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.
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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.
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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.
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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
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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:
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(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.
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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
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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
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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
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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. "
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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:
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"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
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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
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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
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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.
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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
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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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