SCHIL SERVICES LTD, MUMBAI V. DCIT 4(2)(1), MUMBAI

ITA 1777/MUM/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 4166 (ITAT-MUMBAI)
• Duration Of Justice: 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-02-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2011-2012
• Appeal Filed On: 26-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: F V IRANI SHRI Z MEHTA
• Keywords: Maximum Marginal Rate; Fair market value
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL E BEN CH, MUMBAI BEFORE SHRI C.N. PRASAD, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER / I .TA NO.1777/MUM/2015 ( / ASSESSMENT YEAR: 2011-12 M/S. SHCIL SERVICES LTD., C/O KALYANIWALLA & MISTRY, ARMY & NAVY BLDG., 3 RD FLOOR, 148 M.G. ROAD, FORT, MUMBAI-400 001 / VS. THE DCIT - 4(2)(1), AAYAKAR BHAVAN, MUMBAI-400 020 / I .TA NO.1669/MUM/2015 ( / ASSESSMENT YEAR: 2011-12 THE DCIT - 4(2)(1), AAYAKAR BHAVAN, MUMBAI-400 020 / VS. M/S. SHCIL SERVICES LTD., C/O KALYANIWALLA & MISTRY, ARMY & NAVY BLDG., 3 RD FLOOR, 148 M.G. ROAD, FORT, MUMBAI-400 001 / I .TA NO.5004/MUM/2015 ( / ASSESSMENT YEAR: 2011-12 M/S. SHCIL SERVICES LTD., C/O KALYANIWALLA & MISTRY, ARMY & NAVY BLDG., 3 RD FLOOR, 148 M.G. ROAD, FORT, MUMBAI-400 001 / VS. THE DCIT - 4(2)(1), AAYAKAR BHAVAN, MUMBAI-400 020 ./ ./ PAN/GIR NO. AAJCS 5661H ( / APPELLANT ) .. ( / RESPONDENT ) / ASSESEE BY: SHRI F.V. IRANI SHRI Z. MEHTA / RESPONDENT BY: SHRI MANJUNATHA SWAMY SHRI R.A. DHYANI SCHIL SERVICES LTD. 2 / DATE OF HEARING :27.01.2016 !' / DATE OF PRONOUNCEMENT :05.02.2016 / O R D E R PER C.N. PRASAD, JM: ITA NOS. 1777/M/2015 & 1669/M/2015 ARE THE APPEA LS BY THE ASSESSEE AND THE REVENUE PREFERRED AGAINST THE VERY SAME ORDERS PASSED BY THE LD. CIT(A)-9, MUMBAI DATED 28. 01.2015 FOR ASSESSMENT YEAR 2011-12 ARISING OUT OF THE ASSESSME NT ORDER PASSED U/S. 143(3) OF THE ACT. ITA NO. 1669/M/2015 IS TH E APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER PASSED BY THE LD. CI T(A)-9, MUMBAI DT. 28.01.2015 PERTAINING TO ASSESSMENT YEAR 2011-12 AG AINST THE PENALTY ORDER U/S. 271(1)(C) OF THE ACT. SINCE ISS UES ARE COMMON IN ALL THESE APPEALS, THEY WERE HEARD TOGETHER AND DIS POSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVIT Y. ITA NO. 1777/M/2015 ASSESSEES APPEAL 2. THE FIRST ISSUE IN THE APPEAL OF THE ASSESSEE IS THAT THE LD. CIT(A) ERRED IN RESTRICTING THE ALLOWANCE OF SUB-BR OKERAGE TO 50% OF THE EXPENDITURE INCURRED AND CLAIMED BY THE ASSESS EE HOLDING IT AS EXCESSIVE AND UNREASONABLE WITHIN THE MEANING OF SE C. 40A(2)(B) OF THE ACT. 3. BRIEF FACTS ARE THAT THE ASSESSEE IS A 100% SUBS IDIARY OF STOCK HOLDING CORPORATION OF INDIA LTD., AND ENGAGED IN THE BUSINESS OF SHARE BROKING AND PROVIDING PORTFOLIO MANAGEMENT S ERVICES. THE ASSESSEE FILED ITS RETURN OF INCOME ON 29.9.2011 DE CLARING TOTAL INCOME OF RS. 5,0,73,621/-. THE ASSESSMENT WAS COM PLETED ON 21.2.2014 U/S. 143(3) OF THE ACT DETERMINING THE IN COME AT RS. SCHIL SERVICES LTD. 3 26,93,95,020/-. WHILE COMPLETING THE ASSESSMENT, T HE ASSESSING OFFICER DISALLOWED SUB-BROKERAGE OF RS. 21,80,51,6 74/- PAID BY THE ASSESSEE TO STOCK HOLDING CORPORATION OF INDIA LTD. , FOR THE REASON THAT ASSESSEE HAS NOT DEDUCTED TDS U/S. 194J OF TH E ACT. ACCORDING TO THE AO, THE PAYMENTS MADE BY THE ASSESSEE TO STO CK HOLDING CORPORATION OF INDIA LTD., BEING THE SUB-BROKERAGE IS NOTHING BUT FEES FOR PROFESSIONAL AND TECHNICAL SERVICES, THEREFORE THE PROVISIONS OF SEC. 194J OF THE ACT ARE ATTRACTED. 