Appeal details
Counselvise Citation
[2017] 123 COUNSELVISE.COM (IT) 2771 (ITAT-CHENNAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
11 month(s) 1 day(s)
Appellant
Respondent
Appeal Type
Cross Objection
Pronouncement Date
16-02-2017
Appeal Filed By
Assessee
Bench Allotted
C
Next Hearing Date
15-02-2017
Assessment Year
2007-2008
Appeal Filed On
15-03-2016
Judgement Text
, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , ' # . $ & ' BEFORE SHRI M. BALAGANESH, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 / ASSESSMENT YEAR : 2007-08 DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT- 1, CHENNAI - 600 034. VS. M/S. CATERPILLAR POWER INDIA (P) LTD., 7TH FLOOR, INTERNATIONAL TECH PARK CHENNAI , TARAMANI ROAD, CHENNAI - 600 113. [PAN: AAACH 2193N] (APPELLANT) (RESPONDENT/ CROSS O BJECTOR) ) * / APPELLANT BY : SHRI A.V. SREEKANTH, JCIT -.) * / RESPONDENT BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE & SHRI S P. CHIDAMBARAM, ADVOCATE * /DATE OF HEARING : 15.02.2017 * /DATE OF PRONOUNCEMENT : 16.02.2017 /O R D E R PER M. BALAGANESH, ACCOUNTANT MEMBER: THIS APPEAL OF THE REVENUE ARISE OUT OF THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-1, VIDE PROCEE DINGS IN ITA NO. 716/2010- 11 NEW NO. ITA3/CIT(A)-1/2010-11, DATED 01.09.2015 FOR THE ASSESSMENT YEAR :-2-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 2007-08. SINCE, THE ISSUE IN APPEALS ARE COMMON IN NATURE, THE APPEALS ARE CLUBBED AND HEARD TOGETHER AND DISPOSED OFF BY THE COMMON ORDER. FOR THE SAKE OF CONVENIENCE, NOW WE TAKE UP THE FACTS NARRATED I N THE APPEAL ITA NO. 61/MDS/2016. ITA NO. 61/MDS/2016 REVENUE APPEAL 2. AT THE OUTSET, THERE WAS A DELAY OF 1 DAY IN FI LING THE APPEAL BEFORE US BY THE REVENUE. WE ARE CONVINCED WITH THE REASON ADDU CED THEREON BY THE LD DR AND ACCORDINGLY WE CONDONE THE DELAY AND ADMIT THE APPEAL FOR ADJUDICATION BEFORE US. 3. THE ONLY ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE LD CITA WAS JUSTIFIED IN DELETING THE ADDITION OF RS. 2,07, 16,000/- MADE TOWARDS BUSINESS MANAGEMENT SERVICES IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 4. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSES SEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF DIESEL ENGINES, GENERATI NG SETS AND TRADING OF RELATED SPARES. THE RETURN OF INCOME FOR THE ASST YEAR 20 07-08 WAS FILED BY THE ASSESSEE ON 25.10.2007 DECLARING TAXABLE INCOME OF RS. 29,79,03,996/- WHICH WS PROCESSED U/S 143(1) OF THE ACT ON 16.10.2008. SU BSEQUENTLY, THE LD AO SOUGHT TO REOPEN THE ASSESSMENT FOR THE ASST YEAR 2007-08 ON THE GROUND THAT ASSESSEE HAD MADE PAYMENT TOWARDS BUSINESS SUPPORT SERVICES TO CATERPILLAR INDIA PVT LTD :-3-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 WHICH WAS FOUND TO BE UNWARRANTED AND EXCESSIVE IN TERMS OF SECTION 40A(2)(A) OF THE ACT, AMONG OTHER ISSUES. ACCORDINGLY, NOTI CE U/S 148 OF THE ACT WAS ISSUED ON THE ASSESSEE ON 19.11.2009. IN RESPONSE TO THIS NOTICE, THE ASSESSEE REQUESTED THE DEPARTMENT TO TREAT THEIR ORIGINAL RE TURN FILED ON 25.10.2007 VIDE ACKNOWLEDGEMENT NO. 2759240251007 AS THE RETURN OF INCOME IN RESPONSE TO NOTICE U/S 148 OF THE ACT. THIS WAS SELECTED FOR SCRUTINY AND THE LD AO REFERRED THE SAME TO LEARNED TRANSFER PRICING OFFICER (LD TP O) AS THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATED EN TERPRISES (AES) HAD EXCEEDED THE THRESHOLD LIMIT U/S 92CA OF THE ACT. THE FINA L ACCOUNTS, AUDIT REPORTS AND OTHER DETAILS AVAILABLE ON RECORD WERE VERIFIED AND SINCE THE SAME WERE NOT SELF REVEALING, A NOTICE U/S 142(1) WAS ISSUED TO THE AS SESSEE ON 12.10.2010. THE LD AO OBSERVED THAT THE ASSESSEE HAD MADE PAYMENTS TOW ARDS BUSINESS SUPPORT SERVICES TO M/S CATERPILLAR INDIA P LTD (CIPL) FOR RS. 94,76,000/- . THE LD AO QUESTIONED THE REASONABLENESS, EXIGENCY AND NECESSI