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Nippon Leakless Talbros Private Ltd., Plot 125 A, Sec-6, HSIIDC Growth Centre, Bawal Rewari, Haryana. Vs. Asstt. Commissioner of Income Tax, Circle Rewari, Haryana
August, 31st 2015
             IN THE INCOME TAX APPELLATE TRIBUNAL
                  DELHI BENCH: `I-2' : NEW DELHI

          BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER
                             AND
         SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER

                           IT(TP)A No. 475/Del/2015
                           Assessment Year: 2010-11

Nippon Leakless Talbros              Vs.   Asstt. Commissioner of Income
Private Ltd., Plot 125 A, Sec-6,           Tax, Circle Rewari, Haryana
HSIIDC Growth Centre, Bawal
Rewari, Haryana.
(PAN: AACCN0630J)
    (Appellant)                                   (Respondent)

   Appellant by  : Sh. Ajay Vohra, Sr. Adv., Sh. Neeraj Jain, Adv. &
                   Sh. Puneet Chugh, CA
   Respondent by : Sh. Vijay Choudhary, Sr. DR

                                      Date of hearing: 12.06.2015
                                      Date of pronouncement: 28.08.2015

                                   ORDER

PER INTURI RAMA RAO, A.M.:

      This is an appeal filed by the assessee company against the order passed

by ACIT, Rewari, dated 31.12.2014, passed under Section 143(3) r.w.s. 144C of

the Income Tax Act, 1961 (for short "the Act" ). The assessee company raised

the following grounds of appeal:

      General:

      1.     That the impugned order of assessment framed by the assessing
      officer in pursuance of the directions of the Dispute Resolution Panel
      (hereinafter referred to as 'DRP') under Section 143(3) read with Section
      144C of the Income-tax Act, 1961 ( 'Act'), is bad in law, violative of
      principles of natural justice and void ab-initio.
                                  2

1.1 That assessing officer erred on facts and in law in computing the
income of the appellant at Rs 14,52,23,420 against the income of
Rs.10,02,94,349 returned by the appellant.

Transfer Pricing:

2.     That the assessing officer/ Transfer Pricing Officer ('TPO') erred on
facts and in law in making addition to the income of the appellant to the
extent of Rs. 2,99,52,717 on account of the alleged difference in the arm's
length price of international transactions.

2.1 That the assessing officer/ TPO erred on facts and in law in holding
the arm's length price for international transaction of payment of
management fee as Nil as against management fee of Rs 2,99,52,717 paid
by the appellant on the ground that no benefit was derived by the
appellant from payment of such fee.

2.2 That the Assessing Officer/TPO erred on facts and in law in not
appreciating that significant benefits were drawn by the appellant from
payment of management fee in terms of increased revenue and high
profitability, even in the initial years of its business.

2.3 That the assessing officer/TPO erred on facts and in law in not
appreciating that the appellant was able to achieve significant cost savings
due to the management services provided by the associated enterprise.

2.4 That the assessing officer/the TPO erred on facts and in law in not
appreciating that the services availed under the management agreement
was distinct from the services availed for payment of royalty under the
Joint Venture agreement

2.5 That the assessing officer/TPO erred on facts and in law in not
appreciating that the payment of management fee was validly bench
marked applying TNMM as most appropriate method and that no adverse
inference could be drawn on this account.

2.6 That the assessing officer/TPO erred on facts and in law in applying
CUP method for benchmarking the transaction of payment of
management fee without placing on record any comparable data for
comparison.

2.7 That the assessing officer/the TPO erred on facts and in law in not
appreciating that the expenditure on the payment of management fee was
wholly and exclusively for the purpose of business of the appellant.
                                 3

2.8 That the assessing officer/TPO erred on facts and in law in not
aggregating the transaction of payment of management fee with other
interlinked international transactions and erroneously seeking to
benchmark it separately.

2.9 That the assessing officer/TPO erred in law in holding that the
majority of benefit is flowing from Indian joint venture company, i.e.,
Talbros Automotive Components Limited while the Japanese Joint
Venture Company i.e. Nippon Leakless Corporation is being remunerated
more.

2.10 That the DRP erred on facts and in law in upholding the adjustment
made by TPO without giving any cogent and germane reasons.

Corporate Tax Issues:

3.   That the assessing officer erred on facts and in law in disallowing a
sum of Rs 1,49,76,358 being payment made to Talbros Automotive
Components Ltd. ('TACL') towards administrative services under section
40A(2) of the Act.

3.1 That the assessing officer erred on facts and in law in not
appreciating that having regard to the effort involved and additional cost
incurred by TACL in providing services to the assessee, the charge on
account of payment for administrative services was not excessive and was
commensurate with the services availed.

3.2 That the assessing officer erred on facts and in law in making the
disallowance invoking section 40A(2) of the Act on mere conjecture and
surmises without bringing on record any comparable evidence of market
price of such services to demonstrate that the expenditure incurred by the
appellant was excessive.

3.3 That the assessing officer erred on facts and in law in not
appreciating that the payment for administrative services, has also
suffered tax in the hands of the recipient company and there could be no
allegation of any tax evasion.

3.4 That the DRP erred on facts and in law in upholding the adjustment
made by assessing officer without giving any cogent and germane
reasons.

4.     That the assessing officer erred on facts and in law in levying
interest under Section 2348 and Section 234C of the Act.
                                       4

      The appellant craves leave to add, amend, alter or vary, any of the
      aforesaid grounds of appeal before or at the time of hearing of the appeal
      and consider each of the grounds as without prejudice to the other grounds
      of appeal.

2.    The brief facts of the case are that the appellant i.e. M/s Nippon Leakless

Talbros Pvt. Ltd. is a company incorporated in India on 9 th March, 2005 in

pursuance of joint venture between Talbros Automotive Components Ltd. India

(TACL) and Japanese partner M/s Nippon Leakless Corporation, Japan (NLK)

ON 31.01.2000. The return of income for the assessment year 2010-11 was filed

on 29th September, 2010 declaring income of Rs. 10,02,94,349/-. The return was

accepted under the provisions of Section 143(1) of the Income-tax Act, 1961

(for short "the Act"). However, subsequently the case was selected for scrutiny

assessment as per the guidelines of CBDT. During the course of assessment

proceedings, the Assessing Officer noticed the that the international transaction

entered by the appellant company and therefore a reference under Section

92CA(1) of the Act was made to Transfer Pricing Officer (TPO) to determine

the Arm's Length Price (ALP) in respect of such transactions. The TPO vide his

order dated 24th January, 2014 held that the ALP of international transactions

related to payment of management consultation fees to its AE M/s Nippon

Leakless Corporation, Japan, as nil against Rs. 2,99,52,717/- claimed by the

appellant on the ground that the appellant had failed to point out any

comparables. The Assessing Officer based on the order of TPO passed a draft

assessment order under Section 143 r.w.s. 144C of the Act. Against this drafted

assessment order, the objections were filed before the DRP. The DRP vide order
                                        5

dated 14.11.2014 upheld the order of TPO. Finally the Assessing Officer passed

an order under Section 143 r.w.s. 144 of the Act dated 31.12.2004 in conformity

with the direction of DRP making addition of Rs. 2,99,52,717/- on account of

management fees paid to these AEs of Nippon Leakless Corporation, Japan and

made further addition of Rs. 1,49,76,358/- on account of management fees paid

to Talbros Automotive Components Ltd. India under the provisions of Section

40A(2)(b) of the Act. Being aggrieved the appellant had filed the present appeal

before us.

3.    Before us, ld. Senior Counsel for the appellant submitted that during the

year under consideration, the applicant was primarily manufacturing and selling

gaskets to Honda and Honda JVs in India. The applicant did not have the

requisite resources, e.g., qualified and experienced personnel, and expertise to

carry out product design and development to develop new models of gaskets as

per specifications and requirements of the customers. For the newer models of

vehicles developed and introduced by Honda, there is change in the engine

design. Honda has a system of completely developing the engine in Japan and

then deploying the - newly developed, engine for the Indian manufacturing

operations. As a consequence of change in engine design, newer type of gaskets

have to be developed. It may be noted that development of new model /variant

of gaskets requires constant interaction of the technicians" with the customers to

develop requisite drawing, design and specification, etc. The process of

development of gaskets for engine primarily involves the following activities:
                                        6


      (i)    Technical review and continuous interaction with the customers
      after the receipt of Request For Quotation (RFQ).

      (ii) Freezing of product specification in discussion with the customers.

      (iii)   Agreeing on a time line of development.

      (iv) Development of proto type and submission to the customers with
      necessary inspection report.

      (v) Validation of the product by the customers on the engine by
      running for certain specified hours.

      (vi) Feed-back based on the results of the validation and any necessary
      changes that may have to be incorporated in the product as a result of
      testing.

      (vii) Re-testing I revalidation, if required.

      (viii) Release of approved drawing for mass production and manufacture
      of necessary tooling for such mass production.

      Since Honda R&D as well as the associated enterprise, under

consideration were situated in Japan, involving the associated enterprise, was the

most economical and efficient way of developing gaskets which were approved

by Honda, Japan for being manufactured by the assessee in India, to be fitted in

the engine I vehicles assembled I manufactured by Honda in India.

      After the product is approved by Honda R&D and the specifications are

frozen, the action shifts to India where the mass production takes place. The

assessee has to co-ordinate very closely with Honda India for submission of off

tool samples and plan of readiness for mass production in tune with the

customer's start of production.
                                         7

      The aforesaid process entails intensive discussions and interaction with

the customer i.e. Honda group companies. Since all the technical discussions

and critical decisions with regard to Honda product development are taken by

Honda R&D in Japan in consultation with the supplier, the product development

cost would increase manifold if the assessee was to undertake this activity itself,

since it would involve travelling each time for a meeting or discussion. In any

case, the assessee did not have the expertise and resources to develop new

products. Further the prototypes are to be tested and validated in house by the

supplier as well as by HONDA, this requires equipment for testing and in house

capability, which were not available with the assessee. Accordingly, it was

imperative for the assessee to avail the services from its associated enterprises.

