ITAT deletes transfer pricing royalty adjustment, disallowances

ITAT deletes transfer pricing royalty adjustment, disallowances under section 14A and section 40(a)(i), remanding other issues.

Issue

Whether transfer pricing adjustments on royalty and commission, capital gains indexation, section 54G additional exemption claims, overseas commission withholding taxes, and section 14A disallowance are sustainable.

Facts

Royalty TP Adjustment (AY 2012-13 & 2013-14): Assessee paid an 8% royalty on exports to its foreign AE under an aggregated TNMM. The TPO unbundled the transaction and applied a 5% domestic rate as an internal CUP to propose an upward adjustment.
Commission TP Adjustment (AY 2012-13 & 2013-14): Assessee paid marketing commission to AEs benchmarked under TNMM. The TPO applied CUP using agreements from the KMine database without establishing comparability.
Capital Gains Indexation & Transfer Expenses (AY 2012-13): The AO restricted cost indexation based on the registration year (FY 2002-03) instead of holding year (FY 2001-02) and restricted deduction for transfer expenses.
Section 54G Additional Exemption (AY 2012-13): Assessee made an additional claim during assessment for section 54G exemption regarding plant and machinery investments following industrial relocation, which the AO rejected for lack of a revised return.
Non-Resident Commission Withholding Tax (AY 2013-14): AO disallowed commission payments to non-resident agents under section 40(a)(i) for non-deduction of tax under section 195.
Section 14A Disallowance (AY 2013-14): AO invoked section 14A read with Rule 8D to disallow expenditure related to exempt income without recording objective satisfaction and despite the assessee having sufficient interest-free own funds.

Decision

Royalty TP Adjustment: In favor of Assessee. Royalty is intrinsically linked to manufacturing; adoption of a domestic rate as an internal CUP without establishing a reliable CUP was improper. Adjustment deleted.
Commission TP Adjustment: Remanded to TPO. TPO failed to bring evidence that KMine database agreements represented uncontrolled comparable transactions.
Capital Gains Indexation & Transfer Expenses: Remanded to AO. Adoption of FY 2002-03 based on registration date was justified, but AO was directed to verify and allocate common transfer expenses.
Section 54G Exemption: Remanded to AO. Procedural rejection was invalid as details were already on record; AO must verify substantive compliance for plant and machinery investments.
Commission to Non-Resident Agents: In favor of Assessee. Commission paid for services rendered outside India by non-residents without a business connection/PE in India is not taxable in India; no TDS under section 195 required.
Section 14A Disallowance: In favor of Assessee. Interest disallowance deleted as own funds exceeded investments (presumption applies) and AO failed to record proper statutory satisfaction under section 14A(2).

Key Takeaways

Intrinsically Linked Transactions: Royalty payments closely integrated with manufacturing activities cannot be arbitrarily separated to apply an unreliable internal CUP where TNMM is appropriate on an aggregate basis.
Non-Resident Agent Commission: Payment to foreign agents performing services abroad without a business connection or PE in India carries no Indian tax liability, exempting it from TDS under section 195.
Sufficiency of Own Funds Presumption: Where interest-free own funds exceed tax-exempt investments, courts presume investments were made from own funds, precluding interest disallowance under section 14A absent contrary proof by the Revenue.
Procedural Flexibility for Bona Fide Claims: Additional exemption claims (such as under section 54G) supported by existing record data during assessment should not be dismissed purely for lack of a formal revised return.

IN THE ITAT AHMEDABAD BENCH ‘D’

Kloeckner Desma Machinery (P.) Ltd.

Deputy Commissioner of Income-tax

Dr. B.R.R. Kumar, Vice President
and Ms. Suchitra Kmble, Judicial Member

IT Appeal (TP) Nos. 555, 2579 & 2322 (Ahd.) of 2017
[Assessment years 2012-13 and 2013-14]

JULY 17, 2026

S.N. Soparkar, Sr. Adv. for the Appellant. Sher Singh, CIT- DR for the Respondent.