TY OF INCURRENCE OF THE SAID EXPENDITURE IN RUNNING THE AFFAIRS OF THE ASSESSEE COMPANY. THE ASSESSEE FILED DETAILED WRITTEN SUBMISSIONS BEFORE THE LD AO EXPLA INING THE BENEFIT DERIVED BY THE ASSESSEE OUT OF THE SERVICES RENDERED BY CIPL. THE LD AO OBSERVED IN HIS ORDER AS UNDER :- ' 6.2 THE CONTENTION OF THE ASSESSEE WAS FOUND TO B E UNACCEPTABLE. FOR THE YEAR, STATISTICAL COMPARISON ON THIS ISSUE AS COMPARED TO THE PRECEDING YEAR WITH REGARD TO THE BENEFITS OBTAINED BY THE ASSESSEE COMPANY IN LIEU OF SUCH TRANSACTION, COULD NOT BE M ADE MORE ELABORATE, BECAUSE AN AMOUNT OF RS.1,12,40,000/- HAD BEEN INCU RRED IN THE PRECEDING YEAR ITSELF. IN AY. 06-07, THIS CLAIM OF EXPENDITURE WAS :-4-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 INTRODUCED FOR THE FIRST TIME AND BY AN AGREEMENT D ATED ON THE LAST DAY OF THE FINANCIAL YEAR I.E., 31-03-2006, THE ASSESSEE C LAIMED TO HAVE OBTAINED SERVICES FROM M/S. CATERPILLAR INDIA LTD., WHICH NE CESSITATED PAYMENT OF RS.1,12,40,000/-. THE CONTENTS OF ORDER OF ASSESSME NT U/S. 143(3) R.W.S. 92CA DATED 31-12-2009 HAD PROVIDED A LUCID DESCRIPT ION TO SUBSTANTIATE THAT THE SAID EXPENDITURE WAS UNREASONABLE, EXCESSI VE AND UNWARRANTED SINCE THERE HAD BEEN NOTHING BROUGHT ON RECORD TO PROVE THAT THE PAYMENT HAD REALLY BENEFITED THE ASSESSEE COMPANY. IT IS WORTH MENTIONING THAT THE PAYMENT DID NOT IMPACT THE TAXA TION OF THE RECIPIENT DUE TO AVAILABILITY OF ACCUMULATED LOSSES IN ITS BO OKS. THAT THE ECONOMICS OF THE ASSESSEE COMPANY HAD UNDERGONE A CHANGE AS A RESULT OF THIS PAYMENT MADE DURING THE YEAR CONTINUES TO BE A MISN OMER, MORE SO BECAUSE THE ASSESSEE HAS NOT PROVIDED ANY STATISTIC AL INFORMATION TO EXEMPLIFY ITS CAUSE AND THE CONTENTS OF THE SUBMISS ION CONTESTING THE DEPARTMENT'S CONTENTION AVAILABLE IN EXHIBIT 'A' SP EAKS VOLUMES IN THEORY BUT NOT PRACTICE. SINCE, THE CHARACTER OF EXPENSES AND THE ALLEGED SERVICES RECEIVED, NATURE OF PAYMENT AND THE RECIPIENT HAD N OT UNDERGONE ANY CHANGE AS COMPARED TO THE PRECEDING YEAR, THE TREAT MENT THAT NEEDS TO BE GIVEN TO THIS CLAIM OF EXPENDITURE ALSO FOLLOWS SUI T. 6.3. IN THIS REGARD, AN OBJECTION AS RAISED BY THE ASSESSEE DURING THE YEAR THAT M/S. CATERPILLAR INDIA LTD. AND THE A SSESSEE ARE NOT RELATED PARTIES AS PER THE DEFINITION OF SEC. 40A(2)(B). TH E ARGUMENT DOES NOT FIND FAVOUR SINCE IT IS THE ASSESSEE WHO HAS REPORTED TH ESE INTER CORPORATE TRANSACTIONS UNDER 'RELATED PARTY TRANSACTIONS' WHI CH CONTAINED ALL SORT OF TRANSACTIONS WITH THE CONSTITUENTS OF CATERPILLAR G ROUP IN INDIA AND ABROAD. NOTWITHSTANDING THIS FACT, IF THE SAME DOES NOT QUA LIFY AS EXPENDITURE AS PER SEC. 40A(2)(A) ON THE SAME PARAMETER OF UNREASO NABLENESS, EXCESSIVE AND UNWARRANTED CHARACTERISTICS EXHIBITED IN THIS P AYMENT, IT NEEDS TO BE ADDITIONALLY DISALLOWED ON AN ANOTHER FIRM COUNT U/ S. 37(1) SINCE IT IS ESTABLISHED THAT SAME IS NOT LAID OUT OR EXPENDED W HOLLY AND EXCLUSIVELY :-5-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 FOR THE PURPOSE OF BUSINESS DURING THE YEAR AND IN THE PRECEDING YEAR, AS WELL. EITHER WAY, THE EXPENDITURE OF RS. 94,76,000/ - IS ADDED TO THE TAXABLE INCOME OF THE ASSESSEE. 7. THE ASSESSEE HAD ON ITS OWN DISALLOWED THE BMSS EXPENSES TO M/S. CATERPILLAR INDIA LTD. OF RS. 1,12,40,000/- U/ S. 40(A)(IA). SINCE THE PAYMENT WAS FOUND TO BE ENTERTAINABLE, THE SAME WAS DISALLOWED U/S. 40A(2). THEREFORE, ITS RE-ENTRY INTO THE CURRENT YE AR S PRO IT ON REMITTANCE OF TDS DUE ON THIS PAYMENT IS THEREFORE, AN UNWORTH Y CLAIM AND THE ASSESSEE IS RESTRAINED OF THIS SET OFF OF RS. 1,12, 40,000/- D4RING THE YEAR BY THIS ORDER. 