DC DCI JOINT VENTURE, MUMBAI V. DY.CIT-15(3), MUMBAI

ITA 3477/MUM/2011

• Counselvise Citation: 347719914 RSA 2011
• Duration Of Justice: 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-12-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 17-11-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 02-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: O A MAO

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B : MUMBAI BEFORE SHRI D. MANMOHAN, (VICE PRESIDENT [MZ]) AND SHRI RAJENDRA SINGH,(ACCOUNTANT MEMBER) ITA NO.3477/MUM/2011 ASSESSMENT YEAR : 2007-08 DC DCI JOINT VENTURE 236 OSHIWARA INDUSTRIAL CENTRE OFF NEW LINK ROAD GOREGAON (W) MUMBAI-400 014. ..( APPELLANT ) P.A. NO. (AAAAD 2918 D) VS. DY. COMMISSIONER OF INCOME TAX -15(3) MUMBAI. ..( RESPONDENT ) APPELLANT BY : MS. A ARTI VISSANJI RESPONDENT BY : SHRI O. A. MAO DATE OF HEARING : 17.11.2011 DATE OF PRONOUNCEMENT : 9 TH DECEMBER, 2011 O R D E R PER RAJENDRA SINGH (AM). THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 14.3.2011 OF CIT(A) FOR THE ASSESSMENT YEAR 2007-08 . THE ONLY DISPUTE RAISED IS REGARDING DISALLOWANCE OF RS.43,19,081/- UNDER S ECTION 40A(2)(B) OF THE INCOME TAX ACT. 2. THE ASSESSEE WHO IS AN UN-INCORPORATED JOINT VEN TURE BETWEEN DORSCH HOLDING GMBH (GERMANY) AND DORSCH CONSULT (I) PVT. L TD., (DCIPL) HAD BEEN FORMED TO EXECUTE DETAILED ENGINEERING PROJECT MANA GEMENT CONSULTANCY (DEPMC) AND REVIEW CONSULTANCY ASSIGNMENTS FOR BUIL DING ACCOMMODATION FOR MARRIED PERSONNEL IN DEFENCE. BOTH THESE CONTRACTS HAD BEEN AWARDED BY THE ITA NO.3477/M/11 A.Y:07-08 2 ASSESSEE TO DCIPL. THE AO NOTED THAT THE ASSESSEE FOR THE RELEVANT YEAR HAD TOTAL CONTRACT RECEIPTS OF RS.3,35,91,297/- AGAINST WHICH EXPENDITURE OF RS.3,07,67,277/- HAD BEEN CLAIMED RESULTING INTO NE T PROFIT RS.28,24,020/- . THE EXPENDITURE INCURRED BY THE ASSESSEE INCLUDED A N AMOUNT OF RS.2,93,56,114/- PAID TO DCIPL FOR EXECUTION OF THE TWO PROJECTS. THUS EXPENDITURE ON ACCOUNT OF DCIPL WAS 95.41% OF THE T OTAL EXPENDITURE AND 87.39% OF THE GROSS RECEIPTS OF THE ASSESSEE. THE AO ALSO NOTED THAT DCIPL HAD DECLARED GROSS CONSULTANCY FEE OF RS.6,20,72,93 7/- AND AFTER CLAIMING EXPENDITURE OF RS.4,79,53,068/- HAD DECLARED NET PR OFIT OF RS.1,51,03,950/-. THE AO COMPUTED THE PROFIT OF DCIPL IN RESPECT OF T HE CONTRACT RECEIPT OF RS.2,93,56,114/- FROM THE ASSESSEE ON THE BASIS OF ITS AVERAGE PROFIT RATE WHICH CAME TO RS.71,43,101/- AS PER THE COMPUTATION GIVEN BELOW:- PROFITS OF DCIPL FOR AY 2007-08 ------------------------------------ X CONTRACTUAL RECEIPTS FROM THE JOINT VENTURE GROSS CONSULTANCY FEES OF DCIPL 15103950 ------------------ X 29356114 = 7143101 62072937 2.1 THE AO THUS CONCLUDED THAT DCIPL HAD EARNED PRO FIT OF RS.71,43,101/- FROM THE TWO PROJECTS AWARDED BY THE ASSESSEE BUT T HE ASSESSEE HAD SHOWN ONLY PROFIT OF