Cummins Generator Technologies India Ltd., Pune V. Asst. Comm. of Income-tax, Ahmednagar

ITA 1061/PUN/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4349 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 9 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-05-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 12-10-2012
• Assessment Year: 1997-1998
• Appeal Filed On: 19-08-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANN KAPTHUAMA
• Keywords: Business income; Question of law; Fair market value; Onus to prove; Condonation of delay
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHES A, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO. 1061/PN/2011 (ASSESSMENT YEAR : 1997-98) CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. GODREJ ETERNIA C, B WING, 5 TH FLOOR, WAKDEWADI, MUMBAI PUNE ROAD, PUNE - 411 005 PAN : AABCC1533E . APPELLANT VS. ASST. COMMISSIONER OF INCOME TAX AHMEDNAGAR CIRCLE, AHMEDNAGAR . RESPONDENT ITA NO. 1062/PN/2011 (ASSESSMENT YEAR : 1998-99) CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. GODREJ ETERNIA C, B WING, 5 TH FLOOR, WAKDEWADI, MUMBAI PUNE ROAD, PUNE - 411 005 PAN : AABCC1533E . APPELLANT VS. ADDL. COMMISSIONER OF INCOME TAX SPECIAL RANGE-2, AURANGABAD . RESPONDENT ITA NOS. 1063 & 1064/PN/2011 (ASSESSMENT YEARS : 1999-2000 & 2000-01) CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. GODREJ ETERNIA C, B WING, 5 TH FLOOR, WAKDEWADI, MUMBAI PUNE ROAD, PUNE - 411 005 PAN : AABCC1533E . APPELLANT VS. ASST. COMMISSIONER OF INCOME TAX AHMEDNAGAR CIRCLE, AHMEDNAGAR . RESPONDENT ITA NO. 1065/PN/2011 (ASSESSMENT YEAR : 2001-02) CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. GODREJ ETERNIA C, B WING, 5 TH FLOOR, WAKDEWADI, MUMBAI PUNE ROAD, PUNE - 411 005 PAN : AABCC1533E . APPELLANT VS. DY. COMMISSIONER OF INCOME TAX AHMEDNAGAR CIRCLE, AHMEDNAGAR . RESPONDENT ITA NOS. 1061 TO 1065/PN/2011 A.YS. 1997-98 TO 2001-02 CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. APPELLANT BY : MR. RAJAN VORA RESPONDENT BY : MS. ANN KAPTHUAMA DATE OF HEARING : 08-05-2013 DATE OF PRONOUNCEMENT : 23-05-2013 ORDER PER BENCH THE CAPTIONED FIVE APPEALS HAVE BEEN PREFERRED BY THE ASSESSEE AND RELATE TO ASSESSMENT YEARS 1997-98 TO 2001-02. 2. AT THE OUTSET, THE LEARNED COUNSEL FOR THE ASSES SEE SUBMITTED THAT THE CAPTIONED APPEALS HAVE BEEN FILED BELATEDLY BEFORE THE TRIBUNAL AND INASMUCH AS THERE IS A DELAY OF 26 DAYS IN FILING OF THE APP EALS. EXPLAINING THE REASONS FOR THE DELAY, THE LEARNED COUNSEL HAS REFERRED TO THE AFFIDAVITS FILED BY THE CHIEF FINANCIAL OFFICER OF THE ASSESSEE AND ALSO TH E CONSULTANT, WHICH ARE ON RECORD. THE SUM AND SUBSTANCE OF PLEA IS THAT DUE T O LACK OF COMMUNICATION BETWEEN THE ASSESSEE AND THE CONSULTANT THERE IS A DELAY IN FILING OF THE APPEAL BEFORE THE TRIBUNAL WHICH IS UNINTENTIONAL A ND THEREFORE IT IS PRAYED THAT THE DELAY OF 26 DAYS BE CONDONED. THE LEARNED DEPAR TMENTAL REPRESENTATIVE HAS NOT SERIOUSLY OPPOSED THE PRAYER OF THE ASSESSE E SEEKING CONDONATION OF DELAY IN FILING OF THE APPEALS. 3. HAVING CONSIDERED THE RIVAL STANDS, WE FIND THAT THERE IS NO MATERIAL TO DOUBT THE BONAFIDES OF THE EXPLANATION RENDERED WIT H REGARD TO THE DELAY OF 26 DAYS IN FILING OF APPEALS BEFORE THE TRIBUNAL. THE HONBLE SUPREME COURT IN THE CASE OF COLLECTOR, LAND ACQUISITION VS. MST. KATII & ORS. (1987) 167 ITR 471 (SC) HAS OBSERVED THAT THE POWER TO CONDONE DELAY I S LIABLE TO BE EXERCISED WITH A VIEW TO ENABLE THE COURTS TO DO SUBSTANTIAL JUSTICE TO LITIGANTS BY DISPOSING OF THE CASES ON MERITS AND NOT ADOPT AN A PPROACH WHICH SCUTTLES A DECISION ON MERITS. IN THE PRESENT CASE, WE SATISFI ED THAT THERE WAS A SUFFICIENT CAUSE WITH THE ASSESSEE FOR THE DELAY OF 26 DAYS IN FILING OF APPEALS AND IN THE ITA NOS. 1061 TO 1065/PN/2011 A.YS. 1997-98 TO 2001-02 CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. ABSENCE OF ANY DOUBT ON THE BONAFIDES OF THE REASON S ADVANCED FOR THE DELAY, WE DEEM IT PROPER TO CONDONE THE DELAY IN FILING OF APPEALS. THE AFORESAID DECISION WAS ANNOUNCED BEFORE THE PARTIES IN THE CO URSE OF HEARING AND ACCORDINGLY THE RIVAL COUNSELS PROCEEDED TO ADDRESS THE ISSUE ON MERITS. 