8. THE ASSESSEE'S CASE WAS REFERRED TO TRANSFER PR ICING OFFICER - 1, CHENNAI FOR EXAMINING THE ARM'S LENGTH PRICE OF ITS INTERNATIONAL TRANSACTIONS WITH ASSOCIATE ENTERPRISES. THE TPO-1 VIDE HER ORDER UNDER C.R.NO. C-108/TPO-1/A.Y.2007 -08 DATED 25-10-2010 D IRECTED THAT NO ADJUSTMENT IS CONSIDERED NECESSARY TO THE VALUE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE COMPANY W ITH ITS ASSOCIATE ENTERPRISES.' FROM THE ABOVE, IT COULD BE SEEN THAT THE LD AO HA D DISALLOWED A SUM OF RS. 94,76,000/- BOTH U/S 37(1) OF THE ACT AS WELL AS U/ S 40A(2)(A) OF THE ACT STATING THAT THE SAME IS EXCESSIVE OR UNREASONABLE. IT CO ULD ALSO BE SEEN THAT THE LD AO HAD DISALLOWED A SUM OF RS. 1,12,40,000/- U/S 40A(2 )(A) OF THE ACT. HENCE TOTAL ADDITION OF RS. 2,07,16,000/- (94,76,000 + 1,12,40 ,000) WAS MADE TOWARDS BUSINESS SUPPORT CHARGES IN THE RE-ASSESSMENT BY TH E LD AO. :-6-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 5. BEFORE THE LD CITA, THE ASSESSEE ARGUED THE FOL LOWING :- (A) THE ASSESSEE HAD INCURRED BUSINESS MANAGEMENT SUPPORT CHARGES AS CONSIDERATION FOR SERVICES RECEIVED FROM CIPL WHICH WERE RENDERED BASED ON A SERVICE AGREEMENT BETWEEN THE ASSESSEE AND CIPL , W HICH PROVIDES THE NATURE AND SCOPE OF SERVICES ALONG WITH THE REMUNERATION T OWARDS SUCH SERVICES. THE SERVICES RECEIVED BY ASSESSEE FROM ITS GROUP ENTITI ES ARE IN THE NATURE OF MANAGEMENT SUPPORT SERVICES THAT ENABLE THE COMPANY TO CARRY OUT ITS OPERATION EFFICIENTLY IN INDIA. THE NATURE OF SERVICES REND ERED ARE AS BELOW:- GENERAL MANAGEMENT AND ADMINISTRATION SERVICE THAT ENABLE CPIPL TO MANAGE THE DAY TO DAY OPERATIONS EFFICIENTLY; MANUFACTURING SUPPORT SERVICES THAT ENABLE CPIPL TO MAINTAIN THE GLOBAL PRODUCTION AND QUALITY STANDARDS OF THE CATE RPILLAR GROUP. THESE SERVICES ALSO INVOLVE PROVIDING GUIDELINES TO CPIPL ON PRODUCTION SCHEDULING; PURCHASING SERVICES THAT ASSIST CPIPL IN EVALUATING THE SUPPLIERS / VENDORS, PROVIDING GUIDELINES ON QUALITY TESTING; MARKET RESEARCH SERVICES THAT PROVIDES AN INSIGHT O N THE POTENTIAL MARKET FOR ITS PRODUCTS IN INDIA AND INTERNATIONAL MARKETING PLANS; HUMAN RESOURCE STRATEGY FOR DEVISING PROPER PLANS F OR IDENTIFYING AND RETAINING EMPLOYEE TALENT; GENERAL IT SOFTWARE, NETWORK AND TECHNICAL SUPPORT SERVICES WHICH ENABLES CPIPL TO CAPITALIZE ON THE HIGH END TECHNOL OGY, TO REMAIN COMPETITIVE IN THE 'CUT END TECHNOLOGY DOMAIN' WITH IN THE HEAVY MACHINERY INDUSTRY. FINANCIAL MANAGEMENT AND ACCOUN TING SUPPORT RENDERED FROM THE SHARED SERVICE CENTRE OF CIPL THA T ENABLES CPIPL TO MANAGE ITS ACCOUNTS PAYABLE AND ACCOUNTS RECEIVA BLE; :-7-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 (B) THE BUSINESS MANAGEMENT SERVICES RECEIVED BY A SSESSEE HAD HELPED IT TO REDUCE THE BOTTLENECKS IN PRODUCTION PROCESS, INVEN TORY MANAGEMENT AND WORKING CAPITAL MANAGEMENT. THIS HAD LED TO REDUCE D OPERATING AND ADMINISTRATIVE COSTS WHICH HAVE ULTIMATELY CONTRIBU TED TO THE INCREASE IN PROFITABILITY. THIS IS EVIDENT FROM THE FACT THAT P ROFIT BEFORE TAX HAD INCREASED SIGNIFICANTLY COMPARED TO THE EARLIER YEAR. THE A BOVE SERVICES HAVE ADDED THE ASSESSEE COMPANY IN PERFORMING THE DAY TO DAY BUSIN ESS ACTIVITIES MORE EFFECTIVELY AND EFFICIENTLY. (C ) THE ASSESSEE HAD INCURRED THIS EXPENDITURE AS ON 31.3.2006 PURSUANT TO THE SERVICE AGREEMENT ALREADY ENTERED INTO TO THE T UNE OF RS. 1,12,40,000/- AND THE SAME WAS DISALLOWED BY THE ASSESSEE U/S 40(A)(I A) OF THE ACT VOLUNTARILY IN THE MEMO OF INCOME AS TAX WAS NOT DEDUCTED AT SOURC E ON THE SAID EXPENDITURE BY THE ASSESSEE. HOWEVER, THE ASSESSEE HAD DEDUC TED AND REMITTED THE DUE TAX AT SOURCE ON THE SUBJECT MENTIONED PAYMENT OF R S. 1,12,40,000/- DURING THE ASST YEAR 2007-08 AND ACCORDINGLY CLAIMED THE SAME AS DEDUCTION U/S 40(A)(IA) OF THE ACT. (D) WITH REGARD TO THE PAYMENT OF SUBJECT MENTIONE D EXPENDITURE IN THE SUM OF RS. 94,76,000/- DURING THE YEAR UNDER APPEAL TO CIPL, THE ASSESSEE STATED THAT IT HAD DERIVED VARIOUS BENEFITS IN THE FORM OF INCR EASED PROFITABILITY