      During the relevant previous year, the assessee commercialized 29 new

products, therefore, considerable time was spent by the technical team of the

associated enterprises in Japan for development of product. It would be

appreciated that the cost of development of a single gasket to the associated

enterprise is JPY 40,88,000 (Rs 16,35,200 per gasket) in case of metal gaskets

and JPY 26,88,000 (Rs 10,75,200 per gasket) in cases of non- metallic gaskets.

      Further, the senior level employees of the associated enterprise also

visited India for the purpose of representing the assessee before various

prospective customers as well as for the purpose of supervising the factory

machinery and building of the assessee. The travel related expenses of the
                                        8

employees of the associated enterprise in relation to such visits amounting to

JPY 28,37,108 (equivalent to Rs 15,03,667) was borne by the AE.

      It would be noted that over a period of 6 years, the associated enterprise

has developed more than 100 gaskets for the assessee. The assessee, it is

respectfully submitted, does not have on its payroll any technical employee

possessing experienced and expertise in this field. It would be appreciated from

the details of employees of the assessee that the assessee did not employe even a

single personnel in the product design and developed division. The fact that the

required resources were not available with the assessee is evident from the

following statistics:

          Particulars    Comparable               Assessee
                         Companies
          Employee cost 10.4% to 15.5%            4.10%
          to sales ratio

      In view of the aforesaid it is respectfully submitted that the assessee did

not have the requisite expertise and was therefore dependent upon the associated

enterprise of new product development and testing activity.

      It would also be appreciated that sales of the assessee have grown to Rs

50.60 crores in FY 2009-10 from Rs. 32.18 crores in FY 2007-08. The

automotive component industry is very competitive and it takes a company

some time lag to get established, accepted by the customer and to break even.

The assessee has not only got established in the initial years, but also has posted

profits far above the breakeven point. A margin of 20.71 % at net level for auto
                                        9

components is way above the arm's length profit and that too in the second year

of full operations.

      It may further be noted that during the relevant previous year the total

revenue of the assessee increased to Rs. 50.60 crores from Rs. 37.26 crores in

the preceding previous year i.e. an increase of 35.81 %.Itis pertinent to note that

the AE has been providing the services since inception of the JV on account of

the services received. the JV in a short span of 3 years has been able to become

the preferred supplier of gaskets. Consequent to the support received from the

AE the increasing turnover led to increase in the net profit margin to Rs.

10,48,34,509 from Rs. 8,58,91,331 in the preceding previous year resulting in

year on year increase of 22.01 % in the net profit margin.

3.1   Re: Payment of royalty

      The TPO further held that since the assessee is paying royalty for the

receipt of technical guidance, it need not have paid management fee.

      In this regard, it is respectfully submitted that the development of gasket

is a technologically intensive activity and requires high degree of technical

knowledge and expertise. The assessee neither had the technology nor the

technically qualified employees to be able to independently develop gaskets.

      It would be appreciated that in terms of the joint venture agreement dated

31.01.2005, the associated enterprise provided the assessee with the right to 'use

the technical knowledge/information and proprietary know- how'. Such

technology is in respect of manufacturing process as well as design engineering
                                        10

etc. On the other hand, against the payment of management fee, the associated

enterprise is providing specific services of new product development, which

involves inter-alia continuous interaction and discussion with the customers.

Such fee is paid by the assessee for the development of specific gaskets. It is

respectfully submitted that the assessee did not had the requisite resources i.e.

qualified and experienced personnel as well as requisite assets to be able to

absorb and apply the technology and develop the new products/gaskets itself.

Such expertise can only be gained over a period of time.

      In the absence of employees who are technically competent to be able to

develop new gaskets, it was imperative for the assessee to engage the services of

the associated enterprise for such purpose. The fact that the assessee did not

have the requisite resources is evident from its low employee cost to sales and

depreciation to sales ratio, as has been submitted above.

      Reliance in this regard is also placed on the decision of the Hon'ble Delhi

Bench of the tribunal in the case of Abhishek Auto Industries Ltd vs DCIT (ITA

No 1433/Del/2009) wherein the Hon'ble Tribunal held as under:

             "Whenever international transactions of such nature are
             undertaken, it is a combination of technical know-how, royalty,
             technical assistance through the deputation of ex- pat employees on
             the rolls of the person obtaining the technical know-how. There is
             merit in appellants submissions that merely by importing
             machinery, it cannot be said that the appellant would become
             competent to make use of such machinery. Technical know-how and
             technical assistance was needed for the use of machinery under the
             normal circumstances. "
                                         11

      It is further submitted that the TPO failed to appreciate the difference

between the grant of 'right to use the technology' and provision of services

which may involve/require use of such technology. In cases where a right to use

the technology is granted, the licensee is required to absorb and apply the

technology using its own resources viz. technically qualified employees and

requisite assets. The licensor is only required to make available the technology

and the proprietary know-how.

      However, in the instant case, the assessee did not have the requisite

resources to absorb and apply the technology. Such expertise can only be build

over a period of time. Therefore, in order to capture market and build credibility,

the assessee availed the services of its associated enterprises for the development

of new products/gaskets.

      Further, in terms of the management fee agreement, the associated

enterprise is also providing the services of testing and validating indigenous raw

material. Such services were not covered by the joint venture agreement and, are

specifically covered by the management fee agreement

      (i) Whether intra-group services have been rendered

      As regards the first question, the OECD states that whether or not a

service has, been, rendered depends, on whether the service provides the

recipient with some commercial or economic value to enhance its commercial

position: Para 7,6 of the guidelines states as under:
                                        12

             "7.6 Under the arm's length principle, the question whether an
             intragroup service has been rendered when an activity is performed
             for one or more group members by another group member should
             depend on' whether the activity provides a respective group
             member with economic or commercial value to enhance its
             commercial position, This can be determined by considering
             whether an independent enterprise in comparable circumstances
             would have been willing to pay for the activity if performed for it by
             an independent enterprise or would have performed the activity
             inhouse for itself."

      It is respectfully submitted that development of the gasket is the most

critical part of the business of the assessee without which the assessee could not

have undertaken the business of manufacture and sale of gaskets. Since, the

assessee did not had the requisite technical skills to develop the gaskets it had to

avail the services of its associated enterprise. As a result of services provided by

the associated enterprise, during the year, the assessee commercialized 29 new

products; therefore, considerable time was spent by the technical team of the

associated enterprises in Japan for development of product. It would be

appreciated that the cost of development of a single gasket to the associated

enterprise is JPY 40,88,000 in case of metal gaskets and JPY 26,88,000 in cases

of non-metallic gaskets.

      Further, the senior level employees of the associated enterprise also

visited India for the purpose of representing the assessee before various

prospective customers as well as for the purpose of supervising the factory

machinery and building of the assessee. The cost of such visits viz. gross CTC

of such employees was also not recovered by the AE from the assessee

company. Additionally, the cost of travel related expenses of the employees of
                                        13

the associated enterprise in relation to such visits amounted to JPY 28,37,108

(equivalent to Rs 15,03,667). In view of the aforesaid, it is submitted that the

assessee derived significant benefits from the management services provided by

the associated enterprise and therefore, the services provided by the associated

enterprise satisfies the first criteria as laid down by the OECD guidelines.


Re: Commercial and Business expediency of incurring any expenditure

      It is submitted, that the assessee is free to conduct business in the manner

that assessee deems fit and the commercial or business expediency of incurring

any expenditure is to be seen from the assessee's point of view.

      It is a settled position as laid down in the following decisions is that

whether any expenditure is required to be incurred for the purpose of business

and the reasonableness of the quantum thereof has to be judged from the point of

view of the businessman and not of the Revenue:

      - CIT v. Malayalam Plantations Limited, 53 ITR 140 (SC)
      - CIT v. Walchand & Co. etc., (1967) 65 ITR 381
      - J K Woollen Manufacturers v. CIT, 72 ITR 612(SC)
      - CIT v. Birla Cotton Spg. And Wvg. Mills, 82 ITR 166 (SC)
      - Madhav Prasad Jatia v. CIT U.P., 118 ITR 200 (SC)
      - S.A. Builders Ltd. vs. CIT , 288 ITR 1 (SC)
      - CIT v. Rockman Cycle Industries Ltd., 331 ITR 401 (P&H)
      (FB)
      - CIT v. Bharti Televentures Ltd, 331 ITR 502 (Del)
      - CIT vs. EKL Appliances Ltd., ITA No. 1068/2011 & 1070/2011 (Del
      HC)

      The aforesaid settled position that the quantum of expenditure required to

be incurred for the purpose of business is the businessman's decision, is of

universal application and cannot be given a go by on the pretext of application
                                          14

of the arm's length test provided under the Transfer Pricing Regulations and only

price of an expenditure arising being an international transaction can be

determined by the TPO having regard to the arm's length test under section

92(1) of the Act.

      Further, it is submitted that once expenditure on payment for management

fees incurred by the assessee are accepted as having been incurred wholly and

exclusively for the purpose of business and, therefore, allowable under section

37, it is not open to the Revenue to still hold part of such expenditure as not

having been incurred on behalf of and/or for the benefit of the AE, calling for

adjustment under section 92 of the Act.

      This Hon'ble Court in the case of CIT vs. EKL Appliances Ltd., 345 ITR

241, has laid down the law in this regard, as under:

             "21. The position emerging from the above decisions is that it is not
             necessary for the assessee to show that any legitimate expenditure
             incurred by him was also incurred out of necessity. It is also not
             necessary for the assessee to show that any expenditure incurred by
             him for the purpose of business carried on by him has actually
             resulted in profit or income either in the same year or in any of the
             subsequent years. The only condition is that the expenditure should
             have been incurred "wholly and exclusively" for the purpose of
             business and nothing more. It is this principle that inter alia finds
             expression in the OECD guidelines, in the paragraphs which we
             have quoted above.
                                              xxx
             22     ...............So long as the expenditure or payment has been
             demonstrated to have been incurred or laid out for the purposes of
             business, it is no concern of the TPO to disallow the same on any
             extraneous reasoning. As provided in the OECD guidelines, he is
             expected to examine the international transaction as he actually
             finds the same and then make suitable adjustment but a wholesale
             disallowance of the expenditure, particularly on the grounds which
             have been given by the TPO is not contemplated or authorized."
                                        15


      Following the decision of Delhi High Court, the Bangalore Bench of the

Tribunal in the case of Festo Controls Pvt. Ltd. vs DC IT (ITA No.