4. ITA NO. 1062/PN/2011 RELATING TO THE ASSESSMENT YEAR 1998-99 IS TAKEN AS A LEAD CASE FOR THE REASON THAT IN ALL THE APPEALS THE ISSUE RAISED IS COMMON AND FACTS AND CIRCUMSTANCES STAND ON AN IDEN TICAL FOOTING. ACCORDINGLY, WE TAKE UP FOR CONSIDERATION THE APPEA L OF THE ASSESSEE FOR ASSESSMENT YEAR 1998-99 VIDE ITA NO. 1062/PN/2011 W HICH IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-1, PUNE DATED 22.12.2010. THE SAID ORDER OF THE CIT(A) IS A S A CONSEQUENCE OF THE ORDER OF THE TRIBUNAL VIDE ITA NO. 1045/PN/2002 DAT ED 31.07.2006 WHEREBY CERTAIN ISSUES WERE REMANDED TO THE CIT(A) FOR RE -CONSIDERATION. 5. IN ORDER TO APPRECIATE THE PRCISE CONTROVERSY, IT WOULD BE APPROPRIATE TO REFER TO THE FOLLOWING BACKGROUND OF THE CASE. T HE APPELLANT IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 AND IS INTER-ALIA ENGAGED IN THE BUSINESS OF MANUFACTURE OF VARIOUS T YPES OF GENERATORS. THE ASSESSEE IS A JOINT VENTURE COMPANY OF CROMPTON GRE AVES LTD. (GCL) AND NEWAGE INTERNATIONAL LTD. U.K.. FOR THE ASSESSMENT YEAR UNDER CONSIDERATION I.E. ASSESSMENT YEAR 1998-99, ASSESSEE COMPANY FILE D A RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 5,67,38,400/- WHICH W AS SUBJECT TO SCRUTINY ASSESSMENT UNDER SECTION 143(3) OF THE ACT WHEREIN THE TOTAL INCOME WAS DETERMINED AT RS. 9,24,74,802/- AFTER MAKING VARIOU S DISALLOWANCES/ADDITIONS VIDE ORDER DATED 10.01.2001. IN SO FAR AS THE ISSUE BEFORE US IS CONCERNED IT WOULD SUFFICE TO OBSERVE THAT ASSESSEE WAS FOUND TO HAVE INCURRED EXPENDITURE BY WAY OF PAYMENT OF BROKERAGE @ 15% ON SALE OF GENERATORS AND @ 20% ON SALE OF SPARES TO CGL. AS PER THE ASSE SSING OFFICER, CGL WAS A CONCERN COVERED WITHIN THE PURVIEW OF SECTION 40A (2)(B) OF THE ACT AND ACCORDINGLY HE DISALLOWED RS. 75,39,306/- (BEING 71 .42% OF THE TOTAL ITA NOS. 1061 TO 1065/PN/2011 A.YS. 1997-98 TO 2001-02 CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. EXPENDITURE OF RS. 1,05,55,584/- ON BROKERAGE/COMMI SSIONS @ 15% ON SALE OF GENERATORS AND @ 20% ON SALE OF SPARES PAID TO CGL) , CONSIDERING THE SAME TO BE EXCESSIVE. SIMILARLY, THE ASSESSING OFFICER A LSO APPLIED THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT TO THE EXPENDITURE OF RS. 80,62,644/- INCURRED UNDER THE HEAD SERVICE CHARGES FOR AFTER-SALE SER VICES. THE SERVICE CHARGES WERE PAID BY THE ASSESSEE AT THE RATE OF 2% TO CGL FOR AFTER-SALE SERVICES ON THE DIRECT SALES MADE BY THE ASSESSEE TO NON-CGL PA RTIES. THE ASSESSEE FILED AN APPEAL TO THE CIT(A), WHICH INTER-ALIA INCLUDED CHALLENGE TO THE AFORESAID DISALLOWANCES. WITH REGARD TO THE BROKERAGE AND SER VICE CHARGES PAID TO CGL, ASSESSEE JUSTIFIED THE GENUINENESS AND APPROPRIATEN ESS OF THE PAYMENTS. THE CIT(A) DELETED THE ENTIRE ADDITIONS VIDE HIS ORDER DATED 11.12.2002. SUBSEQUENTLY, THE DEPARTMENT PREFERRED AN APPEAL BE FORE THE TRIBUNAL AGAINST THE ORDER OF THE CIT(A) DATED 11.12.2002, WHICH INTER-ALIA CONTAINED A CHALLENGE TO THE DELETION MADE WITH RESPECT TO THE DISALLOWANCES MADE BY THE ASSESSING OFFICER INVOKING SECTION 40A(2)(B) OF THE ACT IN RELATION TO BROKERAGE/COMMISSION AND AFTER-SALES SERVICE CHARG ES PAID TO CGL. THE TRIBUNAL BY WAY OF AN ORDER VIDE ITA NO. 1045/PN/20 02 & OTHERS DATED 31.07.2006 AFFIRMED THE PORTION OF THE ORDER OF THE CIT(A) DELETING THE DISALLOWANCE OUT OF SERVICE CHARGES PAID TO CGL BUT IN SO FAR AS IT RELATED TO THE DISALLOWANCE TO RS. 75,39,306/-/- OUT OF PAYMEN T OF