DUE TO EFFECTIVE INVENTORY MANAGEMENT, PRODUCTION PROCESS AND WORKING CAPITAL MANAGEMENT AND OTHER FACTORS AS COULD BE SEEN FROM THE VARIOUS SERVICES :-8-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 RENDERED BY CIPL SUPRA AND HENCE THE SAME IS ALLOWA BLE AS DEDUCTION AS AN EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. (E) THE ASSESSEE ARGUED THAT THE DISALLOWANCE OF RS. 1,12,40,000/- AND RS. 94,76,000/- U/S 40A(2)(A) OF THE ACT IS PATENTLY WR ONG AS THE SAID PROVISIONS PERSE ARE NOT APPLICABLE TO THE ASSESSEE. WITHOUT PREJUDICE TO THIS ARGUMENT, IT WAS ARGUED THAT THE LD AO HAD NOT BROUGHT ANY MATER IAL ON RECORD TO PROVE AS TO HOW THE SUBJECT MENTIONED PAYMENTS MADE BY THE ASSE SSEE IS EXCESSIVE OR UNREASONABLE SO AS TO FALL WITHIN THE AMBIT OF SECT ION 40A(2)(A) OF THE ACT. (F) IT WAS PLEADED THAT WHILE THE DEFINITION OF RE LATED PARTY / ASSOCIATED ENTERPRISE U/S 40A(2) OF THE ACT AND TRANSFER PRICI NG REGULATIONS ENVISAGE DIFFERENT RELATIONSHIPS WITHIN THEIR AMBIT, IT WAS SUBMITTED THAT THERE IS A SIMILARITY AS FAR AS DETERMINATION OF FAIR MARKET V ALUE (FMV) / ARMS LENGTH PRICE (ALP) IS CONCERNED. IN THIS REGARD, THE ORDER OF THE LD TPO U/S 92CA(3) OF THE ACT WAS DRAWN ATTENTION WHEREIN HE HAD CONFIRMED TH AT NO ADJUSTMENT IS NECESSARY TO THE VALUE OF THE INTERNATIONAL TRANSAC TIONS ENTERED INTO BY THE ASSESSEE COMPANY WITH ITS ASSOCIATED ENTERPRISES. I T WAS PLEADED THAT THE ASSESSEE HAD FOLLOWED TRANSACTIONAL NET MARGIN METH OD (TNMM) FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION ENTERED. THE AFORESAID BUSINESS MANAGEMENT CHARGES HAVE BEEN TAKEN INTO ACCOUNT WHI LE COMPUTING THE OPERATING MARGINS OF THE ASSESSEE. GIVEN THAT THE P AYMENTS MADE TO CIPL HAVE BEEN FACTORED AND THE LD TPO HAS CONFIRMED THAT NO ADJUSTMENT IS WARRANTED. :-9-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 ACCORDINGLY, IT WAS SUBMITTED THAT THE PAYMENT MADE WAS NOT IN EXCESS OF FMV AND HENCE DISALLOWANCE U/S 40A(2)(A) OF THE ACT WAS NOT WARRANTED. (G) IT WAS FURTHER PLEADED THAT THE FINANCE ACT 20 12 HAD AMENDED SECTION 40A(2)(B)(IV) TO INCLUDE OR ANY OTHER COMPANY CARR YING ON BUSINESS OR PROFESSION IN WHICH THE FIRST MENTIONED COMPANY HAS SUBSTANTIA L INTEREST . IN THE LIGHT OF THE AFORESAID AMENDMENT, TRANSACTIONS BETWEEN FELLO W SUBSIDIARIES WERE COVERED WITHIN THE AMBIT OF SECTION 40A(2)(B)(IV) OF THE A CT. IT WAS SUBMITTED THAT THE AFORESAID AMENDMENT WAS MADE APPLICABLE ON A PROSPE CTIVE BASIS FROM 1 ST APRIL 2012 ONWARDS AND THAT THE TRANSACTIONS BETWEEN THE FELLOW SUBSIDIARIES WERE BROUGHT WITHIN THE AMBIT OF SECTION 40A(2) OF THE A CT ONLY WITH EFFECT FROM ASST YEAR 2012-13 AND HENCE NOT APPLICABLE FOR THE ASST YEARS 2006-07 AND 2007-08. 6. THE LD CITA APPRECIATING THE AFORESAID CONTENTI ONS DELETED THE DISALLOWANCE BY MAKING THE FOLLOWING OBSERVATIONS : - ' 6.2 I HAVE CAREFULLY CONSIDERED THE FACTS IN ISSU E, THE VIEW TAKEN BY THE AO, THE ARGUMENTS ADVANCED BY THE APPELLANT AND MATERIAL ON RECORD. THERE ARE TWO PAYMENTS MADE TO THE FELLOW S UBSIDIARY WHICH ARE IN CONSIDERATION FOR THE PRESENT APPEAL. ONE, A SUM OF RS.1,12,40,000 PERTAINING TO THE PRECEDING YEAR RELEVANT TO A.Y. 2 006-07 ON WHICH TDS WAS EFFECTUATED DURING THE PRESENT YEAR AND THEREFO RE CLAIMED AS DEDUCTION. TWO, THE CLAIM OF RS.94,76,000 PERTAININ G TO THE PAYMENT MADE DURING A.Y.2007-08. THE AO QUESTIONED THE PAYM ENT ON GROUNDS OF REASONABLENESS, EXIGENCIES AND NECESSITY IN RUNNING THE AFFAIRS OF THE COMPANY. THE AO WAS NOT CONVINCED WITH THE BENEFIT DERIVED BY THE APPELLANT FROM THE FELLOW SUBSIDIARY TO WHOM THE PA YMENT WAS MADE. ON :-10-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 THE PLEA OF THE APPELLANT THAT THE TRANSACTION WAS NOT BETWEEN RELATED PARITIES AND THEREFORE THEY DID NOT ATTRACT THE PRO VISIONS OF S. 