3.1. THE ASSESSEE CONTENDED THAT THE PROVISIONS OF SEC. 194J HAVE NO APPLICATION AS THE SUB-BROKERAGE PAID BY THE ASS ESSEE TO STOCK HOLDING CORPORATION OF INDIA LTD., DO NOT FALL UNDE R PROFESSIONAL OR FEES FOR TECHNICAL SERVICES SO AS TO ATTRACT THE PR OVISIONS OF SEC. 194J OF THE ACT. IT WAS FURTHER CONTENDED THAT THE PRO VISIONS OF SEC. 194H WOULD APPLY TO THE SUB-BROKERAGE PAID BY THE ASSESS EE BUT THE SUB- BROKERAGE WAS PAID IS EXEMPT FROM THE PROVISIONS OF SEC. 194H IN VIEW OF EXPLANATION-I TO SEC. 194H OF THE ACT. HOW EVER, THE AO DISALLOWED THE SUB-BROKERAGE PAID HOLDING THAT THE PROVISIONS OF SEC. 194J WOULD ATTRACT TO THE SAID PAYMENTS AND SINCE T HE ASSESSEE HAS NOT DEDUCTED ANY TAX AT SOURCE FROM SUCH PAYMENTS, HE DISALLOWED THE SUB-BROKERAGE PAID BY THE ASSESSEE. 4. ON APPEAL, THE LD. CIT(A) ACCEPTED THE CONTENTIO N OF THE ASSESSEE THAT THE PAYMENTS MADE BY THE ASSESSEE DO NOT FALL UNDER FEES FOR TECHNICAL SERVICES U/S. 194J OF THE ACT B UT THE SAME WOULD FALL U/S. 194H OF THE ACT WHICH IS A SPECIFIC PROVI SION DEALING WITH COMMISSION/BROKERAGE WITH SECURITIES BY FOLLOWING H IS OWN DECISION FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR. HOW EVER, THE LD. CIT(A) BY INVOKING THE PROVISIONS OF SEC. 40A(2)(B) HELD THAT SINCE SCHIL SERVICES LTD. 4 THE ASSESSEE AND STOCK HOLDING CORPORATION OF INDIA LTD ARE RELATED ENTITIES COVERED U/S. 40A(2)(B), HE RESTRICTED THE ALLOWANCE OF SUB- BROKERAGE TO 50% OF THE BROKERAGE INCURRED. 5. THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT TH E LD. CIT(A) INVOKED THE PROVISIONS OF SEC. 40A(2)(B) OF THE ACT STATING THAT THERE IS EXCESSIVE PAYMENT OF SUB-BROKERAGE TO THE STOCK HOLDING CORPORATION OF INDIA LTD WHICH IS A HOLDING COMPANY OF THE ASSESSEE. HE SUBMITS THAT NO EXERCISE HAS BEEN DONE BY THE LO WER AUTHORITIES TO SAY THAT THE SUB-BROKERAGE PAID BY THE ASSESSEE IS EXCESSIVE. REFERRING TO PAGE-47 OF THE PAPER BOOK, IT IS THE S UBMISSION OF THE LD. COUNSEL THAT SEVERAL ENTITIES HAVE PAID SUB-BROKERA GE HIGHER THAN 50% AND IN FACT COPY OF DOCUMENTS STATING THAT BROK ER NAMED M/S. KAONAIN SECURITIES PVT. LTD HAD PAID ALMOST 70% OF BROKERAGE BY WAY OF SUB-BROKERAGE WAS ALSO SUBMITTED TO THE LOWER AU THORITIES. LD. COUNSEL SUBMITS THAT ASSESSEE ALSO ENCLOSED COPY DO WNLOADED FROM INTERNET OF ECONOMIC TIMES STATING THAT THE TREND O F SUB-BROKERAGE PAYMENT IS APPROXIMATELY 70% OF THE BROKERAGE RECEI VED. IT WAS ALSO SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION, THE PERCENTAGE OF SUB-BROKERAGE PAID BY THE ASSESSEE WAS REDUCED F ROM 75% TO 60% W.E.F 1.10.2010 AS PER THE AGREEMENT DATED 3.11.201 0. THEREFORE THE COUNSEL FOR THE ASSESSEE SUBMITS THAT IT IS NOT UNU SUAL THAT THE SUB- BROKERAGE PAYMENTS RANGE FROM 50 TO 80% DEPENDING U PON THE MARKET CONDITIONS. REFERRING TO PAGE-43 OF THE