BROKERAGE/COMMISSION ON SALE OF GENERATORS AND ON SALE OF SPARES TO CGL, THE MATTER WAS SET-ASIDE TO THE CIT(A) WITH DIRECTIONS. AS PER THE TRIBUNAL WITH REGARD TO THE EXPENDITURE INCURRED BY WAY OF PAYMENTS OF BROKERAG E @ 15% ON SALE OF GENERATORS AND @ 20% ON SALE OF SPARES TO CGL, THE PROVISIONS OF SECTION 40A(2)(A) OF THE ACT WERE CORRECTLY INVOKED BY THE ASSESSING OFFICER. THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL DATED 31.07.2006 (SUPRA) IS REPRODUCED AS UNDER :- 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS IN TH E LIGHT OF MATERIAL ON RECORD AND THE PRECEDENTS CITED. BEFORE PROCEEDING TO EXAMINE THE FACTS OF THE CASE WE CONSIDER IT NECESSARY TO E NUNCIATE THE LEGAL POSITION ITA NOS. 1061 TO 1065/PN/2011 A.YS. 1997-98 TO 2001-02 CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. WITH REGARD TO THE PROVISIONS OF SECTION 40A(2) OF THE ACT IN THE FOLLOWING PARAGRAPHS. 14. SECTION 40A(2) WAS INSERTED BY THE FINANCE ACT, 1968 WITH EFFECT FROM 1.4.1968 BECAUSE IT WAS FELT BY THE GOV ERNMENT THAT SOMETIMES THE TAXPAYERS ARTIFICIALLY REDUCED THE TAX LIABILITY BY DIVERTING PART OF THE BUSINESS PROFIT TO RELATIVES AND ASSOCIATE CONCERNS IN THE F ORM OF EXCESSIVE PAYMENTS FOR GOODS AND SERVICES. 15. THE PROVISION OF SECTION 40A HAVE BEEN DECLARE D TO BE OF OVERRIDING NATURE BECAUSE OF THE NON OBSTANTE CLAUS E WITH WHICH THE SECTION 40A(1) STARTS. THE SUB-SECTION (2) OF THE NEW SECTI ON 40A PROVIDES THAT THE EXPENDITURE INCURRED IN A BUSINESS OR PROFESSION FO R WHICH THE PAYMENT HAS BEEN MADE OR IS TO BE MADE TO THE ASSESSEES RELATI VES OR ASSOCIATE CONCERNS, IS LIABLE TO BE DISALLOWED IN COMPUTING T HE PROFITS OF BUSINESS OR PROFESSION TO THE EXTENT THE EXPENDITURE IS CONSIDE RED TO BE EXCESSIVE OR UNREASONABLE. 16. THE CRUCIAL WORDS IN SECTION 40A(2)(A) ARE FAIR MARKET VALUE OF THE GOODS SERVICE OR FACILITIES. THE REASONABLENESS OF ANY EXPENDITURE IS TO BE JUDGED HAVING REGARD TO THE FAIR MARKET VALUE OF TH E GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEG ITIMATE NEEDS OF THE BUSINESS OR PROFESSION OR THE BENEFIT DERIVED BY OR ACCRUING TO THE ASSESSEE FROM THE EXPENDITURE. SUCH PORTION OF THE EXPENDITU RE WHICH IN OPINION OF THE AO IS EXCESSIVE OR UNREASONABLE ACCORDING TO THESE CRITERIA TO BE DISALLOWED IN COMMANDING THE PROFITS OF THE BUSINESS OR PROFES SION. 17. IN THE CASE OF CIT VS. SHATRUNJAY DIAMONDS (200 3) 261 ITR 258 (BOM) IT WAS HELD BY THE BOMBAY HIGH COURT THAT IN CASES FALLING UNDER SECTION 40A(2)(B) THE BURDEN OF PROOF SHIFTS TO THE ASSESSEE AND THAT IN SUCH CASES IT IS THE DUTY OF THE ASSESSEE TO PROVE AND D ISCHARGE ITS BURDEN BY LEADING PROPER EVIDENCE. 18. IN THE CASE OF KELTRON COMPONENT COMPLEX LTD. V S. DY.CIT AND ANOR (2003) 264 ITR 352 (KER.) THE KERALA HIGH COUR T OBSERVED AS UNDER : . SECTION 40A(2)(B) OF THE ACT CLEARLY PROVIDES F OR DISALLOWANCE OF AMOUNTS WHICH THE ASSESSING AUTHORI TY CONSIDERED TO BE IN EXCESS OF THE REQUIREMENTS OF THE BUSINESS. T HE AO IN FACT HAD ITA NOS. 1061 TO 1065/PN/2011 A.YS. 1997-98 TO 2001-02 CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. LIMITED THE COMMISSION TO 50 PER CENT OF THE PROFIT ACCRUING TO THE COMPANY BEFORE THE COMMISSION. THE FIRST APPELLATE AUTHORITY HAD CONSIDERED THE CIRCUMSTANCES AND LIMITED THE DISALL OWANCE BEYOND 7 PER CENT. THE TRIBUNAL HAD ALSO AGREED WITH THE VIE W TAKEN BY THE FIRST APPELLATE AUTHORITY. ON THE FACE OF THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT AND THE FACTUAL CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE TWO APPELLATE AUTHORITIES WERE PERFECTLY JUSTIFIED IN LIMITING THE COMMISSION TO 7 PER CENT AS AGAINST 7.5 PER CENT PR OVIDED IN THE AGREEMENT. ACCORDING TO US, THE CONCLUSION REACHED BY THE TRIBUNAL ARE BASED ON FINDING OF FACT ON WHICH NO SUBSTANTIAL QU ESTION OF LAW MUCH LESS ANY SUBSTANTIAL QUESTION OF LAW ARISES. 