4O(A)(2)(B), THE AO BRUSHED ASIDE THE OBJECTION ON THE GROUND TH AT THE CLAIM WAS NOT MAINTAINABLE U/S 37(1) OF THE ACT ALTERNATIVELY. TO BUTTRESS THE VIEW HE RELIED UPON THE DISALLOWANCE SUO MOTO OFFERED BY TH E APPELLANT OF RS.1, 12,40,000 IN THE IMMEDIATELY PRECEDING YEAR. 6.2.1 BE THAT AS IT MAY, AS EXPLAINED IN THE FOREGO ING THE CLAIM OF THE APPELLANT IS IN TWO PARTS. THE FIRST OF RS.1,12,40, 000 RELATED TO THE PRECEDING YEAR AS EXPLAINED IN THE FOREGOING AND TH E SECOND OF RS.94,76,000 PERTAINING TO THE PERIOD UNDER CONSIDE RATION. THE SERVICES FOR WHICH THE PAYMENT HAD BEEN MADE HAS NOT BEEN QU ESTIONED OR THE BENEFITS DERIVED FROM THE FELLOW SUBSIDIARY AS A CO NSIDERATION THEREOF HAS NOT BEEN CONTROVERTED BY THE AO AT ANY STAGE. THE A O HAS FURTHER NOT BROUGHT ON RECORD ANY MATERIAL FROM WHERE INFERENCE COULD BE DRAWN THAT THE TRANSACTIONS WERE BETWEEN RELATED PARTIES WITHI N THE MEANING OF S. 40A(2)(B) MUCH LESS THAT THE SERVICES WERE NOT COMM ENSURATE TO THE PAYMENTS MADE. WITH REGARD TO THE OBSERVATION THAT THE APPELLANT ITSELF HAS OFFERED DISALLOWANCE OF RS.1,12,40,000 FOR THE A Y.2006-07 THE AO FAILED TO NOTICE THAT THE CLAIM WAS ENFORCED DURING THE PERIOD UNDER CONSIDERATION IE., AY. 2007-08 WHEN THE TDS THEREON WAS PAID. THE PLEA OF THE APPELLANT WITH REGARD TO THE PROVISIONS OF S . 4OA(2)(B) AND HOW THEY ARE NOT ATTRACTED IN THE PRESENT SET OF FACTS HAS TO BE UPHELD. SUFFICE TO HOLD THAT THE DISALLOWANCE HAS BEEN MADE WITHOUT ANY MATERIAL BASIS AND HENCE CANNOT BE UPHELD. THE CLAIM MADE BY THE A PPELLANT IS ALLOWED U/S 37(1) AS BEING WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS. THE AO IS DIRECTED TO DELETE THE DISALLOW ANCE. THE ABOVE GROUNDS OF APPEAL ARE ALLOWED.' 7. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS :- :-11-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 1.1 THE ASSESSING OFFICER HAS DISALLOWED THE BUSIN ESS MANAGEMENT SERVICE CHARGES SINCE THE ASSESSEE HAS FAILED TO PR OVE THE COMMERCIAL EXPEDIENCY OF SUCH CHARGES. 1.2 THE CIT(A) ERRED IN DELETING THE ADDITION OF R S. 2,07,16,000/- MADE TOWARDS BUSINESS MANAGEMENT SERVICES. 1.3 THE CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT THE ASSESSEE HAS NOT CONCLUSIVELY PROVED THAT THE SAID CHARGES W ERE INCURRED FOR COMMERCIAL EXPEDIENCY OR FOR BUSINESS PURPOSES. 1.4 THE CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT THE FACT THAT THE TRANSFER PRICING OFFICER' HAS NOT SUGGESTED ANY ADJUSTMENT TO THE TRANSACTION WOULD NOT QUALIFY FOR ACCEPTANCE OF THE EXPENSE BY THE ASSESSING OFFICER. 1.5 THE CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT THE ACTION OF THE TRANSFER PRICING OFFICER IN RECOMMENDING THAT N O ADJUSTMENT WAS WARRANTED WAS ONLY IN RELATION TO THE ARM'S LENGTH PRICE AND NOT THE NECESSITY AND GENUINENESS OF INCURRING SUCH EXPENSE .' 8. THE LD DR FILED A DETAILED WRITTEN SUBMISSION B EFORE US, WHEREIN, HE STATED THAT GENERAL SERVICE AGREEMENT WAS ENTERED INTO BY THE ASSESSEE WITH CIPL ON 31.3.2006 AND THE SAID AGREEMENT SHALL BE EFFECTIVE FOR ONE YEAR FROM THE EFFECTIVE DATE WHICH IS 31.3.2006. HE ARGUED THAT N O SERVICES WERE RENDERED BY CIPL TO THE ASSESSEE COMPANY PRIOR TO THE AGREEMENT WARRANTING ANY PAYMENT OF RS. 1,12,40,000/-. HE ALSO SAID THAT THE FIRST CAL ENDAR MONTH EXPIRED ON 30.4.2006 AND HENCE THE FIRST INVOICE COULD BE RAIS ED BY CIPL ONLY AFTER 30.4.2006 AND NOT BEFORE. HE ALSO STATED THAT AS PER THE AGREEMENT, THERE IS NO :-12-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 CLAUSE FOR PAYMENT OF ADVANCE TOWARDS BUSINESS MA NAGEMENT SUPPORT SERVICES AND MOREOVER, THE ASSESSEE HAS NOT FURNISHED THE DE TAILS OF SERVICES SUCH AS FOLLOWS :- (A) WHEN JOB ORDER WAS ISSUED TO THE SERVICE PROVID ER (B) INVOICE COPY PROVIDED BY THE SERVICE PROVIDER (C ) WHAT WERE THE SERVICES RENDERED (D) BREAK UP OF THE SERVICE CHARGES PERTAINING TO E ACH OF THE SERVICE SO RENDERED OR IN OTHER WORDS, WHAT IS THE BASIS FOR THE QUANTI FICATION OF THE SUM OF RS 1,12,40,000/-. 