DCIT 4(2), MUMBAI V. J.B. MANGHARAM FOODS P. LTD, MUMBAI

ITA 254/MUM/2009

• Counselvise Citation: 25419914 RSA 2009
• Duration Of Justice: 2 year(s) 3 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-04-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: J
• Next Hearing Date: 07-04-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 12-01-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS ASHIMA GUPTA
• Assessee Lawyers: RAJEEV MUNHET
• Keywords: Rule of consistency; Fair market value

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES J, MUMBAI BEFORE SHRI D.K. AGARWAL (J.M.) AND SHRI RAJENDRA S INGH (A.M.) ITA NO. 254/MUM /2009 ASSESSMENT YEAR 2005-06 THE DCIT 4(2), ROOM NO. 642, 6 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. VS. M/S J.B. MANGHARAM FOODS PVT. LTD., 3A, METRO CHAMBERS, 69/71, TRINITY STREET, MUMBAI. 400 002. PAN : AAACJ1657R (APPELLANT) (RESPONDENT) APPELLANT BY : MRS. ASHIMA GUPTA RESPONDENT BY : SHRI RAJEEV MUNHET O R D E R PER D.K. AGARWAL, J.M. THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED A GAINST THE ORDER DATED 07.10.2008 PASSED BY THE LD. CIT (A) FOR THE A.Y. 2005-06. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE AS SESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF BISCUITS, FILED RETURN DECLARING TOTAL INCOME OF ` 1,11,51,565/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. OBSERVED THAT DURING THE YEAR THE ASSESSEE, J.B. MANGHARAM FOODS PVT. LTD. (JBM) HAS MADE PAYMENT OF ` 49,54,595/- ON ACCOUNT OF SECONDMENT CHARGES TO BRITANNIA INDUS TRIES LTD. (BIL). THE ASSESSEE WAS ASKED TO EXPLAIN THE NATURE OF THE CHA RGES AND METHOD ON WHICH THE PAYMENT WAS MADE. IN RESPONSE, THE ASSES SEE SUBMITTED AS UNDER:- ITA 254/M/09 J.B. MAN GHARAM FOODS PVT. LTD.K 2 YOUR ASSESSEE HAD PAID ` 61.65 LACS AND 49.54 LACS TO BIL AS SECONDMENT CHARGES FOR A.Y. 2004-05 AND 2005-06 RES PECTIVELY TOWARDS MANAGEMENT EMPLOYEES SECONDED TO JBM, THE DETAILS O F WHICH HAS ALREADY BEEN SUBMITTED. THE FOLLOWING ARE OUR SUBM ISSIONS, IN THIS REGARD. (1) AS PER CLAUSE (B) OF THE CONVERSION AGREEMENT, PR ODUCTION OF BISCUITS ORDERED BY BIL IS THE RESPONSIBILITY OF JBM. ALL THE EXPENSES RELATING TO THE ABOVE PROCESS OTHER TH AN COST RAW MATERIAL & PACKING MATERIAL WERE TO BE BORNE BY JBM; (2) JBM HIRED THE SECONDED STAFF FROM BIL, INSTEAD OF H IRING FROM OUTSIDE, AS IT HAD AN ADDED ADVANTAGE OF GETTI NG THE BEST AVAILABLE TALENT EXPERIENCED IN THE PROCESS & PROCEDURES FOLLOWED IN THIS INDUSTRY. IT ALSO HAD THE OPTION OF CHARGING THE STAFF AS PER ITS REQUIREMENTS. (3) IT WAS VERY DIFFICULT FOR JBM TO HIRE SENIOR TECHNI CAL & MANAGEMENT PERSONNEL FROM OUTSIDE DUE TO HIGHLY COMPETITIVE MARKET. (4) AS PER THE ABOVE MENTIONED CONVERSION AGREEMENT, BI L WAS NOT RESPONSIBLE FOR MEETING THE COST OF THE SECONDE D EMPLOYEES TO JBM. (5) THERE WAS NO TAX ADVANTAGE