ORDER

Dr. B.R.R. Kumar, Vice-President. – The present batch of appeals comprises one appeal filed by the assessee for AY 2012-13 and cross appeals filed by the assessee and the Revenue for AY 2013-14. ITA (TP) No. 555/Ahd/2017 has been preferred by the assessee against the final assessment order passed under section 143(3) read with sections 144C(13) and 92CA of the Income-tax Act, 1961 (“the Act”), pursuant to the directions issued by the Dispute Resolution Panel (“DRP”), for AY 2012-13. ITA No. 2579/Ahd/2017 has been filed by the assessee, whereas ITA No. 2322/Ahd/2017 has been filed by the Revenue, both arising out of the assessment order passed under section 143(3) read with section 144C(13) of the Act pursuant to the directions of the DRP for AY 2013-14.

2. Since the issues involved in all the appeals arise out of substantially common facts, particularly the transfer pricing adjustments relating to royalty and commission payments and common arguments were advanced by both the parties, these appeals were heard together and are being disposed of by this consolidated order for the sake of convenience and to avoid repetition of facts.

ITA(TP) No. 555/Ahd/2017 for AY 2012-13 (Assessee’s appeal)

3. The assessee has raised following grounds of appeal:-

“1. The Assessing Officer and DRP erred in making the following additions to the returned income:

(i)

Rs.86,96,257/- consisting of Rs.19,18,458/- by way of upward adjustment to royalty payment and Rs.67,77,799/- by way of upward adjustment to commission payment as made by DRP.

(ii)

Long Term Capital Gain of Rs.67,51,959/- in place of Rs.61,64,036/-declared by the Appellant, thus making upward adjustment of Rs.5,87,923/-

(iii)

Without prejudice to Grounds (ii) above the Assessing Officer and DRP ought to have held that assessee will be entitled to depreciation on addition of building resulting from apportionment of cost of transfer to building.

2. The Assessing Officer and DRP erred in rejecting on hyper technical ground, the claim of the assessee u/s.54G that it has invested the capital gain of Rs.67,89,051/- into plant and machinery, and therefore, the assessee will be entitled to the further deduction from the computation of the capital gain of said Rs.67,89,051/- in addition to Rs.63,14,662/- granted by the Assessing Officer and DRP for investment in land.

3. The Commissioner of Rs.14,30,329/- was debited in this year but the entry was reversed in AY. 2016-17 and therefore the upward adjustment will get reduced to the above extent.”

4. For AY 2013-14, the assessee has raised following grounds of appeal:-

ITA No. 2579/Ahd/2017 for AY 2013-14 (Assessee’s Appeal)

“1. The Assessing Officer and DRP erred in making the following additions to the returned income:

(i)

Rs.19,67,641 by way of upward adjustment to royalty payment.

(ii)

Rs.37,07,151/- by way of upward adjustment to commission payment.

Without appreciating the facts as well as law.

2. The Learned DRP has further erred in rejecting the comparable produced by the appellant as additional evidence to justify the commissioner payment.”

5. The Revenue has taken following grounds of appeal in AY 2013-14:-

ITA No. 2322/Ahd/2017 for AY 2013-14 (Revenue’s Appeal)

1. The Ld. DRP has erred in law and on facts in deleting the disallowance u/s.40a(ia) of the IT Act on commission payments made to the Non-resident Agents solely relying on the decision of the Hon’ble Supreme Court in the case of CIT v. Toshuku Ltd. (1980) 125 ITR 525 (SC) which stands suprerseded by the amendment brought in IT Act.

1.1 The DRP has failed to appreciate that such payments are Chargeable to tax in India under provisions of Section 9(1)(vii) of the IT Act and also in respect of provisions of the DTAA between India and Germany/India & Thailand/India and Korea.

2. The Ld.DRP has erred in law and on facts in deleting the disallowance u/s.14A of the IT Act.

2.1 The Ld.DRP has failed to appreciate that the onus lies on the assessee to demonstrate that it had interest free funds available with it for making such investment and not other way round.

2.2 The Ld.DRP has failed to appreciate that as per Section 106 of Evidence Act, when any fact is especially within the knowledge of any person, the burden of proving the fact is upon him.”