PAP ER BOOK, THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT A LIST OF BRO KERS SHARING BROKERAGE IN THE RATIO BETWEEN 60:40 TO 80:20 WAS S UBMITTED BEFORE THE LOWER AUTHORITIES. REFERRING TO PAGE-47 OF THE PAPER BOOK, IT IS THE SUBMISSION OF THE LD. COUNSEL THAT NO EVIDENCE HAS BEEN LEAD BY SCHIL SERVICES LTD. 5 THE LOWER AUTHORITIES TO JUSTIFY THE STAND THAT THE COMMISSION PAID BY THE ASSESSEE IS EXCESSIVE. FURTHER, THERE IS NO RE BUTTAL BY THE LOWER AUTHORITIES ON THE SUBMISSION OF THE ASSESSEE THAT IT IS NOT AN UNUSUAL PRACTICE IN PAYING SUB-BROKERAGE MORE THAN 50-60%. 5.1. IT IS FURTHER CONTENDED BY THE LD. COUNSEL TH AT BOTH THE ASSESSEE AND THE STOCK HOLDING CORPORATION OF INDIA LTD, ARE TAXED AT MAXIMUM MARGINAL RATE THEREFORE THE STOCK HOLDING C ORPORATION OF INDIA LTD HAS ADMITTED THE COMMISSION INCOME AND P AID TAXES HENCE IT IS REVENUE NEUTRAL. REFERRING TO THE DECISION OF EDWISE CONSULTANTS PVT. LTD VS DCIT IN ITA NO. 5376/M/2011 DATED 14.1 0.2015, THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT FOLLOWING TH E JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF CIT VS INDO SAU DI SERVICES (TRAVEL) PVT. LTD. (310 ITR 306), THE HONBLE BENC H HELD THAT NO DISALLOWANCE IS TO BE MADE U/S. 40A(2) IN RESPECT O F THE PAYMENTS MADE TO RELATED PARTIES WHEN THERE IS NO ATTEMPT TO EVADE TAX. IT IS FURTHER SUBMITTED BY THE LD. COUNSEL THAT THE AO AL LEGED THAT SINCE THERE IS NO DIVIDEND DECLARED BY THE ASSESSEE, THER E IS NO PAYMENT OF DIVIDEND DISTRIBUTION TAX. REFERRING TO PAGE-3 OF THE PAPER BOOK WHICH IS A DIRECTORS REPORT, THE LD. COUNSEL SUBMI TS THAT IN THE DIRECTORS REPORT, IT IS CLEARLY INDICATED THAT WIT H A VIEW TO CONSERVING RESOURCES FOR BUSINESS/EXPANSION DIVIDEND WAS NOT R ECOMMENDED FOR THE FINANCIAL YEAR 2010-11. HOWEVER, THE STOCK HOLDING CORPORATION OF INDIA LTD DECLARED DIVIDEND AND PAID DIVIDEND DISTRIBUTION TAX. 5.2. THE LD. COUNSEL FOR THE ASSESSEE PLACING RELIA NCE ON THE DECISION OF THE MUMBAI E BENCH IN THE CASE OF DCI T VS S.J. SCHIL SERVICES LTD. 6 INVESTMENT AGENCIES (P) LTD., (146 ITD 691) SUBMIT S THAT IT HAS BEEN HELD BY THE MUMBAI TRIBUNAL THAT THE PROVISIONS OF SEC. 194H HAVE NO APPLICATION FOR THE SUB-BROKERAGE PAID IN CONNEC TION WITH THE SERVICES RENDERED IN THE COURSE OF BUYING AND SELLI NG OF UNITS OF MUTUAL FUNDS OR IN RELATION TO TRANSACTIONS RELATIN G TO MUTUAL FUNDS. FOR THIS PROPOSITION, HE ALSO PLACES RELIANCE ON TH E DECISION OF THE KOLKATA BENCH IN THE CASE OF DCIT VS NOBLE ENCLAVE & TOWERS (P) LTD (50 SOT 05). 5.3. THE LD. COUNSEL FOR THE ASSESSEE PLACING RELIA NCE ON THE DECISION OF THE MUMBAI BENCH IN THE CASE OF ORCHAR D ADVERTISING (P) LTD VS ACIT (8 TAXMANN.COM 162) SUBMITS THAT IN ORD ER TO INVOKE THE PROVISIONS OF SEC. 40A(2) ONE HAS TO SEE FOR T HE EXPENDITURE INCURRED IN RESPECT OF WHICH PAYMENT IS MADE TO THE SPECIFIED PERSONS, IS EXCESSIVE OR UNREASONABLE HAVING REGAR D TO THE MARKET VALUE OF GOODS SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSESSE E OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM. THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT IT IS NOT BROUGHT ON