TO EITHER OF THESE COMPA NIES AS THE RECOVERY OF SECONDMENT CHARGES WAS FULLY TAXED IN THE HANDS OF BIL, WHICH IS A REGULAR TAX PAYING COMPANY . (6) THE CONVERSION CHARGES PAID TO JBM COMPRISES OF ALL THE EXPENSES PERTAINING TO PRODUCTION OF BISCUITS INCLU DING OF SECONDED EMPLOYEES (EXCLUDING COST OF RM & PM). (7) JBM REIMBURSES THE TOTAL AMOUNT SPENT BY BIL ON THE SE EMPLOYEES AND THERE IS NO ELEMENT OF PROFIT IN IT. (8) FINALLY, IT IS TO BE NOTED THAT SECONDMENT OF EMPLO YEES IS JUST ONE OF THE MODES OF HIRING EMPLOYEES. HOWEVER, THE A.O. OBSERVED THAT THE QUALITY AND PRO CESS OF MANUFACTURING OF BISCUIT IS NOT A NEW FOR THE ASSES SEE AND THE REQUISITE EXPERTISE WOULD HAVE BEEN AVAILABLE IN HOUSE. HE FURTHER OBSERVED THAT ... THEREFORE ANY AMOUNT THAT BIL WANT TO SPENT ON THE QUALITY STANDARDS MUST BE BOOKED IN THE BOOKS OF BIL AND NO T THAT OF THE ASSESSEE COMPANY. THE PAYMENTS WOULD BE JUSTIFIABL E, IF THEY ARE MADE BY THE MARKET RATE. SINCE THE COMPANY HAD MADE AT A RATE WHICH ARE AT ITA 254/M/09 J.B. MAN GHARAM FOODS PVT. LTD.K 3 VERY HIGH THEREFORE 20% OF THE ABOVE EXPENDITURE IS BEING DISALLOWED AS BEING UNREASONABLE AND NOT FOR THE PURPOSE OF BUSIN ESS AND PROFESSION. THE DISALLOWANCE ON THIS ACCOUNT COMES TO ` 9,90,919/- AND THE SAME IS ADDED TO THE INCOME OF THE ASSESSEE.... ON APPEAL , THE LD. CIT(A) AFTER CONSIDERING THE ASSESSEES SUBMISSION OBSERVED THAT THE DISALLOWANCE MADE BY THE A.O. IS WITHOUT ANY BASIS, NOT SUSTAINA BLE AND ACCORDINGLY HE DELETED THE ESTIMATED DISALLOWANCE OF ` 9,90,919/-. 3. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A) , THE REVENUE IS IN APPEAL BEFORE US TAKING THE FOLLOWING GROUNDS OF AP PEAL:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) FAILED TO APPRECIATE THE FACT THAT THE Q UALITY AND PROCESS FOR MANUFACTURING OF THE BISCUIT WAS NOT NEW FOR THE AS SESSEE AND THE REQUISITE EXPERTISE WAS AVAILABLE IN THE HOUSE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN IGNORING THE FACT THAT THE PAYM ENTS WERE MADE AT A RATE WHICH WERE VERY HIGH AND NOT AT MARKET RATE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN IGNORING THE FACT THAT IT WAS T HE ONUS OF THE ASSESSEE TO PROVE THAT THE EXPENSES INCURRED BY IT WERE MADE AT A COMPARABLE MARKET RATE. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE IMPUGNED ORDER OF THE LD. CIT(A) IS CONTRARY TO LAW AND CONS EQUENTLY MERITS TO BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE REST ORED. 4. AT THE TIME OF HEARING, THE LD. D.R. SUBMITS THA T FOR THE REASONS AS MENTIONED IN THE ASSESSMENT ORDER, THE LD. CIT(A) W AS NOT JUSTIFIED IN DELETING THE DISALLOWANCE MADE BY THE A.O. 5. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSES SEE WHILE REITERATING THE SAME SUBMISSIONS AS SUBMITTED BEFOR E THE A.O. AND LD. CIT(A) FURTHER SUBMITS THAT THE ASSESSEE IS A PROFE SSIONALLY MANAGED ITA 254/M/09 J.B. MAN GHARAM FOODS PVT. LTD.K 4 COMPANY SOLELY MANAGED BY THE TEAM OF SECONDED EMPL OYEES CONSTITUTING THE TOP LEVEL MANAGEMENT, NO AMOUNT IS BEING PAID T O THE DIRECTORS OF THE COMPANY IN ANY FORM. HENCE, SECONDMENT CHARGES AMO UNTING TO ` 49.5 LACS ON ACCOUNT OF THESE 4 EMPLOYEES IS FULLY JUSTI FIED. HE FURTHER SUBMITS THAT THE A.O. WITHOUT ANY BASIS TO SHOW THAT THE IN DUSTRY STANDARDS WERE LOWER THAT WHAT WAS PAID TO SECONDED EMPLOYEES, HAS MADE THE DISALLOWANCE ON ESTIMATION BASIS. HE THEREFORE SUB MITS THAT SECONDMENT OF EMPLOYEES IS JUST ONE OF THE MODES OF HIRING EMP LOYEES AND IS BEING FOLLOWED BY THE ASSESSEE SINCE LAST MANY YEARS AND NO DISALLOWANCE WAS MADE BY THE DEPARTMENT ON THIS ACCOUNT. HE FURTHER SUBMITS THAT THE LD. CIT(A) WAS FULLY JUSTIFIED IN DELETING THE DISA LLOWANCE MADE BY THE A.O. AND HIS ORDER BE UPHELD. 6. WE HAVE CAREFULLY HEARD THE SUBMISSIONS OF THE R IVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND T HAT THE FACTS ARE NOT IN DISPUTE INASMUCH AS THERE IS NO DISPUTE THAT THE DI SALLOWANCE OF ` 9,90,919/- BEING 20% OF ` 49,54,595/- OF SECONDMENT CHARGES WAS MADE BY THE A.O. ON ESTIMATE BASIS WITHOUT BRINGING ANY SUPPORTING MATERIAL ON RECORD TO SHOW THAT THE PAYMENT OF SECONDMENT CH ARGES WAS MADE BY THE ASSESSEE IS NOT LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR THE SAME IS EXCESSIVE O R UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVI CES PROVIDED. THIS BEING SO AND IN THE ABSENCE OF ANY OTHER CONTRARY M ATERIAL PLACED ON RECORD BY THE REVENUE AGAINST THE FINDINGS OF THE L D. CIT(A) AND ALSO KEEPING IN VIEW OF THE RULE OF CONSISTENCY, WE HOLD THAT THE ADHOC DISALLOWANCE OF ` 9,90,919/- BEING 20% OF ` 49,54,595/- OF SECONDMENT CHARGES IS NOT SUSTAINABLE IN LAW AND ACCORDINGLY W E ARE INCLINED TO UPHOLD THE FINDINGS OF THE LD. CIT(A) IN DELETING T HE SAME. THE GROUNDS TAKEN BY THE REVENUE ARE, THEREFORE, REJECTED. ITA 254/M/09 J.B. MAN GHARAM FOODS PVT. LTD.K 5 7. IN THE RESULT, THE REVENUES APPEAL STANDS DISMI SSED. ORDER PRONOUNCED IN THE OPEN COURT ON 15.4.201 1 SD/ - (RAJENDRA SINGH) ACCOUNTANT MEMBER SD/ - (D.K. AGARWAL) JUDICIAL MEMBER MUMBAI, DATED 15.4.2011 RK COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)- 34, MUMBA I 4. COMMISSIONER OF INCOME TAX, 24, MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH J, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI ITA 254/M/09 J.B. MAN GHARAM FOODS PVT. LTD.K 6 1 DRAFT DICTATED ON 6.7.11 SR PS 2 DRAFT PLACED BEFORE AUTHOR ON 7.4.11 SR PS 3 DRAFT PROP OSED & PLACE BEFORE THE 2 ND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY 2 ND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR PS SR.PS 6 KEPT FOR PRONOUNCEMENT ON SR PS 7 FILE SENT TO THE BENCH CLERK SR PS 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE ON WHICH FILE GOES TO THE AR 10 DATE OF DESPATCH SR PS