6. The facts of the case, as culled out from the record for AY 2012-13, are that the assessee company, KloecknerDesma Machinery Private Limited, is a downstream subsidiary of Kloeckner Desma Elastomertechnik GmbH, Germany (‘KDE Germany’). The assessee company is engaged in manufacturing of vertical injection moulding machines with clamping forces up to 400 tons. It is also engaged in turnkey projects, produces moulds, and spares and provides after sales service support. For A.Y. 2012-13, the assessee filed its return declaring total income of Rs.11,46,98,279/-. The case was selected for scrutiny and reference under section 92CA(1) was made to the Transfer Pricing Officer (“TPO” for short). The TPO proposed transfer pricing adjustments aggregating to Rs.86,96,257/- comprising adjustment towards royalty payment of Rs.19,18,458/- and commission payment of Rs.67,77,799/-

7. The Assessing Officer thereafter passed a draft assessment order u/s 144C(1) incorporating the transfer pricing adjustment and further proposed addition on account of long-term capital gain and disallowance u/s 40(a)(i) of the Act. The assessee filed objections before the Ld. DRP. The Ld. DRP issued directions dated 29.11.2016 disposing of the objections raised by the assessee. Pursuant to the Ld. DRP’s directions, the Assessing Officer passed the final assessment order determining the total income at Rs.12,76,63,060/-.

8. Aggrieved by the additions/disallowances sustained in the final assessment order, the assessee has preferred the present appeal before the Tribunal.

AY: 2012-13

Ground No.1(i)

Issue No. 1 – Transfer Pricing adjustment on account of royalty payment -Rs.19,18,458/

9. The first grievance of the assessee relates to the adjustment made by the TPO and confirmed by the Ld. DRP in respect of payment of royalty to its Associated Enterprise.

9.1 The relevant facts relating to this are that the assessee had entered into an agreement with its Associated Enterprise, Kloeckner Desma Elastomertechnik GmbH, Germany, for use of technical know-how, technology and intellectual property rights in relation to manufacturing activities carried out by the assessee. The assessee benchmarked the international transaction of payment of royalty by adopting the Transactional Net Margin Method (“TNMM” for short) as the most appropriate method. According to the assessee, the royalty payment formed an integral part of its manufacturing operations and therefore the same was aggregated with other international transactions. The assessee submitted that the overall margins earned by the assessee were within the arm’s length range and accordingly no adjustment was warranted. The Ld. TPO rejected the approach adopted by the assessee and proceeded to benchmark the royalty transaction separately by applying the Comparable Uncontrolled Price (“CUP” for short) method.

9.2 The TPO observed that since there is no difference between technical know-how used for exploitation of domestic and export market, there is no need to pay royalty at differential rate for both the entities. Accordingly, the TPO adopted rate of royalty paid on domestic sales @ 5% as Comparable Uncontrolled Price (CUP) as against royalty paid @ 8% on export sales and computed adjustment of Rs. 19,18,458/-.

9.3 The DRP confirmed the action of the TPO and rejected the objections raised by the assessee.

9.4 Before us, the Ld. AR submitted that the authorities below were not justified in segregating the royalty transaction from the overall manufacturing activity of the assessee. It was submitted that the royalty payment enabled the assessee to manufacture high-quality machines using technical know-how received from the Associated Enterprise and therefore the transaction was closely linked with the manufacturing operations. The Ld. AR further submitted that the TPO had failed to appreciate the functional and economic relationship between the royalty payment and the overall business activity of the assessee. The Ld. AR argued that the domestic royalty agreement could not be considered as an appropriate CUP for export transactions since the markets, geographical conditions and commercial considerations were different.

9.5 The Ld. DR, on the other hand, supported the orders of the authorities below.

9.6 We have heard the rival contentions and perused the material available on record. It is an accepted principle under transfer pricing provisions that the most appropriate method has to be selected having regard to the nature of transaction, functions performed, assets employed and risks assumed by the parties. In the present case, the assessee is engaged in manufacturing specialized machinery using technical know-how provided by its Associated Enterprise. The payment of royalty is intrinsically connected with the manufacturing activity carried out by the assessee. The technology and know-how received from the AE enable the assessee to manufacture and sell the products. The assessee had benchmarked the international transactions on an aggregated basis under TNMM and demonstrated that the operating margins earned by it were at arm’s length. The TPO has rejected the aggregation approach merely on the basis that royalty was a separate transaction without establishing that reliable internal or external CUP was available. Further, the domestic royalty payment of 5% cannot automatically be considered as an appropriate CUP for export transactions since the commercial terms, geographical markets, volume of sales and business conditions may differ significantly.

