELD TO BE PAYMENT OF ROYALTY TO WED. THE GRANT OF LICENSE TO USE EXISTING TECHNOLOGY FOR THE MANUFACTURE OF W200 AND 220 ENGINES BY THE ASSESSEE IS AN INDEPENDENT ACTIVITY AND THE TERMS OF AGREEMENT FOR PAY MENT OF ROYALTY ARE IN THAT REGARD OR FOR THE SAME. THE PURCHASE OF TWO R&D UNITS THOUGH EMANATES FROM THE SAME AGREEMENT CANNOT BE HELD TO BE PAYMENT OF ROYALTY . WE MAY REFER TO THE DEFINITION OF ROYALTY UNDER SECTION 9(1)(VI) OF THE ACT IN THIS REG ARD, WHICH CLEARLY LAYS DOWN THAT THE PAYMENT SHOULD BE FOR USE OR USE OF ANY TECHNOLOGY. IN THE PRESENT CASE, THE PAYMENT IS MADE FOR PURCHASE OF EQUIPMENT FOR R&D PURPOSE . WE THUS, FIND NO MERIT IN THE ORDERS OF AUTHORITIES ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 21 BELOW IN HOLDING THAT THE AF ORESAID PAYMENT IS ROYALTY UNDER BOTH DOMESTIC INCOME TAX LAW AND ALSO UNDER THE TREATY BETWEEN INDIA AND USA. HENCE, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF ASSESSEE. 3 3 . BEFORE PARTING, WE MAY REFER TO THE RELIANCE PLACED UPON BY THE LEAR NED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON PARA 10.5 OF ORDER OF CIT(A) . W E HAVE ALREADY REFERRED TO THE TERMS OF AGREEMENT, WHICH HAVE BEEN REFERRED IN THE SAID PARA 10.5. FURTHER, HE HAS PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HONBLE HIG H COURT OF KARNATAKA IN CIT VS. SAMSUNG ELECTRONICS CO. LTD. (SUPRA), WHEREIN THE ISSUE WAS GRANT OF LICENSE TO MAKE USE OF SOFTWARE AND WHETHER THE SAME IS ROYALTY BOTH UNDER INCOME TAX AND DTAA. IN THIS REGARD, WE MAY REFER TO THE RECENT DECISION IN THE CASE OF JOHN DEERE INDIA PVT. LTD. VS DDIT (INTERNATIONAL TAXATION) IN ITA NOS.905 TO 908/PUN/2015, RELATING TO ASSESSMENT YEARS 2007 - 08 AND 2008 - 09, ORDER DATED 23.01.2019 , WHEREIN WE HAVE REFERRED TO THE RATIO LAID DOWN BY THE HONBLE HIGH COURT OF DELH I IN DIT VS. INFRASOFT LTD. (2013) 39 TAXMANN.COM 88 (DEL) AND ALSO THE PRO POSITION LAID DOWN BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT VS. SAMSUNG ELECTRONICS CO. LTD. (SUPRA) AND HAVE HELD THAT PAYMENT MADE FOR PURCHASE OF SOFTWARE IS NOT ROYALTY UNDER SECTION 9(1)(VI) OF THE ACT. THE GROUND OF APPEAL NO.3 RAISED BY ASSESSEE IS THUS, ALLOWED. THE GROUNDS OF APPEAL RAISED BY ASSESSEE ARE THUS, ALLOWED. 3 4 . NOW, COMING TO GROUNDS OF APPEAL RAISED BY REVENUE , FIRST ISSUE RAISED IS AGAINST DEPRECIATION ALLOWED ON WINDMILL IN RESPECT OF COST OF ALLIED CIVIL CONSTRUCTION, ERECTION AND COMMISSIONING AND WHETHER THE SAME WERE INTEGRAL PART OF WINDMILL. ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 22 3 5 . WE FIND THAT SIMILAR ISSUE AROSE BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN CROSS APPEA LS IN ITA NO.616/PUN/2014 AND 963/PUN/2014, RELATING TO ASSESSMENT YEAR 2007 - 08, ORDER DATED 12.02.2018. THE TRIBUNAL VIDE PARA 14 OF ORDER HAS HELD THAT THE DEPRECIATION ON WINDMILL IS TO BE ALLOWED EVEN ON THE COST LIKE ERECTION AND COMMISSIONING CHARGE S, ELECTRIC ITEMS, APPLICATION CHARGES, ETC. WHICH ARE CAPITALIZED TO WINDMILL. FOLLOWING THE SAME PARITY OF REASONING, WE DISMISS THE GROUND OF APPEAL NO.1 RAISED BY REVENUE. 3 6 . NOW, COMING TO SECOND ISSUE RAISED BY THE REVENUE I.E. DEPRECIATION ON PRI NTERS, UPS AND OTHER ALLIED ITEMS @ 60% . 3 7 . WE HAVE PERUSED THE ORDERS OF AUTHORITIES BELOW, WHEREIN THE ASSESSING OFFICER WAS OF THE VIEW THAT PRINTERS, UPS AND OTHER ALLIED ITEMS WERE NOT ELIGIBLE FOR DEDUCTION @ 60% I.E. RATE APPLICABLE TO COMPUTERS. HOWEVER, THE CIT(A) HAS ALLOWED THE CLAIM OF ASSESSEE. THE ISSUE STANDS SETTLED BY VARIOUS DECISIONS OF TRIBUNAL THAT THE ASSESSEE IS ENTITLED TO HIGHER CLAIM OF DEPRECIATION AT 60% ON PRINTERS, UPS AND OTHER ALLIED ITEMS AS IN THE CASE OF COMPUTERS. CO NSEQUENTLY, THERE IS NO MERIT IN THE PLEA OF REVENUE AND THE GROUND OF APPEAL NO.2 RAISED BY REVENUE IS THUS, DISMISSED. 3 8 . NOW, COMING TO GROUND OF APPEAL NO.3 RAISED BY REVENUE, WHICH IS AGAINST COMMISSION PAID TO DIRECTORS AT 46 LAKHS BY INVOKING PR OVISIONS OF SECTION 40A(2) OF THE ACT. 3 9 . IT IS THE CASE OF ASSESSEE THAT THE ISSUE STANDS COVERED BY THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE IN EARLIER YEARS. ITA NO. 918 /P U N/20 1 4 ITA NO.1 153 /PUN/201 4 23 40 . WE REFER TO THE ORDER OF TRIBUNAL DATED 12.02.2018 RELATING TO ASSESSMENT YEAR 200 7 - 08, WHEREIN VIDE PARA 25 AT PAGES 19 AND 20, THE TRIBUNAL HAS ALLOWED THE PAYMENT OF COMMISSION , REJECTING THE PLEA OF ASSESSING OFFICER THAT IT IS EXCESSIVE PAYMENT, IN VIEW OF PROVISIONS OF SECTION 40A(2) OF THE ACT. FOLLOWING THE SAME PARITY OF REASO NING, WE FIND NO MERIT IN THE GROUND OF APPEAL NO.3 RAISED BY REVENUE AND THE SAME IS DISMISSED. THE GROUNDS OF APPEAL RAISED BY REVENUE ARE THUS, DISMISSED. 41 . IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALLOWED AND THE APPEAL OF REVENUE IS DISMISS ED. ORDER PRONOUNCED ON THIS 29 TH DAY OF MARCH , 201 9 . SD/ - SD/ - (ANIL CHATURVEDI) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 29 TH MARCH , 201 9 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT ; 2. / THE RESPONDENT; 3. ( ) / THE CIT(A) - 1 , AURANGABAD ; 4. THE PR. CIT - 1 , AURANGABAD ; 5. 6. , , / DR A , ITAT, PUNE ; / GUARD FILE . / BY ORDER , // TRUE COPY // / SR. PRIVATE SE CRETARY , / ITAT, PUNE