DCIT, Bangalore V. M/s Wendt India Limited, Bangalore

ITA 322/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 60726 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 1 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-05-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 16-04-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 25-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUSAN THOMAS JOSE
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Fair market value
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SMT. P MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER ITA NOS.321 & 322/BANG/2011 (ASST. YEARS 005-06 & 2006-07) THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-12(5), BANGALORE. . APPELLANT VS. M/S WENDT INDIA LTD., NO.105, 1 ST FLOOR, NATIONAL GAMES HOUSING COMPLEX, KORAMANGALA, BANGALORE-560 047. . RESPONDENT PAN AAACW1401D. APPELLATE BY : SMT. SUSAN THOMAS JOSE, JCIT, RESPONDENT BY : SHRI T SURYANARAYANA, ADVOCATE DATE OF HEARING : 16-04-2012 DATE OF PRONOUNCEMENT : 04-05-2012 O R D E R PER P MADHAVI DEVI, JUDICIAL MEMBER : THIS APPEAL IS FILED BY THE REVENUE. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX - III AT ITA NOS.321 & 322/B/11 2 BANGALORE DATED 23.12.2010. THE APPEAL ARISES OUT OF THE ASSESSMENT COMPLETED U/S 143(3) OF THE INCOME-TAX ACT, 1961. 2. IN BOTH THE APPEALS, THE REVENUE IS AGGRIEVED BY THE ORDER OF THE CIT(A) IN DELETING THE DISALLOWANCE MADE BY TH E AO U/S 40A(2) OF THE INCOME-TAX ACT OF SERVICE FEES PAID TO M/S CARBORUNDUM UNIVERSAL LTD. (CUMI) ON THE GROUND THAT CUMI IS A TAX PAYING ENTITY HAVING POSITIVE INCOME AND THERE WAS NO ATT EMPT BY THE ASSESSEE TO EVADE TAX. THE GRIEVANCE OF THE REVENU E IS THAT THE CIT(A) HAS NOT APPRECIATED THE FACT THAT THE ASSESS EE HAS FAILED TO PROVE THAT CUMI HAS RENDERED ANY SERVICES TO THE AS SESSEE AND HAS ACCEPTED THE EXPLANATION OF THE ASSESSEE THAT CUMI RENDERED SERVICES IN THE NATURE OF BUSINESS STRATEGY AND REVIEW, HR A ND IR POLICIES, FINANCIAL MATTERS, LEGAL AND TAXATION, WHICH IS TOO GENERAL IN NATURE 3. THE SECOND GROUND RAISED BY THE REVENUE IS WITH REGARD TO THE DELETION OF THE DISALLOWANCE MADE U/S 40A(2) OF THE INCOME-TAX ACT OF SALES COMMISSION PAID TO CUMI ON THE GROUND THAT THE CIT(A) HAS FAILED TO APPRECIATE THE FACT THAT THE ASSESSEE HAS NOT FURNISHED ANY SATISFACTORY EXPLANATION JUSTIFYING THE PAYMENT. ITA NOS.321 & 322/B/11 3 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS A COMPANY WHICH IS IN THE BUSINESS OF MANUFACTURING AND SELLI NG DIAMONDS AND CBN GRINDING WHEELS/TOOLS AND MACHINERY AND ACCESSO RIES. THE ASSESSEE COMPANY WAS INCORPORATED IN 1980 AS A JOIN T VENTURE BETWEEN WENDT GMBH AND CARBORUNDUM UNIVERSAL LTD. E ACH OF THEM HOLD 40% OF THE EQUITY CAPITAL AND