RECORD BY THE LOW ER AUTHORITIES HOW THE SUB-BROKERAGE PAID BY THE ASSESSEE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE MARKET VALUE OF SERVICES OR FA CILITIES FOR WHICH THE PAYMENT IS MADE. REFERRING TO THE DECISION I N THE CASE OF ORCHARD ADVERTISING (SUPRA), THE LD. COUNSEL SUBMI TS THAT WITHOUT GIVING ANY COGENT FINDINGS ABOUT THE CONDITIONS OF APPLICABILITY OF SEC. 40A(2) AND UNLESS THERE IS A CLEAR FINDINGS THAT T HE MARKET VALUE OF THE SERVICES TAKEN FROM THE SISTER CONCERN IS LESS THAN THE PRICE AT WHICH THE SERVICES ARE OBTAINED THERE CANNOT BE AN OCCASION TO APPLY THE DISABLING PROVISIONS OF SEC. 40A(2). THE LD. C OUNSEL SUBMITS THAT SCHIL SERVICES LTD. 7 NO EXERCISES HAVE BEEN CONDUCTED BY THE LOWER AUTHO RITIES IN SUCH DIRECTION, THEREFORE, THE PROVISIONS OF SEC 40A(2) ARE NOT JUSTIFIABLY INVOKED IN ASSESSEES CASE. 6. THE LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY S UPPORTS THE ORDERS OF THE LOWER AUTHORITIES. 7. WE HAVE HEARD BOTH PARTIES AND PERUSED THE ORDER S OF LOWER AUTHORITIES, CASE LAWS RELIED ON AND THE MATERIAL EVIDENCE PLACED BEFORE US. THE ASSESSEE IS A STOCK BROKER AND A ME MBER OF STOCK EXCHANGE CARRYING ON THE BUSINESS OF SALE AND PURC HASE OF SHARE AND SECURITIES IN THE NAME AND STYLE OF SHCIL SERVICES LTD. THE ASSESSEE ENTERED INTO AGREEMENT WITH STOCK HOLDING CORPORATI ON OF INDIA LTD. FOR CONDUCTING BUSINESS AS SUB-BROKER IN SHARES AND SECURITIES ON BEHALF OF ITS CLIENTS WITH THE STOCK BROKER. THE AS SESSEE DURING THIS ASSESSMENT YEAR HAS PAID SUB-BROKERAGE TO STOCK HOL DING CORPORATION OF INDIA LTD., A HOLDING COMPANY. THE AO WAS OF THE VIEW THAT SUCH COMMISSION IS ATTRACTED THE PROVISIONS OF SEC. 194J OF THE ACT AS THE ASSESSEE PAID AMOUNTS TO HOLDING COMPANY AND THESE AMOUNTS WOULD FALL UNDER FEES FOR TECHNICAL SERVICE S WITHIN THE MEANING OF SEC. 194J OF THE ACT. . 7.1. IT WAS THE CONTENTION OF THE ASSESSEE THAT TH E SUB-BROKERAGE PAID TO THE SUB-BROKER WILL FALL U/S. 194H WHICH I S A SPECIFIC PROVISION FOR COMMISSION AND BROKERAGE BUT NOT UNDE R THE PROVISIONS OF SEC. 194J OF THE ACT. FURTHER IT WAS SUBMITTED THAT THE PROVISIONS OF SECTION 194H ARE NOT ATTRACTED FOR TH E SUB-BROKERAGE PAID ON DEALING WITH SECURITIES IN VIEW OF THE PROV ISO WHICH EXEMPTS SUCH BROKERAGE. HOWEVER, THE AO REJECTING THE CONT ENTIONS AND ON SCHIL SERVICES LTD. 8 SECURITIES TREATED THE SAID AMOUNT OF SUB-BROKERAGE PAID BY THE ASSESSEE AS FEES FOR TECHNICAL SERVICES WITHIN THE PROVISIONS OF SEC. 194J OF THE ACT. THE LD. CIT(A) ACCEPTED THE CONTEN TION OF THE ASSESSEE THAT THE PAYMENT MADE BY THE ASSESSEE WOUL D FALL UNDER THE PROVISIONS OF SEC. 194H AND SINCE THE SECURITIES AR E EXEMPT, PROVISIONS OF SEC. 194H HAVE NO APPLICATION. HOWEV ER, HE INVOKED THE PROVISIONS OF SEC. 40A(2) OF THE ACT AND RESTR ICTED THE DISALLOWANCE TO 50% OF BROKERAGE. ACCORDING TO HIM THERE IS EXCESS PAYMENT OF SUB-BROKERAGE BY THE ASSESSEE. HE HELD THAT IT IS FOR THE ASSESSEE TO PROVE BEYOND ALL DOUBT THAT THE PAYMENT MADE CONSTITUTED THE FAIR MARKET VALUE OF THE SERVICES R ECEIVED. AS FAR AS THE FINDINGS OF THE LD. CIT(A) THAT THE PAYMENTS AR E ATTRACTED THE