19. NOW WE PROCEED TO EXAMINE THE FACTS OF THIS CAS E IN THE LIGHT OF THE LEGAL POSITION DISCUSSED IN THE ABOVE PARAGRAPH S. THE CIT(A) HAS NOTED IN PARAGRAPH 5.3 OF HIS ORDER THAT THIS WAS NOT THE CA SE WHERE THE PROVISIONS OF SECTION 40A(2) COULD HAVE BEEN INVOKED. IN OUR OPIN ION, THIS IS A TOTALLY ERRONEOUS OBSERVATION TO SAY THE LEAST. 20. IT IS AN UNDISPUTED FACT THAT CROMPTON GREAVES LTD. WAS A SISTER CONCERN OF THE ASSESSEE COMPANY AND THEREFOR E THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT DID APPLY TO THE IMPUG NED PAYMENTS MADE FOR AFTER SALES SERVICE AND BROKERAGE WAS HELD BY THE B OMBAY HIGH COURT IN THE CASE OF CIT VS SHAIRUNJAY DIAMONDS (SUPRA) THAT IN CASES FALLING UNDER SECTION 40A(2)(B) THE BURDEN OF PROOF SHIFTS TO THE ASSESSE E AND THAT IN SUCH CASES IT IS THE DUTY OF THE ASSESSEE TO PROVE AND DISCHARGE ITS BURDEN BY LEADING PROPER EVIDENCE. IN THE PRESENT CASE THERE IS NO MA TERIAL ON RECORD WITH REGARD TO THE FAIR MARKET VALUE OF THE SERVICES OR FACILITIES FOR WHICH THE BROKERAGE WAS PAID AT THE RATE OF AS MUCH AS 15% ON SALE OF GENERATORS AND 20% ON SALE OF SPARES AND THE ASSESSEE DID NOT DISC HARGE THE BURDEN IN THIS REGARD. 21. WE ARE OF THE CONSIDERED VIEW, ON THE FACTS OF THE CASE THAT THE PAYMENT OF BROKERAGE AT AS MUCH AS 15% ON SALE OF G ENERATORS AND AT 20% ON SALE OF SPARES WAS ON A VERY HIGH SIDE AND WE FI ND IT DIFFICULT TO AGREE WITH THE CONCLUSIONS REACHED BY THE CIT(A). HOWEVER, WE DO FEEL THAT IN THE INTEREST OF JUSTICE THE ASSESSEE BE GIVEN ONE MORE CHANCE TO EXPLAIN ITS CASE ITA NOS. 1061 TO 1065/PN/2011 A.YS. 1997-98 TO 2001-02 CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. AND TO DISCHARGE ITS BURDEN WITH REGARD TO THE PAYM ENT OF BROKERAGE WITHIN THE MEANING OF SECTION 40A(2) OF THE ACT. 22. THEREFORE, WE REMIT THIS MATTER BACK TO THE FIL E OF THE CIT(A) WITH A DIRECTION THAT HE SHOULD RE-EXAMINE THE ISSU E RELATING TO THE PAYMENT OF BROKERAGE IN THE LIGHT OF THE PROVISIONS OF SECTION 40A(2) OF THE ACT AND OUR OBSERVATIONS MADE IN THE ABOVE PARAGRAPHS. HE SHOUL D PASS A FRESH ORDER AFTER GIVING ONE MORE CHANCE TO THE ASSESSEE TO DIS CHARGE ITS BURDEN WITH REGARD TO THE PAYMENT OF BROKERAGE TO ITS SISTER CO NCERN CROMPTON GREAVES LTD. IN THE LIGHT OF THE PROVISIONS OF SECTION 40A( 2) OF THE ACT. 23. THE OTHER DISALLOWANCE WHICH WAS DELETED BY THE CIT(A) RELATED TO THE PAYMENT OF CHARGES FOR AFTER SALES S ERVICES TO CGL AT 2% IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE BEFORE THE AO A ND THE CIT(A) THAT CROMPTON GREAVES LTD. HAD A WIDE NETWORK HAVING 23 BRANCHES/SALES OFFICES AND 22 SALE CENTERS IN THE COUNTRY WITH WELL EQUIPP ED AND MODERN FACILITIES THAT THE ASSESSEE HAD BEEN PAYING THE AFTER SALES S ERVICE CHARGES AT 2% ON ALL DIRECT SALES THAT ABOUT 85% OF THE TOTAL SALES WERE DIRECT SALES TO THE OEMS THAT THE ASSESSEES CLAIM WAS ACCEPTED BY THE AO IN SUCCESSIVE YEARS IN THE ASSESSMENT ORDERS PASSED U/S 143(3) OF THE ACT. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES WE SEE NO REASON TO INTERFERE WIT H THE ORDER OF THE CIT(A). HIS ORDER, DELETING THE DISALLOWANCE MADE BY THE AO IN RESPECT OF THE PAYMENT OF CHARGES ON ACCOUNT OF AFTER SALES SERVIC E IS UPHELD. THE GROUND NO. 2 IS DECIDED ACCORDINGLY. 