ITO 5(2)(4), MUMBAI V. MARSH INDIA P. LTD, MUMBAI

ITA 1573/MUM/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 2868 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-10-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 24-03-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 23-02-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; Business expenditure; Assessment record
• Section: 37

Judgement Text

, , , , INCOME-TAX APPELLATE TRIBUNAL -KBENCH MUMBAI , ,, , , , , , , ,, , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER AND SAKTIJIT DEY,JUDICIAL MEMBER / ITA NO.1573/MUM/2011 : /ASSESSMENT YEAR-2004-05 INCOME TAX OFFICER-5(2)(4) ROOM NO.571, 5 TH FLOOR AAYAKAR BHAVAN, M.K. ROAD MUMBAI-400 020. VS. M/S. MARSH INDIA PVT. LTD. PENINSULA CORPORATE PARK 902, TOWER 1, GANPATRAO KADAM MARG LOWER PAREL, MUMBAI-400 013. PAN:AADCM 4220 G (APPELLANT) (RESPON DENT) REV ENUE BY: SHRI N.K. CHAND-CIT ASS ESSEE BY: SHRI NISHANT THAKKAR / DATE OF HEARING: 27.09.2016 / DATE OF PRONOUNCEMENT: 05.10.2016 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , / PER RAJENDRA A.M. - CHALLENGING THE ORDERS DATED 10.12.2010 OF THE CIT( A)- 15,MUMBAI,THE ASSESSING OFFICER (AO)HAS FILED PRESENT APPEAL.ASSESSEE-COMPANY,ENGAG ED IN THE BUSINESS OF INSURANCE BROK - ING,REINSURANCE-BROKING,RISK MANAGEMENT AND INSURAN CE PROGRAMME MANAGEMENT SERVICES FOR BUSINESSES,PUBLIC ENTITITES,INSURANCE COMPANIES, AS SOCIATIONS, PROFESSIONAL SERVICES ORGANISA - TION AND PRIVATE CLIENTS,FILED ITS RETURN OF INCOME ON 31.10.2004,DECLARING TOTAL LOSS AT RS.1, 75,28,794/-.THE AO COMPLETED THE ASSESSMENT U/S.143 (3) ON 22.12.2006, DETERMINING ITS LOSS AT RS.98.74 LAKHS. 2. FIRST GROUND OF APPEAL IS ABOUT DELETING THE DISALL OWANCE OF INCOME TAX ON EXPATRIATE SALARY, AMOUNTING TO RS.43.24 LAKHS. DURING THE ASS ESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD BORNE INCOME TAX OF RS.49,39,525/- IN RESPECT OF EXPATRIATES SALARY, THAT ON ITS OWN IT HAD DISALLOWED RS.6.15 LAKHS U/S.40(A)(V ) OF THE ACT, THAT DISALLOWANCE WAS MADE BY IT FOR NON MONETARY PERQUISITES.THE AO DIRECTED THE ASSESSEE TO FILE EXPLANATION WITH REGARD TO THE REMAINING AMOUNT. AFTER CONSIDERING T HE SUBMISSION OF THE ASSESSEE,THE AO HELD THAT INCOME TAX PAID ON BEHALF OF EXPATRIATES SALARY COULD NOT BE ALLOWED. FINALLY.HE MADE A DISALLOWANCE OF RS.43,24,288/-. 2.1. AGGRIEVD BY THE ORDER OF THE AO THE ASSESSEE PREFER RED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA). BEFORE HIM,IT WAS ARGUED THAT THE ASSESSEE HAD BORNE INCOME TAX IN RESPECT OF SALARY PAID TO WILLIAM JONES (WJ), TH AT THE SAID EXPENDITURE WAS IN TERMS OF 1573/M/11-MARSH INDIA P.LTD. 2 EMPLOYMENT AGREEMENT ENTERED INTO WITH WJ, THAT THE TAX BORNE BY THE ASSESSEE HAD BEEN OFFERED FOR TAX AS PART OF PERQUISITE BY WJ IN HIS ASSESSMENT RECORDS, THAT TAX ON NON MONETARY PERQUISITES COULD BE DISALLOWED.AFTER CONS IDERING THE SUBMISSION OF THE ASSESSEE AND THE ASSESSMENT ORDER, THE FAA HELD THAT THE ASS ESSEE HAD BORNE THE INCOME TAX OF WJ AS PER THE TERMS OF EMPLOYMENT AGREEMENT THAT IT WAS I N THE NATURE OF SALARY/EMPLOYMENT COST TO THE COMPANY THAT WAS OTHERWISE ALLOWABLE AS A DEDUC TION, THAT THE TAX BORNE BY THE COMPANY. 