ITO, New Delhi V. M/s Triveni Retail Ventures Ltd, Noida

ITA 4630/DEL/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 0635 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-01-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Assessment Year: 2003-2004
• Appeal Filed On: 20-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMARENDRA KUMAR
• Assessee Lawyers: AVDHESH BANSAL; RUPESH J AIN
• Keywords: Wholly owned subsidiary; Fair market value

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH H DELHI) BEFORE SHRI A.D. JAIN AN SHRI K.G. BANSAL ITA NO. 4630(DEL)2010 ASSESSMENT YEAR: 2003-04 INCOME TAX OFFICER, M/S. TRIVENI RETAIL VENTURES LTD., WARD 16(4), NEW DELHI. V. (FORMERLY KNOWN AS TRIVENI SRI LTD.) 8 TH FLOOR, EXPRESS TRADE TOWERS, 15-16, SEC. 16A, NOIDA-201301. (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI AMARENDRA KUMAR, SR. DR RESPONDENT BY: SHRI RUPESH JAIN, ADV. & SHRI AVDHESH BANSAL, FCA ORDER PER A.D. JAIN, J.M . THIS IS DEPARTMENTS APPEAL FOR THE ASSESSMENT YEAR 2003-04, TAKING THE FOLLOWING GROUNDS:- THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW BY DE LETING THE DISALLOWANCE OF ` 8,29,272/- MADE U/S 40A(2)(B) ON THE GROUND THAT THE AO HAS NOT BROUGHT ON RECORD ANY COMPARABLE CAS E OF EXCESSIVE PAYMENT, IGNORING THAT: 1. THE DISALLOWANCE WAS MADE BY THE AO AFTER A THOROUG H COMPARISON OF THE TURN OVER, EXPENSES AND PROFITS O F THE YEAR UNDER CONSIDERATION AND THE PRECEDING YEAR. 2. THE MEMORANDUM OF UNDERSTANDING REGARDING RE-IMBURS EMENT OF EXPENSES BY THE ASSESSEE TO ITS HOLDING COMPANY IS NOT BASED ON ANY SOUND RATIONALE BUT IS APPARENTLY A SELF SER VING DOCUMENT AIMED AT REDUCING THE TAX LIABILITY OF THE ASSESSEE. ITA 4630(DEL)2010 2 2. THE ASSESSEE COMPANY IS PRIMARILY ENGAGED IN TH E BUSINESS OF DESIGN, ENGINEERING, SUPPLY & INSTALLATION OF SUGAR PLANT EQUIPMENTS. IT IS THE WHOLLY OWNED SUBSIDIARY COMPANY OF M/S. TRIVENI ENGINEERING & INDUSTRIES LTD. THE HOLDING COMPANY IS A MULTI-LO CATIONAL, DIVERSIFIED COMPANY ENGAGED, INTER ALIA, IN BUSINESSES OF SUGAR PRODUCTION, MANUFACTURE OF TURBINES AND GEAR BOXES. IT ALSO UNDERTAKES VAR IOUS PROJECTS IN CONNECTION WITH OPERATION AND SET UP OF SUGAR PLANTS, MACHINER Y CONSTRUCTION, WATER TREATMENT PLANTS AND RENEWABLE ENERGY PROJECTS. O NE OF THE BUSINESS PREMISES OF THE HOLDING COMPANY IS SITUATED IN OKHL A, NEW DELHI FROM WHERE, IT CARRIED OUT THE AFORESAID PROJECT RELATED BUSINESS ACTIVITIES UNDER THREE DIFFERENT PROJECT RELATED DIVISIONS, VIZ. THE SUGAR PLANT & MACHINERY DIVISION (SPM), THE PROJECTS AND ENGINEERING DIVI SION (PAE) AND THE RENEWABLE ENERGY BUSINESS GROUP (REBG). ALL THE THREE UNITS WERE OPERATING FROM THE SAME RENTED PREMISES IN OKHLA. 