DCIT RG. 9(1), MUMBAI V. AGILISYS MANAGED SERVICES (I) P.LTD, MUUMBAI

ITA 6970/MUM/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1540 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-06-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 18-05-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 08-12-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S S RANA
• Assessee Lawyers: RONAK K DOSHI
• Keywords: Business expenditure; Set aside
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI. BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER I.T.A. NO. 6970 /MUM/2008. ASSESSMENT YEARS: 2005-06. DY. COMMISSIONER OF M/S AGIL ISYS MANAGED SERVICES INCOME TAX, RG. 8(1), VS. (I) P. LTD., MET BLDG., GEN A.K. MUMBAI. VAIDYA CHOWK, BANDRA RECLAMATION, BANDRA (W), MUMBAI 400 050. PANAABCD4398J APPELLANT RESPONDENT APPELLANT BY : SHRI S.S. RANA, AND SHRI PIYUSH JAIN. RESPONDENT BY : SHRI RONAK K. DOSHI. O R D E R PER J. SUDHAKAR REDDY, A.M. THIS IS AN APPEAL FILED BY THE REVENUE DIRECTED A GAINST THE ORDER OF THE CIT(APPEALS)-IX, MUMBAI, DATED 07-10-2 008 FOR ASSESSMENT YEAR 2005-06, ON THE FOLLOWING GROUNDS : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE O F RS.4,38,774/- ON ACCOUNT OF FOREIGN TRAVEL EXPENSES MERELY ON THE GROUND THAT NO EVIDENCE WAS BROUGHT ON RECOR D BY THE ASSESSING OFFICER, WITHOUT APPRECIATING THE FINDING OF THE ASSESSING OFFICER THAT THE EXPENDITURE WAS NOT INCU RRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE ASSES SEES BUSINESS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE O F 2 RS.1,09,591/- BEING 25% OF THE STAFF WELFARE EXPENS ES CLAIMED, WITHOUT APPRECIATING THE FACTS THAT THE EX PENSES WERE NEITHER VERIFIABLE NOR THE ASSESSEE COULD ESTA BLISH ITS CLAIM THAT THE EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN REDUCING THE DISALLOWANCE O F MISCELLANEOUS EXPENSES OF RS.1,21,457/- (BEING 50% OF THE EXPENSES CLAIMED TOWARDS UTILITIES / FLOWERS) TO RS .22,825/- BY ERRONEOUSLY HOLDING THAT ONLY A SUM OF RS.91,301 /- WAS INCURRED TOWARDS UTILITIES / FLOWERS AS AGAINST RS. 2,42,913/- ACTUALLY CLAIMED BY THE ASSESSEE. WHILE REDUCING TH E DISALLOWANCE MADE BY THE ASSESSING OFFICER, THE LD. CIT(A) HAS NOT APPRECIATED THE FACTS RECORDED BY THE ASSES SING OFFICER THAT THE ASSESSEE CLAIMED TOTAL MISCELLANEO US EXPENSES OF RS.3,86,632/- WHICH INCLUDED RS.2,42,91 3/- UNDER THE HEAD UTILITIES / FLOWER. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE O F RS.18,66,483/- OUT OF SHARED EXPENSES ALLOCATED AND CLAIMED BY THE ASSESSEE AT RS.39,67,278/- WITHOUT APPRECIAT ING THE FACT THAT THE ASSESSING OFFICER HAS PROPERLY ALLOCA TED THE EXPENSES PROPORTIONATE TO TURNOVER OF SHARING ASSOC IATE COMPANIES AS BOTH THE COMPANIES ARE IN THE SAME LIN E OF BUSINESS. 5. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFI CER BE RESTORED. 6. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GR OUNDS OR ADD A NEW GROUND WHICH MAY BE NECESSARY. 2. WE HAVE HEARD SHRI S.S. RANA, THE LEARNED DR AN D SHRI RONAK K. DOSHI, LEARNED COUNSEL FOR THE ASSESSEE. 