6. AFTER HOLDING THAT THE PROVISIONS OF SECTION 40A (2)(B) OF THE ACT WERE ATTRACTED, THE TRIBUNAL ALSO CAME TO A CONCLUSION T HAT THE PAYMENT OF BROKERAGE @ 15% ON SALE OF GENERATORS AND @ 20% ON SALE OF SPARES TO CGL, WAS ON A VERY HIGH SIDE . THE TRIBUNAL ALSO OBSERVED THAT THE ASSESSEE BE GIVEN ONE MORE CHANCE TO EXPLAIN ITS CASE TO DIS CHARGE ITS BURDEN WITH REGARD TO THE PAYMENT OF BROKERAGE WITHIN THE MEANI NG OF SECTION 40A(2) OF THE ACT. FOR THE AFORESAID REASON, THE MATTER WAS R EMITTED BACK TO THE FILE OF THE CIT(A) WITH A DIRECTION TO RE-EXAMINE THE ISSUE IN THE LIGHT OF THE PROVISIONS OF SECTION 40A(2) OF THE ACT AS WELL AS THE OBSERVA TIONS OF THE TRIBUNAL AND TO PASS AN ORDER AFRESH AFTER ALLOWING THE ASSESSEE AN OPPORTUNITY TO DISCHARGE ITA NOS. 1061 TO 1065/PN/2011 A.YS. 1997-98 TO 2001-02 CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. ITS BURDEN WITH REGARD TO THE PAYMENT OF BROKERAGE TO SISTER CONCERN. PERTINENTLY, WITH REGARD TO THE DISALLOWANCE OUT OF SERVICE CHARGES @ 2% PAID TO CGL, THE ACTION OF THE CIT(A) IN DELETING THE DI SALLOWANCE WAS AFFIRMED. IN THIS LIGHT, THE IMPUGNED ORDER HAS BEEN PASSED BY T HE CIT(A). 7. THE CIT(A) NOTED THAT THE TRIBUNAL REMITTED BACK THE MATTER ONLY WITH THE OBJECTION TO FIND OUT THE QUANTUM OF DISALLOWAN CE BY EXAMINING THE FAIR MARKET VALUE OF THE SERVICES OR FACILITIES FOR WHIC H THE COMMISSION/BROKERAGE WAS PAID. THE CIT(A) OBSERVED THAT SUCH BROKERAGE/C OMMISSION HAS BEEN CLAIMED BY THE ASSESSEE AT FIXED RATES FOR ALL THE ASSESSMENT YEARS UNDER CONSIDERATION, AND ACCORDING TO HIM, 10% DISALLOWAN CE WILL BRING THE COST OF SERVICE TO A FAIR AND REASONABLE LEVEL HAVING REGAR D TO THE FACTS AND CIRCUMSTANCES OF THE CASE. IN VIEW OF THE SAME FOR THE ASSESSMENT YEAR 1998-99 AS AGAINST THE DISALLOWANCE OF RS. 75,39,70 6/- REPRESENTING 71.42% OF THE TOTAL EXPENSES OF BROKERAGE AT RS.1,05,55,58 9/-, THE CIT(A) RESTRICTED THE DISALLOWANCE TO 10% OF THE TOTAL BROKERAGE EXPE NSES. AGAINST SUCH A DECISION, ASSESSEE IS IN FURTHER APPEAL BEFORE US. 8. BEFORE US, THE SUM AND SUBSTANCE OF THE PLEA RAI SED BY THE ASSESSEE IS TO THE EFFECT THAT THE CIT(A) ERRED IN CONFIRMING T HE DISALLOWANCE UNDER SECTION 40A(2) OF THE ACT TO THE EXTENT OF 10% OF TOTAL BRO KERAGE PAID TO CGL. A PRELIMINARY POINT WAS RAISED BY THE LEARNED COUNSEL , WHICH IS TO THE EFFECT THAT THE PROVISIONS OF SECTION 40A(2) OF THE ACT, ARE NO T APPLICABLE TO THE FACTS OF THE PRESENT CASE. THIS ASPECT OF THE MATTER, IN OUR VIEW, IS NOT OPEN FOR DEBATE IN SO FAR AS THE PRESENT PROCEEDINGS ARE CONCERNED, IN VIEW OF THE ORDER OF THE TRIBUNAL DATED 31.07.2006 (SUPRA) WHEREIN THE ISSUE OF THE APPLICABILITY OF THE PROVISIONS OF SECTION 40A(2) OF THE ACT TO THE IMPU GNED TRANSACTIONS HAS BEEN DECIDED AGAINST THE ASSESSEE AND IT HAS ALSO BEEN O BSERVED BY THE TRIBUNAL THAT THE LEVEL OF PAYMENT OF BROKERAGE/COMMISSION I N QUESTION WAS EXCESSIVE. IN THIS BACKGROUND, IN OUR VIEW, THE CIT(A) MADE NO MISTAKE IN PROCEEDING TO ITA NOS. 1061 TO 1065/PN/2011 A.YS. 1997-98 TO 2001-02 CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. EXAMINE THE EFFICACY OF THE QUANTUM OF DISALLOWANCE UNDER SECTION 40A(2) OF THE ACT. FOLLOWING DISCUSSION IN THE ORDER OF THE C IT(A) IS RELEVANT :- THE LD. CIT(A) IN THE ORDER DATED 29.05.2002 HAD G OT THE ISSUE EXAMINED IN DETAIL BY REFERRING THE MATTER AND THE SUBMISSIONS OF THE APPELLANT TO THE ASSESSING OFFICER AND THE JT. CIT AND AFTER CONSIDERING ALL THE MATERIAL AVAILABLE CAME TO THE CONCLUSION THAT THE ASSESSING OFFICER ERRED IN INVOKING THE PROVISIONS OF SEC. 40A(2)(B) AS THERE WAS NO MA TERIAL ON RECORD WHICH COULD SHOW THAT THE BROKERAGE WAS PAID FOR AVOIDANC E OF TAX. THE HONBLE ITAT HAS CLEARLY HELD AFTER CONSIDERING THE PROVISI ONS OF THE ACT AND THE DECISIONS OF THE HIGH COURTS MENTIONED THEREIN THAT THE ABOVE FINDING OF THE LD. CIT(A) IS ERRONEOUS. IT WAS HELD THAT THE PROVI SIONS U/S 40A(2)(B) IS APPLICABLE AND THE PAYMENTS OF BROKERAGE IS EXCESSI VE. THE DIRECTION OF THE HONBLE ITAT CAN BE SEEN IN DETAIL FROM THE ORDER Q UOTED ABOVE. IT WAS HOWEVER, REMITTED BACK ONLY WITH THE OBJECTIVE TO F IND OUT THE QUANTUM OF DISALLOWANCE BY EXAMINING THE FAIR MARKET VALUE OF THE SERVICES OR FACILITIES FOR WHICH THE BROKERAGE WAS PAID. THE APPELLANT HAS ONC E AGAIN TRIED TO RAISE THE ISSUE ABOUT THE NON-MAINTAINABILITY OF ACTION TAKEN U/S 40A(2)(B) BUT THE SAME IS HELD TO BE ALREADY DECIDED AGAINST THE APPELLANT AND THEREFORE, IS HELD NOT OPEN BEFORE THIS OFFICE PRESENTLY. 9. ON THE ISSUE ON QUANTUM OF DISALLOWANCE THE PLEA OF THE ASSESSEE IS THAT THE DISALLOWANCE MADE BY THE CIT(A) IS EXCESSI VE AND UNREASONABLE. IN THIS REGARD, IT IS POINTED OUT THAT THE REASONABLEN ESS OF EXPENDITURE HAS TO BE JUDGED FROM THE BUSINESSMANS POINT OF VIEW AND IN THE PRESENT CASE THE PAYMENTS ARE GENUINE AND ARE MADE OUT OF BUSINESS E XIGENCIES. IT IS POINTED OUT THAT THE ASSESSEE AS WELL AS THE RECIPIENT ENTI TY I.E. CGL ARE NORMAL TAXPAYING ENTITIES. IT IS FURTHER POINTED OUT THAT OUT OF THE TOTAL SALES MADE NEARLY 85% OF THE SALES WERE TO OEMS AND NO COMMISS ION/BROKERAGE IS PAID TO CGL ON SUCH SALES AND ONLY SERVICE CHARGES FOR A FTER-SALES SERVICES ARE PAID. IT IS SOUGHT TO BE POINTED OUT THAT IT IS ONL Y IN RELATION TO THE BALANCE 15% OF SALES MADE TO CGL OR THROUGH CGL THAT THE IMPUGN ED COMMISSION/BROKERAGE HAS BEEN PAID. IT IS ALSO SUBM ITTED THAT IN CASE OF DIRECT ITA NOS. 1061 TO 1065/PN/2011 A.YS. 1997-98 TO 2001-02 CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. SALES TO OEMS, ASSESSEE HAS PAID DISCOUNT AT VARYIN G RATES @ 10% TO 20% AND ON COMPARISON OF SUCH DISCOUNT PAID VIS--VIS T HE BROKERAGE/COMMISSION PAID TO CGL, THE PAYMENT TO CGL CANNOT BE SAID TO B E EXCESSIVE OR UNREASONABLE. IN THIS CONNECTION, IT IS POINTED OUT THAT CGL RENDERS MARKETING AND SERVICING ACTIVITIES IN TERMS OF THE AGREEMENT AND FOR THE SAID PURPOSE CGL ALSO INCURS COST BY WAY OF MAINTAINING A MARKET ING NETWORK. IT IS ALSO POINTED OUT THAT FOR SALES MADE THROUGH CGL, THE RE SPONSIBILITY OF PAYMENT IS ALSO TAKEN UP BY CGL AND IT HAS A WIDE SALES AND MA RKETING NETWORK. THE LEARNED COUNSEL EXPLAINED THAT THE ASSESSEE COMPANY HAS ONLY A MANUFACTURING UNIT AT AHMEDNAGAR AND A SMALL STRENG TH OF EMPLOYEES TO RUN IT AND SO FAR AS THE SALES AND SERVICES NETWORK WAS CO NCERNED, IT WAS SUPPORTED BY CGL FOR WHICH ASSESSEE WAS REQUIRED TO PAY 15% O N SALE OF GENERATORS AND 20% ON SALE OF SPARES AS BROKERAGE. IT WAS ALSO VEHEMENTLY POINTED OUT THAT THE ASSESSEE HAD ENTERED INTO MARKETING AND DI STRIBUTION AGREEMENTS WITH CGL, WHICH ARE APPROVED BY THE GOVERNMENT OF INDIA (I.E. FIPB AND CLB) AND SUCH PAYMENTS WERE MADE SINCE ASSESSMENT YEAR 1994- 95 ONWARDS. IT IS ASSERTED THAT SINCE 1994-95 ONWARDS, THE ASSESSING OFFICER DID NOT MAKE ANY DISALLOWANCE TILL ASSESSMENT YEAR 1998-99 ONWARDS W HEREAS THE RATE OF BROKERAGE/COMMISSION PAID TO CGL REMAINED THE SAME. IN THIS MANNER, THE DISALLOWANCE SUSTAINED BY THE CIT(A) IS SOUGHT TO B E DEMONSTRATED AS BEING EXCESSIVE AND UNREASONABLE, HAVING REGARD TO THE F ACTS AND CIRCUMSTANCES OF THE CASE. 10. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE APPEARING FOR THE REVENUE HAS DEFENDED THE ORDER OF THE CIT(A ) DETERMINING THE DISALLOWANCE UNDER SECTION 40A(2) OF THE ACT @ 10% OF THE TOTAL EXPENDITURE OF BROKERAGE/COMMISSION FOR THE REASONS CONTAINED I N THE ORDER OF THE CIT(A). THE REASONING ADVANCED BY THE CIT(A) HAD ALREADY BE EN NOTICED IN THE EARLIER PARAGRAPHS AND IS NOT REPEATED FOR THE SAKE OF BREV ITY. ITA NOS. 1061 TO 1065/PN/2011 A.YS. 1997-98 TO 2001-02 CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. AT THE OUTSET, IT WOULD BE PERTINENT TO OBSERVE THAT IN SO FAR AS THE APPLICABILITY OF SECTION 40A(2)(A) TO THE TRANSACTIONS OF PAYMENT OF BROKERA GE @ 15% ON SALE OF GENERATORS AND @ 20% ON SALE OF SPARES TO CGL IS CO NCERNED, THE SAME HAS BEEN DECIDED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE VIDE ORDER DATED 31.07.2006 (SUPRA) AGAINST THE ASSESSEE. THE TRIBUN AL WHILE OBSERVING THAT THE PAYMENT OF BROKERAGE/COMMISSION WAS EXCESSIVE A ND ON HIGH SIDE, REMITTED THE MATTER BACK TO THE FILE OF THE CIT(A) FOR DETERMINATION OF THE QUANTUM OF DISALLOWANCE AFTER ALLOWING THE ASSESSEE AN OPPORTUNITY TO DISCHARGE ITS BURDEN WITH REGARD TO THE PAYMENTS. T HE LEARNED COUNSEL FOR THE ASSESSEE STATED AT BAR THAT THE AFORESAID DECISION OF THE TRIBUNAL CONTINUES TO HOLD THE FIELD AND HAS NOT BEEN ALTERED BY ANY HIGH ER AUTHORITY. IN THE IMPUGNED ORDER, THE CIT(A) HAS QUANTIFIED THE DISAL LOWANCE AT 10% OF THE TOTAL EXPENDITURE. 