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Facts
The assessee appealed against the orders of the CIT(A) which deleted disallowances made by the AO. The key issues involved disallowance of technical know-how fees, expenses related to a captive power plant, and disallowance under Section 14A. The Revenue is in appeal against the deletions.
Held
The Tribunal held that the technical know-how fee paid to JDIL was a legitimate business expense and the disallowance by the AO was based on a change of opinion. The expenses related to the captive power plant were substantiated. For Section 14A, the Tribunal agreed with the CIT(A) that disallowance should only be on investments yielding exempt income, aligning with High Court decisions.
Key Issues
Whether the technical know-how fees and power/fuel expenses were genuinely incurred for business purposes, and whether the disallowance under Section 14A was correctly restricted to investments yielding exempt income.
Sections Cited
37(1), 143(3), 144B, 14A, 8D(2)(iii), 8D(i)
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Income Tax Appellate Tribunal, DELHI BENCHES: C : NEW DELHI
Before: SHRI S. RIFAUR RAHMAN & SHRI ANUBHAV SHARMA
ORDER PER ANUBHAV SHARMA, JM: These are appeals preferred by the assessee against the orders dated 16.10.2023 and 17.10.2023 of the Commissioner of Income-tax (Appeals)-27, New Delhi (hereinafter referred to as the Ld. First Appellate Authority or ‘the Ld. FAA’, for short) in Appeals No.CIT(A), Delhi-5/10315/2019-20 and NFAC/2017-18/10089095 arising out of the appeals before it against the orders dated 27.12.2019 and 27.09.2021 passed u/s 143(3) and 143(3) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the DCIT, Circle-13(2), New Delhi and NFeAC (hereinafter referred to as the Ld. AO), respectively.
Heard and perused the records. The assessee company is engaged in the business of manufacturing of ERW, black and galvanized steel pipes and tubes in different thickness conforming to the various national and international standards. In the relevant years before this Bench, the assessee’s returns were selected for scrutiny leading to certain disallowances which have been deleted by the ld.CIT(A) for which the Revenue is in appeal. The cases were heard together as they have common questions involved and wherever needed, facts for AY 2016-17 in shall be reproduced and considered.
The first issue arises out of disallowance on account of technical know- how fee paid to M/s Jindal Drilling and Industries Ltd. (JDIL) by invoking section 37(1) of the Act and the issue pertains to AY 2016-17. During the assessment proceedings, the AO had called for various information which were supplied by the assessee and, as per the assessee, it has placed bids with ONGC and as per the bid requirement, the assessee was required to have three years of experience in jack up rig drilling activities. Since the assessee did not have such experience, so, the assessee entered into technical collaboration agreement with M/s JDIL who had vast experience in the field of offshore jack up rig drilling operations for the purpose of placing bids with ONGC and rendering services to 2 ONGC upon awarding of contracts. All the necessary documents in regard to this agreement were filed before the AO. However, the AO concluded that the assessee has failed to furnish any proof of receiving services of technical persons of rig managers/rig superintendent of M/s JDIL and, accordingly, the addition of Rs.4,08,81,700/- was made.
In the appellate proceedings before the CIT(A), the assessee re-asserted the claim that in terms of agreement with JDIL, only rig manager/rig superintendent and assistance in operation and maintenance were provided by M/s JDIL and no equipment was provided by JDIL to assessee during the year under consideration. The assessee was only charged by JDIL @ $850 per day for providing rig manager/rig superintendent and providing assistance in operation and maintenance and the invoices issued by the assessee were accepted by ONGC and this establishes the rendering of services as received by the assessee from JDIL. It was submitted that the Rig Division of the assessee has reported a profit of Rs.24.03 crore during AY 2016-17 and incurred expenses of Rs.4.08 crore on technical services obtained from JDIL which shows that the assessee company was able to generate additional profit by providing drilling services.
We find that the ld. CIT(A) analysed the nature of the services rendered by the assessee, highlighting the acceptance of invoices by ONGC and the corresponding technical know-how fee tax deductions. These deductions were substantiated by the requisite documentation, such as the submission of Form 16A and other evidences that validated the actual rendering of services. Moreover, the CIT (A) highlighted that the services had been accepted and utilized by ONGC, who duly made payments to the assessee for the same. The ld. CIT(A) also noted the deduction of TDS on the payments made for technical services rendered, as evidenced by the quarter-wise Form 16A issued to JDIL, which conclusively demonstrated that the fees paid by the assessee were for legitimate services provided. This highlights the assessee’s stance that all payments were appropriately documented and in accordance with the tax provisions. The ld. CIT(A) further observed that the Rig division of the assessee company reported a profit of R. 24.03 crore during AY 2016-17, while incurring an expense of R4.08 crore on technical services obtained from JDIL. This highlights that the technical services procured contributed directly to the assessee’s ability to provide drilling services and generate additional profit. The ld. CIT(A) further confirmed that the incurred expenditure was essential for enhancing the company's operational capacity, and thus, the expense is fully justified in light of the division's profitability. Further there is substance in the contention of ld. Counsel, that the disallowance of the technical know-how fees has resulted in the same income being taxed twice, once as an expense in the hands of the assessee and again as income in the hands of M/s JDIL. The technical know-how fees paid or payable by the assessee company to JDIL is a legitimate business expense for the assessee, while it is recognized as income 4 for JDIL. The ld. CIT(A), in its order righlty observed that both the assessee and JDIL fall within the same tax bracket under the provisions of the Income Act, therefore, no additional benefit has accrued to either the assessee company or JDIL from the transaction.