RS.28,24,020/-. SINCE DCIPL WAS A R ELATED PARTY, THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY EXPENSES INCURRED ON ACCOUNT OF DCIPL SHOULD NOT BE DISALLOWED UNDER SECTION 40A(2)(B). THE ASSESSEE EXPLAINED THAT IT HAD ENGAGED SERVICES OF DCIPL AS IT DID NOT HAVE ANY FACILITIES OF INFRASTRUCTURE AND SKILLED PERSONNEL FOR EXECUTING ENORMOUS AND LARGE SIZED PROJECTS AWARDED BY THE MINISTRY OF DEFENSE WHICH W ERE SPREAD OUT AT VARIOUS PLACES ALL OVER INDIA. IT WAS ALSO SUBMITTED THAT RATE CHARGED BY DCIPL WAS VERY REASONABLE COMPARED TO OTHER PROJECTS BEING EX ECUTED DURING THE SAME PERIOD DETAILS OF WHICH WERE GIVEN IN THE FORM OF C OMPARATIVE STATEMENT. THE ASSESSEE ALSO GAVE DETAILS OF BILLS ETC. THE AO OB SERVED THAT THE DETAILS FURNISHED BY THE ASSESSEE WITH REGARD TO STATION-WI SE EXPENDITURE INCURRED BY THE ASSESSEE DID NOT INCLUDE DETAILS RELATING TO MA NPOWER DEPLOYMENT AT VARIOUS STATIONS AND NUMBER OF MAN DAYS WHICH WERE CONSUMED BY SUCH TEAM ITA NO.3477/M/11 A.Y:07-08 3 OF PERSONNEL TO REVEAL WHETHER OR NOT FINAL PAYMENT IS MADE BY THE ASSESSEE AS PER THE TERMS AND CONDITIONS OF PAYMENT AGREED B ETWEEN ASSESSEE AND DCIPL. IT WAS ALSO OBSERVED BY HIM THAT PROFIT MAR GIN OF THE ASSESSEE IN RESPECT OF TWO PROJECTS AWARDED TO DCIPL WAS ONLY R S.11,87,304/- WHICH WAS ONLY 4.04% OF THE TURNOVER OF RS.2,93,56,114/- AND THE PROFIT FROM OTHER PROJECTS EXCLUDING THE TWO PROJECTS BY DCIPL WAS 42 .54% WHICH WAS APPARENTLY VERY HIGH. THE ASSESSEE HAD THUS TRIED TO SHIFT PROFIT TO DCIPL WHICH WAS A RELATED PARTY. THE AO, THEREFORE, DISAL LOWED PART OF THE EXPENSES INCURRED BY THE ASSESSEE ON ACCOUNT OF DCIPL WHICH WAS COMPUTED AT RS.43,19,081/- (RS.7143101/- MINUS RS.2824020/-). ACCORDINGLY, HE MADE AN ADDITION OF RS.43,19,081/- TO THE TOTAL INCOME. 2.2 AGGRIEVED BY THE DECISION OF THE AO ASSESSEE FI LED DETAILS SUBMISSIONS BEFORE CIT(A) VIDE LETTER DATED 27.1.2011 AND VIDE LETTER DATED 4.2.2011 RECEIVED ON 9.2.2011. THESE SUBMISSIONS WERE FORWA RDED TO THE AO FOR FURNISHING REMAND REPORT AFTER NECESSARY VERIFICATI ON. THE AO IN THE REPORT DATED 1.3.2011 SUBMITTED THAT THE ASSESSEE WAS GIVE N OPPORTUNITY TO EXPLAIN THE CONTENTIONS RAISED BUT NO ONE ATTENDED. THE AO ALSO REPORTED THAT THERE WAS NO FURTHER MATERIAL PLACED BY THE ASSESSEE AND, THEREFORE, THE WORKING GIVEN BY THE AO IN THE ASSESSMENT ORDER MAY BE UPHE LD. THE CIT(A), THEREFORE, CONCLUDED THAT THE ASSESSEE HAD NO FURTH ER SUBMISSIONS TO MAKE AND ACCORDINGLY UPHELD THE EXCESS EXPENDITURE COMPU TED BY THE AO UNDER SECTION 40A(2)(B) AT RS.43,19,081/-. AGGRIEVED BY THE SAID DECISION THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. ! 