DCIT Corporate Circle 4(1), CHENNAI V. LGF Services Ltd., CHENNAI

ITA 3227/CHNY/2017

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 3799 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 9 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-10-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-10-2021
• Assessment Year: 2013-2014
• Appeal Filed On: 28-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R ANITA
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Permanent establishment; Set aside
• Section: 13

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI [ , . , BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./ ITA NO.: 3227/CHNY/2017 / ASSESSMENT YEAR: 2013-14 THE DCIT, CORPORATE CIRCLE 4(1), CHENNAI 34. V. M/S. LGF SERVICES LTD., 21, PATTULLOS ROAD, MOUNT ROAD, CHENNAI 600 002. PAN: AAACL 9555A ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : SMT. R. ANITA, ADDL. CIT /RESPONDENT BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE /DATE OF HEARING : 05.10.2021 /DATE OF PRONOUNCEMENT : 08.10.2021 / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-8, CHENNAI, DATED 04.10.2017 AND PERTAINS TO ASSESSMENT YEAR 2013-14. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: -2- ITA. NO: 3227/CHNY/2017 1. THE ORDER OF THE LD. CIT(A) IS CONTRARY TO LAW AND FACTS OF THE CASE. 2. THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF SERVICE EXPENSES OF RS 2,19,95,966/- . 2.1 THE LD. CIT(A) FAILED TO NOTE THAT THE AGREEMENT FOR SHARING OF EXPENSES IS MADE ONLY AT THE FAG END OF THE YEAR I.E. ON 14.03.20 13 AND MONTHLY DEBIT NOTES FOR USE OF COMMON FACILITIES WERE NOT RAISED ON THE 12' H OF EACH MONTH WHICH IS A CONDITION MADE IN THE AGREEMENT. 2.2 THE LD.CIT(A) FAILED TO NOTE THAT THE COMPANY HAS INCURRED RS 3.22 CRORES AS MANPOWER OUTSOURCING COST REPRESENTING MANPOWER AND OTHER COSTS TO M/S APARAJITHA DYNAMIC SYNERGIES P LTD. WHICH INCLUDES SALARY, TRAVEL ETC. SERVICE EXPENSES OF RS 2.19 CRORES PAID TO M/S SUNDARAM FINANCE LTD (SFL) ALSO INCLUDES EXPENSES TOWARDS ADMINISTRATION, INFRASTRUCTURE, SUPERVISION, ACCOUNTING ETC. 2.3. THE LD.CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT PAYMENT TO M/S SFL TOWARDS MANPOWER AND BRANCH NETWORK COST IS IN ADDITION TO MANPOWER AND OTHER COSTS PAID TO M /S APARAJITHA DYNAMIC SYNERGIES P LTD. 2.4 THE LD.CIT(A) ERRED BY ALLOWING ASSESSEES CLAIM IN SPITE OF THE FACT THAT THE ASSESSEE COMPANY FAILED TO EXPLAIN WITH ACCURATE BREAK-UP, THE COST REIMBURSED TO THE ABOVE MENTIONED COMPANIES. HENCE THE ASSESSEE HAS NOT COMPLETELY EXPLAINED THE DETAILS OF COMMON EXPENSES INCLUDED IN THE OUTSOURCING COST OF RS 3.22 CRORES AND SERVICE EXPENSES OF RS 2.19 CRORES. 2.5 THE LD.CIT(A) FAILED TO NOTE THAT THE ABSENCE OF PROPER DOCUMENTATION IN THE FORM OF AGREEMENT AVAILABLE FOR THE FULL YEAR AND MONTHLY DEBIT NOTES PROPERLY RAISED ON THE COMPANY IS A SERIOUS LAPSE WHICH COULD DISENTITLE THE ASSESSEE TO CLAIM THE EXPENSES AS NORMAL AND LEGITIMATE. THERE IS NO OTHER MEANS OF VERIFYING THE ACCURACY OF THE CLAIM APART FROM THE INFERENCES DERIVED FROM ORAL EXPLANATIONS. 