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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-9, Mumbai, [in short CIT(A)] in appeal No. CIT(A)-21/Cir.4/375/2014-15 dated 31.12.2015. The Assessment was framed by the Addl.CIT, Range-4(2), Mumbai (in short Addl.CIT/ AO) for the assessment year 2012-13 order dated 19.02.2015 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).
The first issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of expenses relatable to exempt income added by the AO by invoking the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (hereinafter ‘the Rules’). For this assessee has raised the following ground: -
“1. (i) The ld. CIT(Appeals) erred in confirming the action of Addl.CIT of making addition of ₹ 21,56,695/- under section. 14A read with Rule 8D.
(ii) Without prejudice, the Ld. CIT (Appeals) further erred in confirming the action of Addl. CIT of including stock in trade along with investment for the purpose of calculation of disallowance under section 14A read with Rule 8D.
(iii) Without prejudice, the Ld. CIT(A) also erred in confirming the action of addl. CIT of including debenture along with investment for the purpose of calculation of disallowance under section 14A read with Rule 8D."
Briefly stated facts are that during the course of assessment proceedings, the AO noticed from the balance sheet of the assessee that it has invested a sum of ₹ 19,95,22,277/- in the equity shares. The AO noticed from the profit and loss account that the assessee has earned dividend income from investment in equity shares at ₹ 24,14,433/- and claimed the same as exempt under section 10(34) of the Act in the computation of income. The AO also noticed from the computation of income and Form No. 3CD that the assessee company has disallowed a sum of ₹ 2,50,839/- under section 14A of the Act. The AO after discussing the provisions of section 14A of the Act read with section 8D of the Rules and the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Limited Vs. DCIT (2010) 328 ITR 81 (Bom), made further disallowance under Rule 8D2(iii) being average value of investment equally to 1½ percent at ₹ 21,56,695/- apart from the expenditure already disallowed by assessee at ₹ 2,50,839/-. The AO made gross disallowance at Rs. 24,07,534/- but reduced the suo moto disallowance of ₹ 2,50,839/- and disallowance was restricted at ₹ 21,56,695/-. Aggrieved, assessee preferred the appeal before CIT(A). CIT(A) also confirmed the action of the Assessing Officer.
Before us, the learned Counsel for the assessee first of all took us through the assessment order and the order of CIT(A) and argued that no satisfaction is recorded by the AO as to how the for suo motto disallowance made by assessee amounting to ₹ 2,50,839/- is incoorect. The learned Counsel for the assessee referred to the scientific disallowance made by assessee and the relevant reads as under: -
“Amount of deduction inadmissible in terms of section 14A in respect of expenditure incurred in relation to income which do not form part of the total income a) i. Dividend income of Rs. 24,14,433/- does not form part of total income. ii) The dividend is directly credited to our bank account or dividend warrants are generally encashable par in Mumbai and there is no major expenditure relating to dividend earned. b) As on 1st April 2011 the Company's own paid up capital is Rs 3,51,00000/- and Reserves of Rs 1,094,276,090/- out of which investments are made. Further there are no borrowings as the Company has surplus fund for its investments The investments are made out of Share Capital and Reserves d) However expenditure incurred to earn tax free income is estimated at Rs 2,50,839/- which is disallowed u/s. 14A is worked out as under.
Particulars Amount Amount i. Depository charges 1106 ii. 50% of Expenses incurred by staff who is attending job related to investments
Salary +PF 373478 Telephone Exposes 5266 ii.2.5% of dividend income 60361 Amount disallowed under section `14A 250839
The learned Counsel for the assessee relied on the recent decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT [2018] 402 ITR 640 (SC), for the proposition that recording of satisfaction is necessary having reference to the accounts of the assessee that suo moto disallowance under section 14A by the assessee is incorrect. On the other hand, the learned sr. Departmental Representative, relied on the orders of the lower authorities.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the assessee has made scientific computation for disallowance under section 14A of the Act read with Rule 8D i.e. administrative expenses and direct expenses at ₹ 2,50,839/-. We find from the assessment order that there is no finding as to how the computation of disallowance of expenses relatable to exempt income is wrong or incorrect. We have gone through the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. (supra) and find that the Supreme Court recorded the following finding: -
“41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/ making the investment in shares is to be examined by the AO.”
In view of the above facts and respectfully following the Supreme Court, we are of the view that in the present case, the AO has not recorded any satisfaction as to why the disallowance made by assessee suo moto is incorrect. Accordingly, we delete the disallowance and allow the appeal of the assessee. However, the disallowance will be restricted to the extent of ₹ 2,50,839/-. This issue of assessee’s appeal is allowed.
The next issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of expenses claimed on account of amount paid to FACTSET Research Systems Inc. in foreign country, USA expenses amounting to ₹ 4,03,640. For this AO has invoked the provisions of section 195 read with section 9 and 40a(i) of the Act. For this assessee has raised the following ground No. 2:-
“The Ld. CIT(Appeals) erred in confirming the addition made by Ld. Addl. CIT of ₹ 4,03,640/- under section 9 read with section 195 with Rule 8D."