In view of the above discussion, we are of the considered view that the TPO was not justified in applying CUP method by treating domestic royalty rate as benchmark for export royalty payments. Accordingly, the adjustment made on account of royalty payment amounting to Rs.19,18,458/- is directed to be deleted.

Ground raised by the assessee in this regard is accordingly allowed.

Issue No. 2 – Transfer Pricing adjustment on account of commission payment – Rs.67,77,799/-

10. The next grievance of the assessee relates to the upward adjustment of Rs.67,77,799/- made by the TPO in respect of commission paid to Associated Enterprises. (AE)

10.1 The facts relating to this issue are that during the year under consideration, the assessee had entered into international transactions relating to payment of commission to its AE for marketing and sales support services provided by them. The assessee benchmarked the transaction by adopting TNMM as the most appropriate method. According to the assessee, the commission transaction was closely connected with its overall business operations and the profitability earned by the assessee demonstrated that the transaction was at arm’s length. The assessee submitted before the TPO that the AE provided various services including identifying potential customers, providing market intelligence, assisting in negotiations, coordinating with customers and facilitating business development activities in overseas markets. The TPO, however, rejected the benchmarking approach adopted by the assessee and proceeded to benchmark the transaction independently by applying the CUP method. For this purpose, the TPO referred to agreements available in the KMine database and determined an arm’s length commission rate. Based on such analysis, the TPO determined that the assessee had paid excess commission and proposed an adjustment of Rs.67,77,799/-.

10.2 The DRP upheld the adjustment made by the TPO by observing that the benchmarking carried out by the TPO was scientific and in accordance with the Indian Transfer Pricing Regulations.

10.3 Before us, the Ld. AR submitted that the authorities below had erred in rejecting the aggregation approach adopted by the assessee. The Ld. AR submitted that the commission payment was an integral part of the assessee’s business model and was directly linked with sales generated by the assessee in foreign markets. The Ld. AR contended that the CUP method applied by the TPO was not appropriate since the alleged comparable agreements considered by the TPO were not functionally comparable with the assessee’s transactions. The Ld. AR also argued that the agreements relied upon by the TPO differed in terms of (i) geographical location of customers, (ii) nature and scope of services, (iii) responsibilities undertaken by the parties, (iv) market conditions and (v) commercial terms; and the Ld. AR also submitted that merely because certain agreements provided for a particular commission percentage, the same could not be treated as an uncontrolled comparable unless functional comparability was established.

10.4 We have carefully considered the rival submissions and perused the material available on record.

The issue before us is whether the commission transaction was appropriately benchmarked by the TPO by applying CUP method.

10.5 Transfer pricing provisions require determination of arm’s length price by adopting the most appropriate method having regard to the nature of the transaction and availability of reliable comparables. In the present case, the assessee had adopted TNMM at entity level and demonstrated that the overall margins earned by it were within the acceptable range. The assessee’s contention was that the commission expenditure formed part of the overall business operations and was incurred for earning revenue from overseas markets. The TPO rejected the aggregation approach and adopted CUP method based on agreements extracted from KMine database. However, the material placed before us does not demonstrate that the agreements considered by the TPO were comparable in terms of functions performed, risks assumed and commercial circumstances. A comparable under CUP method requires a high degree of similarity between the controlled and uncontrolled transactions. Minor differences in contractual obligations, market conditions or geographical factors may materially affect the commission rate. In the present case, the TPO has not brought any material on record to establish that the agreements relied upon represented uncontrolled transactions comparable with the assessee’s transaction.

10.6 Further, the DRP has merely approved the action of the TPO without examining whether the comparables satisfied the requirements of functional comparability. In view of the above, we are of the considered opinion that the matter requires reconsideration by the TPO. Accordingly, the issue relating to commission payment adjustment is restored to the file of the TPO/AO for fresh adjudication. The TPO shall examine the benchmarking adopted by the assessee under TNMM and also verify the comparables selected by him under CUP method after providing reasonable opportunity of being heard to the assessee.