3. DURING THE YEAR, THE SPM DIVISION OF THE HOLDING COMPANY, AS STATED, WAS UNDER A FINANCIAL STRAIN DUE TO LOW MARGINS AND HIGH EXPENDITURE ON ACCOUNT OF GUARANTEE AND OTHER PROJECT COMMITMENTS. AS SUCH, THE HOLDING COMPANY DECIDED TO CURTAIL ITS BUSINESS ACTIVITIES UNDER THE SPM DIVISION RELATING TO EXECUTION OF SUGAR PLANTS AND MACHINERY CONSTRUCTION. IT DECIDED TO SHUT DOWN THE SPM BUSINESS DIVISION AFTER FULFIL LING ITS EXISTING ITA 4630(DEL)2010 3 CONTRACTUAL OBLIGATIONS. IT DID NOT TAKE UP ANY F RESH CONTRACTS. THEREFORE, IT DECIDED TO LIMIT OPERATIONS IN THE TURN KEY PROJECT IMPLEMENTATIONS BEING CARRIED ON BY THE SPM UNIT AND EXPANDED THE BUSINES S OF PROVIDING TECHNOLOGICAL SOLUTIONS BY MANUFACTURING AND INSTAL LING HIGH END SUGAR PROCESS EQUIPMENTS, THROUGH THE ASSESSEE COMPANY. THE PERSONNEL AND INFRASTRUCTURE FACILITIES REQUIRED FOR CARRYING OUT SUCH BUSINESS ACTIVITIES WERE ALREADY AVAILABLE WITH THE HOLDING COMPANY AT ITS OKHLA PREMISES. ACCORDINGLY, IT WAS DECIDED, THAT THE ASSESSEE COMP ANY WOULD OPERATE FROM SUCH PREMISES INSTEAD OF FROM ITS OWN SEPARATE AND INDEPENDENT INFRASTRUCTURE TO BE ESTABLISHED. A MEMORANDUM O F UNDERSTANDING (MOU) WAS ENTERED INTO BETWEEN THE ASSESSEE COMPA NY AND THE HOLDING COMPANY SO AS TO FACILITATE THE OPERATIONS OF THE A SSESSEE COMPANY AT THE OKHLA PREMISES ON A COST EFFECTIVE BUSINESS. IN T HE MOU DATED 22.5.2002, VARIOUS TERMS AND CONDITIONS OF COST SHARING ARRANG EMENT BETWEEN THE ASSESSEE COMPANY AND THE HOLDING COMPANY, WERE PENN ED. IN PURSUANCE OF THE SAID AGREEMENT, DURING THE YEAR, THE ASSESSEE C OMPANY REIMBURSED ADMINISTRATIVE AND PERSONNEL EXPENSES TO THE HOLDIN G COMPANY ON ACTUAL BASIS. THESE EXPENSES WERE CLAIMED AS A DEDUCTION, I.E., DEDUCTION OF ` 14,28,640/- AS ADMINISTRATIVE EXPENSES AND ` 18,50,716/- AS PERSONNEL EXPENSES. ITA 4630(DEL)2010 4 4. THOUGH THE AO AGREED IN PRINCIPLE WITH THE CLAIM OF THE ASSESSEE THAT THE REIMBURSEMENT OF COST BY THE ASSESSEE IN LIEU O F SERVICES UTILIZED WAS FAIR, HE MADE A DISALLOWANCE OF ` 8,29,272/- U/S 40A(2)(B) OF THE I. T. ACT. IT WAS OBSERVED THAT THE EXPENSES INCURRED BY THE A SSESSEE BY WAY OF REIMBURSEMENT TO HOLDING COMPANY, WERE NOT REASONAB LE, HAVING REGARD TO THE SCALE OF THE OPERATIONS OF THE ASSESSEE COMPANY . 5. BY VIRTUE OF THE IMPUGNED ORDER, THE LD. CIT(A) DELETED THE DISALLOWANCE MADE BY THE AO. 6. AGGRIEVED, THE DEPARTMENT IS IN APPEAL. 7. THE LD. DR HAS CONTENDED, CHALLENGING THE IMPUGN ED ORDER, THAT THE LD. CIT(A) HAS ERRED IN HOLDING THE DISALLOWANCE OF ` 8,29,272/- MADE U/S 40A(2)(B) OF THE I. T. ACT; THAT THE LD. CIT(A), WH ILE DOING SO, HAS GONE IN OBSERVING THAT THE AO HAD NOT BROUGHT ON RECORD ANY COMPARABLE CASE OF EXCESSIVE PAYMENT; THAT IN DOING SO, THE LD. CIT(A) HAS FAILED TO CONSIDER THAT THE DISALLOWANCE HAD BEEN MADE BY THE AO ON A THOROUGH COMPARISON OF THE TURN OVER, EXPENSES AND PROFITS OF THE YEAR UNDER CONSIDERATION AS WELL AS THOSE OF THE PRECEDING YEAR; AND THAT THE MOU EN TERED INTO BETWEEN THE ASSESSEE COMPANY AND ITS HOLDING COMPANY REGARDING REIMBURSEMENT OF THE EXPENSES BY THE ASSESSEE TO ITS HOLDING COMPANY IS NOT BASED ON ANY SOUND ITA 4630(DEL)2010 5 RATIONALE TO ITS APPARENTLY SELF SERVING DOCUMENTS AIMED AT REDUCING THE TAX LIABILITY OF THE ASSESSEE COMPANY. 8. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTH ER HAND, HAS PLACED STRONG RELIANCE ON THE IMPUGNED ORDER. IT HAS BEEN CONTENDED THAT THE LD. CIT(A) HAS COMMITTED NO ERROR IN DELETING THE DISAL LOWANCE WRONGLY MADE; THAT THE ASSESSEE COMPANY HAS INCURRED ADMINISTRATI VE EXPENSES OF ` 14,28,640/-; THAT THESE EXPENSES COMPRISED OF ` 11,10,000/- ON ACCOUNT OF COMMON EXPENSES ALLOCATED TO THE ASSESSEE AND REIMB URSED TO THE HOLDING COMPANY; THAT THE ADMINISTRATIVE EXPENSES OF ` 14,28,640/- ALSO CONSTITUTED EXPENSES OF ` 3,18,640/- DIRECTLY INCURRED BY THE ASSESSEE COMPAN Y; THAT THE AO WRONGLY MADE THE DISALLOWANCE, WITHOUT BRINGING ON RECORD ANY COMPARABLE CASE AND ESTABLISHING AS TO HOW THE NATU RE OF PAYMENT WAS EXCESSIVE; THAT THE DECISION THAT THE ASSESSEE COMP ANY WOULD OPERATE FROM THE OKHLA PREMISES, WAS TAKEN BY THE HOLDING COMPAN Y DUE TO THE FACT THAT THE OPERATIONAL AND INFRASTRUCTURAL FACILITY REQUIR ED FOR CARRYING OUT THE BUSINESS ACTIVITY, WERE ALREADY AVAILABLE WITH THE HOLDING COMPANY AT OKHLA; THAT IT WAS IN FURTHERANCE OF FACILITIES OF OPERATI ONS OF THE ASSESSEE COMPANY AT OKHLA BUT ON A COST EFFECTIVE BASIS THAT THE AS SESSEE AND ITS HOLDING COMPANY ENTERED INTO THE MOU DATED 22.5.2002; THAT IT WAS IN PURSUANCE OF THE TERMS AND CONDITIONS CONTAINED IN THE SAID MOU, THAT THE ASSESSEE ITA 4630(DEL)2010 6 COMPANY REIMBURSED ADMINISTRATIVE AND PERSONNEL EXP ENSES TO THE HOLDING COMPANY; THAT SUCH REIMBURSEMENT WAS MADE ON AN ACT UAL BASIS WHICH WAS NOWHERE DENIED; AND THAT IT WAS SUCH REIMBURSEMENT WHICH WAS MADE DEDUCTION AND NO DEDUCTION THEREON WAS CALLED FOR. 9. WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE M ATERIAL ON RECORD. UNDISPUTEDLY, THE SPM DIVISION OF THE HOLDING COMPA NY AND THE ASSESSEE COMPANY, DURING THE YEAR, WAS UNDER A FINANCIAL ST RAIN DUE TO LOW MARGINS AND HIGH EXPENDITURE ON ACCOUNT OF GUARANTEES AND O THER PROJECT COMMITMENTS. IT WAS DUE TO THIS THAT THE HOLDING COMPANY WANTED TO CURTAIL ITS BUSINESS ACTIVITIES IN THE SPM DIVISION. THE BUSINESS IN THE SPM DIVISION WAS THEREFORE SHUT DOWN. AS SUCH, THE BU SINESS OF EXECUTION OF SUGAR PLANT AND MACHINERY CONSTRUCTION, WHICH WAS B EING CARRIED ON IN THE SPM DIVISION, WAS CURTAILED DURING THE YEAR AND THE HOLDING COMPANY WENT IN FOR EXPANSION OF ITS BUSINESS OF PROVIDING TECHN OLOGICAL SOLUTIONS BY MANUFACTURING AND INSTALLING HIGH END