THE BALANCE IS HELD BY THE PUBLIC. THE ASSESSEE IS A PART OF MURUGAPPA GROUP, HEAD QUARTERED AT CHENNAI. FOR THE RELEVANT ASSESSMENT YEARS, THE AS SESSEE FILED ITS RETURN OF INCOME. ON SCRUTINY OF THE RESPECTIVE RE TURNS OF INCOME FILED FOR THE RELEVANT ASSESSMENT YEARS U/S 143(3) OF THE INCOME-TAX ACT, THE ASSESSING OFFICER OBSERVED THAT THE ASSESS EE HAS PAID SERVICE FEES TO CABORANDUM UNIVERSAL LTD., WHICH IS AN ASSO CIATE PERSON AND IS UNDER THE SAME CONTROL AND MANAGEMENT. THEREFOR E, HE OBSERVED THAT THE CUMI IS A PERSON COVERED U/S 40A(2)(B) OF THE INCOME-TAX ACT. HE, THEREFORE, ISSUED A QUESTIONNAIRE TO THE ASSESSEE ASKING IT TO JUSTIFY THE EXPENDITURE. THE ASSESSEE VIDE ITS REP LY DATED 4.8.2008 WHICH IS REPRODUCED IN PAGES 4 TO 7 OF THE ASSESSME NT ORDER STATED THAT THE ASSESSEE HAS MADE THE PAYMENT OF SERVICE FEE TO CUMI WAS FOR THE SERVICES RENDERED BY IT TOWARDS FINANCIAL MATTERS S UCH AS FUNDS MANAGEMENT, INVESTMENTS, FOREIGN EXCHANGE MANAGEMEN TS, BANK LOANS ETC. AND ALSO GUIDANCE/CLARIFICATION IN DIREC T AND INDIRECT ITA NOS.321 & 322/B/11 4 TAXATION MATTERS. AFTER CONSIDERING THE SAID DETAI LS FILED BY THE ASSESSEE, THE AO HELD THAT THE EXPLANATION GIVEN BY THE ASSESSEE IS VERY GENERAL IN NATURE AND DOES NOT SPECIFY ANY SE RVICES WHICH NEEDED SPECIFIC EXPERTISE. HE ALSO OBSERVED THAT T HE ASSESSEE COMPANY WAS ALREADY HAVING A TEAM OF PROFESSIONALS LOOKING AFTER EVERY AREA SUCH AS FINANCIAL MATTERS ARE LOOKED AFT ER BY THE CFO AND OTHER MATTERS ARE LOOKED AFTER BY OTHER PROFESSIONA LS. AS REGARDS THE CORRESPONDING AGREEMENT BETWEEN THE ASSESSEE AND TH E CUMI, THE AO HELD THAT THE CORRESPONDING AGREEMENT IS VERY BRIEF AND DOES NOT GIVE ANY INDICATION THAT IT HAS BEEN PREPARED BY AN EXPE RT. HE HELD THAT THESE CORRESPONDING AGREEMENT/REPORTS DO NOT REFLEC T ANY BENEFIT TO THE BUSINESS OF THE ASSESSEE COMPANY AND NONE OF TH E REPORTS SPEAK ANYTHING ABOUT MANUFACTURING OR GRINDING EQUIPMENTS OR ANYTHING RELATED TO METALLURGICAL ASPECTS OF THE ASSESSEE CO MPANY. HE, THEREFORE, HELD THAT THE SERVICE PAYMENT IS SUPERFL UOUS EXPENDITURE HAVING NO CORRELATION WITH THE BUSINESS OF THE ASSE SSEE WHATSOEVER. HE ACCORDINGLY DISALLOWED THE ENTIRE AMOUNT AND ADD ED THE SAME BACK TO THE ASSESSEES INCOME. FOR SIMILAR REASONS, THE ASSESSING OFFICER HAS ALSO DISALLOWED THE COMMISSION ON SALES PAID TO CUMI AND ADDED IT TO THE TOTAL INCOME OF THE ASSESSEE. ITA NOS.321 & 322/B/11 5 5. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEF ORE THE CIT(A) AND MADE DETAILED SUBMISSIONS. 