3. THE ASSESSEE IN THIS CASE IS A COMPANY AND IS 1 00% SUBSIDIARY OF AGILISYS MANAGED SERVICES LTD. U.K. T HE ASSESSEE COMPANY BILLS ITS PARENT COMPANY, ON THE BASIS OF C OST PLUS 15% MARK-UP. THE METHOD OF BILLING IS ARRIVED AT, AS PER TRANSFE R PRISING STUDY CARRIED OUT BY THE COMPANY. IT IS IN THE BUSINESS OF POSTIN G AND MAINTAINING WEB 3 PORTERS, DATA PROCESSING AND OTHER WEB RELATED SERV ICES. ITS TOTAL BILLING IS TO ITS PARENT COMPANY. THE ASSESSEE FILED A RETURN OF INCOME ON 30-10- 2005 DECLARING A TOTAL INCOME OF RS.64,87,745/-. TH E AO MADE DISALLOWANCES FROM THE CLAIMS MADE ON FOREIGN TRAVE L EXPENSES, STAFF WELFARE EXPENSES, TELEPHONE AND CELL PHONE CHARGES, MISCELLANEOUS EXPENSES, LEGAL AND PROFESSIONAL FEES AND SHARE EXP ENSES. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL. THE FIRST AP PELLATE AUTHORITY GRANTED SUBSTANTIAL RELIEF. ON THE ISSUES WHERE THE FIRST A PPELLATE AUTHORITY, GRANTED RELIEF TO THE ASSESSEE, AN APPEAL HAS BEEN FILED BY THE REVENUE. 4. ON A CAREFUL CONSIDERATION OF RIVAL CONTENTIONS AND A PERUSAL OF THE FACTS ON RECORD AND THE ORDERS OF THE AUTHOR ITIES BELOW, WE HOLD AS FOLLOWS. 5. ON THE FIRST GROUND AGAINST DELETING THE DISALL OWANCE OF RS.4,38,774/- ON ACCOUNT OF FOREIGN TRAVEL EXPENSES , WE FIND THAT THE BASIS ON WHICH THE DISALLOWANCE HAS BEEN MADE BY THE AO I S LEGALLY INCORRECT. THE EXPENDITURE CANNOT BE DISALLOWED FOR THE REASON THAT, IT WOULD HAVE BENEFITED THE PARENT COMPANY ALSO. THERE IS NOT EVE N AN ALLEGATION MADE BY THE AO THAT THE EXPENDITURE IN QUESTION IS NOT B USINESS EXPENSES. ON THIS FACTUAL MATRIX, WE UPHOLD THE FINDING OF THE F IRST APPELLATE AUTHORITY AT PAR 3.3 OF HIS ORDER AND DISMISS GROUND NO. 1 OF THE REVENUE. 6. COMING TO GROUND NO. 2, WE FIND THAT THIS IS IN RELATION TO ADHOC DISALLOWANCE OF STAFF WELFARE EXPENDITURE. TH E FIRST APPELLATE AUTHORITY NOTED THE ASSESSEES EXPLANATION, THAT TH E MAJORITY OF THE EXPENSES WERE INCURRED ON LUNCH AND DINNER OF THE E MPLOYEES DUE TO OVERTIME OR WITH THE AUDITORS OR WITH OTHER PROFESS IONAL CONSULTANT. HE ALSO NOTED THAT IT IS THE COMPANYS POLICY TO OFFER DAILY SNACKS TO THE EMPLOYEES IN NIGHT SHIFTS AND THOSE BEYOND FIXED WO RKING HOURS AND ALSO 4 TO REIMBURSE LUNCH EXPENSES WHEN THE EMPLOYEE GOES OUT SIDE THE OFFICE OF THE ASSESSEE FOR WORK. THIS IS ALSO A COMMON PRA CTICE IN THE INDUSTRY. AS THIS IS A GENUINE BUSINESS EXPENDITURE, THE FIRS T APPELLATE AUTHORITY, IN OUR OPINION, RIGHTLY DELETED THE DISALLOWANCE. 7. IN THE RESULT, GROUND NO. 2 OF THE REVENUE IS D ISMISSED. 8. COMING TO GROUND NO.3, WE FIND THAT THE ISSUE I S THE REDUCTION OF DISALLOWANCE OF MISCELLANEOUS EXPENDIT URE TO 25%, WHEN THE AO DISALLOWED 50%. ON A PERUSAL OF THE ORDER OF THE FIRST APPELLATE AUTHORITY, WE DO NOT FIND ANY INFIRMITY IN THE SAME . IN OUR CONSIDERED OPINION, THE FINDING DOES NOT CALL FOR ANY INTERFER ENCE. HENCE, WE DISMISS GROUND NO. 3 OF THE REVENUE. 9. GROUND NO. 4 IS ON THE ISSUE OF QUANTIFICATION OF ALLOWABLE COMMON SHARING EXPENDITURE. THE COMPANY SHARES CERT AIN COMMON EXPENSES AND OFFICE FACILITIES WITH ITS ASSOCIATE C OMPANY, NET DECISION. COMMON OVERHEADS ARE SHARED BY BOTH THE COMPANIES, BASED ON THEIR EMPLOYEE HEADCOUNT. THE AO ADOPTED COMPARABLE TURNO VER METHOD AND DISALLOWED PART OF THE CLAIM OF THE ASSESSEE. AS PE R THE AO, THE ALLOCATION OF COMMON EXPENSES SHOULD BE BASED ON TURNOVER OF E ACH OF THE COMPANIES AND NOT ON THE HEAD COUNT OF EMPLOYEES. T HE ASSESSEES CONTENTION IS BROUGHT OUT AT PAGE 6 PARA 8.2 OF THE CIT(APPEALS) ORDER. THE SUM AND SUBSTANCE OF THE ASSESSEES SUBMISSION IS THAT : A) IT IS IN THE SERVICE INDUSTRY WHERE THE EMPLOYEES ARE THE MOST IMPORTANT RESOURCES. B) THERE IS NO TURNOVER AS ERRONEOUSLY OBSERVED BY THE AO. ONLY FEE IS RECEIVED BY THE ASSESSEE FROM ITS PAREN T COMPANY. C) IN RESPECT OF THIRD FLOOR OF THE PREMISES, THE ASSE SSEE REIMBURSED THE ENTIRE AMOUNT OF RENT OF NET DECISI ON SINCE 5 THE ASSESSEE WAS USING THE SAID PREMISES FOR ITS O WN BUSINESS. D) MONTHWISE HEADCOUNT IS TAKEN TO COMPUTE RESPECTIVE SHARES. E) IN THE ASSESSMENT OF NET DECISION U/S 143(3) FOR TH E SAME YEAR THE BASIS OF SHARING COMMON COST HAS NOT BEEN DISTURBED. F) THAT THE NATURE OF WORK OF EACH OF THE GROUP COMPAN IES IS DIFFERENT AND ALLOCATION BASED ON TURNOVER IS NOT T HE MOST APPROPRIATE BASIS. 10. ON CONSIDERING THESE SUBMISSIONS, THE FIRST AP PELLATE AUTHORITY AT PARA 8.3 PAGE 7 HELD AS FOLLOWS : I HAVE CAREFULLY CONSIDERED THE APPELLANTS SUBMI SSION AND THE AOS CONTENTION AS WELL AND I AM IN AGREEMENT W ITH THE APPELLANTS VIEW THAT, THE ALLOCATION OF EXPENSES C ANNOT BE DONE ON TURNOVER BASIS SINCE THE APPELLANT IS IN SERVICE IN DUSTRY WHERE THE EMPLOYEES ARE THE MOST IMPORTANT RESOURCE AND THERE IS NO TURNOVER S OBSERVED BY THE AO. THE APPELLANT RECEIVES FEE FR OM THE PARENT COMPANY. IT IS ALSO PERTINENT TO MENTION HERE THAT WHILE PASSING THE ASSESSMENT ORDER U/S 143(3) IN THE CASE OF NET DECI SIONS WITH WHOM THE COMPANY SHARES CERTAIN COMMON EXPENSES, TH ERE IS NO DISPUTE AS REGARDS THE BASIS OF SHARING COMMON COST WITH THE APPELLANT. IT IS ALSO OBSERVED THAT RENTAL AND SERV ICE CHARGES FOR 3 RD FLOOR WERE INITIALLY BORNE BY NET DECISIONS AND FUL LY RECOVERED FROM THE APPELLANT AS THE SAID OFFICE WAS ENTIRELY USED BY THE APPELLANT COMPANY. VARIOUS FACILITIES LIKE ADMINIST RATIVE SUPPORT, SALARIES, EMPLOYEES WELFARE, TELEPHONE CHARGES, REN T OF 3 RD FLOOR OFFICE, ELECTRICITY AND POWER, HIRE CHARGES, PRINTI NG AND STATIONERY, COMPUTER CONSUMABLES, REPAIRS AND MAINTENANCE, MISC ELLANEOUS EXPENSES, ENTERTAINMENT EXPENSES, ARE SHARED BY BOT H THE COMPANIES I.E. NET DECISIONS AND THE APPELLANT COMP ANY AND SUCH ALLOCATION OF THE FACILITIES IS AS PER THE AGREEMEN T ENTERED INTO BY BOTH THE COMPANIES ON THE BASIS OF EMPLOYEE HEAD CO UNT OF EACH COMPANY AT THE END OF THE MONTH. IN SUPPORT OF ITS CONTENTION, THE APPELLANT HAS SUBMITTED DETAILED STATEMENT GIVING B REAK-UP OF EXPENSES INCURRED BY NET DECISIONS AND SHARED BY TH E ASSESSEE COMPANY. IN THE ABSENCE OF ANY MATERIAL BROUGHT ON RECORD BY THE AO, THERE IS NO JUSTIFICATION TO DISTURB THE CONSIS TENT METHOD ADOPTED BY THE APPELLANT. MERELY FOR THE REASON THA T BOTH THE ASSOCIATE COMPANIES ARE ENGAGED IN THE SAME BUSINES S ACTIVITY, THE AO CANNOT REJECT THE METHOD ADOPTED BY THE APPELLAN T ON ADHOC 6 BASIS OR ON TURNOVER BASIS. UNDER THE CIRCUMSTANCES AND FACTS OF THE CASE AND IN THE ABSENCE OF ANY VALID REASONS THE DI SALLOWANCE MADE BY THE AO IS HEREBY DELETED. THIS GROUND OF APPEAL IS ALLOWED. WE FULL AGREE WITH THESE FINDINGS OF THE CIT(APPEA LS). 11. IN THE RESULT, WE UPHOLD THE SAME AND DISMISS GROUND NO. 4 OF THE REVENUE. 12. GROUND NO. 5 AND 6 ARE GENERAL IN NATURE 13. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED. ORDER PRONOUNCED ON THIS 4 TH DAY OF JUNE, 2010. SD/- SD/- (D. MANMOHAN) (J. SUDHAKAR REDDY) VICE PRESIDENT. ACCOUNTANT MEMBER. MUMBAI, DATED : 4 TH JUNE, 2010. WAKODE COPY FORWARDED TO : 1. APPELLANT. 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, B-BENCH. (TRUE COPY ) BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI BENCHES, MUMBAI.