Even otherwise, the genuineness of the expense on technical services obtained from JDIL had been accepted by the Assessing Officer during the assessment proceedings for AY 2013-14, AY 2014-15, and AY 2015-16. No additions with respect to the technical fees were made to the income of the assessee for these years, as is evident from the assessment orders placed in the paper book at pages 91-98, 99-109, and 110-117 respectively. Further, the Assessing Officer disallowed the technical know-how fees without pointing out any specific discrepancies or bringing forward any new material facts to warrant such a disallowance. This clearly shows that the disallowance was made merely on account of a change of opinion, which is contrary to the Doctrine of Principle of Consistency as upheld in various judicial pronouncements. Thus the grounds raised
this issue need not interference.
7. The second issue arises out of the disallowances made on account of power and fuel expenses claimed by the assessee. The issue is common for both the years. The assessee company during the years had incurred power and fuel expenses of Rs.12,79,82,440 in AY 2016-17 and Rs.11,42,04,999/- for AY 2018-19 through its 5 MW captive power plant which was installed at 22 Milestone, Delhi-Hapur Road, P.O. Jindal Nagar, Ghaziabad for the purpose of 5 utilization of generated electricity at its manufacturing plants located at the same address. During the assessment proceedings, the AO, on the basis of segmental information of primary segments reported in financial statements observed that Power-Electricity Division was showing losses of Rs.12,79,82,440/- in AY 2016-17 and, accordingly, required the assessee to submit segregated balance sheet and P&L Account for this segment and to establish that the power has actually been supplied. The necessary evidences were filed. It was submitted that there are no separate segment of Power and Electricity division as the segment was not generating any revenue from selling of electricity. That it is only the requirement of auditor to show Power Electricity Division as a separate segment in the financial statements.
The ld.CIT(A) has appreciated that no revenue was generated from these reported segments and the electricity generated was used for manufacturing activities on assessee’s plants only. More so, the necessity arose out of the fact that the captive power plant based on bio mass and major fuel uses rice husk which is considered to be an environment friendly fuel and practically there is no emissions when compared with conventional fuel. The ld. CIT(A) has also appreciated that the captive power plant was established in 2011 and before that the assessee procured electricity supply from UP Electricity Board. However, before FY 2015-16 the AO has never doubted the genuineness of power and fuel expenses as evident from the copies of assessment orders for AYs 2013-14, 2014-15 and 2015-16 relied before us. 6 Thus, there was no substance in the conclusion of the AO that the assessee has failed to establish that captive power plant has actually generated and supplied powers for the manufacturing activities of the assessee and the ld.CIT(A) has rightly deleted the addition. Accordingly, the issue with corresponding grounds, in both the years, deserve to be allowed.
The third issue is disallowance u/s 14A of the Act pertaining to AY 2018-19. The AO made a disallowance of Rs.1,35,01,735/- by taking 1% of the total average investment irrespective of the fact that whether any exempt income has been received from such investment during the year or not. The ld. CIT(A) has restricted the addition to 1% of the average investment in respect of the investments which have earned exempt income during the year. The ld. counsel has pointed out that during the year the assessee had received rent from agricultural land of Rs.7 lakhs and against this, the assessee had disallowed Rs.4,245/- being expenses incurred in relation to this exempt income from agricultural land and declared Rs.69,57,550/- net exempt income. The total investment in the agricultural land is of Rs.29,42,500/-. The ld.CIT(A) has taken this investment as the base and 1% of the same has been disallowed which comes to Rs.2,94,250/-. The law in this regard is no more res integra and the Hon’ble Delhi High Court in the case of ACB India Ltd. vs. ACIT, ITA 615/2014 and Cargo Motors Pvt. Ltd. vs. DCIT (2022) 10 TMI 571, vide order dated 07.10.2022 has held that it is not all investment, but only that which is expressly spelt out in Rule 8D(2)(iii) r.w.s. 14A and Rule 8D(i) which is to be 7 reckoned for the purpose of calculation of average of half percent. The ld. CIT(A) has merely directed the AO to apply the correct ratio of the jurisdictional High Court decisions and only investment yielding exempt income have to be considered for the purpose of Rule 8D. We find no substance in the ground of challenge of the Revenue. The same is accordingly decided against the Revenue.
In the light of the aforesaid discussions, there is no substance in the grounds as raised. The appeals of the Revenue are dismissed.