2.6 THE LD.CIT(A)S OBSERVATION THAT THE REIMBURSEMENT HAS BEEN CONSIDERED AS INCOME IN THE RETURN OF INCOME OF THE M/S SFL ALONE WILL NOT BE A PROPER CRITERION FOR ALLOWING THE EXPENSES IN THE HANDS -3- ITA. NO: 3227/CHNY/2017 OF THE ASSESSES ESPECIALLY WHEN THE ASSESSEE COMPANY IS ONE OF THE GROUPS COMPANIES OF M/S SFL. 2.7 THE LD.CIT(A) FAILED TO NOTE THAT THE TRANSACTION IS NOTHING BUT A SHAM TRANSACTION RECORDED IN THE BOOKS OF THE ASSESSEE COMPANY WHICH REDUCES THE PROFIT SUBSTANTIALLY. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF DISTRIBUTION OF FINANCIAL PRODUCTS FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2013-14 ON 28.09.2013 ADMITTING TOTAL INCOME OF RS.1,13,95,034/-. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS AVAILED VARIOUS SERVICES INCLUDING INFRASTRUCTURE FACILITIES FROM M/S. SUNDARAM FINANCE LTD., FOR WHICH IT HAS MADE PAYMENTS FOR SHARED COST AND SERVICE CHARGES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, WHEN THE AO CALLED UPON THE ASSESSEE TO EXPLAIN NATURE OF EXPENDITURE, THE ASSESSEE HAS SUBMITTED AN AGREEMENT DATED 14.03.2013 BETWEEN M/S. SUNDARAM FINANCE LTD., AND ASSESSEE, AS PER WHICH, ALL EXPENDITURE RELATED TO BUSINESS ACTIVITY OF THE ASSESSEE WAS INCURRED BY M/S. SUNDARAM FINANCE LTD., AND THE SAME HAS BEEN ALLOCATED ON THE BASIS OF REVENUE GENERATED FOR THE YEAR. THE AO HOWEVER, WAS NOT CONVINCED WITH THE EXPLANATION FURNISHED BY -4- ITA. NO: 3227/CHNY/2017 THE ASSESSEE AND ACCORDING TO HIM, THE ASSESSEE HAS NOT JUSTIFIED PAYMENT MADE TO M/S. SUNDARAM FINANCE LTD., FOR SHARED COST AND OTHER SERVICE CHARGES WITH NECESSARY EVIDENCES AND MORE PARTICULARLY, IN THE ABSENCE OF ANY EVIDENCE. THEREFORE, HE OPINED THAT PAYMENT MADE BY THE ASSESSEE TO M/S. SUNDARAM FINANCE LTD., IS NOTHING BUT SHIFTING OF PROFIT FROM ONE COMPANY TO ANOTHER COMPANY, WITHIN THE GROUP AND HENCE, DISALLOWED SERVICE CHARGES REIMBURSED BY THE COMPANY TO M/S. SUNDARAM FINANCE LTD., AMOUNTING TO RS.2,19,95,966/-. 4. BEING AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD.CIT(A). BEFORE THE LD.CIT(A), THE ASSESSEE HAS FILED WRITTEN SUBMISSIONS WHICH HAD BEEN REPRODUCED AT PARA 4 ON PAGE NOS.5 & 6 OF LD.CIT(A) ORDER. THE SUM AND SUBSTANCE OF ARGUMENT OF THE ASSESSEE BEFORE THE LD.CIT(A) ARE THAT THE ASSESSEE IS CARRYING OUT BACK OFFICE / CLERICAL WORK FOR ORIENTAL INSURANCE COMPANY LTD., WHICH INCLUDES COLLECTION OF PROPOSAL FORM AND FOLLOW-UP OF RENEWALS. THE SAID SERVICE HAD BEEN CARRIED OUT THROUGH VARIOUS BRANCHES OF M/S. SUNDARAM FINANCE LTD., FOR WHICH THE ASSESSEE HAS SHARED COMMON COST AND OTHER SERVICE CHARGES. THE LD.CIT(A) AFTER -5- ITA. NO: 3227/CHNY/2017 CONSIDERING RELEVANT SUBMISSIONS OF THE ASSESSEE AND ALSO TAKEN NOTE OF NATURE OF EXPENSES CLAIMED BY THE ASSESSEE, OPINED THAT WHEN THE ASSESSEE HAD NO PERMANENT ESTABLISHMENT AND FURTHER, FUNCTIONING