8.1. HE PLACED RELIANCE ON THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF LAKSHMINARAYAN MADANLAL VS CIT REPORTED IN 86 ITR 439 (SC) AND ALSO ON THE DECISION OF THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF JAIPUR ELECTRO PVT LTD VS CIT REPORTED IN 134 CTR 237 (RAJ) IN SUPPORT OF HIS ARGUMENTS. 8.2. HE FURTHER ARGUED THAT THE ARGUMENT OF THE A SSESSEE BEFORE THE LD CITA THAT THE TRANSACTIONS DO NOT FALL WITHIN THE AMBIT OF SECTION 40A(2) OF THE ACT IS FALLACIOUS IN VIEW OF THE FACT THAT THE ASSESSEE IT SELF HAD REPORTED THESE TRANSACTIONS IN AUDIT REPORT IN FORM 3CEB FILED ALO NG WITH THE RETURN OF INCOME. 9. IN RESPONSE TO THIS, THE LD AR REITERATED THE S UBMISSIONS MADE BEFORE THE LOWER AUTHORITIES AND VEHEMENTLY RELIED ON THE FIND INGS OF THE LD CITA. THE SAID :-13-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 EXPENDITURE DOES NOT FALL WITHIN THE AMBIT OF SECTI ON 40A(2) OF THE ACT AS THE AMENDMENT WITH REGARD TO THE SUBJECT MENTIONED TRAN SACTION CAME INTO FORCE ONLY FROM ASST YEAR 2012-13 ONWARDS AND HENCE NOT A PPLICABLE FOR THE EARLIER YEARS. HE FURTHER IMPRESSED UPON THE POINT THAT IN ANY CASE, THE LD TPO HAD ACCEPTED THE SUBJECT MENTIONED PAYMENTS TO CIPL TO BE AT ARMS LENGTH IN HIS ORDER PASSED U/S 92CA(3) OF THE ACT BY NOT PROPOSIN G ANY ADJUSTMENT TO THE ALP THEREON. HENCE THE PAYMENT MADE BY THE ASSESSEE I S TO BE CONSTRUED ONLY AT FMV AND EVEN ON THAT COUNT, THE PROVISIONS OF SECTI ON 40A(2) OF THE ACT WOULD HAVE NO APPLICATION. HE ARGUED THAT IN ANY CASE, TH E LD AO HAD NOT BROUGHT ON RECORD ANY MATERIAL TO PROVE AS TO HOW THE PAYMENT MADE BY THE ASSESSEE IS EXCESSIVE OR UNREASONABLE THEREBY VITIATING THE MAN DATE PROVIDED IN THE PROVISIONS OF SECTION 40A(2) OF THE ACT. NO COMPAR ABLES WERE BROUGHT ON RECORD TO PROVE THE CASE OF THE REVENUE BY THE LD AO. IN ANY CASE, THE LD AO CANNOT DISALLOW THE ENTIRE EXPENDITURE AS THE PROVISIONS M ANDATE HIM TO DISALLOW ONLY SUCH PORTION WHICH, IN HIS OPINION, IS EXCESSIVE OR UNREASONABLE, HAVING REGARD TO THE FAIR MARKET VALUE OF GOODS OR SERVICES. IN AN Y CASE, THE ASSESSEE HAD DULY DEMONSTRATED BEFORE THE LOWER AUTHORITIES THE VARIO US BENEFITS DERIVED BY THE ASSESSEE FROM CIPL PURSUANT TO THE SUBJECT MENTIONE D PAYMENTS MADE BY THE ASSESSEE. THIS GOES TO PROVE THAT CIPL HAD RENDERE D THE SERVICES BEYOND DOUBT TO THE ASSESSEE WHICH HAD IN TURN CONTRIBUTED FOR B ETTER PRODUCTIVITY AND BETTER PROFITABILITY TO THE ASSESSEE WHICH FACT HAD BEEN C ONVENIENTLY IGNORED BY THE REVENUE. HENCE HE ARGUED THAT THE SUBJECT MENTIONE D EXPENDITURE IS SQUARELY :-14-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 ALLOWABLE AS DEDUCTION U/S 37(1) OF THE ACT AND THE PROVISIONS OF SECTION 40A(2)(A) OF THE ACT ARE NOT APPLICABLE TO THE FACT S OF THE INSTANT CASE. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE SERVICE AGREEMENT ENTE RED INTO BETWEEN THE ASSESSEE AND CIPL IS VERY MUCH ON RECORD AND THE SE RVICES WERE INDEED ACTUALLY RENDERED BY CIPL TO THE ASSESSEE IN CONSIDERATION O F WHICH THE ASSESSEE HAD MADE THE SUBJECT MENTIONED PAYMENTS OF RS. 1,12,40, 000/- AND RS. 94,76,000/- AFTER DUE DEDUCTION OF TAX AT SOURCE. WE HOLD THA T RENDERING OF SERVICES COULD NOT BE EVIDENCED BY MERE RAISING OF AN INVOICE FOR THE SAME AS MANDATED BY THE LD DR IN HIS WRITTEN SUBMISSION. WITH REGARD TO THE BASIS OF QUANTIFICATION AS MANDATED BY THE LD DR IN HIS WRITTEN SUBMISSION, WE ARE AFRAID AS TO WHETHER THE REVENUE COULD STEP INTO THE SHOES OF THE BUSINESSMA N AND DECIDE THE PROPRIETY OF INCURRENCE OF AN EXPENDITURE. IT IS WELL SETTLED T HAT THE BUSINESSMAN KNOWS HIS INTEREST BEST