PROVISIONS OF SEC. 194H IS CONCERNED, WE COMPLETELY AGREE WITH THE LD. CIT(A) THAT SINCE THERE IS A SPECIFIC PROVISION DEALING WITH COMMISSION AND BROKERAGE, THE SAME WOULD ATTRACT T O THE PAYMENTS MADE BY THE ASSESSEE AND NOT THE PROVISIONS OF SECT ION 194J OF THE ACT. WE ALSO FIND THAT SEC. 194H CARVES OUT AN EXC EPTION IN RESPECT OF TRANSACTIONS IN SECURITIES AND THEREFORE NO TAX IS DEDUCTIBLE IN RESPECT OF SUB-BROKERAGE PAID. THE DECISIONS OF TH E MUMBAI BENCH AND KOLKATA BENCH IN THE CASE OF S.J. INVESTMENT A GENCIES PVT. LTD. (SUPRA) AND NOBLE ENCLAVE & TOWERS (P) LTD (SUPRA) ARE TO THIS EFFECT. 7.2. HOWEVER, IN RESPECT OF THE FINDING THAT THE PR OVISIONS OF SEC. 40A(2)(B) ARE ATTRACTED AND THE SUB-BROKERAGE PAID IS IN EXCESS, WE DO NOT AGREE WITH THE FINDINGS OF THE CONCLUSIONS O F THE LD. CIT(A). 7.3. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS AS WELL AS THE APPELLATE PROCEEDINGS, THE ASSESSEE VERY MUCH CONTE STED THAT THE PAYMENT OF SUB-BROKERAGE IS NOT UNUSUAL THAT IT RAN GES MORE THAN SCHIL SERVICES LTD. 9 50%. THE ASSESSEE ALSO FURNISHED LIST OF SUB-BROKI NG COMPANIES WHO PAID SUB-BROKERAGE IN THE RATIO OF 60:40 AND 80:20. THE ASSESSEE ALSO GIVEN AN INSTANCE IN THE CASE OF A BROKER NAME KAO NAIN SECURITIES PVT. LTD. WHERE 70% OF ITS BROKERAGE WAS PAID BY WA Y OF SUB- BROKERAGE. IT IS ALSO SUBMITTED BY THE ASSESSEE AS UNDER: A) THAT THE GENUINENESS OF THE EXPENDITURE WAS NOT IN DOUBT. B) A LIST OF ENTITIES WHO IN THE UNDERSTANDING OF THE APPELLANT PAY SUB-BROKERAGE IN EXCESS OF 60% OF THE TOTAL BROKERAGE EARNED, GOING PROGRESSIVELY UPWARDS TO 80 % C) COPY OF AN ARTICLE FROM ECONOMIC TIMES DATED 26 TH DECEMBER, 2008 TO THE EFFECT THAT SEVERAL BROKERS H AVE AGREED FOR A 30-70 ARRANGEMENT FAVOURING THE SUB- BROKER. D) A ADVERTISEMENT GIVING PARTICULARS OF AN ENTITY, NA MELY KAONAIN SECURITIES PVT. LTD., APPEARING ON THE INTE RNET, SHOWING THAT THEY ARE WILLING TO PART WITH 70% BY W AY OF COMMISSION TO A FRANCHISEE PARTNER. E) BALANCE SHEET OF INTERCONNECTED STOCK EXCHANGE OF I NDIA LTD. TO SHOW THAT THE SAID ENTITY IS PAYING SUB-BRO KERAGE TO THE TUNE APPROXIMATELY 80% F) THAT THE SUB-BROKERAGE IS PAID TO STOCK HOLDING CORPORATION OF INDIA LTD. WHICH IS A HIGHLY PROFITA BLE ENTITY AND HAS OFFERED THE SAID INCOME TO TAX, AS I S CONFIRMED BY THE ASSESSING OFFICER HIMSELF IN THE ASSESSMENT ORDER-AND THAT THE ENTIRE ARRANGEMENT IS DRIVEN BY COMMERCIAL CONSIDERATIONS AND NOT WITH AN Y INTENTION TO AVOID TAX. G) THAT EVEN AS PER DATABASES, THE PROFITABILITY OF TH E APPELLANT, EVEN AFTER PAYMENT OF SUB-BROKERAGE, IS BETTER THAN THE COMPARABLES. SCHIL SERVICES LTD. 10 7.4. NONE OF THESE SUBMISSIONS OF THE ASSESSEE HAVE BEEN REBUTTED BY THE LOWER AUTHORITIES. THUS, THE OBSERVATION OF THE LD. CIT(A) THAT IT IS FOR THE APPELLANT TO PROVE BEYOND ALL DOUBT THAT THE PAYMENT MADE CONSTITUTED THE FAIR MARKET VALUE OF THE SERVI CES RECEIVED IS NOT JUSTIFIED SINCE ASSESSEE HAS GIVEN INSTANCES WHERE THE SUB-BROKERAGE WAS PAID AT 70% OF THE COMMISSION RECEIVED. FURTHE R A LIST OF PARTIES WERE SUBMITTED TO SHOW THAT THE SUB-BROKERAGE PAID WAS IN THE RATIO OF 60:40 AND 80:20 DEPENDING ON THE MARKET CONDITIO NS. THE LOWER AUTHORITIES HAVE NOT MADE ANY ENQUIRIES TO DISPROVE THE SUBMISSIONS OF THE ASSESSEE. 