BY OUTSOURCING ITS ACTIVITIES TO SISTER CONCERNS, THE AO HAS ERRED IN NOT ALLOWING PAYMENT MADE TO M/S. SUNDARAM FINANCE LTD., FOR REIMBURSEMENT OF VARIOUS EXPENSES INCURRED BY THEM ON BEHALF OF THE ASSESSEE. HE, FURTHER NOTED THAT THE AO HAD DISALLOWED EXPENDITURE IN THE HANDS OF THE ASSESSEE EVEN THOUGH, THE ASSESSEE MADE IT CLEAR THAT IT DOES NOT HAVE ANY PERSONAL OFFICE OR SIMILAR SUCH PERMANENT ESTABLISHMENT TO CARRY OUT BUSINESS. THEREFORE, HE OPINED THAT EXPENDITURE INCURRED BY M/S. SUNDARAM FINANCE LTD., AND SHARED AMONG ASSESSEE AND OTHER GROUP CONCERNS IS INCURRED FOR BUSINESS PURPOSE OF THE ASSESSEE AND HENCE, DELETED ADDITIONS MADE BY THE AO. AGGRIEVED BY THE CIT(A) ORDER, THE REVENUE IS IN APPEAL BEFORE US. 5. THE LD.DR SUBMITTED THAT THE LD.CIT(A) HAS FAILED TO NOTE THAT THE AGREEMENT FOR SHARING OF EXPENSES IS MADE ONLY ON THE FAG END OF THE YEAR I.E., ON 14.03.2013 AND MONTHLY DEBIT NOTE FOR USE OF COMMON FACILITIES WERE NOT RAISED ON 12 TH OF EACH -6- ITA. NO: 3227/CHNY/2017 MONTH, WHICH IS A CONDITION MADE IN THE AGREEMENT. THE LD.CIT(A) FURTHER FAILED TO NOTE THAT THE ASSESSEE COMPANY HAD INCURRED HUGE EXPENDITURE OF RS.3.22 CRORES AS MANPOWER OUTSOURCING COST AND OTHER COST TO M/S. APARAJITHA DYNAMIC SYNERGIES P LTD., WHICH INCLUDES SALARY, TRAVEL, ETC., AND HENCE, PAYMENT OF SERVICE EXPENSES OF RS.2.19 CRORES TO M/S. SUNDARAM FINANCE LTD., FOR VARIOUS EXPENSES INCLUDING INFRASTRUCTURE, SUPERVISION, ACCOUNTING, ETC., IS NOT BACKED BY NECESSARY EVIDENCES. 6. THE LD.AR FOR THE ASSESSEE ON THE OTHER HAND SUPPORTING ORDER OF THE CIT(A) SUBMITTED THAT THE ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH M/S. SUNDARAM FINANCE LTD., AND M/S. SUNDARAM FINANCE DISTRIBUTION LTD., FOR AVAILING VARIOUS SERVICES INCLUDING ADMINISTRATIVE AND INFRASTRUCTURE FACILITIES, FOR WHICH IT HAS REIMBURSED VARIOUS EXPENSES INCURRED BY M/S. SUNDARAM FINANCE LTD., ON BEHALF OF THE ASSESSEE. THE LD.AR FURTHER SUBMITTED THAT THE ASSESSEE COMPANY USES M/S. SUNDARAM FINANCE LTD., NETWORK OF BRANCHES AND MANPOWER FOR ITS BUSINESS AND ACCORDINGLY, THE EXPENSES INCURRED TOWARDS SERVICES RENDERED IN RESPECT OF ADMINISTRATIVE, INFRASTRUCTURE, SUPERVISION, -7- ITA. NO: 3227/CHNY/2017 ACCOUNTING, ETC., HAS BEEN SHARED ON THE BASIS OF REVENUE EARNED BY THREE COMPANIES. THE ASSESSEE HAS FILED ALL EVIDENCES TO SUPPORT PAYMENT OF REIMBURSEMENT TO M/S. SUNDARAM FINANCE LTD. THEREFORE, THE LD.CIT(A) AFTER CONSIDERING RELEVANT FACTS HAS RIGHTLY DELETED ADDITION MADE BY THE AO AND HIS ORDER SHOULD BE UPHELD. 