AND THE TEST OF COMMERCIAL EXPEDIENCY SHOULD BE LOOKED INTO FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT FROM T HE POINT OF VIEW OF THE REVENUE. IN THIS REGARD, THE RELIANCE PLACED BY TH E LD DR ON THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN THE CASE OF JAIPUR ELECTRO PVT LTD VS CIT REPORTED IN 134 CTR 237 (RAJ) WOULD COME TO THE RES CUE ONLY WHEN THE LD AO HAD MADE SUFFICIENT INVESTIGATIONS TO PROVE THE FAC T THAT THE SAID EXPENDITURE WAS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. WE HOLD THAT NO ENQUIRIES / INVESTIGATIONS WERE CARRIED OUT TO UNDERSTAND THE VERACITY OF THE CLAIM OF THE ASSESSEE TO JUSTIFY THE CONCLUSION OF THE LD AO AND HENCE THE :-15-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 RELIANCE PLACED ON THE DECISION THEREON IS NOT APPL ICABLE TO THE FACTS OF THE INSTANT CASE. 10.1. FROM THE BARE READING OF THE SERVICES RENDER ED BY CIPL TO THE ASSESSEE AS ENUMERATED IN THE ORDER OF THE LD CITA AND FROM THE SERVICE AGREEMENT, WHICH IS PART OF THE RECORDS BEFORE US, WE FIND THA T THE ASSESSEE HAD IMMENSELY BENEFITED OUT OF THE SAID SERVICES BY WAY OF IMPROV ED PRODUCTIVITY AND INCREASED PROFITABILITY BY BETTER WORKING CAPITAL MANAGEMENT, COST REDUCTION MEASURES ETC. HENCE WE ARE CONVINCED THAT THE EXPENDITURE IS SQUA RELY ALLOWABLE AS DEDUCTION U/S 37(1) OF THE ACT. ACCORDINGLY, THE CASE LAW RELIED UPON BY THE LD DR ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF LAKSHMINARAYAN MADANLAL VS CIT REPORTED IN 86 ITR 439 (SC) IS NOT APPLICABLE TO THE FACTS OF THE INSTANT CASE. IN THE FACTS BEFORE THE HONBLE SUPREME COURT , THE COURT HEAVILY RELIED ON THE FACTUAL FINDINGS RECORDED BY THE TRIBUNAL. TH E TRIBUNAL IN THAT CASE TOOK INTO CONSIDERATION THAT , OUT OF THE PARTNERS, TWO WERE MINORS WHO COULD NOT HAVE RENDERED ANY ASSISTANCE IN THE MATTER OF SELLING TH E PRODUCTS OF THE ASSESSEE FIRM AND THREE OF THE PARTNERS OF THE FIRM WERE LADIES W HO HAD NO PRIOR BUSINESS EXPERIENCE. IT WAS ALSO FURTHER FOUND THAT THE ONL Y MALE ADULT WHO WAS THE PARTNER IN THAT HAD ONLY 1/9 TH SHARE IN THE PROFITS OF THE FIRM AND HE WAS ALSO A PARTNER IN ANOTHER MANUFACTURING CONCERN SITUATED A T A PLACE QUITE DISTANT FROM THE PLACE WHERE THE SELLING AGENCY BUSINESS WAS CAR RIED ON. BASED ON THESE FINDINGS, THE TRIBUNAL IN THAT CASE HAD HELD THAT T HE AGREEMENT WAS ONLY A MAKE BELIEVE ARRANGEMENT AND WAS MERELY A DEVICE TO MINI MIZE ASSESSEES TAX LIABILITY. :-16-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 HENCE IT COULD BE SAFELY CONCLUDED THAT THE VERY BA SIS OF RENDERING THE SERVICES WERE DOUBTED IN THE FACTS OF THE CASE BEFORE THE HO NBLE SUPREME COURT SUPRA. IN THE INSTANT CASE, THE SERVICES WERE RENDERED TO THE ASSESSEE BY CIPL WHICH IS AN ESTABLISHED INDEPENDENT ENTITY CAPABLE OF RENDER ING THE REQUISITE SERVICES ON WHICH FACT, NO TWO THOUGHTS OR OPINIONS ARE POSSIBL E. HENCE WE HOLD THAT THE DECISION RELIED UPON BY THE LD DR IS FACTUALLY DIST INGUISHABLE. 10.2. WE ALSO FIND THAT THE LD AO HAD ALSO INVOKED THE PROVISIONS OF SECTION 40A(2) OF THE ACT FOR MAKING THE SAID DISALLOWANCE. AT THE OUTSET, WE FIND THAT THE TRANSACTIONS BETWEEN FELLOW SUBSIDIARIES FELL W ITHIN THE AMBIT OF SECTION 40A(2)(B)(IV) ONLY WITH EFFECT FROM ASST YEAR 2012- 13 AND HENCE NOT APPLICABLE FOR EARLIER YEARS. IN ANY CASE, THE LD AO HAD NOT BROUGHT ANY MATERIAL ON RECORD BY BRINGING IN COMPARABLE CASES TO PROVE THAT THE S UBJECT MENTIONED PAYMENTS MADE BY THE ASSESSEE TO CIPL IS EXCESSIVE OR UNREAS ONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF GOODS OR SERVICES. WE FIND THAT THE PROVISIONS OF SECTION 40A(2) ARE VERY CLEAR IN THIS REGARD AND THE ONUS I S ON THE LD AO TO BRING ON RECORD WHETHER IN THE FACTS AND CIRCUMSTANCES OF TH E CASE, THE PROVISIONS OF SECTION 40A(2) OF THE ACT ARE INDEED