Ground raised by the assessee in this regard is allowed for statistical purposes.

Ground No.1(i) is partly allowed.

Ground No. 1(ii)

Addition of Long-Term Capital Gain – Rs.67,51,959/- against declared LTCG of Rs.61,64,036/-

11. The assessee challenged the addition of Rs.5,87,923/- made by the Assessing Officer by recomputing long-term capital gain. The difference arose mainly due to:

(a)

adoption of different indexed cost of acquisition; and

(b)

restriction of cost of transfer expenses.

A. Indexed cost of acquisition : –

The assessee claimed indexation from Financial Year 2001-02, whereas the Assessing Officer adopted Financial Year 2002-03 considering the date of registration of conveyance deed. The DRP confirmed the action of the Assessing Officer. We find that the conveyance deed transferring the leasehold rights in favour of the assessee was registered on 26.08.2002 and the asset was capitalised in the books during Financial Year 2002-03. Accordingly, the adoption of Financial Year 2002-03 as the first year of holding for indexation purposes is justified. This part of the ground is dismissed.

B. Allocation of cost of transfer expenses :-

The assessee had claimed deduction of Rs.11,30,222/- towards expenses incurred for transfer of land and building. The Assessing Officer apportioned the expenses between land and building in the ratio of sale consideration and allowed only Rs.7,67,383/- towards land. The assessee contended that certain expenses were incurred exclusively for transfer of leasehold land and therefore should not be apportioned.

We find that the assessee has furnished details showing that some expenses were specifically related to leasehold land whereas certain expenses were common. Accordingly, the Assessing Officer is directed to verify the nature of each expense and allow deduction accordingly. Claim of depreciation is consequential.

The ground is allowed for statistical purposes.

Ground No.2

Claim of exemption under section 54G for investment in plant and machinery – Rs.67,89,051/-

12. The assessee shifted its industrial undertaking from an urban area to a rural area and claimed exemption under section 54G. In the return of income, exemption was claimed only in respect of investment in land amounting to Rs.63,14,662/-. During assessment proceedings, the assessee claimed additional exemption towards investment in plant and machinery amounting to Rs.67,89,051/-. The Assessing Officer rejected the claim on the ground that the assessee had not filed a revised return, relying upon the decision of the Hon’ble Supreme Court in Goetze (India) Ltd.

12.1 We find that the assessee had already claimed exemption under section 54G. The additional claim was only enhancement of the same claim based on investment details already available before the Assessing Officer. The Hon’ble Supreme Court in Goetze (India) Ltd. has restricted only the power of the Assessing Officer to entertain a fresh claim otherwise than by revised return. It does not restrict the powers of appellate authorities. Further, the objective of section 54G is to grant relief where an industrial undertaking is shifted from an urban area to a rural area and investments are made in eligible assets. Therefore, the claim cannot be rejected merely on a procedural ground.

Accordingly, the issue is restored to the file of the Assessing Officer to examine whether the investment of Rs.67,89,051/- in plant and machinery satisfies the conditions prescribed under section 54G and allow the claim in accordance with law.

Ground No.2 is allowed for statistical purposes.

Ground No.3

Reversal of provision of Rs.14,30,329/- in subsequent year

13. The assessee submitted that an amount of Rs.14,30,329/- was debited during the year under consideration, but the corresponding entry was reversed in Assessment Year 2016-17 and therefore the upward adjustment, if any, should be reduced to that extent. We find that this issue requires verification of the accounting entries and their tax treatment in subsequent years. Accordingly, this issue is restored to the file of the Assessing Officer with a direction to verify whether the said amount has been offered to tax or reversed in Assessment Year 2016-17 and grant appropriate relief to avoid double taxation.

Ground No.3 is allowed for statistical purposes.

14. In the result, the appeal of the assessee for AY 2012-13 is partly allowed for statistical purposes.

ITA No. 2579/Ahd/2017 – AY 2013-14 (Assessee’s Appeal)

Ground No.1(i)

Transfer Pricing adjustment on account of royalty payment – Rs.19,67,641/-

15. The first grievance of the assessee for the assessment year 2013-14 relates to the upward adjustment of Rs.19,67,641/- made by the TPO in respect of royalty payment made to its AE.