3. BEFORE US, THE LD. AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD FILED DETAILED SUBMISSIONS VIDE L ETTER DATED 4.2.2011 PLACED AT PAGE 1-10 OF THE PAPER BOOK IN WHICH ALL THE POINTS MADE BY AO IN THE ASSESSMENT ORDER HAD BEEN REPLIED AND THE ASSESSEE HAD ALSO GIVEN COMPLETE DETAILS OF THE PROJECTS AS WELL AS COMPARISON WITH OTHER SIMILAR PROJECTS BEING UNDERTAKEN BY THE DCIPL. IT WAS POINTED OUT THAT COMPLETE DETAILS WERE GIVEN BEFORE AO WHO DID NOT EXAMINE THE S AME AS HE WANTED TO APPLY HIS OWN FORMULA. THE DCIPL HAD EXECUTED SIM ILAR THREE PROJECTS IN ITA NO.3477/M/11 A.Y:07-08 4 RESPECT OF WHICH THE PAYMENT RECEIVED PER MAN MONTH WA S HIGHER THAN THAT IN CASE OF THE ASSESSEE. THE PAYMENT PER MAN MONTH IN THOS E CASES VARIED FROM RS.1,65,000 TO RS.2,22,223/-, WHEREAS, IN CASE OF THE ASSESSEE, IT WAS RS.1,26,000/-. FURTHER, THE NET PROFIT PERCENTAGE IN RES PECT OF THOSE PROJECTS WAS ALSO THE SAME AT 4.04% AS IN CASE OF THE ASSESSEE . COMPLETE DETAILS OF THESE PROJECTS HAVE BEEN PLACED AT PAGE 61-66 OF THE PA PER BOOK WHICH WERE ALSO AVAILABLE BEFORE THE AUTHORITIES BELOW. IT WAS A LSO SUBMITTED THAT ANY EXCESS PAYMENT TO THE ASSOCIATED CONCERN HAS TO BE COMPU TED WITH REFERENCE TO THE MARKET VALUE OF SIMILAR SERVICES PROVIDED BY OTH ER CONCERNS. THE BASIS ADOPTED BY THE AO WAS TOTALLY INCORRECT. THE AO HAD NOT PLACED ANY MATERIAL ON RECORD TO SHOW THAT DCIPL HAD CHARGED HIGHER TO THE A SSESSEE THAN TO OTHERS IN RESPECT OF SIMILAR PROJECTS. IT WAS ACCORDIN GLY URGED THAT THE ADDITION MADE SHOULD BE DELETED. THE LD. DR, ON THE OTHER HAN D, SUPPORTED THE ORDERS OF AUTHORITIES BELOW AND PLACED RELIANCE ON THE FINDIN GS GIVEN IN THE RESPECTIVE ORDERS. 4. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF EXPENDITURE U/S.40A(2)(B) OF THE I.T. ACT. THE ASSESSEE AS MENTIONED EARLIER WAS A JOINT VENTURE OF DORSCH HOLDING GMBH (GERMANY) AND ITS INDIAN SUBSIDIARY I.E . DORSCH CONSULT (I) PVT. LTD., (DCIPL). THE ASSESSEE HAD RECEIVED TWO PROJECTS FROM MINISTRY OF DEFENSE IN CONNECTION WITH THE BUILDING ACCOMMODATION FOR MAR RIED PERSONNEL IN DEFENSE. THE ASSESSEE HAD GIVEN BOTH THE CONTRACTS TO DC IPL FOR EXECUTION, AS IT DID NOT HAVE THE NECESSARY INFRASTRUCTURE. THE ASSESS EE HAD PAID A SUM OF RS.2,93,56,114/- TO DCIPL FOR EXECUTION OF THE TWO PRO JECTS. IN THE RELEVANT YEAR, THE ASSESSEE HAD TOTAL CONTRACT RECEIPTS OF RS.3,3 5,91,297/- IN RESPECT OF WHICH EXPENDITURE OF RS.3,07,67,277/- HAD BEEN INCUR RED INCLUDING THE PAYMENT OF RS.2,93,56,114/- TO DCIPL RESULTING INTO THE NET PROFIT OF RS.28,24,020/-, DCIPL ON THE OTHER HAND, HAD GROSS R ECEIPTS OF RS.6,20,72,937/- INCLUDING THE SUM OF RS.2,93,56,11 4/- RECEIVED FROM THE ASSESSEE ON WHICH NET PROFIT SHOWN WAS RS.1,51,03,950 /-. THE AO COMPUTED THE PROFIT EARNED BY DCIPL IN RESPECT OF THE AMOUNTS REC EIVED FROM THE ASSESSEE OF RS.2,93,56,114/- ON THE BASIS OF AVERAGE PROFIT EARNED BY DCIPL ON ITA NO.3477/M/11 A.Y:07-08 5 ALL PROJECTS, WHICH COME TO RS.71,43,101/-, WHEREAS, THE ASSESSEE HAD RECEIVED ONLY THE NET