APPLICABLE OR NOT. FOR THE SAKE OF CONVENIENCE, THE PROVISIONS OF SECTION 40A(2) ARE R EPRODUCED HEREUNDER:- EXPENSES OR PAYMENTS NOT DEDUCTIBLE IN CERTAIN CIRC UMSTANCES 40A (2)(A) WHERE THE ASSESSEE INCURS ANY EXPENDITUR E IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REF ERRED TO IN CLAUSE (B) OF THIS SUB-SECTION, AND THE ASSESSING OFFICER IS O F OPINION THAT SUCH :-17-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REG ARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHIC H THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESS IVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION 10.2.1. HENCE IT IS VERY CLEAR THAT THE ONUS IS ON THE LD AO TO BRING THE FAIR MARKET VALUE OF THE GOODS PURCHASED OR SERVICES REN DERED BY BRINGING IN COMPARABLE CASES; ONUS IS ON THE LD AO TO BRING ON RECORD THAT THE PAYMENT OF BUSINESS MANAGEMENT SUPPORT SERVICES HAD RESULTED I N SOME BENEFIT DERIVED BY THE OTHER PERSON TO WHOM THE PAYMENT HAS BEEN MADE. ONLY IN SUCH CASES, HE COULD DISALLOW TO THE EXTENT THAT SUCH PAYMENT IS F OUND TO BE EXCESSIVE OR UNREASONABLE IN HIS OPINION. IN THE INSTANT CASE, THE LD AO HAD NOT BROUGHT ANY COMPARABLE CASES ON RECORD TO DISPROVE THE BUSINESS MANAGEMENT SUPPORT SERVICES PAID BY THE ASSESSEE TO ITS FELLOW SUBSIDI ARY. WE FIND THAT THE DECISION OF THE HONBLE MADHYA PRADESH HIGH COURT IN THE CASE OF CI T VS UDHOJI SHRIKRISHNADAS REPORTED IN 139 ITR 827 (MP) IS DIRECTLY ON THE POINT WHEREIN IT WAS HELD THAT :- IN VIEW OF THE FINDING OF THE TRIBUNAL THAT THERE W AS NO ADEQUATE MATERIAL TO HOLD THAT THE PURCHASE OF THE TOBACCO WAS NOT MA DE AT THE MARKET RATE, IT COULD NOT BE SAID THAT THE PAYMENT OF PRICE MADE BY THE ASSESSEE TO THE FIRM WAS EITHER EXCESSIVE OR UNREASONABLE. THEREFO RE, THE EXTRA PAYMENT OF RS. 70,257 COULD NOT BE ADDED TO THE INCOME OF T HE ASSESSEE UNDER SECTION 40A(2). :-18-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 10.2.2. WE ALSO FIND THAT THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS DENSO HARYANA PVT LTD REPORTED IN 32 8 ITR 14 (DEL) ALSO SUPPORTS THE CASE OF THE ASSESSEE WHEREIN IT WAS HELD THAT THE ASSESSING OFFICER WAS REQUIRED TO COMPARE THE PRICE WHICH PREVAILED IN TH E LOCAL MARKET IN THE SAME YEAR. IT WAS A PURE FINDING OF FACT RECORDED BY TH E TWO APPELLATE AUTHORITIES AND, THEREFORE, NO QUESTION OF LAW ARISES. 10.3. IN VIEW OF OUR AFORESAID FINDINGS, WE HOLD THAT THE PROVISIONS OF SECTION 40A(2)(A) OF THE ACT ARE NOT APPLICABLE TO THE FACTS OF THE INSTANT CASE AND THE SUBJECT MENTIONED PAYMENTS MADE BY THE ASSE SSEE TO CIPL WOULD BE SQUARELY ALLOWABLE AS DEDUCTION U/S 37(1) OF THE AC T. HENCE WE HOLD THAT THE ORDER OF THE LD CITA DO NOT REQUIRE ANY INTERFERENC E. ACCORDINGLY, THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 11. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED. CO NO. 43/MDS/2016 ASSESSEE CROSS OBJECTIONS 12. AT THE OUTSET, THERE WAS A DELAY OF 2 DAYS IN FILING THE CROSS OBJECTIONS BEFORE US BY THE ASSESSEE. WE ARE CONVINCED WITH T HE REASON ADDUCED THEREON BY THE LD AR AND ACCORDINGLY WE CONDONE THE DELAY A ND ADMIT THE APPEAL FOR ADJUDICATION BEFORE US. :-19-: I.T.A. NO. 61/MDS/2016 & C.O. NO. 43/MDS/2016 13. DURING THE COURSE OF HEARING, THE LD AR STATED THAT HE IS NOT PRESSING THE GROUNDS RAISED IN THE CROSS-OBJECTIONS BEFORE US. ACCORDINGLY THE SAME IS DISMISSED AS NOT PRESSED. 14. TO SUM UP, BOTH THE APPEAL OF THE REVENUE AND CROSS OBJECTION OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED ON THURSDAY, THE 16TH DAY OF FEBRU ARY, 2017 AT CHENNAI. SD/- ( ' # . $ ) (DUVVURU RL REDDY) & /JUDICIAL MEMBER SD/- ( ) (M. BALAGANESH) /ACCOUNTANT MEMBER /CHENNAI, 3 /DATED: 16TH FEBRUARY, 2017 JPV * -&45 65 /COPY TO: 1. ) APPELLANT 2. -.) /RESPONDENT 3. 7 ( )/CIT(A) 4. 7 /CIT 5. 5 -&& /DR 6. 9 /GF