15.1 The facts relating to this issue are similar to those considered by us while adjudicating the identical issue in assessee’s own case for AY 2012-13. During the year under consideration also, the assessee had entered into an agreement with its AE, Kloeckner Desma Elastomertechnik GmbH, Germany, for use of technical know-how, technology and intellectual property rights. The assessee benchmarked the royalty transaction by adopting Transactional Net Margin Method as the most appropriate method by aggregating the same with other international transactions.

15.2 The TPO, however, rejected the aggregation approach adopted by the assessee and proceeded to benchmark the royalty transaction separately by applying Comparable Uncontrolled Price method. The TPO considered the royalty paid on domestic sales at the rate of 5% as an internal comparable and applied the same rate for export transactions also. Accordingly, an adjustment of Rs.19,67,641/- was proposed. The DRP upheld the action of the TPO.

15.3 Before us, the Ld. AR submitted that the issue is squarely covered by the decision of the Tribunal in assessee’s own case for AY 2012-13. It was submitted that the royalty payment was intrinsically connected with the manufacturing activity of the assessee and the TPO was not justified in segregating the same from other international transactions. It was further submitted that the domestic royalty arrangement could not be considered as a valid CUP for export transactions.

15.4 The Ld. DR supported the orders of the lower authorities.

15.5 We have heard the rival submissions and perused the material available on record. While adjudicating an identical issue for AY 2012-13, we have held that the royalty payment made by the assessee to its AE was closely connected with its manufacturing activity and that the TPO was not justified in applying CUP method by treating domestic royalty payment as a benchmark for export transactions without establishing functional comparability.

15.6 The facts and circumstances for the year under consideration are identical. No distinguishing feature has been brought on record by the Revenue. Following our aforesaid findings for AY 2012-13, the adjustment made on account of royalty payment amounting to Rs.19,67,641/- is directed to be deleted.

Ground No.1(i) relating to royalty adjustment is allowed.

Ground No.1(ii)

Transfer Pricing adjustment on account of commission payment – Rs.37,07,151/-

16. The next grievance of the assessee relates to the upward adjustment of Rs.37,07,151/- made by the TPO towards commission payment made to Associated Enterprises.

16.1 The facts relating to this issue are identical to those considered by us in AY 2012-13. The assessee had paid commission to its AE towards marketing support and sales-related services rendered in overseas markets. The assessee benchmarked the transaction by adopting TNMM on an aggregated basis. The TPO rejected the approach adopted by the assessee and applied CUP method by relying upon certain agreements obtained from the KMine database.

16.2 The DRP upheld the adjustment proposed by the TPO.

16.3 Before us, the Ld. AR submitted that the issue is covered by the findings recorded by the Tribunal in AY 2012-13. It was submitted that the comparables selected by the TPO were not functionally comparable and the CUP method was incorrectly applied without carrying out proper comparability analysis.

16.4 The Ld. DR supported the orders of the lower authorities.

16.5 We have considered the rival submissions. While adjudicating the identical issue for AY 2012-13, we have held that the CUP method adopted by the TPO requires examination of functional comparability, contractual terms, geographical factors and commercial conditions. Since the comparables relied upon by the TPO were not demonstrated to be comparable with the assessee’s transaction, the matter was restored for fresh examination.

16.6 Since the facts for the year under consideration are similar, following the aforesaid decision, we restore this issue also to the file of the TPO/AO for fresh adjudication. The TPO shall examine the benchmarking adopted by the assessee under TNMM as well as the comparables relied upon under CUP method and decide the issue afresh after providing reasonable opportunity of hearing to the assessee.

Ground No.1(ii) is allowed for statistical purposes.

Ground No.2

Rejection of additional evidence/comparables submitted by the assessee

17. The assessee has raised a specific grievance that the DRP erred in rejecting the comparable agreements submitted by the assessee as additional evidence for benchmarking the commission transaction.

17.1 Since the issue relating to commission payment has already been restored to the file of the TPO/AO for fresh benchmarking, the assessee shall be at liberty to furnish all relevant documents, including additional comparables, before the TPO.

17.2 The TPO shall consider such material in accordance with law while undertaking the fresh benchmarking exercise.

Ground No.2 is allowed for statistical purposes.

18. In the result, the appeal filed by the assessee in ITA No.2579/Ahd/2017 for AY 2013-14 is partly allowed for statistical purposes.

ITA No.2322/Ahd/2017 – AY 2013-14 (Revenue’s Appeal)

Ground No.1

Disallowance under section 40(a)(i) on commission paid to non-resident agents

19. The first grievance of the Revenue is against the action of the DRP in deleting the disallowance made by the Assessing Officer under section 40(a)(i) of the Act in respect of commission payments made to non-resident agents.

19.1 The facts relating to this issue are that the assessee had paid commission to non-resident agents for procuring export orders and providing marketing support outside India. The Assessing Officer held that such commission payments were chargeable to tax in India and consequently the assessee was required to deduct tax at source under section 195 of the Act. Since no tax was deducted, disallowance under section 40(a)(i) was proposed.

19.2 The DRP deleted the disallowance by relying upon the judgment of the Hon’ble Supreme Court in the case of CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC)and holding that commission paid to non-resident agents for services rendered outside India was not taxable in India.

19.3 Before us, the Ld. DR submitted that the amendment brought in section 9(1)(vii) of the Act had altered the legal position and the DRP was not justified in relying upon the decision of Toshoku Ltd. It was submitted that the payments were taxable in India under the provisions of the Act as well as relevant DTAA provisions.

19.4 The Ld. AR supported the order of the DRP and submitted that the nonresident agents had rendered services outside India and had no permanent establishment in India.

19.5 We have heard the rival submissions. The issue is no longer res integra that commission paid to non-resident agents for services rendered outside India, where the agents do not have any business connection or permanent establishment in India, is not taxable in India merely because the payment is made by an Indian resident.

19.6 The Revenue has not brought any material on record to establish that the non-resident agents had rendered services in India or that they had any permanent establishment in India. The mere amendment in section 9(1)(vii) does not automatically result in taxability of every payment made to a nonresident.

19.7 Respectfully following the settled legal position, we uphold the order of the DRP deleting the disallowance made under section 40(a)(i).

Ground No.1 raised by the Revenue is dismissed.

Ground No.2

Disallowance under section 14A of the Act

20. The next grievance of the Revenue relates to deletion of disallowance made under section 14A of the Act.

20.1 The Assessing Officer made disallowance under section 14A read with Rule 8D on the ground that the assessee had earned exempt income and failed to establish that no expenditure was incurred in relation thereto.

20.2 The DRP deleted the disallowance by observing that the assessee had sufficient own funds and no borrowed funds were utilized for making investments.

20.3 Before us, the Ld. DR submitted that the DRP erred in shifting the burden upon the Assessing Officer and that the assessee was required to establish availability of interest-free funds.

20.4 The Ld. AR supported the order of the DRP.

20.5 We have considered the rival submissions. It is an admitted position that the assessee possessed sufficient own funds during the year under consideration. Where own funds available with the assessee exceed the investments made, a presumption arises that the investments have been made out of own funds unless the Revenue establishes a contrary nexus.

20.6 The Revenue has not brought any material on record to establish that borrowed funds were utilized for making investments yielding exempt income. Further, the Assessing Officer has not recorded any specific satisfaction regarding correctness of the assessee’s claim as required under section 14A(2) of the Act.

20.7 In view of the above, we find no infirmity in the order of the DRP deleting the disallowance under section 14A.

Ground No.2 raised by the Revenue is dismissed.

21. In the result, the appeal filed by the Revenue in ITA No.2322/Ahd/2017 for AY 2013-14 is dismissed.

22. In the combined result, ITA(TP) No.555/Ahd/2017 (AY 2012-13) filed by the assessee is partly allowed for statistical purposes. ITA No.2579/Ahd/2017 (AY 2013-14) filed by the assessee is partly allowed for statistical purposes. ITA No.2322/Ahd/2017 (AY 2013-14) filed by the Revenue is dismissed.