6. THE CIT(A) AFTER GOING THROUGH THE SUBMISSIONS OF THE ASSESSEE AND ALSO THE JUDICIAL PRECEDENTS ON WHICH THE ASSE SSEE PLACED RELIANCE UPON THE DECISIONS AND AFTER CONSIDERING THE CBDT CIRCULAR 6-P DATED 6 TH OF JULY, 1968, HELD THAT AS PER THE SAID CBDT CIRC ULAR NO DISALLOWANCE IS TO BE MADE U./S 40A(2) IN RESPECT O F PAYMENTS MADE TO RELATIVES AND SISTER CONCERNS WHERE THERE IS NO ATTEMPT TO EVADE TAX. HE ALSO PLACED RELIANCE UPON THE DECISION OF THE HO NBLE KARNATAKA HIGH COURT IN THE CASE OF DCIT VS. MICROTEK SEPARA TORS LTD. REPORTED IN 293 ITR 451, WHEREIN IT WAS HELD THAT S O LONG AS THERE IS NO INTENTION TO EVADE TAX AND SO LONG AS THE EXPEND ITURE IS NOT SHOCKING, THE SAID EXPENDITURE HAS TO BE ACCEPTED, PARTICULARLY IN THE LIGHT OF THE WORDINGS OF SEC. 40A(2) OF THE INCOME- TAX ACT FOR DELETING THE ADDITION. THE CIT(A) HAS ALSO OBSERVE D THAT THE ASSESSEE HAS DEDUCTED APPROPRIATE TAXES AT SOURCE BEFORE REM ITTING THE AMOUNT TO CUMI AS EVIDENCED BY THE TDS CERTIFICATE SUBMIT TED TO THE APPELLATE PROCEEDS. OBSERVING THAT CUMI IS A TAX P AYING ENTITY HAVING POSITIVE INCOME FOR THE PERIOD UNDER CONSIDE RATION, HE HELD THAT THERE WAS NO ATTEMPT BY THE ASSESSEE TO EVADE TAX AND HENCE, THERE ITA NOS.321 & 322/B/11 6 COULD BE NO DISALLOWANCE U/S 40A(2) OF THE INCOME-T AX ACT. HE ACCORDINGLY DELETED THE DISALLOWANCE OF SERVICE FEE AND ALSO SALES COMMISSION PAID TO CUMI. . 7. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 8. THE LEARNED DR SMT. SUSAN THOMAS JOSE STRONGLY S UPPORTED THE ORDER OF THE AO AND SUBMITTED THAT THE ASSESSEE AND CUMI BEING ASSOCIATE ENTERPRISE, FALL WITHIN THE AMBIT OF SEC. 40A(2) OF THE INCOME-TAX ACT. THEREFORE, ACCORDING TO HER IT IS INCUMBENT UPON THE ASSESSING OFFICER TO EXAMINE THE JUSTIFIABILITY OF THE PAYMENT MADE BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISES. SHE SUBMITTED THAT THE ASSESSEE HAS CLAIMED TO HAVE PAID THE SERVICE FEE T O CUMI FOR THE SERVICES OF ADMINISTRATION, FINANCIAL, LEGAL AND T AXATION MATERS. SHE SUBMITTED THAT AS ALREADY HELD BY THE CIT(A), THE E XPLANATION OF THE ASSESSEE IS TOO GENERAL IN NATURE. ACCORDING TO HE R, THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCES BEFORE THE AUTHORITIES B ELOW AS TO THE EXACT NATURE OF SERVICES RENDERED BY THE CUMI JUSTI FYING THE PAYMENT. SHE SUBMITTED THAT THE ASSESSEE COMPANY HAS VERY ME AGER STAFF AND, THEREFORE, IT IS NOT UNDERSTANDABLE AS TO WHAT HR P OLICIES WOULD BE FRAMED BY THEM (CUMI) FOR THE ASSISTANCE AND THE B ENEFIT OF THE ITA NOS.321 & 322/B/11 7 ASSESSEE COMPANY. SIMILARLY, FOR THE PURPOSES OF S ALES COMMISSION ALSO, SHE SUBMITTED THAT THE ASSESSEE HAS NOT GIVEN ANY DETAILS OF THE SERVICES PROVIDED TO THE ASSESSEE BY CUMI. IN SUPP ORT OF THE CONTENTION THAT IN SUCH CIRCUMSTANCES THE DISALLOWA NCE U/S 40A(2) OF THE INCOME-TAX ACT IS JUSTIFIED, THE LEARNED DR PL ACED RELIANCE UPON THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN T HE CASE OF CORONATION FLOUR MILLS VS. ACIT REPORTED IN 314 ITR 1. 9. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTH ER HAND PLACED RELIANCE UPON THE ORDER OF THE CIT(A) AND SUBMITTED THAT THE ASSESSEE HAD FILED ALL THE DETAILS RELATING TO THE SERVICES RENDERED BY ITS ASSOCIATE ENTERPRISES CUMI BEFORE THE AUTHORITIES B ELOW. HE HAS DRAWN OUR ATTENTION TO PAGE NO.132 OF THE PAPER BOO K TO JUSTIFY ASSESSEES SUBMISSIONS TO THE ASSESSING AUTHORITY A LONG WITH ALL THE DETAILS WHICH WERE FURNISHED BEFORE THE AO. HE HAS ALSO DRAWN OUR ATTENTION TO PAGES 140 TO 142 OF THE PAPER BOOK, WH ICH IS A COPY OF THE AGREEMENT BETWEEN THE ASSESSEE AND THE CUMI FOR THE PAYMENT OF SERVICE FEE @ 1.5% ON VALUE OF THE PRODUCTS MANUFA CTURED AND SOLD BY THE ASSESSEE. HE HAS ALSO DRAWN OUR ATTENTION T O PAGES 11 TO 62 OF THE ASSESSEE, WHICH ARE THE COPIES OF VARIOUS EMAIL CORRESPONDENCE BETWEEN THE ASSESSEE AND CUMI TO DE MONSTRATE THE ITA NOS.321 & 322/B/11 8 NATURE OF SERVICES RENDERED BY CUMI TO THE ASSESSEE . AT PAGES 63 TO 65 ARE THE TDS CERTIFICATES FOR THE TAX DEDUCTED AT SOURCE BY THE ASSESSEE WHILE MAKING THE PAYMENTS TO CUMI. THUS, H E SUBMITTED THAT THE ASSESSEE HAS PRODUCED ALL THE NECESSARY EV IDENCES BEFORE THE AUTHORITIES BELOW AND THAT IT WAS ONLY AFTER DETAIL ED CONSIDERATION OF THE SAME THAT THE CIT(A) HAS ALLOWED THE BENEFIT TO THE ASSESSEE. IN SUPPORT OF HIS CONTENTION THAT THE DISALLOWANCE U/S 40A(2) OF THE INCOME-TAX ACT CAN BE MADE ONLY WHERE THE PAYMENT I S FOUND TO BE EXCESSIVE OR UNREASONABLE, THE ASSESSEE HAS PLACED RELIANCE UPON THE CBDT CIRCULAR NO. 60 DATED 6 TH JULY 1988, WHEREIN IT IS MENTIONED THAT INCOME-TAX OFFICER IS EXPECTED TO EXERCISE HIS JUDGMENT IN A REASONABLE AND FAIR MANNER AND IT SHOULD BE BORNE I N MIND THAT THE PROVISION IS MEANT TO CHECK EVASION OF TAX THROUGH EXCESSIVE OR UN REASONABLE PAYMENTS TO RELATIVES OR ASSOCIATES CONC ERNS AND SHOULD NOT BE APPLIED IN A MANNER WHICH WILL CAUSE HARDSHI P IN BONAFIDE CASES. HE HAS ALSO PLACED RELIANCE UPON THE DECIS ION OF S.K ENGINEER VS. JCIT REPORTED IN 286 (AT) 210 (BANG) AND ALSO THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF MICROTE X SEPARATORS LTD. REPORTED IN 293 ITR 451 IN SUPPORT OF ITS CONTENTIO N. ITA NOS.321 & 322/B/11 9 10. HAVING HEARD BOTH THE PARTIES AND HAVING CONSI DERED THE RIVAL CONTENTIONS, WE FIND THAT UNDISPUTEDLY THE ASSESSEE AND CUMI ARE ASSOCIATE PERSONS DEFINED U/S 40A(2)(B) OF THE INCO ME-TAX ACT. THEREFORE, THE ASSESSING OFFICER HAS SOUGHT TO EXAM INE THE REASONABLENESS OF THE PAYMENT MADE TO CUMI BY THE A SSESSEE. HOWEVER AS ALREADY HELD BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CORONATION FLOUR MILLS, WHETHER UNDER THE PROVISION OF SEC. 40A(2) OF THE INCOME-TAX ACT, WHERE AN ASSESSEE INC URS ANY EXPENDITURE IN RESPECT OF WHICH THE PAYMENT IS REQU IRED TO BE MADE OR HAS BEEN MADE