Briefly stated facts are that the AO noticed that the assessee has made payment of ₹ 4,03,640/- to FACTSET Research Systems Inc. in foreign country, USA under head and claim the same as expenditure under the head of business information expenses. The AO noticed that the payments of business information expenses is towards subscription charge for on line data basis rendered by the said company and according to AO the assessee company has not deducted any tax on such payments. According to AO, the provision of section 40a(i) of the Act read with section 9 and 195 of the Act are attracted and these payments falls under Fee For Technical Services (FTS). Aggrieved, assessee preferred the appeal before CIT(A) and the CIT(A) also confirmed the action of the Assessing Officer. Aggrieved, now is in second appeal before us.
Before us, the learned Counsel for the assessee filed copy of order of Authority for Advance Ruling in the case of supplier party i.e. FACTSET Research Systems Inc., In re, (AAR) (2009) 317 ITR 169 (AAR) wherein, the same payments are not held to be royalty and hence, this cannot be FTS. The AAR held as under (from head notes):-
“Held, (i) No proprietary right and no exclusive right, which the applicant has, has been made over to the customer. The copyright or the proprietary rights over the 'literary work' remains intact with the applicant, notwithstanding the fact that the right to view and make use of the data for internal purposes of the customer is conferred. The copyright of the applicant has not been assigned or otherwise transferred so as to enable the subscriber to have certain exclusive rights over the applicant's works as contemplated by section 14(a) of Copyright Act 1957. Nor was any right of “adaption” of the work within the meaning of section 2(a) of the Copyright Act conferred. The subscription fees received by the applicant from the licensee (user of the database) did not fall within the scope of clause (v) of Explanation 2 to section 9(1)(vi) of the Act dealing with ´royalty’.
(ii) That the applicant's subscriber getting access to the database for his own internal purpose did not fall within the expression “the use of or right to use any copyright of a literary or scientific work" in article 12 of the Double Taxation Avoidance Agreement between India and the U. S. A. (DTAA). The expression "use" of copyright was not used in a generic or general sense of having access to a copyright work. The emphasis in article 12 was on the "use of copyright or the right to use it". In other words, if any of the exclusive rights which the owner of the copyright (the applicant) had in the database were made over to the customer/subscriber so that he could enjoy such rights either permanently or for a fixed duration of time and make a business out of it, then it would fall within the ambit of the phrase "use or right to the copyright". In this case, the underlying copyright behind the database could not be said to have been conveyed to the licensee who made use of the copyrighted product. DIM and Nradstreet Espana. S.A. (2005) 272 ITR 99 (AAR) relied on.
(iii) That the DTAA in article 12(3) spoke of payment received for "information concerning industrial, commercial or scientific experience". The applicant did not share the experiences, the techniques or methodology employed in evolving the database with the subscribers.
(iv) That, therefore, the income by way of subscription fees was not in the nature of "royalty".
(v) That, on the facts, the existence of a "permanent establishment" in India was ruled out. But the applicant should have furnished better particulars with supporting documents to explain the role of the Mumbai office maintained by the applicant's group subsidiary. The statement of the applicant that it had no permanent establishment in India had to be accepted, but it was open to the Department to make necessary enquiry on the point.
(vi) That the customers of the applicant were not required to withhold the tax until and unless the Department found the existence of a "permanent establishment" of the applicant in India.
(vii) That there was no obligation to file a return of income on the finding of the Authority that there was no royalty income and, on the facts stated by the applicant, that there was no permanent establishment in India."
The learned Counsel for the assessee also relied on the decision of Hon’ble Karnataka High Court in the case of CIT vs. DE Beers India Minerals P. Ltd. (2012) 346 ITR 647 (Karn), wherein the definition for fee for technical services is discussed and held that the consideration paid for transfer of right in any intellectual property or for rendering of any services which are managerial technical or consultancy services, the liabilities to tax is attracted but the technical or consultancy service rendered should be aim at and result in transmitting technical knowledge etc. so that the benefit of the services could be derived by the assessee on the basis of enduring benefit and utilized the knowledge or knowhow on his own in future without the aid of the service provider. In other words, the technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending upon the provider. Technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service. Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as 'fee for technical/included services' only if the twin-test of rendering services and making technical knowledge available at the same time is satisfied. On the other hand, the learned Sr. Departmental Representative heavily relied on the assessment order and the order of the CIT(A).
We have heard the parties and after going through the facts of the case, we are of the view that the payment made by assessee to FACTSET Research Systems Inc. is for simply providing of service and no technology is transfer to assessee. It is a payment for annual basis and each year separate payment is to be made for availing these services. Accordingly, this issue of assessee’s appeal is allowed.
The next issue in this appeal of assessee is against the order of CIT(A) confirming the addition made by AO of mismatch in AIR data amounting to ₹ 54,240/-. For this assessee has raised the following ground No. 3: -
“3. The ld. CIT(Appeal) erred in confirming the addition made of ₹ 57,240/- by Ld. Addl. CIT in respect of mismatch of AIR India."
We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the assessment order that the assessee before AO filed a complete details of reconciliation but only entries relating to an amount of ₹ 29,007/- and ₹ 28,170/- totaling amounting to ₹ 57,240/- was not matched and assessee categorically submitted that these transactions do not pertain to them. But subsequently, offered this amount to be taxed due to smallness of amount. The CIT(A) also confirmed the action of the Assessing Officer.
We have gone through the facts in entirety and find that the assessee himself has offered these amounts for tax as noted by the AO and this finding is not controverted by the assessee before us. Accordingly, we confirm this addition. This issue of assessee’s appeal is dismissed.
In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 30-07-2018.