2.2. BEFORE US,THE DEPARTMENTAL.REPRESNETATIVE(DR) SUPPO RTED THE ORDER OF THE AO AND REFERRED TO THE PROVISIONS OF SECTION 10(E)(E) OF T HE ACT. THE AUTHORISED REPRESENTATIVE(AR)STATED THAT WJ HAD OFFERED THE AM OUNT IN QUESTION FOR TAXATION, THE ASSESSEE ITSELF HAD MADE THE DISALLOWANCE OF RS.6.2 4 LAKHS. HE ALSO REFERRED TO FORM NO.16 OF WJ . 2.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE ASSESSEE HAD PAID INCOME-TAX IN RESPECT OF SALARY P AID TO WJ AS PER THE EMPLOYMENT AGREEMENT, THAT IT HAD SUO MOTU MADE A DISALLOWANCE FOR NON-MONETARY PERQUISITES, THAT WJ HAD OFFERED THE DISPUTED AMOUNTS IN HIS RETURN OF I NCOME. CONSIDERING THE FACT THAT WJ HAD PAID THE TAX ON THE AMOUNT IN QUESTION,WE ARE OF TH E OPINION THAT THE ORDER OF THE FAA NEEDS NO INTERFERENCE WHATSOEVER, UPHOLDING HIS ORDER GRO UND NO.1 IS DECIDED AGAINST THE AO. 3. SECOND GROUND OF APPEAL IS WITH REGARD TO DELETION OF CLUB MEMBERSHIP FEE AMOUNTING TO RS.3.24 LAKHS.DURING THE ASSESSMENT PROCEEDINGS,IT WAS FOUND THAT THE AMOUNT WAS PAID TOWARDS MEMBERSHIP FEE OF WILLINGDON SPORTS CLUB AN D BREACH CANDY SWIMMING BATH TRUST BY THE ASSESSE.THE AO HELD THAT THE MEMBERSHIP FEE PAID TOWARDS THE CLUB BY THE ASSESSEE COMPANY WAS CAPITAL IN NATURE AS IT WAS THE FIRST Y EAR OF REVENUE GENERATION,THAT IT WAS GOING TO BRING ENDURING BENEFIT TO THE ASSESSEE FOR YEARS TO COME.HE MADE A DISALLOWANCE OF RS. 3. 24 LAKHS. 3.1. DURING THE APPELLATE PROCEEDINGS THE FAA, RELYING U PON THE JUDGMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF OTIS ELEVATORS CO. (I) (1 95ITR682) HELD THAT EXPENDITURE INCURRED BY THE ASSESSEE WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. HE ALLOWED THE APPEAL FILED BY THE ASSESSEE. 3.2. BEFORE US,THE DR SUPPORTED THE ORDER OF THE AO. THE AR RELIED UPON THE CASE OF UNITED GLASS MFG. CO. LTD. (CIVIL APPEAL NO.6447 OF 2012 D T.12.9.12 OF THE SUPREME COURT). 1573/M/11-MARSH INDIA P.LTD. 3 3.3. AFTER HEARING THE RIVAL SUBMISSIONS WE FIND THAT TH E HON'BLE APEX COURT,IN THE CASE OF UNITED GLASS MFG. CO. LTD.(SUPRA),HAS HELD THAT CLU B MEMBERSHIP FEES INCURRED BY AN ASSESSEE IS A BUSINESS EXPENDITURE AND HAS TO BE AL LOWED AS PER PROVISIONS OF SECTION 37 OF THE ACT. RESPECTFULLY FOLLOWING THE ABOVE JUDGEMENT GRO UND NO.2 IS DECIDED AGAINST THE AO. 4. GROUND NO.3 IS ABOUT TRANSFER PRICING (TP).DURING T HE ASSESSMENT PROCEEDINGS THE AO NOTED THAT THE ASSESSEE HAD ENTERED INTO INTERNATIO NAL TRANSACTIONS (IT)WITH ITS ASSOCIATE ENTERPRISE(AE).HE DIRECTED IT TO JUSTIFY THE TP STU DY AND PROVE THAT THE TRANSACTIONS WERE AT ARMS LENGTHPPRICE (ALP).VIDE ITS LETTER,DT.7.12.20 06, THE ASSESSEE STATED THAT COMPANYS OP/TC RATIO WAS 28.28% AS AGAINST THE MEAN OF COMPA RABLE COMPANY (24.02%).THE AO HELD THAT WHILE CALCULATING RATIO THE ASSESSEE HAD TAKEN ADVISORY FEE AT RS.59.99 LAKHS, THAT AS PER AUDIT REPORT ADVISORY FEE WAS RS.86.36 LAKHS.HE ASKED THE ASSESSEE TO SHOW CAUSE THE BASIS OF TAKING ADVISORY FEE AT RS.59.99 LAKHS AND TO EXPLAIN AS TO WHY TWO DIFFERENT TP METHODS HAD BEEN USED FOR DIFFERENT AE.S IN RESPECT OF ADVISORY FEE. VIDE ITS LETTER DT.7.12.2006 THE ASSESSEE COMPUTED THE MEAN AS UND ER :- COMPARABLE COMPANIES ADJUSTED OP/TC GEOJIT FINANCIAL SERVICES LTD. 57.39% INTEGRATED ENTERPRISES (INDIA) LTD. 21.16% KEYNOTE CORPORATE SERVICES LTD. -2.61% S K P SECURITIES LTD. 69.57% VCK CAPITAL MARKET SERVICES LTD. -25.40% MEAN 24.02% 4.1. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE TH E AO HELD THAT OUT OF THE FIVE COMPARABLES TWO WERE LOSS MAKING AND HAD NO CONNECT ION WITH THE LINE OF BUSINESS. HE REWORKED THE COMPARABLE MEAN OF ADJUSTED OP/TC RATI O AS UNDER :- COMPANY NAME INDIVIDUAL COMPANY MEAN GEOJIT FINANCIAL SERVICES LTD. 57.39% INTEGRATED ENTERPRISES (INDIA) LTD. 21.16% S K P SECURITIES LTD. 69.57% MEAN 49.37% HE APPLIED THE RATE OF 49.37% AS ALP ON THE TOTAL C OST AS AGAINST 28.28% PERCENT. AS A RESULT FOLLOWING ADJUSTMENT WAS MADE. PARTICULARS AMOUNT(RS.) TOTAL OPERATING COST(AS PER ASSESSEES LETTER DATED 21.12. 06) 64,42,528 ADD: ARMS LENGTH RETURN ON TOTAL COST @ 49.37 31,80,725 ARMS LENGTH PRICE OF ADVISORY FEES 96,23,353 ALP AFTER CONSIDERING 5% RANGE AS PER PROVISO TO S ECTION 92C(2) OF THE ACT. 91,42,185 LESS: ACTUAL ADVISORY FEE AS PER PARA 4.4(B) 82,64,583 ADJUSTMENT 8,77,602 1573/M/11-MARSH INDIA P.LTD. 4 4.2. DURING THE APPELLATE PROCEEDINGS THE ASSESSEE ARGU ED THAT THE INCLUSION OF LOSS MAKING COMPANY IN THE DISTRIBUTION CURVE WAS JUST AS NORMA L AS THE INCLUSION OF COMPANY THAT WERE EXTREMELY PROFITABLE, THAT THE AO HAD WRONGLY EXCLU DED THE LOSS MAKING COMPANIES HOLDING THAT THOSE WERE NOWHERE NEAR TO ASSESSEES LINE OF BUSINESS, THAT THE LOSS MAKING COMPANIES WERE IN THE SAME BUSINESS, THAT THE NET WORTH OF BO TH THE LOSS MAKING COMPANYS WAS POSITIVE. AFTER CONSIDERING THE SUBMISSION OF THE A SSESSEE AND THE ASSESSMENT ORDER THE FAA HELD THAT VCK AND KEYNOTE CORPORATE I.E. THE LOSS M AKING COMPANYS WERE FUNCTIONALLY SIMILAR TO THE ASSESSEE, THAT THEY HAD INCURRED A L OSS DURING A YEAR, THAT THEIR NETWORK REMAINED POSITIVE, THAT THE INCLUSION OF LOSS MAKIN G COMPANIES IN THE DISTRIBUTION CURVE WAS NORMAL. FINALLY HE DELETED THE ADDITION MADE BY THE AO. 5. BEFORE US, DR STATED THAT THE COMPANIES WERE CONST ANTLY MAKING LOSSES, THAT SAME COULD NOT BE SELECTED AS COMPARABLES.HE REFERRED TO THE C ASE OF AFFINITY EXPRESS INDIA PVT. LTD. (ITA NO.106/PN/2012-ASSESSMENT YEAR-2004-05 DT.09.0 3.16).THE AR SUPPORTED THE ORDER OF THE FAA.ON A SPECIFIC QUERY BY THE BENCH,THE AR STA TED THAT BOTH THE COMPANIES WERE SUFFERING LOSSES IN THE EARLIER YEARS AS WELL AS IN THE CURRENT YEAR. 6. WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE AO HAD MADE ADJUSTMENT AS THE ASSESSEE HAD INCLUDED LO SS MAKING ENTITIES IN THE COMPARABLES LIST, THAT THE FAA HAD IGNORED THE FACT THAT TWO OF THE FIVE COMPARABLES WERE SHOWING LOSS , THAT HE EMPHASISED ON NET WORTH OF THE COMPANY RATH ER THAN THE LOSSES SUFFERED BY THE COMPANIES,THAT BOTH THE COMPANIES WERE SUFFERING LO SSES FOR CONTINUOUSLY THREE YEARS . IN OUR OPINION THE AO WAS JUSTIFIED IN EXCLUDING THE CONST ANT LOSS MAKING ENTITLES FROM THE LIST OF COMPARABLES.THEREFORE,REVERSING THE ORDER OF THE FA A GROUND NO.3 IS DECIDED IN FAVOUR OF THE AO. AS A RESULT APPEAL FILED BY THE AO STANDS PARTLY AL LOWED. . ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH OCTOBER, 2016. 05 , 2016 SD/- SD/- ( / SAKTIJIT DEY ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 05. 10.2016. JV.SR.PS. 1573/M/11-MARSH INDIA P.LTD. 5 / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR K BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.