8. IN THE CASE OF ORCHARD ADVERTISING (P) LTD. (SUP RA), THE MUMBAI BENCH OF THE TRIBUNAL HELD AS UNDER: WE SEE MERITS IN THE PLEA OF THE ASSESSEE. THE IMPUGNED DISALLOWANCE UNDER SECTION 40A(2)(B) VIZ P ROVIDES THAT WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN R ESPECT OF WHICH PAYMENT HAS BEEN MADE TO SPECIFIED PERSON, AN D THE ASSESSING OFFICER IS OF OPINION THAT SUCH EXPENDITU RE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF T HE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREF ROM, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. THE SCHEME REQUIRES THE ASSESSING OFFICE R TO ESTABLISH THE FAIR MARKET VALUE OF THE SERVICES FOR WHICH PAYMENT IS MADE AND ANY AMOUNT THAT HE FINDS TO HAV E BEEN PAID BY THE ASSESSEE IN EXCESS OF SUCH FAIR MARKET VALUE OF THE SERVICES ALONE CAN BE DISALLOWED UNDER THE SAID SECTION. IT IS, THEREFORE, CONDITION PRECEDENT WITHOUT RESOR TING TO THE DISALLOWANCE UNDER SECTION 40A(2)(B). SO FAR AS THE EXPENDITURE BEING EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET SERVICES IS CONCERNED, THAT THE FAIR MARKET VALUE OF SUCH SERVICES IS TO BE DETERMINED FIRST. U NLESS THIS BENCHMARK IS SET, THERE CANNOT BE ANY QUESTION OF R ESORTING SCHIL SERVICES LTD. 11 TO DISALLOWANCE UNDER SECTION 40A(2)(B) FOR EXCESSI VE PAYMENT VIS--VIS FAIR MARKET VALUE OF SERVICES. IN THE CASE OF BATLIVALA & KARANAI VS ACIT ( 2 SOT 379), A COORDIN ATE BENCH OF THIS TRIBUNAL HAS OBSERVED AS FOLLOWS SECTION 40A(2) PROVIDES THAT WHERE THE ASSESSING OFFICER IS OF THE VIEW THAT EXPENDITURE INCURRED BY THE ASSESSEE, IN RESPECT OF WHICH PAYMENT IS MADE TO TH E SPECIFIED PERSONS, IS EXCESSIVE OR UNREASONABLE HAV ING REGARD TO THE MARKET VALUE OF GOODS, SERVICES OR FA CILITIES FOR WHICH THE PAYMENT IS MADE, OR THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM, SO MUCH OF THE EXPENDITURE AS IS CONSIDERED TO BE EXCESSIVE OR UNREASONABLE SHALL NO T BE ALLOWED AS DEDUCTION. THE EMPHASIS IS ON THE MARKET VALUE OF THE GOODS OR SERVICES .. THE CIT(A) HAS ALSO DEALT WITH THE MATTER AT AN EQUALLY SUPERF ICIAL LEVEL BY ONLY MODIFYING THE QUANTUM AND WITHOUT GIVING AN Y COGENT FINDING ABOUT THE CONDITIONS OF APPLICABILIT Y OF SECTION 40A(2) BEING SATISFIED. UNLESS THERE IS A C LEAR FINDING THAT THE MARKET VALUE OF THE SERVICES TAKEN FROM TH E SISTER CONCERN IS LESS THAN THE PRICE AT WHICH THE SERVICE S ARE OBTAINED, THERE CANNOT BE AN OCCASION TO APPLY THE DISABLING PROVISIONS OF SECTION 40A(2). THIS EXERCISE, THEREF ORE, NECESSITATES A FINDING ABOUT THE FAIR MARKET VALUE OF SUCH SERVICES. FOR THIS REASON ALONE, THE DISALLOWANCE U NDER SECTION 40A(2) IS INHERENTLY UNSUSTAINABLE IN LAW O N THE FACTS OF THIS CASE. 9. IN THE CASE OF ARADHANA BEVERAGES & FOODS CO. (P ) LTD VS DCIT 51 SOT 426, THE DELHI BENCH HELD AS UNDER: THE OPENING WORDS OF SECTION 40A(1) INDICATE THAT THE PROVISIONS OF THIS SECTION SHALL HAVE EFFECT NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISIONS OF THIS ACT RELATING TO THE COMPUT ATION