969/Bang/2011) held that expense incurred wholly and exclusively for the

purpose of business cannot be disallowed by the TPO alleging that such

expenditure does not resulted in profits to the assessee.

      Recently the Hyderabad Tribunal also in case of Kirby Building Systems

India Ltd vs. Addl. CIT (ITA 1975/ HYD/ 2010) affirmed the principle laid

down by Hon'ble Delhi HC in Ekla Appliances and held as follows:

             "19. In the guise of examining the payments under T.P. provisions,
             it is noticed that the TPO has not analyzed these payments either
             under TNMM method or under any other method which require to
             be analyzed as per the provisions. However, the TPO has examined
             the business necessity of payment of technical knowhow fee and
             royalty under the provisions of section 37(1) rather than under the
             provisions of T.P. His decision of not allowing any royalty payment
             or technical knowhow payment and determining the ALP at NIL
             cannot be sustained in view of the fact that this technical knowhow
             fee and royalty were agreed upon when the assessee has originally
             entered into agreement as on 01.04.2000 much before the TP.
             provisions came on statute. It may be another reason that assessee
             has revised the agreement and paid subsequently, partly in the
             impugned year, but that does not prevent assessee claiming
             expenditure which was necessary for its business operations in view
             of the agreement entered at the time of establishing the unit in
             India. Had there been no revision of the agreement, the payment of
             technical knowhow fee would have been over by the year 2002
             itself. Assessee paid in a sense belatedly the same amount which
             was payable originally due to rescheduling in payment period. No
             extra amount was required to be paid. Moreover, on the entire
             turnover in the intervening years, assessee also would have paid
             royalty.      However, due to business requirements, both the
             parties agreed to revise the royalties. TP provisions does not
             empower the TPO to decide about the commercial decisions and
             determining the ALP at NIL thereby denying the entire claim
                                             16

              instead of allowing the amount on the basis of ALP to be
              determined under the provisions.

              20. The Hon'ble Delhi High Court in the case of CIT vs. EKL
              Appliances ITA.No.1068 of 2011 and 1070 of 2011 dated 29th
              March, 2012 considered similar issue whether the TPO has power
              to restrict in determining the ALP at NIL under the provisions of
              T.P. when he was supposed to have determined the arms length
              price of the international transaction ................

              20.1 The Principles laid down by the Hon'ble Delhi High Court in
              the above said case equally applies to the facts of the case. What
              TPO has done in the present case is to hold that assessee need not
              pay any royalty or technical knowhow fee to the AE. Even though
              ORP has partly modified the payment of royalty, what we noticed is
              that they also made a mistake in allowing only 3.5% of royalty
              when in fact, there is no such claim in any of the earlier years. As
              submitted by the Ld. Counsel in the course of
              arguments/presentation before us assessee claimed at 7.5% in
              earlier year which was also allowed.




       The Hon'ble Tribunal in the case of M/s. Ericsson India Pvt. Ltd. vs.

OCIT (ITA No. 514110e112011), too, following the law laid down by the

Hon'ble jurisdictional High Court, held that " ................. it   would be wrong

to hold that the expenditure should be disallowed only on the ground that these

expenses were not required to be incurred by the appellant............."

       In the case of Dresser Rand India Pvt. Ltd. vs. Addl. CIT (ITA No

8753/Mum/2010) the Hon'ble Mumbai bench of the Tribunal, while dealing with

similar management fee paid to the associated enterprise held that benefits

derived by the assessee is not a relevant criteria for determination of arm's

length of an expenditure incurred by the assessee.
                                          17

         Recently the Hon'ble Delhi High Court in the case of CIT vs Cushman

and Wakefield (India) Pvt Ltd. (ITA 475/2012) has held that the authority of the

TPO is to conduct a TP analysis to determine the ALP and not to determine

whether the tax payer derives a benefit from the service. The Hon'ble Delhi High

Court has opined that the determination of benefit to the tax payer is in the

domain of the AO. The Hon'ble High Court held as follows:

               "34. The Court first notes that the authority of the TPO is to
               conduct a transfer pricing analysis to determine the ALP and not to
               determine whether there is a service or not from which the assessee
               benefits. That aspect of the exercise is left to the A O. This
               distinction was made clear by the ITAT in Dresser-Rand India Pvt.
               Ltd. v. Additional Commissioner        of Income Tax, 2012 (13)
               ITR (Trib) 422.........

               ....... 35. The TPO's Report is, subsequent to the Finance Act, 2007,
               binding on the AO. Thus, it becomes all the more important to
               clarify the extent of the TPO's authority in this case, which is to
               determining the ALP for international transactions referred to him
               or her by the AO, rather than determining whether such services
               exist or benefits have accrued. That exercise - of factual
               verification is retained by the AO under Section 37 in this case.
               Indeed, this is not to say that the TPO cannot - after a
               consideration of the facts - state that the ALP is 'nil' given that an
               independent entity in a comparable transaction would not pay any
               amount. However, this is different from the TPO stating that the
               assessee did not benefit from these services, which amounts to
               disallowing expenditure. That decision is outside the authority of
               the TPO.... "

         Further, in the case of LG Polymers India Pvt. Ltd vs Addl. CIT (ITA No

524/Vizag/2010), the Hon'ble Visakhapatnam Bench of the Tribunal held as

under:

               "13. We agree with the views of the Learned A.R on this issue. As
               submitted by him, it is the prerogative of the assessee to regulate its
               business affairs and it is not open for the department to question
                                         18

            the same. Similar views have been expressed by the Hon'ble
            Supreme Court in the case of Dhanrajgiriji Raja Narasingirji,
            referred (Supra)"

      Recently in the case of SC Enviro Agro India Ltd vs DCIT (ITA No 2057

& 2058/Mum/2009) the Hon'ble Mumbai Bench of the Tribunal held that "The

TPO has to examine whether the price paid or amount paid was at arm's length

or not under the provisions of Transfer Pricing and its rules. The rule does not

authorize the TPO to disallow any expenditure on the ground that it was not

necessary or prudent for assessee to have incurred the same."

      The Hon'ble Delhi Bench of the Tribunal in the case of- AWB India Pvt.

Ltd vs Addl. CIT (ITA No 4454/Del/2011) held as under:

            "As also settled by judicial decision (supra), the revenue authorities
            are not empowered to question the commercial wisdom of the
            assessee and it is entirely for the assessee to take such decisions as
            favour the advancement of the assessee's business."

      Reliance in this regard is placed on the decision of Ahmadabad Bench of

Tribunal in the case of KHS Machinery (P) Ltd. vs. ITO : 146 TTJ 692, wherein

the Hon'ble Tribunal on the issue of similar disallowance made by the TPO of

payment of royalty, has held as under:

            "The appellant had not made the one-time payment but making the
            continuous payment to the know-how provider which has been
            accepted by the Department in the past. The appellant has been
            charging 5 per cent royalty on each and every transaction and
            therefore the said payment cannot be said to have been paid on the
            aggregate amount, as argued by learned CIT-Departmental
            Representative. The findings of the AO in considering the royalty
            charges as nil as ALP cannot be accepted since the AO in the
            present case has not brought on record, the ordinary profits which
            can be earned in such type of business. Therefore in our view the
            payment of royalty is not hit by the provisions of s. 92 of the Act
                                       19

            and there is no reason to hold that the expenses should not be
            allowed under s. 37(1) of the Act, since the expenditure has been
            incurred by the appellant during the course of business and is
            having the nexus with the business of the appellant. Therefore the
            payment of royalty is a business expenditure which has been
            incurred wholly and exclusively for the purpose of business of the
            appellant and same is to be allowed in toto as a matter of
            commercial expediency. Therefore, the case laws relied upon by the
            learned CIT- Departmental Representative are of no benefit to the
            Revenue. The reasonableness of expenditure in the present
            circumstances and facts of case cannot be doubted and accordingly
            the AOis directed to allow the claim of the appellant and the order
            of learned CIT(A) is reversed. Thus, ground no. 3 of the appellant
            is allowed. "

      The Hon'ble Delhi Bench of the Tribunal in the case of Maruti Suzuki

India Ltd. (ITA No. 5237/Del/2011) also held in this regard as under:

            "15. Another realm of the assessee's submission is that as long as
            an item of expenditure has been incurred wholly and exclusively for
            the purpose of business of the assessee whether or not such
            expenditure actually benefits the assessee is an irrelevant
            consideration for the purpose of determination of ALP. In this
            regard, the case laws referred above by the assessee in its
            submission are germane and supports the case of the assessee.

            - Hon'ble Delhi High Court decision in the case of C.I. T. vs. Ekla
            Appliances Ltd. (ITA No. 1070/2011)
            - Mumbai Tribunal decision in the case of Dresser Rand India Pvt.
            Ltd. vs. Addl. C.I.T. (I. T.A. No. 8753/Mum/2010)
            - Decision of Vishakhapatnam Bench of the Tribunal in the case of
            LG Polymers India Pvt. Ltd. vs. Addl. C.I. T. (I.T.A. No.
            524/Vizag/2010).
            - Decision of the Tribunal in the case of M/s Ericsson India Pvt.
            Ltd. vs. DCIT (I.T.A. No. 5141/Del/2011).
            - Decision of the Mumbai Tribunal in the case of SC Enviro Agro
            India Ltd. vs. DCIT in (I.T.A. No . 2057 &2058/Mum/2009). "

      Further, the Hon'ble Hyderabad bench of Tribunal in the case of TNS

India Pvt. Ltd (2014-TII-24-ITAT-HYD-TP) has deleted the similar royalty
                                       20

additions made by the TPO on the basis inter-alia that TPO cannot question the

business decision. The Hon'ble Tribunal held as follows:

            "16.1. Even otherwise, the role of Transfer pricing Officer is to
            determine the arms length price of a transaction. He cannot reject
            the entire payment under the provisions of sec. 92CA as held by the
            Delhi High Court in the case of EKL Appliances Ltd."