SUGAR PROCESS EQUIPMENTS. THIS WAS TO BE UNDER AEGIS OF THE ASSESSEE COMPANY. THE AS SESSEE COMPANY WAS TO OPERATE FROM THE OKHLA PREMISES, WHERE THE REQUISIT E PERSONNEL AND INFRASTRUCTURAL FACILITIES, NEEDED FOR THE BUSINESS ACTIVITIES, WAS ALREADY EXISTING. IT WAS FOR THIS PURPOSE THAT THE MOU WAS ENTERED INTO. A COPY OF THE SAID MOU IS AT PAGES 40&41 OF THE ASSESSEES PA PER BOOK (APB FOR ITA 4630(DEL)2010 7 SHORT). THE REIMBURSEMENT OF ADMINISTRATIVE AND PE RSONNEL EXPENSES BY THE ASSESSEE TO THE HOLDING COMPANY WAS UNDENIABLY ON A N ACTUAL BASIS. SUCH REIMBURSEMENT WAS CLAIMED AS A DEDUCTION. 10. AS RIGHTLY CONTENDED U/S 40A(2)(B) OF THE ACT, AN INDEPENDENT ENQUIRY IS REQUIRED TO MAKE A COMPARISON, WHICH WAS NOT DON E. AS PER SECTION 40A(2) OF THE ACT, WHERE THE ASSESSEE INCURS ANY EX PENDITURE IN RESPECT OF WHICH THE PAYMENT HAS BEEN MADE OR IS TO BE MADE TO ANY PERSON AS REFERRED TO IN SECTION 40A(2)(B), AND THE AO IS OF THE OPINI ON THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE, HAVING REGARD TO THE FAI R MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY THE AO TO BE EXC ESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. THEREFORE, T HE OPINION OF THE AO THAT THE EXPENDITURE IS EXCESSIVE OR UNREASONABLE, HAS T O BE BASED HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES O R FACILITIES FOR WHICH THE PAYMENT IS MADE. 11. THEREFORE, IT WAS FOR THE AO TO ESTABLISH THAT THE PAYMENT WAS EXCESSIVE. HEREIN, AS RIGHTLY OBSERVED BY THE LD. CIT(A), NEITHER HAS THE AO BROUGHT ON RECORD ANY COMPARABLE CASE, NOR HAS THE NATURE OF THE PAYMENT BEING SHOWN TO BE EXCESSIVE. MOREOVER, REMARKABLY, THE AO HAS HIMSELF AGREED THAT THE REIMBURSEMENT APPEARED TO BE FAIR. ITA 4630(DEL)2010 8 12. IN CIT V. SHATRUNJAY DIAMONDS 261 ITR 258(BOM ), (RELIED ON BY THE AO), IT HAS BEEN HELD U/S 40A(2)(B) OF THE ACT . IT WAS ON THE PECULIAR FACTS OF THAT CASE, IT WAS HELD THAT THE DIFFERENCE BETWEEN THE AVERAGE COST OF PURCHASE OF ROUGH DIAMONDS BY THE ASSESSEE FROM P AND AVERAGE COST OF PURCHASE OF ROUGH DIAMONDS FROM A WAS TO BE EXPLA INED BY THE ASSESSEE. SUCH IS NOT A SITUATION HERE. THEREFORE, SHATRUN JAY DIAMONDS (SUPRA), IS NOT APPLICABLE. 13. IN CIT V. FORBES TEA BROKERS 315 ITR 404(MAD) , IT WAS HELD THAT U/S 40A(2) OF THE ACT, WHEN THE EXPENSES ARE INCURR ED BY A FIRM OR A COMPANY IN RESPECT OF A PERSON WHO IS CLOSELY RELAT ED OR OTHERWISE SUBSTANTIALLY INTERESTED IN THE HOLDING OF THE COMP ANY WHICH IS NOT DIRECTLY PROPORTIONATE EITHER TO THE SERVICES RENDERED OR G OODS OFFERED, THE DEPARTMENT CAN INVOKE THOSE PROVISIONS AND FIND OUT WHETHER SUCH EXPENDITURE WAS REASONABLE, CORRECT OR GOOD; THAT H OWEVER, WHERE THE DEPARTMENT HAD NOT ESTABLISHED THAT THE EXPENDITURE INCURRED WAS EITHER EXCESSIVE OR UNREASONABLE, HAVING REGARD