7. WE HAVE HEARD BOTH THE PARTIES, PERUSED MATERIALS AVAILABLE ON RECORD AND GONE THROUGH ORDERS OF THE AUTHORITIES BELOW. THE ASSESSEE IS IN THE BUSINESS OF DISTRIBUTION AND MARKETING OF INSURANCE, FINANCIAL PRODUCTS, LOAN AND OTHER INVESTMENT PRODUCTS, HAS CARRIED ITS BUSINESS ACTIVITIES THROUGH VARIOUS BRANCHES OF M/S. SUNDARAM FINANCE LTD. THE ASSESSEE HAD ENTERED INTO A COST SHARING AGREEMENT WITH M/S. SUNDARAM FINANCE LTD., AS PER WHICH, INCOME GENERATED FROM AFORESAID BUSINESS IS DIRECTLY BOOKED IN ACCOUNTS OF THE RESPECTIVE PARTIES, BUT EXPENDITURE INCURRED IN RELATION TO SAID BUSINESS ACTIVITY WAS AGREED TO BE APPORTIONED AMONGST THE PARTIES ON THE BASIS OF REVENUE GENERATED FROM BUSINESS. M/S. SUNDARAM FINANCE LTD., HAS RAISED DEBIT NOTES TO ASSESSEE FOR REIMBURSEMENT OF VARIOUS EXPENDITURE INCURRED ON BEHALF OF THE ASSESSEE, WHICH INCLUDES -8- ITA. NO: 3227/CHNY/2017 SERVICES RENDERED IN RESPECT OF ADMINISTRATIVE, INFRASTRUCTURE, SUPERVISION, ACCOUNTING, ETC. THUS, EXPENSES ARE REVENUE IN NATURE AND ARE INCURRED FOR PURPOSE OF BUSINESS OF THE ASSESSEE. ALTHOUGH AGREEMENT ENTERED BETWEEN ASSESSEE AND M/S. SUNDARAM FINANCE LTD., WAS ON 14.03.2013, BUT THE SERVICES HAS BEEN AVAILED FOR THE ENTIRE FINANCIAL YEAR ON PAN INDIA BASIS, WHICH IS EVIDENT FROM THE FACT THAT EXCEPT SHARED COST AND SERVICE EXPENSES, NO OTHER EXPENSES WAS INCURRED BY THE ASSESSEE IN ITS BUSINESS. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT WHEN THE ASSESSEE HAS DEMONSTRATED WITH EVIDENCE THAT IT DOES NOT HAVE ANY PERMANENT ESTABLISHMENT AND OTHER INFRASTRUCTURE FACILITIES TO CARRY OUT ITS BUSINESS OPERATIONS AND FURTHER, IT HAD AVAILED SERVICES OF M/S. SUNDARAM FINANCE LTD., THROUGH NETWORK OF ITS BRANCHES ACROSS THE COUNTRY, THE AO WAS ERRED IN DISALLOWING EXPENSES MERELY FOR THE REASON THAT SAID EXPENSE WAS NOT SUPPORTED BY EVIDENCES, MORE PARTICULARLY WHEN THE ASSESSEE HAS FILED AGREEMENT BETWEEN THE PARTIES AND DEBIT NOTE RAISED BY M/S. SUNDARAM FINANCE LTD. FURTHER, IT IS NOT A CASE OF THE AO THAT EXPENDITURE INCURRED BY THE ASSESSEE IS NOT GENUINE. IN FACT, THE AO HAS NOT QUESTIONED GENUINENESS OF EXPENSES, BUT WHAT WAS DOUBTED IS NECESSITY AND RATIONALE BEHIND INCURRING EXPENDITURE. -9- ITA. NO: 3227/CHNY/2017 IT IS A WELL SETTLED PRINCIPLE OF LAW THAT AO CANNOT QUESTION RATIONALE BEHIND INCURRING ANY EXPENDITURE. WE FURTHER NOTED THAT IN THE SUBSEQUENT FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR 2014-15, THE AO HAS ACCEPTED THE CLAIM OF THE ASSESSEE TOWARDS REIMBURSEMENT OF SHARED COST AND SERVICE EXPENSES TO M/S. SUNDARAM FINANCE LTD. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT WHEN EXPENDITURE WAS CONSIDERED AS GENUINE AND FURTHER, IT WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, THEN THERE IS NO REASON FOR THE AO TO DISALLOW SAID EXPENDITURE WITHOUT ASSIGNING PROPER REASONS. THE LD.CIT(A) AFTER CONSIDERING RELEVANT FACTS, HAS RIGHTLY DELETED ADDITION MADE BY THE AO. HENCE, WE ARE INCLINED TO UPHOLD THE ORDER OF THE LD.CIT(A) AND DISMISS THE APPEAL FILED BY THE REVENUE. 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 8 TH OCTOBER, 2021 AT CHENNAI. SD/- SD/- ( ) (V. DURGA RAO) / JUDICIAL MEMBER ( . ) (G. MANJUNATHA) /ACCOUNTANT MEMBER /CHENNAI, /DATED, THE 8 TH OCTOBER, 2021 RSR -10- ITA. NO: 3227/CHNY/2017 /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. ( ) /CIT(A) 4. /CIT 5. /DR 6. /GF.