            "17. Respectfully following the above, we are of the opinion that the
            TPO went beyond his jurisdiction in denying the payment out-
            rightly, whereas, his role is limited to determining the ALP. In the
            guise of determination of ALP, the TPO cannot question the
            business decision of payment and determine that no services were
            rendered. In that view of the matter, the direction of the TPO
            cannot be upheld at all"

      In view of the aforesaid, it is respectfully submitted that whether an

expense actually benefits the assessee or not is not required to be examined

while determining the ALP of an international transaction.

      Further the Hon'ble ITAT in the appellant's own case for AY 2008- 09 has

allowed the payment of management fees and restored the matter to the file of

TPO. The Hon'ble ITAT held as follows:

            "We have heard the matter both the counsel and perused the
            records. We have gone through the additional evidences as above,
            in our considered opinion the consideration of these additional
            evidences is necessary for proper adjudication of the matter.
            However, we also note that these documents were not before the
            authorities below. In our considered opinion, interest of justice will
            be served, if additional evidences as sought to be placed by the
            assessee are remitted to the file of the assessing officer for
            consideration. Accordingly we admit the additional evidence and
            remit the same to the file of the assessing officer. The AO shall
            consider these grounds afresh."
                                       21

      The TPO while giving the appeal effect to the order of Hon'ble ITAT

examined the additional evidences submitted by the assessee and deleted the

addition on account of management fees vide its order dated 12.01.2015.

      Further in the AY 2009-10 and AY 2011-12 also the TPO has accepted

the transaction of payment of management fees as being at arm's length and did

not draw any adverse inference in this regard.

      Hence, the payment of management fees, therefore, is made entirely for

business consideration and is an expenditure incurred wholly and exclusively for

the purposes of business.


4.     Disallowance of Rs. 1,49,76,358 under section 40A(2)(b) on account
      of payment of administrative charges:

      During the relevant previous years the assessee incurred expenditure

amounting to Rs. 1,49,76,358 on account of administrative charges paid to

Talbros Automotive Components Ltd. (`TACL'). The assessee entered into a

Shared Services Agreement with TACL for availing certain services for

assistance in day to day operations and administration of assessee. In terms of

the agreement the day to day managerial and administrative services are

provided by TACL. The assessee paid 10% of profits before tax to Talbros for

such administrative support.

      The assessing officer, however, disallowed the payment of administrative

charges/management fees on the alleged ground that the assessee has failed to

prove the reasonableness and justification for the aforesaid amount.
                                           22


      It is submitted that in terms of the agreement between the assesee and

TACL, the latter is required to provide the following day to day managerial and

administrative services to the assessee:

      (a) IT Services - All the IT related activities/services were provided by IT
      department of TACL and there was not a single IT employee on the
      payroll of TACL.

      (b) Secretarial Services - The assessee company being a corporate entity
      has to comply with a large number of statutory requirements under the
      Indian Companies Act. During the year it had employed on its rolls only
      one junior company secretary for routine documentation and executive
      jobs. Being a junior he needed guidance and supervision by the team of
      senior professionals who managed the ultimate responsibility for activities
      like,

      - Convening and holding board meetings and shareholders meetings
      - Maintaining minutes of all the meeting
      - Maintaining statutory registers and records prescribed under the law
      - Timely filing statutory returns and reports
      - Obtaining necessary permissions and licenses wherever required.
      - Advising management on various statutory provisions and governance
      issues

      (c) Sales and Marketing Services - As is evident from the manpower
      strength at the assessee company, there is no set-up for sales and
      marketing services. Under the current competitive scenario, this is the
      most important area to survive and grow. Local day to day liasioning with
      HONDA India was thus taken case by TACL.

      The services provided by TACL broadly included:

      - Regular interaction and co-ordination with the customer.

      - Costing of the product in co-ordination with the technical and costing
      department and submission of quotations in the format prescribed the OE
      customers.

      - Price negotiation with the customer and tracking their supply schedules
      on day-to day basis.
                                 23

- Attending to customer complaints, if any and taking suitable corrective.
actions acting as a conduit between the customer and the production line.

- Networking with customers and continuously pitching for new
businesses while protecting existing businesses.

- Put up proposals for necessary price revisions depending up production
cost variations due to inflationary increase in prices, exchange
fluctuations or other external factors.

- Understanding customer requirements and keeping the customer
satisfied all the time.

- Exploring possibilities of developing new business opportunities

- TACL team regularly participated in domestic as well as overseas trade
fairs and represented the assessee without debiting any costs to the
assessee

(d) Financial and Accounting Services - During the year aassesee had
employed a graduate at assistant manager level, which required
supervision and guidance thus the services of professionally qualified
chartered accountants and cost accountant were made available by the
TACL team. These services included:

- Making proposals for working capital and other financing facilities
required by the company.

- Dealing with banks and financial institutions for getting these facilities
sanctioned

- Mr. R. P. Grover, CFO, TACL was authorized by the board for these
activities.
- Executing necessary loan/security documentation and creating charges
over the company's assets to the satisfaction of the lenders

- Guidance for timely submission of required periodic returns and reports
to banks and financial institutions.

- Finalization of quarterly and annual accounts as per the statutory
requirements

- Ensuring due compliance of Accounting Standards and other statutory
guidelines.
                                       24


      - Dealing with Statutory and Internal Auditors, initiating necessary
      corrective actions and ensuring implementations of their suggestions
            .
      - Ensuring compliance with excise and service tax laws dealing with
      excise auditors and guiding and initiating corrective actions based on
      auditors observations.

      - Dealing with sales tax department, ensuring due compliance by timely
      submissions of reports/returns and attending to sales tax assessments and
      other related issues.

      - Dealing with Income tax matters, attending to tax assessments,
      interacting with outside consultants, wherever required.

      - Costing of different work centers, production processes and final
      products in co-ordination with the technical team

      - Ensuring maintenance of statutory cost accounting records

      - Identification and implementation of ERP system, co-coordinating with
      outside       service     provider      and     ensuring     necessary
      modification/customization as and when required

      (e)    Quality Systems

      - Provide necessary guidance to formalize quality systems and procedures.
      - Dealing with outside agency for quality certification
      - Analyzing quality issues from time to time.
      - Interacting with customer us understand and redress their quality related

      From the aforesaid, it would be noted that TACL is providing a wide

array of services such as IT services, Accounting services, financial and taxation

services etc. Further it we would like to submit that the company has about 6/7

employees for managing all the functions of the company, other than

manufacturing, e.g. sourcing, vendor developments, sales promotion, dealing/

follow up with the customers, financial matters, accounting, statutory

compliances, secretarial and various other administrative and commercial issues.
                                        25

These people are at middle management and require regular support by team of

professionals of TACL. At the time of setting up of assessee company, it was

conscious decision taken by the joint venture partners to adopt a lean and thin

management structure so as to avoid duplication of resources which might

remain under-utilized at the joint venture company. In order to achieve this it

was decided that majority of technical services on day today basis will be

provided by Nippon Leakless Corp., Japan, through its technical staff whereas

majority of the managerial and administrative services as mentioned above will

be provided by TACL.

      The disallowance of the payment of administrative charges (management

fee) paid to TACL is, in our respectful submission, has been made without

appreciation of facts and legal position in this regard and not sustainable for the

reasons hereunder:

4.1   Re: Reasonableness of expenses has to be seen from the point of view
      of businessman:

      The ld. Counsel for the appellant submitted before us that under section

37(1) of the Act, deduction is admissible for expenditure incurred wholly and

exclusively for purposes of business. Expenditure justified by business

considerations and incurred out of commercial expediency is allowable

deduction.
                                         26

      The settled position of law is' that the reasonableness of the expenditure

has to be seen from the point of view of businessman and not that of the

Revenue, as laid down by the Supreme Court repeatedly in the following cases:

      ·       CIT vs. Walchand & Co., 651TR 381 (SC)
      ·       J.K. Woollen Manufacturers vs. CIT, 72 ITR 612 (SC)
      ·       Aluminium Corporation of India Ltd. vs. CIT, 86 ITR 11 (SC)
      ·       CIT vs. Panipat Woollen & General Mills Co. Ltd., 103 ITR 666
              (SC)
      ·       J.J. Enterprises v. CIT: 2541TR 216

      Reliance in this regard was placed on the decision of the Hon'ble Delhi

High Court in the case of CIT v. Dalmia Cement (P.) Ltd: 254 ITR 377. In that

case the assessee was a manufacturer of cement and had appointed a company

CDL as its sole selling agent. The assessee paid Rs.1.75 per M.T. as commission

to this agent and claimed the same as business deduction. The assessing officer

held that the amount as paid was on higher side and Re.1 per M.T. would be

permissible deduction as anything beyond Re.1 per M.T. was not for

commercial expediency. The balance amount involved was, therefore,

disallowed.

      The Court while holding the amount as claimed by the assessee as

allowable deduction, observed as under:

              "7. It is to be noted that, in the present case, the question that has
              been raised by the revenue is not one relating to the expenditure
              being not for the purposes of the business. It is the question of an
              appropriate amount which would have been paid as commission. In
              fact, the Assessing Officer himself has allowed to the extent of Rs.4,
              35, 854 holding, inter alia, "the payment of Rs. 1.75 per M. T to
              Cement Distributors Ltd. is very much on the excessive side". This
              in our view was impermissible within the framework of section 37.
              The jurisdiction of the revenue is confined to deciding reality of the
                                       27

             expenditure, namely, whether the amount claimed is as deduction
             was factually expended or laid down and whether it was wholly and
             exclusively for the purpose of the business. The reasonableness of
             the expenditure could be gone into only for the purpose of
             determining whether, in fact, the amount was spent. Once it is
             established that there was a nexus between the expenditure and the
             purpose of business, the revenue cannot justifiably claim to put
             itself in the armchair of a businessman or in the position of the
             board of directors and assume the said role to decide how much is
             a reasonable expenditure having regard to the circumstances of the
             case. We need not go into any hypothetical issue in this case in
             view of the accepted position that the factum of services rendered
             by CDL has not been refuted by the revenue. It needs no reiteration
             that the settled position in law is that no businessman can be
             compelled to maximize his profits. The obvious answer to the first
             question is in the affirmative, in favour of the assessee and against
             the revenue."

