Freight Systems (India) Private Limited, CHENNAI V. DCIT Corporate Circle 2(1), CHENNAI

ITTPA 10/CHNY/2019

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 5324 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 20-01-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Assessment Year: 2014-2015
• Appeal Filed On: 20-01-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL

Judgement Text

आयकर अपीलीय अिधकरण, ‘डी’ ᭠यायपीठ, चे᳖ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI Įी महावीर ͧसंह, उपाÚय¢ एवं Įी मनोज क ु मार अĒवाल, लेखा सदèय के सम¢ BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENTAND SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER आयकर अपील सं./IT(TP)A No.: 10/CHNY/2019 िनधाᭅरण वषᭅ /Assessment Year: 2014-15 Freight Systems (India) Pvt. Ltd., Super A-7, Rathna Tower 1, 1 st Floor, Thiru-vi-ka Industrial Estate, Guindy, Chennai – 600 032. PAN: AAACF 0677K v. The DCIT, Corporate Circle 2(1), Chennai. (अपीलाथᱮ/Appellant) (ᮧ᭜यथᱮ/Respondent) अपीलाथᱮ कᳱ ओर से/Appellant by : Ms. N.V. Lakshmi, C.A for Shri N.V. Balaji, Advocate ᮧ᭜यथᱮ कᳱ ओर से/Respondent by : Shri S. Palani Kumar, CIT स ु नवाई कȧ तारȣख/Date of Hearing : 12.01.2022 घोषणा कȧ तारȣख/Date of Pronouncement : 21.01.2022 आदेश /O R D E R PER MAHAVIR SINGH, VP: This appeal by the assessee is arising out of order of the assessment order passed by DCIT, Corporate Circle 2(1), Chennai for the assessment year 2014-15, order dated 29.11.2018 u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter 2 I.T.(TP)A. No.10/Chny/2019 the ‘Act’) in pursuant to of DRP-2, Bengaluru, direction u/s.144C(5) of the Act, dated 25.09.2018. 2. The first issue in this appeal of assessee is against the order of AO in lieu of directions given by DRP disallowing direct expenses of Rs.1,14,36,904/- on estimate basis @ 20%. For this, assessee has raised the following Ground Nos. 2 to 7:- 2. The Ld. AO has erred in making adhoc disallowance on estimate basis without pointing any specific deficiency in the books of accounts of the Appellant or without citing any particular expenditure to be disallowed. 3. The Ld. AO has erred in law and facts in disallowing the expenses on the incorrect assumption that 'ne Appellant has declared low profits without specifying the ideal profit ratio according to him. 4. The Ld. AO has erred in law and facts by ignoring the fact that the net profit earned by the Appellant during the year under appeal is 1.7 times of the net profit earned in the immediately preceding year. 5. The Ld. AO has erred in law and facts by ignoring the fact that the Appellant has a Gross Profit ratio of 19.73% and Net Profit ratio of 3.77% during the year under appeal as compared to the Gross Profit ratio of 18.09% and Net Profit ratio of 2.27% of the immediately preceding year. 6. The Ld. AO has erred in stating that such expenses constitute approximately 5.5% of cost of domestic operations. The Appellant humbly submits that such expenses are only 3.35% of domestic transactions and 2.25% of total cost of operations. 7. The Ld. AO having acknowledged the fact that the labour involved in logistic business is high to whom payments have to be made in cash, erred in not taking into consideration the fact that the Appellant had executed more than 93,000 jobs during the year under appeal. 3 I.T.(TP)A. No.10/Chny/2019 3. We have heard rival contentions and gone through facts and circumstances of the case. We noted the brief facts that the assessee is a private limited company incorporated in the year 1993 and is an Indian arm of Freight Systems Group (FSL Group) of Companies. This company is headquartered at New Delhi and located across 98 locations in India. The assessee company is engaged in the business of freight forwarding, providing logistics and distribution services, multi model transport and other allied functions like relocation services and administrative support services. The AO while framing draft assessment order noted that the assessee has show gross profit ratio @19.7% which is very low in logistics business in comparison to large international revenue involved. The assessee was asked to give the details of cost of services and expenses incurred. The AO on perusal of details noted that the assessee has allocated most of the expenses as sub- contract expenses as the assessee is facilitating the transport of goods and services and freight forwarding. The AO also noted that out of balance domestic transactions, assessee has claimed direct expenses of Rs.5,71,84,520/. The AO required the assessee to produce the evidences as these expenses are incurred in cash only. The assessee could not produce the vouchers to substantiate the payments which were incurred for the purpose of business. The assessee only produced self made vouchers. The AO noted that 4 I.T.(TP)A. No.10/Chny/2019 these expenses constitute approximately 5.5% of cost pertaining to cost of domestic transaction, which is very high in the nature of business. The AO also noted that it is understandable that labour involved in the logistics business and it is also true that these expenses should be spent by cash. This fact is specifically noted by the AO. According to AO in any case payment in cash to the tune of Rs.5,71,84,520/- is not reasonable in the absence of evidence or voucher. Therefore, he estimated the disallowance @ 20% which comes to Rs.1,14,36,904/-. This disallowance of 20% was added back to the income of the assessee. 4. The assessee raised objection before DRP but the DRP also repeated the order of the AO. Aggrieved, assessee came in appeal before the Tribunal. 5. While hearing the matter, the ld.counsel for the assessee Ms. N.V. Lakshmi pointed out that such expenses constitutes approximately 3.35% of domestic transaction and 2.25% of total cost of operations and not 5.5% of cost of domestic operation as alleged by the AO. She took us through cost of services and ratio in international transaction undertaken by the assessee which is 32.7% and the relevant reads as under:- 5 I.T.(TP)A. No.10/Chny/2019 Sl.No. Particulars Amount 1 Cost of services 2,54,34,63,910 2 Less: Cost of international operations 83,40,07,558 3 Ratio – [2/1] 32.70% Further, she took us to the exact ratio of cost of services which is at 3.35% and not at 5.5% as alleged by the AO. Sl.No. Particulars Amount 1 Cost of services 2,54,34,63,910 2 Less: Cost of international operations 83,40,07,558 3. Cost of domestic operations (Balance) 1,70,94,56,352 4. Direct expenses 5,71,84,250 5. Ratio – [4/3] 3.35% 6. The ld.counsel for the assessee then took us through the entire details of direct expenses of Rs.5,71,84,250/-. But on query from the Bench, ld.counsel for the assessee could not substantiate these figures with the evidence or vouchers. On the other hand, ld. Senior DR only supported the order of DRP as well as that of the AO. 7. We noted that the AO has categorically noted the fact that for this type of business which is labour involved, the expenses should be spent by cash only. Even we noted that the basis of the AO for disallowing 20% is that the expenses constitute approximately 5.5% of cost pertaining to cost of domestic transaction which is not correct. The actual expense constitutes 3.35%. In term of the 6 I.T.(TP)A. No.10/Chny/2019 above, we are of the view that disallowance at 20% is very excessive and high and hence, we restrict the disallowance at 5% and direct the AO accordingly. This issue of assessee’s appeal is partly allowed as indicated above. 8. Coming to second issue, the issue is as regards to adhoc disallowance of entertainment expenses i.e., business promotion expenses of Rs.9,30,906/-. For this assessee has raised following Ground Nos.8 & 9:- 8. The Ld.AO has erred in disallowing entertainment expenses on adhoc basis merely because the bills were in the name of employees/top management and not in the name of the Appellant, without appreciating that the expenditure were in the nature of reimbursement of expenses incurred first by the employees out of their own funds as part of business promotion. 9. That the Ld.AO failed to note that such expenses constitute only 0.13% of the total expenses incurred by the Appellant during the year under appeal. 9. We have heard rival contentions and gone through facts and circumstances of the case. We noted that assessee has claimed business promotion expenses of Rs.1,16,56,211/-. The AO noted that out of entertainment expenses, the bills submitted by the assessee consist of hotel bills in the name of some individuals and none of the bill is having company name. The AO specifically required the assessee to explain and assessee explained that the above expenses are spent for top management to entertain the 7 I.T.(TP)A. No.10/Chny/2019 customers but AO was not convinced and he purposed the disallowance at Rs.9,30,906/-. The assessee objected the same before DRP, which confirmed the action of AO. Aggrieved assessee is in appeal before Tribunal. 10. We have noted that the assessee is unable to provide hotel bills in the name of company and even the estimation is very reasonable. We confirm the disallowance. This issue of assessee’s appeal is dismissed. 11. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on 21 st January, 2022 at Chennai. Sd/- Sd/- (मनोज कुमार अᮕवाल) (MANOJ KUMAR AGGARWAL) लेखा सद᭭य /ACCOUNTANT MEMBER (महावीर ᳲसह ) (MAHAVIR SINGH) उपा᭟यᭃ /VICE PRESIDENT चे᳖ई/Chennai, ᳰदनांक/Dated, the 21 st January, 2022 RSR आदेश कᳱ ᮧितिलिप अᮕेिषत/Copy to: 1. अपीलाथᱮ/Appellant 2. ᮧ᭜यथᱮ/Respondent 3. आयकर आयुᲦ (अपील)/CIT(A) 4. आयकर आयुᲦ /CIT 5. िवभागीय ᮧितिनिध/DR 6. गाडᭅ फाईल/GF.