PROFIT OF RS.28,24,020/-. THE AO, THEREFOR E, CONCLUDED THAT THE ASSESSEE HAD PAID EXCESS AMOUNT TO DCIPL FOR THE TWO PR OJECTS COMPARED TO THE MARKET VALUE AND, THEREFORE, PROVISIONS OF SECTION4 0A(2)(B) WERE ATTRACTED. HE, THEREFORE, DISALLOWED THE EXPENDITURE IN CASE OF TH E ASSESSEE AMOUNTING TO RS.43,19,081/- (RS.71,43,101/- RS.28,24,020/-) 4.1 IN OUR VIEW, THE BASIS ADOPTED BY THE AO FOR HOLDI NG THAT THE PAYMENT MADE BY THE ASSESSEE TO DCIPL WAS EXCESSIVE, IS NOT CO RRECT. THE ASSESSEE HAD SIMPLY TRANSFERRED THE TWO PROJECTS RECEIVED FROM MINIS TRY OF DEFENCE TO DCIPL WITHOUT DOING ANY WORK, WHEREAS, THE DCIPL HAD CARRIED OUT THE ENTIRE ACTIVITIES FOR EXECUTING THE PROJECTS WHICH WERE SCATTE RED AT VARIOUS PLACES ALL OVER INDIA, WHICH REQUIRED SUFFICIENT INFRASTRUCTURE A ND SKILLED PERSONNEL. THEREFORE, THE PROFIT EARNED BY THE ASSESSEE CANNOT BE COMPARED WITH THE PROFIT EARNED BY DCIPL. THE PROVISIONS OF SECTION 40 A(2)(B) CAN BE APPLIED ONLY WHEN IT IS FOUND THAT THE EXPENDITURE INCURRED BY THE ASS ESSEE IS EXCESSIVE COMPARED TO THE MARKET VALUE OF SIMILAR GOODS AND SERV ICES. THEREFORE, IT WAS REQUIRED BY THE AO TO SHOW FOR SIMILAR WORK GIVEN TO O THER CONCERNS, PAYMENT MADE BY THE ASSESSEE WAS LOWER, BUT NO SUCH CASE, HAS BEEN MADE OUT. ON THE CONTRARY, THE ASSESSEE HAD MADE SUBMISSIONS BEFORE THE AO THAT IN RESPECT OF SIMILAR PROJECTS EXECUTED BY DCIPL, THE PROFIT RATE WAS THE SAME AT 4.04%, AS IN CASE ALL THE PROJECTS RECEIVED FROM THE ASSESSEE. THE ASSESSEE HAD ALSO SHOWN THAT THE PAYMENT RECEIVED PER MAN MONTH IN RESPECT OF THE PROJECTS RECEIVED FROM THE ASSESSEE WAS LOWER AT RS.1,26,000/- COMPARED TO SIMILAR OTHER PROJECTS EXECUTED BY THE ASSESSEE IN WHICH THE PAY MENTS PER MAN MONTH VARIED FROM RS.1,65,000/- TO RS.2,22,223/-. THE SE DETAILS HAVE BEEN GIVEN AT PAGE 61 TO 66 OF THE PAPER BOOK, WHICH WERE A VAILABLE BEFORE THE LOWER AUTHORITIES. NO ADVERSE FINDINGS HAVE BEEN GIV EN BY THE AUTHORITIES ON THE CLAIMS MADE BY THE ASSESSEE. THERE IS NO MATERIAL PLACED ON RECORD TO SHOW THAT THE PAYMENT MADE BY THE ASSESSEE FOR SIMILAR P ROJECTS TO OTHER CONCERNS WAS LOWER OR THAT DCIPL HAD RECEIVED LOWER A MOUNT IN RESPECT TO SIMILAR OTHER PROJECTS. UNDER THESE CIRCUMSTANCES, THE ORDER OF THE CIT(A) ITA NO.3477/M/11 A.Y:07-08 6 CONFIRMING THE DISALLOWANCE MADE BY THE AO CANNOT BE SUSTAINED. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) AND DELETE THE ADDITION MADE. 5. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN T ORDER PRONOUNCED IN T ORDER PRONOUNCED IN T ORDER PRONOUNCED IN THE OPEN COURT ON HE OPEN COURT ON HE OPEN COURT ON HE OPEN COURT ON 09.12.2011 09.12.2011 09.12.2011 09.12.2011. .. . SD/- SD/- (D. MANMOHAN) (RAJENDRA SINGH ) VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATED: 09/12/2011. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.