      The Delhi High Court in the case of CIT vs. Padmani Packaging (P) Ltd.:

155 Taxmann 268 following the decision in the case of CIT vs. Dalmia Cement

(Bharat) Ltd. (supra) held as under:

             "Based on the above findings and relying upon the decision of the
             Division Bench in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254
             ITR. 377 (Delhi), the Tribunal held that the addition made by the
             assessing officer was not sustainable. There is, in our view, no
             infirmity in that view. Once on a question of fact it is found that
             there was a nexus between the expenditure incurred by the assessee
             and his business and once it was held that the genuineness of the
             expenditure was not in dispute or had been established, the
             assessing authority could not sit in the arm chair of the
             businessman to determine as to what commission he ought to pay to
             its agents for doing his business. Mr. Jolly, however, argued that
             the CIT (Appeals) and the Tribunal had failed to take into account
             the fact that there was a search at the premises of the assessee in
             which it was discovered that the assessee was doing some business
             outside the books of account. We do not think that the said
             circumstances, even if established, could be conclusive evidence of
             the fact that the commission was either not paid or that the same
             was excessive within the meaning of section 40(A)(2) of the
             Income-tax Act. No substantial question of law arises for our
             consideration. This appeal fails and is hereby dismissed."
                                          28


         The Supreme Court in the case of S.A. Builders Limited vs. CIT: 288 ITR

1, while approving the decision of the Delhi High Court in the case of CIT vs.

Dalmia Cement(B) Ltd (supra) held that:

               "........once it is established that there was nexus between the
               expenditure and the purpose of the business (which need not
               necessarily be the business of the assessee itself), the Revenue
               cannot justifiably claim to put itself in the arm-chair of the
               businessman or in the position of the board of directors and assume
               the role to decide how much is reasonable expenditure having
               regard to the circumstances of the case. No businessman can be
               compelled to maximize his profit. The income-tax authorities must
               put themselves in the shoes of the assessee and see how a prudent
               businessman would act. The authorities must not look at the matter
               from their own view point but that of a prudent
               businessman........."

         To the same effect are the following decisions:

         ·     CIT vs. Malayalam Plantations Limited: 53 ITR 140 (SC)
         ·     CIT v. Birla Cotton Spg. And Wvg. Mills Ltd., 82 ITR 166 (SC)
         ·     Madhav Prasad Jatia v. CIT U.P., 1181TR 200 (SC) .
         ·     CIT V. Bharti Televentures Ltd: 331 ITR 502 (Del HC)
         ·     CIT v. Rockman Cycle Industries Ltd., 331 ITR 401 (P&H HC)
               (FB)

         The Hon'ble Delhi High Court in the case of CIT vs EKL Appliances Ltd

(ITA No. 1070/2011) while adjudicating upon the transfer pricing adjustment

made by the TPO, held that as long as an expense is incurred wholly and

exclusively for the purpose of business, it is irrelevant as to whether such

expenditure actually results in profit or not. The Hon'ble High Court held as

under:

               "21. The position emerging from the above decisions is that it is not
               necessary for the assessee to show that any legitimate expenditure
               incurred by him was also incurred out of necessity. It is also not
                                         29

              necessary for the assessee to show that any expenditure incurred by
              him for the purpose of business carried on by him has actually
              resulted in profit or income either in the same year or in any of the
              subsequent years. The only condition is that the expenditure should
              have been incurred "wholly and exclusively" for the purpose of
              business and nothing more. It is this principle that inter alia finds
              expression in the OECD guidelines, in the paragraphs which we
              have quoted bove. .
                                            xxx
              "So long as the expenditure or payment has been demonstrated to
              have been incurred or laid out for the purposes of business, it is no
              concern of the TPO to disallow the same on any extraneous
              reasoning. As provided in the OECD guidelines, he is expected to
              examine the international transaction as he actually finds the same
              and then make suitable adjustment but a wholesale disallowance of
              the expenditure, particularly on the grounds which have been given
              by the TPO is not contemplated or authorized."

        The Hon'ble Delhi Bench of the Tribunal in the case of M/s. Ericsson

India Pvt. Ltd. vs. DCIT (ITA No. 5141/De1/2011), too, following the law laid

down by the Hon'ble jurisdictional High        Court, held that "............it would

be wrong to hold that the expenditure should be disallowed only on the ground

that these expenses were not required to be incurred by the ssessee........"

        Further, in the case of LG Polymers India Pvt. Ltd. vs Addl. CIT (ITA No

524/Vizag/2010), the Hon'ble Visakhapatnam Bench of the Tribunal held as

under

              "13. We agree with the views of the Learned A.R on this issue. As
              submitted by him, it is the prerogative of the assessee to regulate its
              business affairs and it is not open for the department to question
              the same. Similar views have been expressed by the Hon'ble
              Supreme Court in the case of Oh a nrajgiriji Raja Narasingirji,
              referred (Supra)"
                                         30

      Further reliance in this regard is placed on the decision of the Mumbai

Bench of the Tribunal in the case of Dresser Rand India Pvt Ltd vs Addl. CIT

(ITA No 8753/Mum/2010), wherein the Tribunal held as under:

            "It is only elementary that how an assessee conducts his business is
            entirely his prerogative and it is not for the revenue authorities to
            decide what is necessary for an assessee and what is not."
                                      XXX
            This analysis is also completely irrelevant, because whether a
            particular expense on services received actually benefits an
            assessee in monetary terms or not even a consideration for its being
            allowed as a deduction in computation of income, and, by no
            stretch of logic, it can have any role in determining arm's length
            price of that service. When evaluating the arm's length price of a
            service, it is wholly irrelevant as to whether the assessee benefits
            from it or not; the real question which is to be determined in such
            cases is whether the price of this service is what an independent
            enterprise would have paid for the same. "

      Thus, whether or not a particular expenditure has to be incurred, depends

on the perception of the businessman/assessee, and this business perception

cannot be substituted by the revenue's perception of whether or not such

expenditure should have been incurred.

4.2   Re: Section 40A(2):

      The ld. Senior Counsel for the appellant submitted before us that section

40A(2) is the only provision in the Act which empowers the Revenue to sit in

judgment about the reasonableness of a claim of expenditure incurred by the

assessee if the revenue were to consider the same as excessive or unreasonable

having regard to the fair market value of the services or facilities, taking into

account the legitimate needs of business or the benefit derived by or accruing to

the assessee. Section 40A(2) names the relationships in which the Revenue may
                                       31

intervene to determine whether the payment by one party to another is excessive

or unreasonable.

      The provisions of section 40A (2) of the Act have been brought on the

Statute to prevent evasion of tax through diversion of income by one entity to

another related entity. The Central Board of Direct Taxes vide Circular .No.6-P

dated 6.7.1968 elaborated the scope of section 40A(2) of the Act in the

following terms:

            "The Income-tax Officer is expected to exercise his judgment in a
            reasonable and fair manner. It should be borne in mind that the
            provision is meant to check evasion of tax through excessive or
            unreasonable payments to relatives and associate concerns and
            should not be applied in a manner which will cause hardship in
            bona fide cases. "

      In this regard reliance is placed on the decision of the Bombay High Court

in the case of CIT vs. Indo Saudi Services (Travel) (P.) Ltd., 219 CTR 562

wherein the Hon'ble Court held as under:

            "............iv) The sister concern of the appellant M/s Middle East
            International is also assessed to tax and income assessed for the A.
            Y. 1991-92 is Rs. 9,38,510/- and for A. Y. 1992-93 is Rs.
            14,65,880/- and the said assessment orders have been placed on
            record.
            v)     Under the CBDT Circular No. 6-P dated 6th July, 1968 it is
            stated that no disallowance is to be made under section 40A(2) in
            respect of the payments made to the relatives and sister concerns
            where there is no attempt to evade tax.
            5. In view of the aforesaid admitted facts we are of the view that the
            Tribunal was correct in coming to the conclusion that the CIT (A)
            was wrong in disallowing half percent commission paid to the
            sister concern of the appellant during the Assessment Years 1991-
            92 and 1992-93. The learned Advocate appearing for the appellant
            was also not in a position to point out how the appellant evaded
            payment of tax by alleged payment of higher commission to its
            sister concern since the sister concern was also paying tax at
                                        32

            higher rate and copies of the assessment orders of the sister
            concern were taken on record by the Tribunal.
            6. We, therefore, answer the above question of law raised in these
            appeals in affirmative and dismiss the above appeals filed by the
            appellant. There will, however, be no order as to costs"

      Further, in the case of CIT vs. Glaxo Smithkline Asia Pvt Ltd (SLP No

18121/25007) the Hon'ble Supreme Court while adjudicating upon an issue

involving applicability of section 40A(2) of the Act held as under:

            "Having gone through the relevant material placed before us
            concerning Assessment Year 2001- 2002, we are of the view that, as
            far as this special leave petition is concerned, no interference is
            called for as the entire exercise is a revenue neutral exercise.
            Hence, this special leave petition filed by the Department stands
            dismissed. " .

      It has been held by the Courts that the disallowance under section 40A(2)

of the Act could be considered only after a finding is recorded by the assessing

officer that the expenditure was excessive or unreasonable having regard to (i)

the market value of goods or services; (ii) the legitimate business needs; (iii)

benefit derived by or accruing to the appellant therefrom. The onus is on the

assessing officer to find out the fair market value of goods and services and

bring on record comparable instances.

      Reliance is further placed in this regard on the following decisions:

      - Voltamp Transformers (P) Ltd. vs. CIT: 129 ITR 105(Guj.)
      - Beta Naphthol P, Ltd. vs. OCIT: 50 TT J 375 (Ind)
      - Hathiwala Silk Mills vs. ITO: 19 TT J 284 (Ahd)
      - M & Co. vs. ITO: 23 Taxman (Mag), 27 (Ahd)
      - Binit Corporation vs. ITO: 25 Taxman 238 (Ahd.) (Mag).
      - Upvan International vs. ITO: 15 ITD 215 (Del)
      - Rangoon Chemical Works P. Ltd. vs. ACIT: 100 Taxman (Mag)
        163 (Ahd).
      - Shriram Pistons & Rings Ltd. vs. IAC: 39 TT J 132 (Del).
                                       33

      - Vikshra Trading and Investment Private Ltd. vs. CIT: 61 TTJ 6
        (Ahd.)
      - Batliwala Karani vs. ACIT: (2005) 2 SOT 379 (Mumbai)
      - Nestle (India Ltd (ITA No.4545/D/2000 and 2239/D/2002
      - Shankar Trading Co Pvt. Ltd. vs. ACIT: ITA No.2792 to 2794/D/2004
        and 2155/D/2002.
      - DCIT vs. Lab India Instruments (P) Ltd: 93 ITO 120 (Pune)

      The provisions of section 40A(2) of the Act cannot, be applied in the

present case considering that:

      - No ulterior motive can be attributed to the management fees to TACL
      by the assessee,
      - the arrangement is not to the detriment of Revenue considering that
      TACL has paid tax on the said amount of management fee paid by the
      assessee,
      - there is no evasion of tax in the aforesaid arrangement.
      - the Assessing Officer before disallowing the expenditure has not
      brought on record comparable instances to show that the expenses
      incurred are excessive having regard to the legitimate needs of business of
      the assesses.

      It is submitted that management fee is paid by the assessee on the basis of

the approval granted by Central Government, which implies that such payments

are as per industry norms and are comparable to payment of management fee by

other industries in the segment. The payment of management fee made as per

the agreement approved by the Government cannot, in our respectful

submission, be disallowed under section 40A (2) of the Act.

      The Central Board of Direct Taxes vide Circular No. 6P dated 8.7.1968
      has also clarified that where remuneration to a Director is approved by
      Company Law Board, there is no question of disallowance of the same
      holding it to be excessive and unreasonable.

      The Supreme Court in the case of LIC v. Escorts Ltd (1986): 1 SCC 264

observed as under:
                                        34


            "As we said earlier, under the scheme of the Act, it is the Reserve
            Bank of India that is constituted and entrusted with the task of
            regulating and conserving foreign exchange. If one may use such
            an expression, it is the 'custodian-general' of foreign exchange. The
            task of enforcement is left to the Directorate of Enforcement, but it
            is the Reserve Bank of India and the Reserve Bank of India alone
            that has to decide whether permission mayor may not be granted
            under Section 29(1) of the Act. The Act makes it its exclusive
            privilege and function. No other authority is vested with any power
            nor may it assume to itself the power to decide the question whether
            permission mayor may not be granted or whether it ought or ought
            not to have been granted. The question may not be permitted to be
            raised either directly or collaterally. "

      The Delhi High Court in the case of CIT v. Shriram Pistons & Rings Ltd.,

181 ITR 230 held that where remuneration paid to son of a director of the

assessee, was approved by the Company Law Board, no disallowance under

section 40A(2) of the Act could be made by the Income-tax department on the

ground that the same was excessive considering the professional qualification of

the employee or the lack of it. It was observed by the Court that since the

Company Law Board had decided that the remuneration paid to the employee

was reasonable, it was not ordinarily open to the Income-tax authorities to

regard such fixation as unreasonable.

      Attention is also invited to the decision of Pune bench of the Tribunal in

the case of Kinetic Honda Motors limited: 77 ITD 393, wherein the Hon'ble

Tribunal deleted the disallowance on the ground that the royalty payment was as

per the norms laid down by the guidelines issued by the Ministry of Industry and

the same could not be said to be excessive or unreasonable
                                        35

4.3   Re: Ad-hoc disallowance is impermissible
      Without prejudice, it is submitted that since the books of accounts have

been audited in accordance with the provisions of the Act and has been accepted

as true and correct, there is no justification to make any adhoc disallowance.

      Reliance is also placed on the decision of Hon'ble Delhi High Court in the

case of Jai Engineering limited: 113 ITR 389, wherein it is held as under:

              "It is quite competent for the income-tax authorities not only to
              accept the auditors' report, but also to draw the proper inference
              from the same. The income-tax authorities can, therefore, come to
              the conclusion that, since the auditors were required by the statute
              to find out if the deductions claimed by the assesses in their
              balance- sheets and profit and loss accounts were supported by the
              relevant entries in their account books, the auditors must have done
              so and must have found that the account books supported the
              claims for deduction.

              Where the original account books of the assessee had been
              destroyed in a fire it was held that the Appellate Tribunal, in
              allowing a deduction, could rely upon other material mainly
              consisting of the auditors' reports from which it could be inferred
              that the deductions were properly supported by the relevant entries
              in the account books."

      Kind attention is further invited to the following decisions wherein adhoc

disallowances made in absence of any specific mention of a unvouched

expenditure liable to be disallowed have been held to be untenable and not

called for.

      ·       Dwarka Prasad Agarwal v. ITO: 52 ITD 239 (Cal)
      ·       Mahendra Oil cake Industries Pvt. Ltd. v ACIT: 55 TTJ 711 (Ahd.)
      ·       Rattah Mechanical Works Ltd. v ITO: 87 Taxman 288 (Mag)(Cd.)
      ·       Shriram Pistons and Rings Ltd. v IAC: 39 IT J 132 (Del.)
      ·       Roger Enterprises Pvt. Ltd. v. ITA : 52 TT J 198 (Del.)
      ·       Ramji Das Modi v. DCIT: 110 Taxman 107 (JP) (Mag)
      ·       ACIT v. Bateli Tea Co. Ltd., [2003] SOT 72.
      ·       Continental Seeds & Chemicals Ltd. v. ACIT": (2003) SOT 393
                                           36


         Further the Hon'ble ITAT in the appellant's own case for AY 2008- 09 has

allowed the payment of management fees and restored the matter to the books of

TPO. The Hon'ble ITAT held as follows:

               "We have heard the matter both the counsel and perused the
               records. In our considered opinion the consideration of these
               additional evidences is necessary for proper adjudication of the
               issue. However, we note that these additional evidences are
               admitted and remitted to the files of assessing officer. In our
               considered opinion, interest of justice will be served, if additional
               evidences as sought to be placed by the assessee are remitted to the
               file of the assessing officer for consideration. Accordingly we admit
               the additional evidence and remit the same to the file of the
               assessing officer. The AO shall consider these grounds afresh."

         The aforesaid disallowance, it is respectfully submitted, is based on mere

suspicion and surmises and is devoid of any cogent reason. No evidence has

been brought on record by the assessing officer to substantiate the allegation that

the expenditure was excessive and unreasonable.

         For the aforesaid reasons, it is respectfully submitted that the addition

made by the assessing officer under section 40A(2)(b) of the Act is not

sustainable and is liable to be deleted.

5.       The appellant filed an application for admission of additional evidence in

terms of Rule 29 of the ITAT Rules, 1963. The appellant sought to place on

record the following by way of additional evidence. The approval granted by

Ministry of Company Affairs, Govt. of India for payment of administrative

services fee to Talbros Automotive Components Ltd. and it was submitted as

under:
                                       37

"The appellant seeks to place on record the following by way of additional
evidence:

   1. Approval granted by Ministry of Company Affairs, Government of India
      for payment of Administrative Services Fee to Talbros Automotive
      Components Ltd. Placed at pages 1 to 6

- Merits of the matter in relation to the aforesaid additional evidence are
  explained hereunder:

The: appellant during the relevant previous year incurred expenditure,
amounting to Rs. 1,49,76,358 on account of administrative charges paid to M/s
Talbros Automotive Components Ltd. (TACL) for provision of services such as
sales and marketing services, secretarial services, financial and accounting
services etc.

In view of the thin and lean employee structure of the appellant, the accounting,
marketing and day to day administration function was outsourced to Talbros. In
consideration of the services, the appellant pays 10% of profits before tax to
TACL, It would be appreciated that the appellant does not have the qualified
employees to perform the aforesaid functions.

The assessing officer, however, disallowed the payment of administrative
charges under section 40A(2) of the Act on the ground that the appellant has
failed to prove the reasonableness and justification for the aforesaid amount.

It is submitted that management fee is paid by the appellant on the basis of the
approval granted by Central Government, which implies that such payments are
as per industry norms and are comparable to payment of management fee by
other industries in the segment. The payment of management fee made as per
the agreement approved by the Government cannot, in our respectful
submission, be disallowed under section 40A(2) of the Act.

The Central Board of Direct Taxes vide Circular No. 6P dated 8.7.1968 has also
clarified that where remuneration to a Director is approved by Company Law
Board, there is no question of disallowance of the same holding it to be
excessive and unreasonable.

The Supreme Court in the case of LIC v, Escorts Ltd (1986): 1 SCC 264
observed as under:

      "As we said earlier, under the scheme of the Act, it is the Reserve Bank of
      India that is constituted and entrusted with the task of regulating and
      conserving foreign exchange. If one may use such an expression, it is the
                                        38

      'custodian-general' of foreign exchange. The task of enforcement is left to
      the Directorate of Enforcement, but it is the Reserve Bank of India and the
      Reserve Bank of India alone that has to decide whether permission mayor
      may not be granted under Section 29(1) of the ACT. The Act makes it its
      exclusive privilege and function. No other authority is vested with any
      power nor may it assume to itself the power to decide the question
      whether permission may or may not be granted-or whether it ought or
      ought not to have been granted. The question may not be permitted to be
      raised either directly or collaterally."

The Delhi High Court in the case of CIT v. Shriram Pistons & Rings Ltd., 181
ITR 230 held that where remuneration paid to son of a director of the assessee,
was approved by the Company Law Board, no disallowance under section
40A(2) of the Act could be made by the Income-tax department on the ground
that the same was excessive considering the professional qualification of the
employee or the lack of it. It was observed by the Court that since the Company
Law Board had decided that the remuneration paid to the employee was
reasonable, it was not ordinarily open to the Income-tax authorities to regard
such fixation as unreasonable.

Attention is also invited to the decision of Pune bench of the Tribunal in the case
of Kinetic Honda Motors Limited: 77 ITO 393, wherein the Hon'ble Tribunal
deleted the disallowance on the ground that the royalty payment was as per the
norms laid down by the guidelines issued by the Ministry of Industry and the
same could not be said to be excessive or unreasonable.

In view of the aforesaid, it is respectfully submitted that the aforesaid approvals
granted by the government, placed as additional evidence before your Honors,
are relevant to establish that the payment for administrative services being
pursuant to a specific approval granted by the Government cannot be questioned
by the assessing officer as being excessive or unreasonable.

PRAYER:

It would be appreciated that this is the first appeal before the Hon'ble Tribunal
against the impugned assessment order. The aforesaid additional evidences have
been placed on record to rebut the conclusion arbitrarily arrived at by the lower
authorities and in the interest of Justice, the same may kindly be taken into
consideration while deciding the appeal. Since the evidence placed on record
goes to the root of the matter, the same needs to be admitted for adjudication of
the appeal.

Your Honour's kind attention is invited to the decision of the jurisdictional Delhi
High Court in the case of CIT vs. Text Hundred India Pvt. Ltd.: 239 CTR 263.
                                        39

In that case, their Lordships held that Rule 29, permitting the Tribunal to admit
additional evidence is made to enable the Tribunal to admit any additional
evidence which would be necessary to do substantial justice in the matter. Their
Lordships further observed that the various procedures, including that relating to
filing of additional evidence, is handmade for justice and justice should not be
allowed to be choked only because of some inadvertent error or omission on the
part of one of the parties to lead evidence.

The relevant observations of the Court are reproduced hereunder:

      "13. The aforesaid case law clearly lays down a neat principle of law-
      that discretion lies with the Tribunal to admit additional evidence in the
      interest of justice once the Tribunal affirms the opinion that doing so
      would be necessary for proper adjudication of the matter. This can be
      done even when application is filed by one of the parties to the appeal and
      it need not to be a suo motto action of the Tribunal. The aforesaid rule is
      made enabling the Tribunal to admit the additional evidence in its
      discretion if the Tribunal holds the view that such additional evidence
      would be necessary to do substantial justice in the matter. It is well settled
      that the procedure is handmade of justice and justice should not be
      allowed to be choked only because of some inadvertent error or omission
      on the part of one of the parties to lead evidence at the appropriate stage.
      Once it is found that the party intending to lead evidence before the
      Tribunal for the first time was prevented by sufficient cause to lead such
      an evidence and that this evidence would have material bearing on the
      issue which needs to be decided by the Tribunal and ends of justice
      demand admission of such an evidence, the Tribunal can pass an order to
      that effect."

Reliance is also placed in that regard on the following decisions:

      CIT v. Hewlett Packard India: 314 ITR 55 (Del HC)
      CIT v. Chandra Kant Sahu Bhai: 202 Taxman 262 (Del HC)
      CIT v. Betterways Finance: ITA 995 of 2009 (Del HC)
      Jatia Investment Co v. CIT: 206 ITR 718 (Cal HC)
      Electra (Jaipur) Ltd v. IAC: 26 ITO 236 (Del ITAT)
      Y. W. C. A. of India vs lAC: 29 ITO 620 (Del ITAT)

Reliance in this regard is also placed on. the decision of the Hon'ble Pune Bench
of the Tribunal in the case of Rieterlndia Pvt Ltd vs ACIT (ITA No
1374/PN/2010) wherein, the Hon'ble Tribunal while dealing with an application
for admission of additional evidence, examined the powers of the Tribunal in
terms of Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 and held as
under:
                                  40


"9. We have heard the rival parties with respect to the preliminary prayer
of the assessee seeking admission of the aforesaid additional evidence in
terms of rule 29 of the Appellate Tribunal Rules. At the outset, we may
reproduce hereinafter rule 29 of the Appellate Tribunal Rules which reads
as under :-

"29. Production of additional evidence before the Tribunal.- The parties
to the appeal shall not be entitled to produce additional evidence either
oral or documentary before the Tribunal, but if the. Tribunal requires any
documents to be produced or any witness to be examined or any affidavit
to be filed to enable it to pass orders or for any other substantial cause,
or, if the income- tax authorities have decided the case without giving
sufficient opportunity to the assessee to adduce evidence either on points
specified by them, or not specified by them, the Tribunal, for reasons to be
recorded, may allow such document to be produced or witness to be
examined or affidavit to be filed or may allow such evidence to be
adduced."




A perusal of the above rule would show that the parties to the appeal
before the Tribunal are not entitled to produce additional evidence, either
oral or documentary, as a matter of vested right. However, if the Tribunal
requires any document to be produced or any witness to be examined or
any affidavit to be filed, it may permit so for the reasons to be recorded.
Nevertheless, it has to be understood that the discretion vested in the
Tribunal is not without fetters. We say so for the reason that the rule itself
carves out situations, where the exercise of such discretionary power by
the Tribunal is permissible. Shorn of other details, so far as it is relevant
for the present purpose, one such situation which is prescribed is
admission of additional evidence which enables the Tribunal "to pass
orders or for any other substantial cause". The presence of the aforesaid
expression in rule 29 of the Appellate Tribunal Rules shows that the
Tribunal is competent to admit additional evidence in situation which
enable to Tribunal to pass orders or for any other substantial cause.
                                 XXX
11. In our considered opinion, all the evidences sought to be canvassed
for admission are relevant and germane to appropriately determine the
arm's length price of the international transactions entered by the
assessee with its associated enterprises. Considering the circumstances
explained by the assessee, and the bonafides of the reasons not having
been assailed by the Revenue, the same deserve to be admitted. Therefore,
we deem it fit and proper to admit the additional evidences having regard
to the facts and circumstances of the present case:"
                                         41

Further, recently in the case of Bentley Systems India Pvt Ltd vs ACIT (ITA No
6160/Del/2013) the Hon'ble Tribunal while adjudicating upon an issue involving
transfer pricing adjustment on account of intra group services admitted the
additional evidence, placed on record by the assessee for the purpose of
substantiating the receipt of management services. The Hon'ble Tribunal held
that since the evidence placed on record goes to the root of the matter, the same
needs to be admitted for adjudication of the appeal. In view of the aforesaid, it is
submitted that the additional evidence placed by the applicant may kindly be
admitted and taken into account for disposing the present appeal.

In view of the aforesaid and in the interest of justice, it is respectfully prayed
that the aforesaid additional evidence may kindly be admitted by exercising the
discretion conferred on the Hon'ble Tribunal under Rule 29 of the Income Tax
(Appellate Tribunal) Rules, 1963.

6.    We considered the application for admission of additional evidence

carefully keeping in view the judgment of the Hon'ble Jurisdictional High Court

in the case of CIT Vs. Text Hundred India Pvt. Ltd., 239 CTR 263 that the

additional evidence should be admitted where such additional is necessary to do

substantial justice in the matter. This evidence undisputably is necessary by

adjudication of the matter on hand. Following the ratio laid down in the case

cited supra, we admit the additional evidence placed on record as this would be

necessary to do substantial justice in the matter.

7.    On the other hand, ld. CIT-DR relied on the orders of lower authorities.

8.    We have heard the rival submission and perused the material on record.

First we shall deal with the Transfer Pricing Adjustment (TPA) made by the

Assessing Officer. The TPO held that there were no services rendered by the AE

to the appellant and hence held that ALP is nil and this was summarily rejected

by the DRP vide his order dated 14.11.2014. The contention of the TPO cannot

be upheld for the simple reason that there were no employees with the appellant
                                        42

who are technically competent to be able to develop new gasket. This is evident

from its low employee cost to sales as well as depreciation sales. It is imperative

to refer to the OECD guidelines whether the services have been rendered or not.

Para 7.6 of the guidelines states as under:

      "7.6 Under the arm's length principle, the question whether an intragroup
      service has been rendered when an activity is performed for one or more
      group members by another group member should depend on' whether the
      activity provides a respective group member with economic or
      commercial value to enhance its commercial position, This can be
      determined by considering whether an independent enterprise in
      comparable circumstances would have been willing to pay for the activity
      if performed for it by an independent enterprise or would have performed
      the activity inhouse for itself."


9.    The Hon'ble Jurisdictional High Court in the case of CIT Vs. EKL

Appliances Ltd., 345 ITR 241 after referring to the abovementioned OECD

guidelines held as follows vide paras 19 to 22:

     "19. There is no reason why the OECD guidelines should not be taken
     as a valid input in the present case in judging the action of the TPO. In
     fact, the CIT (Appeals) has referred to and applied them and his
     decision has been affirmed by the Tribunal. These guidelines, in a
     different form, have been recognized in the tax jurisprudence of our
     country earlier. It has been held by our courts that it is not for the
     revenue authorities to dictate to the assessee as to how he should
     conduct his business and it is not for them to tell the assessee as to what
     expenditure the assessee can incur. We may refer to a few of these
     authorities to elucidate the point. In Eastern Investment
     Ltd. v. CIT [1951] 20 ITR 1 (SC), it was held by the Supreme Court that
     "there are usually many ways in which a given thing can be brought
     about in business circles but it is not for the Court to decide which of
     them should have been employed when the Court is deciding a question
     under Section 12(2) of the Income Tax Act". It was further held in this
     case that "it is not necessary to show that the expenditure was a
     profitable one or that in fact any profit was earned".
     In CIT v. Walchand & Co. (P.) Ltd. [1967] 65 ITR 381 (SC), it was held
     by the Supreme Court that in applying the test of commercial
                                  43

expediency for determining whether the expenditure was wholly and
exclusively laid out for the purpose of business, reasonableness of the
expenditure has to be judged from the point of view of the businessman
and not of the Revenue. It was further observed that the rule that
expenditure can only be justified if there is corresponding increase in
the profits was erroneous. It has been classically observed by Lord
Thankerton in Hughes v. Bank of New Zealand [1938] 6 ITR 636 (HL)
that "expenditure in the course of the trade which is unremunerative is
none the less a proper deduction if wholly and exclusively made for the
purposes of trade. It does not require the presence of a receipt on the
credit side to justify the deduction of an expense". The question whether
an expenditure can be allowed as a deduction only if it has resulted in
any income or profits came to be considered by the Supreme Court
again in CIT v.Rajendra Prasad Moody [1978] 115 ITR 519 (SC), and
it was observed as under: -

    "We fail to appreciate how expenditure which is otherwise a proper
    expenditure can cease to be such merely because there is no receipt
    of income. Whatever is a proper outgoing by way of expenditure
    must be debited irrespective of whether there is receipt of income or
    not. That is the plain requirement of proper accounting and the
    interpretation of Section 57(iii) cannot be different. The deduction
    of the expenditure cannot, in the circumstances, be held to be
    conditional upon the making or earning of the income."

It is noteworthy that the above observations were made in the context of
Section 57(iii) of the Act where the language is somewhat narrower
than the language employed in Section 37(1) of the Act. This fact is
recognised in the judgment itself. The fact that the language employed
in Section 37(1) of the Act is broader than Section 57(iii) of the Act
makes the position stronger.

20. In the case of Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118
ITR 261 / 1 Taxman 485 (SC), the Supreme Court referred to the
legislative history and noted that when the Income Tax Bill of 1961 was
introduced, Section 37(1) required that the expenditure should have
been incurred "wholly, necessarily and exclusively" for the purposes of
business in order to merit deduction. Pursuant to public protest, the
word "necessarily" was omitted from the section.

21. The position emerging from the above decisions is that it is not
necessary for the assessee to show that any legitimate expenditure
                                         44

      incurred by him was also incurred out of necessity. It is also not
      necessary for the assessee to show that any expenditure incurred by him
      for the purpose of business carried on by him has actually resulted in
      profit or income either in the same year or in any of the subsequent
      years. The only condition is that the expenditure should have been
      incurred "wholly and exclusively" for the purpose of business and
      nothing more. It is this principle that inter alia finds expression in the
      OECD guidelines, in the paragraphs which we have quoted above.

      22. Even Rule 10B(1)(a) does not authorise disallowance of any
      expenditure on the ground that it was not necessary or prudent for the
      assessee to have incurred the same or that in the view of the Revenue
      the expenditure was unremunerative or that in view of the continued
      losses suffered by the assessee in his business, he could have fared
      better had he not incurred such expenditure. These are irrelevant
      considerations for the purpose of Rule 10B. Whether or not to enter into
      the transaction is for the assessee to decide. The quantum of
      expenditure can no doubt be examined by the TPO as per law but in
      judging the allowability thereof as business expenditure, he has no
      authority to disallow the entire expenditure or a part thereof on the
      ground that the assessee has suffered continuous losses. The financial
      health of assessee can never be a criterion to judge allowability of an
      expense; there is certainly no authority for that. What the TPO has
      done in the present case is to hold that the assessee ought not to have
      entered into the agreement to pay royalty/brand fee, because it has
      been suffering losses continuously. So long as the expenditure or
      payment has been demonstrated to have been incurred or laid out for
      the purposes of business, it is no concern of the TPO to disallow the
      same on any extraneous reasoning. As provided in the OECD
      guidelines, he is expected to examine the international transaction as he
      actually finds the same and then make suitable adjustment but a
      wholesale disallowance of the expenditure, particularly on the grounds
      which have been given by the TPO is not contemplated or authorised."


10.    The ratio that can be culled out from the above decision is that it is not

necessary for the assessee to show that any legitimate expenditure incurred by

him is also incurred out of necessity or the expenditure incurred by him for the

purpose of business actually resulted in profit. This ratio was followed by the

coordinate bench of the Tribunal in the following decisions;
                                       45

  i.   Erricsson India (P.) Ltd. Vs. DCIT, [2012] 25 taxmann.com 472 (Del.)
 ii.   Festo Controls Private Ltd. Vs. DCIT, [2013] 30 taxmann.com 16 (Bang.)
iii.   Fosroc Chemicals India Pvt. Ltd. Vs. DCIT, ITA(TP) No.
       1256(Bang./2011
iv.    AWB India Pvt. Ltd. Vs. ACIT, - TS-67-ITAT-2013 (Del)-TP
 v.    Thysssen Krup Industries India Pvt. Ltd. Vs. ACIT (2012) 27
       taxmann.com 34 (Mum-Trib.)
vi.    Yokogawa India Ltd. Vs. ACIT, ITA No. 1329/Bang/2011

       Therefore, respectfully following the above ratio we hold that the TPO is

not justified in determining the ALP on the payment made for management fees

of Rs. 2,99,52,717/- at nil. Accordingly, the grounds of appeal from 2 to 2.10 are

allowed.

11.    That brings to the issue relating to the disallowance of Rs. 1,49,76,358/-

being the amount paid to M/s Talbros Automotive Components Ltd. towards

administrative services under Section 40A(2) of the Act.

12.    We heard the rival submissions and perused the material on record. It

appears from the assessment order that the Assessing Officer had disallowed the

impugned payment to its sister concern on the ground that the appellant had not

produced any evidence in support of having rendered the services by M/s

Talbros Automotive Components Ltd. During the course of hearing, the

appellant filed the additional evidence in support of the services rendered which

was admitted by us as mentioned in paragraphs supra. This clearly establishes

that the appellant had received the services from the said company. That apart,

in our view, AO had not met the requirement of the provisions of Section

40A(2). A plain reading of the provisions of Section 40A(2) reveals that where

an assessee incurs any expenditure in respect of which payment is required to be
                                         46

made or has been made to any person referred to in clause (b) of section 40A(2)

of the Act and the Assessing Officer is of the opinion that such expenditure is

excessive or unreasonable having regard to (a) fair market value of the goods,

services or facilities for which the payment is made; or (b) the legitimate needs

of the business of the assessee; or (c) the benefits derived by or accruing to the

assessee on receipt of such goods, services or facilities, then the Assessing

Officer shall not allow as a deduction so much of the expenditure as is so

considered by the Assessing Officer to be excessive or unreasonable. Therefore,

it becomes apparent that the Assessing Officer is required to record a finding as

to whether the expenditure is excessive or unreasonable in relation to any one of

the three requirements prescribed. This opinion has to be formed by the

Assessing Officer based on the material evidence available on the record. The

Assessing Officer is duty bound to bring on record the comparable fair market

value of the services rendered to say that the value paid by the assessee is

excessive or unreasonable. We find no evidence on record to notice that the

Assessing Officer made efforts in this direction. He simply made disallowance

based on the surmises and conjectures.

13.   We may also refer to the scope of Section 40A(2) as explain by the CBDT

in Circular No. 6P, dated 06.07.1968. The CBDT clarified that while examining

the reasonableness of expenditure the Assessing Officer is expected to exercise

his judgment in a reasonable and fair manner. It should be borne in mind that the

provision is meant to check evasion of tax through excessive or unreasonable
                                       47

payments to relatives and associate concerns and should not be applied in a

manner which will cause hardship in bona fide cases.

14.   In CIT Vs. Edward Keventer (P.) Ltd. [1972] 86 ITR 370, the Calcutta

High Court considering identical provision in 1922 Act, it was held that the

section places two limitations in the matter of exercise of the power. The section

enjoins the Assessing Officer in forming any opinion as to the reasonableness or

otherwise of the expenditure incurred must take into consideration (i) the

legitimate business needs of the company and (ii) the benefit derived by or

accruing to the company. The legitimate business needs of the company must be

judged from the view point of the company itself and must be viewed from the

point of view of a prudent businessman. It is not for the Assessing Officer to

dictate what the business needs of the company should be and he is only to

judge the legitimacy of the business needs of the company from the point of

view of a prudent businessman. The benefit derived or accruing to the company

must also be considered from the angle of a prudent businessman. The term

"benefit" to a company in relation to its business, it must be remembered, has a

very wide connotation and may not necessarily be capable of being accurately

measured in terms of pound, shillings and pence in all cases. Both these aspects

have to be considered judiciously, dispassionately without any bias of any kind

from the view-point of a reasonable and honest person in business.

15.   The aforesaid judgement of Calcutta High Court was affirmed by the

Apex Court in CIT Vs. Edward Keventer (P.) Ltd. [1978] 115 ITR 149. In the
                                       48

same line is the judgment of Bombay High Court in the case of CIT Vs.

Shtrunjay Diamonds [2003] 261 ITR 258/128, Taxmann, 759.

16.   Following the ratio laid down in the above cases, we hold that in the

present case also there is no warrant for disallowance of sum of Rs.

1,49,76,358/- paid to M/s Talbros Automotive Pvt. Ltd. as the Assessing Officer

failed to discharge the onus that was lying upon him as per the mandate of the

provisions of Section 40A(2) of the Act. Accordingly, the grounds of appeal

from 3 to 3.4 are allowed.

17.    Ground no. 4 is consequential in nature and does not require any

adjudication.

18.   In the result, appeal filed by the assessee company is allowed.

      The decision is pronounced in the open court on 28thAugust, 2015.




           Sd/-                                       Sd/-
     (I.C. SUDHIR)                             (INTURI RAMA RAO)
  JUDICIAL MEMBER                             ACCOUNTANT MEMBER
Dated: 28th August, 2015.
RK/-
Copy forwarded to:
1.     Appellant
2.     Respondent
3.     CIT
4.     CIT(A)
5.     DR
                                               Asst. Registrar, ITAT, New Delhi

 
 
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