OF INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINES S OR PROFESSION. IN OTHER WORDS, SECTION 40A IS AN OVER RIDING PROVISION WHICH OPERATES INSPITE OF ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISIONS OF THE ACT RELATI NG TO THE COMPUTATION OF INCOME UNDER THE HAD PROFITS AND GAI NS OF BUSINESS OR PROFESSION. SUB-SECTION 2(A) OF SECTION 40A SCHIL SERVICES LTD. 12 PROVIDES THAT WHERE THE ASSESSEE INCURS ANY EXPENDI TURE IN RESPECT OF WHICH PAYMENT HAS BEEN MADE OR IS TO BE MADE TO THE PERSONS SPECIFIED IN THAT SECTION AND THE AO IS OF OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE MARKET VALUE OF THE GOODS, SERVICES O R FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEE DS OF BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEF IT DERIVED BY OR ACCRUING TO THE ASSESSEE THEREFROM, SO MUCH O F THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESS IVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. I N OTHER WORDS, IF THE EXPENDITURE INCURRED BY THE ASSESSEE IS CONSIDERED BY THE AO TO BE OF EXCESSIVE OR UNREASON ABLE, HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS , SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE ASSESEE FOR BUSINESS OR PROFESSION OR THE BENEFIT DERIVED BY THE ASESSEE OR ACCRUING TO THE ASSESSEE FOR PAYMENT, THEN SO MUCH OF THE EXPENDITURE AS IS SO C ONSIDERED BY THE AO TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. IF THE ABOVE CONDITIONS ARE FULFILLED, THE AO CAN DISALLOW THE EXPENDITURE TO THE EXTENT H E CONSIDERS IT EXCESSIVE OR UNREASONABLE BY THE ABOVE OBJECTIVE STANDARDS OR OTHERWISE. THE OBJECT, SCOPE AND EFFECT OF THE INTRODUCTION OF SECTION 40A(2)(A) WAS EXPLAINED BY THE BOARD IN ITS CIRCULAR NO.6P OF 1968 DATED 6. 7.1968 AND IN THAT CIRCULAR AT PARA 74, THE BOARD HAS STAT ED THAT WHERE PAYMENT FOR ANY EXPENDITURE IS FOUND TO HAVE BEEN MADE OT A RELATIVE OR ASSOCIATE CONCERN FALLING WIT HIN THE SPECIFIED CATEGORIES, IT WILL BE NECESSARY FOR THE AO TO SCRUTINIZE THE REASONABLENESS OF THE EXPENDITURE WI TH REFERENCE TO THE CRITERIA MENTIONED IN THE SECTION. IT WAS FURTHER STATED THAT THE AO IS EXPECTED TO EXERCISE HIS JUDGEMNET IN A REASONABLE AND FAIR MANNER, AND IT S HOULD BE BORNE IN MIND THAT THIS PROVISIONS IS MEANT TO CHEC K EVASION OF TAX THROUGH EXCESSIVE OR UNREASONABLE PAYMENTS T O RELATIVES AND ASSOCIATE CONCERNS AND SHOULD NOT BE APPLIED IN A MANNER, WHICH WILL CAUSE HARDSHIP IN BONAFIDE CASES. 10. IN THE CASE OF EDWISE CONSULTANTS PVT. LTD VS DCIT (SUPRA), THE CO-ORDINATE BENCH OF THIS TRIBUNAL HELD AS UNDER: WE HAVE EARLIER NOTICED THAT ALL THE DIRECTORS ARE IN CHARGE OF THE ENTIRE OPERATIONS OF THE ASSESSEE COMPANY AN D THE SCHIL SERVICES LTD. 13 FINANCIAL/OPERATIONAL RESULTS OF THE COMPANY ARE GR OWING EVERY YEAR. HENCE, ON THAT COUNT ALONE, THE SALARY AND IN CENTIVE PAID TO THE DIRECTORS COULD BE JUSTIFIED AND COULD NOT BE F OUND FAULT WITH, WITHOUT BRINGING THE FAIR MARKET VALUE OF SERVICES. IN OUR VIEW, THE FINANCIAL AND OPERATIONAL RESULTS, JUSTIFY THE PAYM ENTS MADE TO THE DIRECTORS. AT THIS JUNCTURE, IT IS PERTINENT TO REF ER TO THE BINDING DECISION