TO THE FA IR MARKET VALUE OF THE GOODS OR SERVICES RENDERED, WHICH WERE OF A SPECIFI C NATURE AND THERE WAS NO REASON TO INTERFERE WITH THE ORDER OF THE TRIBUNAL, WHICH HAD FOUND AGAINST THE DEPARTMENT. ITA 4630(DEL)2010 9 14. IN THE PRESENT CASE, THE UNDISPUTED FACTUAL SIT UATION, AS PUT ON RECORD BY THE ASSESSEE, IS THAT OUT OF 8 EMPLOYEES AGREED TO BE SECONDED TO THE ASSESSEE, THE ASSESSEE AND ITS HOLDING COMPANY HAD MUTUALLY DECIDED THAT 6 EMPLOYEES WOULD BE SECONDED FULLY WITH THEIR 100% I NVOLVEMENT IN THE BUSINESS ACTIVITIES OF THE ASSESSEE. THE REMAININ G 2 EMPLOYEES WERE TO BE SECONDED WITH 50% INVOLVEMENT. IT WAS ALSO AGREED THAT THE ENTIRE REMUNERATION PAID BY THE HOLDING COMPANY TO THE SAI D EMPLOYEES WOULD BE REIMBURSED BY THE ASSESSEE COMPANY ON AN ACTUAL BAS IS. IT WAS ON THE BASIS OF THIS UNDERSTANDING THAT THE SALARY COSTS OF THE SAID OPERATIONAL PERSONNEL AMOUNTING TO ` 14,41,866/- WAS PAID BY THE ASSESSEE COMPANY TO THE HOLDING COMPANY ON AN ACTUAL BASIS AND WAS CLAIMED AS PERSO NNEL EXPENSES. 15. APROPOS THE SUPPORT STAFF RENDERING FINANCE AND ACCOUNTING SERVICES IN CONNECTION WITH THE BUSINESS ACTIVITIES AT THE O KHLA PREMISES, IT WAS DECIDED INTER SE THE ASSESSEE AND THE HOLDING COMPA NY THAT 50% OF THE PROPORTIONATE SHARE OF THEIR SALARY COSTS ALLOCATED TO THE SPM DIVISION WILL BE RECOVERED BY THE HOLDING COMPANY FROM THE ASSESS EE. 16. THE PAYMENT HAD BEEN MADE IN TERMS OF THE AGREE MENT. THIS WAS NOT DISPUTED BY THE AO. ITA 4630(DEL)2010 10 17. IT IS INCORRECT TO STATE, IN VIEW OF THE ABOVE, THAT THE DISALLOWANCE MADE BY THE AO, BASED ON A COMPARISON OF THE TURN O VER, EXPENSES AND PROFITS OF THE YEAR AND THOSE OF THE PRECEDING YEAR , WAS CORRECT. THE COMPARISON OUGHT TO HAVE BEEN MADE ON THE BASIS OF THE FAIR MARKET VALUE OF THE SERVICES. THIS, HOWEVER, WAS NOT DONE. 18. IT HAS ALSO NOT BEEN SHOWN AS TO HOW, IF AT ALL , THE MOU ENTERED INTO INTER SE THE ASSESSEE COMPANY AND ITS HOLDING COMPA NY, WAS NOT BASED ON ANY SOUND RATIONALE AND WAS A SELF SERVING DOCUMENT AIMED AT REDUCING THE TAX LIABILITY OF THE ASSESSEE. MOREOVER, IT WAS N OT FOR THE AO TO DECIDE AS TO HOW THE BUSINESS IS TO BE CARRIED ON BY THE ASSESSE E. 19. IN VIEW OF THE ABOVE DISCUSSION, FINDING NO MER IT THEREIN, THE GROUND RAISED BY THE DEPARTMENT IS REJECTED. 20. IN THE RESULT, THE APPEAL FILED BY THE DEPARTME NT IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 14.01.2011 . SD/- SD/- (K.G. BANSAL) (A.D. JAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 14.01.2011 *RM ITA 4630(DEL)2010 11 COPY FORWARDED TO: 1. ITO, WARD 16(4), NEW DELHI. 2. M/S. TRIVENI RETAIL VENTURES LTD.,(FORMERLY KNOWN A S TRIVENI SRI LTD.)8 TH FLOOR, EXPRESS TRADE TOWERS, 15-16, SEC. 16A, NOID A-201301 3. CIT 4. CIT(A) 5. DR TRUE COPY BY ORDER DEPUTY REGISTRAR