TO ANY PERSON REFERRED IN CLAUSE (B) AND THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO - A) THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE; B) THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSE SSEE; OR C) THE BENEFITS DERIVED BY OR ACCRUING TO THE ASSES SEE ON RECEIPT OF SUCH GOODS SERVICES OR FACILITIES; THEN THE ASSESSING OFFICER SHALL NOT ALLOW AS A D EDUCTION SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY THE AO TO BE EXCESSIVE OR UNREASONABLE AND THE AO IS REQUIRED TO RECORD A FINDING AS TO WHETHER THE EXPENDITURE IS EXCESSIVE OR UNREASONABL E IN RELATION TO ITA NOS.321 & 322/B/11 10 ANY ONE OF THE THREE REQUIREMENTS PRESCRIBED, WHICH ARE INDEPENDENT AND ALTERNATIVE TO EACH OTHER. 11. APPLYING SUCH DECISION TO THE FACTS OF THE CAS E BEFORE US, WE HAVE TO SEE WHETHER THE PAYMENT MADE BY THE ASSESSE E TO ITS ASSOCIATE PERSON IS EXCESSIVE OR UNREASONABLE ON THE TOUCH ST ONE OF THE CONDITION LAID DOWN U/S 40A(2) OF THE INCOME-TAX A CT. WE FIND THAT THE ASSESSEE BEFORE THE AUTHORITIES BELOW HAS PLACE D THE COPIES OF THE AGREEMENTS BETWEEN THE ASSESSEE AND THE CUMI FOR TH E PAYMENT OF SERVICE FEE @ 1.5% OF THE TURNOVER AND HAS ALSO FUR NISHED BEFORE THE AUTHORITIES BELOW, THE EVIDENCES RELATING TO VARIOU S SERVICES RENDERED BY THE ASSESSEE. WE FIND THAT THE CIT(A) HAS RIGHT LY CONSIDERED THE SAME AND ALSO AFTER TAKING NOTE OF THE CBDT CIRCUL AR, WHICH IS BINDING ON THE REVENUE AUTHORITIES, HAS HELD THAT T HE DISALLOWANCE IS NOT JUSTIFIED. THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF MICROTEX SEPARATORS LTD. (CITED SUPRA) AFTER TAKIN G INTO CONSIDERATION THE DECISION OF THE VARIOUS HIGH COURTS, HAS HELD T HAT SO LONG AS THERE IS NO INTENTION TO EVADE TAX AND SO LONG AS THE COM MISSION IS NOT SHOCKING, THE SAID COMMISSION HAS TO BE ACCEPTED, P ARTICULARLY IN THE LIGHT OF THE WORDINGS OF SEC. 40A(2) OF THE INCOME- TAX ACT AND IT IS NOT THE QUANTUM ALONE THAT GOVERN SUCH CASES BUT TH E FAIR MARKET VALUE ITA NOS.321 & 322/B/11 11 OF THE GOODS, SERVICES, LEGITIMATE NEEDS OF THE BUS INESS OR PROFESSION OF THE ASSESSEE WOULD BE GUIDING FACTOR IN TERMS OF SEC. 40A(2) OF THE INCOME-TAX ACT. WE FIND THAT THE CIT(A) HAS ALSO T AKEN INTO CONSIDERATION THESE JUDICIAL PRECEDENTS AND ALSO T HE FACT THAT CUMI IS TAX PAYING ENTITY WITH POSITIVE INCOME FOR THE YEAR UNDER CONSIDERATION BEFORE DELETING THE DISALLOWANCE. IN VIEW OF THE SAME, WE DO NOT SEE ANY REASON TO TAKE ANY CONTRA VIEW. 12. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 4TH MAY , 2012. SD/- SD/- (JASON P BOAZ) (MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER VMS. BANGALORE DATED : 04/05/2012 COPY TO : 1.THE ASSESSEE 2.THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER ASST. REGISTRAR, I TAT, BANGALORE.