12. IN THIS BACKGROUND, A PERTINENT POINT WHICH EME RGES IS THAT SO FAR AS THE PRESENT PROCEEDINGS, BEFORE US ARE CONCERNED, THE S AME MERELY RELATES TO THE EFFICACY OF THE QUANTUM OF DISALLOWANCE DETERMINED BY THE CIT(A) AND THE APPLICABILITY OF SECTION 40A(2)(B) OF THE ACT IS NO T AN ISSUE BEFORE US. 13. IN THIS BACKGROUND, WE MAY NOW EXAMINE THE CONC LUSION OF THE CIT(A) WHICH IS BEING CHALLENGED BY THE ASSESSEE. SECTION 40A(2)(A) PRESCRIBES THAT IN CASE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN MADE TO THE PERSONS SPECIFIED IN CLAUSE (B) OF SECTION 40A(2) OF THE ACT, AND IF THE ASSESSING OFFICER IS OF OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEG ITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE, SO MUCH OF THE EXPENDITURE AS IS CONSIDERED EXCESSIVE OR UNREASONABLE, SHALL NOT BE ALLOWED AS A DEDUCTION. THE PERTINENT POINT WHICH IS RELEVANT FOR THE PRESENT PURPOSE IS THAT THE DISALLOWANCE UNDER SECTION 40A(2)(A) IS TO BE MADE HAVING REGARD TO TH E FAIR MARKET VALUE OF THE ITA NOS. 1061 TO 1065/PN/2011 A.YS. 1997-98 TO 2001-02 CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT S ARE BEING MADE AND ONLY THE EXPENDITURE IN EXCESS OF THE FAIR MARKET VALUE IS LIABLE TO BE DISALLOWED. THEREFORE, THE EXPENDITURE INCURRED BY THE ASSESSEE BY WAY OF PAYMENTS OF BROKERAGE/COMMISSION TO CGL WAS REQUIRED TO BE COMP ARED WITH THE FAIR MARKET VALUE OF SIMILAR SERVICES IN ORDER TO ASCERT AIN THE PORTION OF EXCESSIVE OR UNREASONABLE EXPENDITURE. ON THIS ASPECT, THE CI T(A) ATTEMPTED TO EXAMINE THE SALES MADE TO OEMS AS TO WHETHER THE SAME WAS A FTER DISCOUNT OR BEFORE DISCOUNT AND TO COMPARE THE SAME WITH THE SALES MAD E THROUGH CGL. THE AFORESAID EXERCISE WAS ATTEMPTED BY THE CIT(A) FOR THE REASON THAT AS PER THE ASSESSEE IT WAS NOT PAYING BROKERAGE/COMMISSION TO CGL ON SALES MADE TO OEMS AND ON SUCH SALES IT WAS OFFERING DISCOUNT UP TO 20% ON THE LIST PRICE WHEREAS THE PRICE CHARGED FROM CGL WAS HIGHER ON WH ICH ONLY BROKERAGE/COMMISSION WAS PAID. THE CIT(A) HAS NOTIC ED IN PARA 7 THAT THE RELEVANT DETAILS COULD NOT BE PRODUCED BY THE ASSES SEE AS IT WAS VERY OLD AND ALL THE DOCUMENTS WERE NOT CLAIMED TO BE PRESERVED. THEREFORE, THE CIT(A) HELD THAT A REASONED COMPUTATION OF FAIR MARKET VAL UE OF THE SERVICES CANNOT BE COMPUTED FOR ARRIVING AT THE DISALLOWANCE AND TH EREFORE HE PROCEEDED TO ESTIMATE THE DISALLOWANCE. IN OUR CONSIDERED OPINIO N, THE PROVISIONS OF SECTION 40A(2)(A) LEAVES NO DOUBT THAT THE DISALLOWANCE HAS TO BE BASED HAVING REGARD TO THE FAIR MARKET VALUE OF THE FACILITIES, AS IT IS ONLY AFTER ITS COMPARISON WITH THE ACTUAL EXPENDITURE, THE EXCESSIVENESS/UNRE ASONABLENESS OR OTHERWISE OF THE EXPENDITURE CAN BE DETERMINED. TO A QUERY FR OM THE BENCH THAT SINCE THE DETERMINATION OF DISALLOWANCE BY THE CIT(A) IS NOT AS PER THE PRESCRIPTION OF SECTION 40A(2)(A) OF THE ACT, THE MATTER DESERVE S TO THE REVISITED BY THE INCOME-TAX AUTHORITIES AFRESH IN ACCORDANCE WITH TH E PROVISIONS OF SECTION 40A(2)(A) OF THE ACT, THE LEARNED COUNSEL FOR THE A SSESSEE AS WELL AS THE LEARNED DEPARTMENTAL REPRESENTATIVE POINTED OUT THA T THE MATTER BEING OLD, NO USEFUL PURPOSE WILL BE SERVED BY REMANDING IT BACK TO THE LOWER AUTHORITIES. AT THIS POINT, THE LEARNED COUNSEL FOR THE ASSESSEE AL SO STATED AT BAR THAT A REASONABLE ESTIMATION OF THE DISALLOWANCE BE MADE A T THIS FORUM AND THE ASSESSEE WOULD BE SATISFIED WITH SUCH DETERMINATION OF THE DISALLOWANCE. ITA NOS. 1061 TO 1065/PN/2011 A.YS. 1997-98 TO 2001-02 CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. 14. IN THE AFORESAID BACKGROUND, IN DEFERENCE TO TH E COMMON STAND OF THE RIVAL COUNSELS, WE PROCEED TO EXAMINE THE REASONABL ENESS OF THE ESTIMATION MADE BY THE CIT(A), HAVING REGARD TO THE FACTS AND CIRCUMSTANCES WITH A VIEW TO IMPART FINALITY TO THE PRESENT LITIGATION. NO DO UBT ANY ESTIMATION INVOLVES CERTAIN ELEMENT OF GUESSWORK AND SUBJECTIVITY. IN T HE PRESENT CASE, IT WOULD BE SUFFICE TO NOTE THE FOLLOWING FEATURES NAMELY (A) T HAT THE DISTRIBUTION AGREEMENT IN TERMS ON WHICH THE BROKERAGE/COMMISSIO N HAS BEEN PAID TO CGL AT THE STATED RATES WAS APPROVED BY THE GOVERNM ENT OF INDIA (I.E. FIPB AND CLB); (B) THAT PAYMENTS TO CGL BY WAY OF BROKER AGE/COMMISSION WERE PAID SINCE ASSESSMENT YEAR 1994-95 AND IN THE ASSES SMENTS PRIOR TO ASSESSMENT YEAR 1998-99 NO DISALLOWANCE WAS MADE UN DER SECTION 40A(2); (C) THAT ALMOST 85% OF SALES HAVE BEEN EFFECTED TO OEMS ON WHICH NO BROKERAGE/COMMISSION WAS PAID TO CGL, AND ONLY SERV ICE CHARGES @ 2% HAS BEEN PAID FOR AFTER-SALES SERVICES; AND, (D) THAT T HERE IS NO DISPUTE TO ASSESSEES ASSERTION THAT CGL HAS MADE AVAILABLE IT S INFRASTRUCTURE I.E. SALE NETWORK, ETC. FOR SELLING THE PRODUCTS OF THE ASSES SEE TO THE RETAIL CUSTOMERS. 15. CONSIDERED IN THE AFORESAID LIGHT, IN OUR VIEW THE ESTIMATION OF DISALLOWANCE MADE BY THE CIT(A) @ 10% OF THE TOTAL EXPENDITURE INCURRED ON BROKERAGE/COMMISSION PAID TO CGL, IS ON A HIGHER SI DE AND THAT IT WOULD BE FAIR AND REASONABLE TO RESTRICT THE DISALLOWANCE TO 5% OF THE TOTAL EXPENDITURE OF BROKERAGE/COMMISSION PAID TO CGL. ACCORDINGLY, T HE ASSESSEE GETS NECESSARY PARTIAL RELIEF. 16. BEFORE PARTING, WE MAY REFER TO A PLEA RAISED B Y THE ASSESSEE TO THE EFFECT THAT WHILE COLLATING THE TOTAL EXPENDITURE O N BROKERAGE, THE CIT(A) HAS ALSO INCLUDED THE AMOUNT OF EXPENDITURE BY WAY OF P AYMENT OF SERVICE CHARGES @ 2% TO CGL WHICH WAS NOT THE SUBJECT MATTER OF THE DISPUTE BEFORE HIM. IN THIS REGARD, IT WAS POINTED OUT THAT THE SERVICE CH ARGES PAID BY THE ASSESSEE AT THE RATE OF 2% TO CGL FOR AFTER-SALES SERVICES ON T HE DIRECT SALES MADE TO NON- CGL PARTIES HAS BEEN FOUND TO BE WITHIN THE NORMS O F SECTION 40A(2)(A) OF THE ITA NOS. 1061 TO 1065/PN/2011 A.YS. 1997-98 TO 2001-02 CUMMINS GENERATOR TECHNOLOGIES INDIA LTD. ACT BY THE TRIBUNAL IN ITS ORDER DATED 31.07.2006 ( SUPRA), WHEREIN THE ADDITION DELETED BY CIT(A) WAS AFFIRMED. THE AFORESAID PLEA OF THE ASSESSEE IS A FACTUAL ASPECT AND IN OUR VIEW, IT IS LIABLE TO BE EXAMINED BY THE ASSESSING OFFICER, WHILE RECOMPUTING THE DISALLOWANCE AS PER OUR DECISION ABOVE. 17. IN CONCLUSION, WE DIRECT THE ASSESSING OFFICER TO RE-COMPUTE THE DISALLOWANCE UNDER SECTION 40A(2) OF THE ACT ON ACC OUNT OF EXPENDITURE INCURRED BY WAY OF PAYMENT TO CGL OF BROKERAGE/COMM ISSION @ 15% ON SALE OF GENERATORS AND @ 20% ON SALE OF SPARES, HAVING REGARD TO OUR AFORES AID DISCUSSION. 18. IN THE RESULT, THE APPEAL OF THE ASSESSEE VIDE ITA NO. 1062/PN/2011 FOR ASSESSMENT YEAR 1998-99 IS PARTLY ALLOWED. SINCE TH E FACTS AND CIRCUMSTANCES IN ALL OTHER APPEALS VIDE ITA NOS. 1062 TO 1065/PN/ 2011 STAND ON IDENTICAL FOOTING, OUR DECISION IN ITA NO. 1062/PN/2011 APPLI ES MUTATIS-MUTANDIS TO OTHER APPEALS ALSO 19. RESULTANTLY, ALL THE APPEALS OF THE ASSESSEE AR E PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD MAY, 2013. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 23 RD MAY, 2013 SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-I, PUNE; 4) THE CIT-I, PUNE; 5) THE DR, A BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// PRIVATE SECRETARY I.T.A.T., PUNE