RENDERED BY THE HONBLE JURISDICTIONAL BOM BAY HIGH COURT IN THE CASE OF CIT VS. INDO SAUDI SERVICES (T RAVEL) (P) LTD (2009)(310 ITR 306), WHEREIN THE HONBLE BOMBAY HIG H COURT REFERRED TO THE CIRCULAR ISSUED BY CBDT WITH REGARD TO SEC. 40A(2)(A) AS UNDER:- UNDER THE CBDT CIRCULAR NO. 6-P, DATED 6TH JULY, 1 968 IT IS STATED THAT NO DISALLOWANCE IS TO BE MADE UNDER SECTION 40A(2) IN RESPECT OF PAYMENTS MADE TO RELATIVES AND SISTER CONCERNS WHERE THERE IS NO ATTEMPT TO EVADE TAX. IN THE CASE BEFORE THE BOMBAY HIGH COURT, THE REVE NUE WAS NOT IN A POSITION TO SHOW AS TO HOW THE ASSESSEE TH EREIN EVADED PAYMENT OF TAX BY ALLEGED PAYMENT MADE TO ITS SISTE R CONCERN, SINCE THE SISTER CONCERN WAS ALSO PAYING TAX AT HIGHER RA TE AND HENCE THE DISALLOWANCE MADE U/S 40A(2)(A) WAS DELETED. WE FUR THER NOTICE THAT THE HONBLE BOMBAY HIGH COURT HAS EXPRESSED ID ENTICAL VIEW IN THE CASE OF V.S. DEMPO & CO. (P) LTD (336 ITR 20 9) ALSO. THE HONBLE PUNJAB & HARYANA HIGH COURT HAS ALSO EXPRES SED SIMILAR VIEW IN THE CASE OF CIT VS. SIYA RAM GARG (HUF) (20 11)(237 CTR 321). 11. IN VIEW OF OUR DISCUSSION ABOVE AND THE CASE L AWS REFERRED TO ABOVE, WE ARE NOT IN AGREEMENT WITH THE LD. CIT(A) IN HOLDING THAT THE BROKERAGE PAID SHOULD BE RESTRICTED BY INVOKING THE PROVISIONS OF SECTION 40A(2) OF THE ACT. THUS WE SET ASIDE THE O RDER OF THE LD. CIT(A) ON THIS ISSUE. ITA NO. 1669/M/2015 REVENUES APPEAL 12. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APP EAL. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN NOT ACCEPTING THE FACT THAT THE SCHIL SERVICES LTD. 14 PAYMENT MADE TO M/S SHCIL LTD, BEING A HOLDING COMP ANY OF THE ASSESSEE FALLS WITHIN THE PREVIEW OF SECTION 194J OF THE I.T. ACT? 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN NOT CONFIRMING THE ACT ION OF THE ASSESSING OFFICER THAT THE PAYMENTS OF SUB BROK ERAGE PAID BY THE ASSESSEE FALLS UNDER SECTION194J OF THE I.T. ACT? 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN RESTRICTING THE SUB-BR OKERAGE TO 50% I.E. RS.5,73,30,221/- OF THE TOTAL BROKERAGE INCURRED BY THE ASSESSEE? 13. AS WE HAVE UPHELD THE ORDER OF THE LD. CIT(A) I N HOLDING THAT THE SUB-BROKERAGE PAID WOULD FALL UNDER THE PROVIS IONS OF SEC. 194H AND NOT UNDER THE PROVISIONS OF SECTION 194J, THE P ROVISIONS OF SEC. 40A(2) HAVE NO APPLICATION IN THE FACTS AND CIRCUMS TANCES OF THE CASE, WE DISMISS THE REVENUES APPEAL. ITA NO. 5004/M/2015 ASSESEES APPEAL 13. SINCE THE DISALLOWANCE OF SUB-BROKERAGE IN Q UANTUM APPEAL IS DELETED, QUESTION OF LEVYING PENALTY U/S. 271(1)(C) OF THE ACT WOULD NOT ARISE. HENCE THIS APPEAL IS ALLOWED. 14. IN THE RESULT, BOTH THE APPEALS FILED BY THE AS SESSEE ARE ALLOWED AND THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH FEBRUARY, 2016. SD/- SD/ (RAJESH KUMAR) (C.N. PRASAD ) # / ACCOUNTANT MEMBER %&# /JUDICIAL MEMBER SCHIL SERVICES LTD. 15 MUMBAI; )# DATED : 5 TH FEBRUARY , 2016 . & . ./ RJ , SR. PS !'#$#! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. * ( ) / THE CIT(A)- 4. * / CIT 5. +,-&&./ , ./' , / DR, ITAT, MUMBAI 6. -012 / GUARD FILE. / BY ORDER, +& //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI