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2010 (10) TMI 1065 - AT - Income TaxDisallowance u/s 40A(2)(b) - HELD THAT:- In the present case, the AO has made no effort to demonstrate as to what would be fair market value of services and proceeded to disallow the same on ad hoc basis as overall percentage of expenditure incurred. The disallowance in the present case is thus based on quantum of expenditure incurred rather than the fair market value of services for which expenditure is incurred. As regards the basis of allocation, we have noted that costs have been allocated to the assessee-company on the basis of turnover, and it cannot, therefore, be said that allocation of expenses are devoid of any basis. It is essential to bear in mind that the fact the company to which the payment has been made is a parent company of the assessee and commercial realities do not dictate rigidity a in such approach in intra group dealings. The disallowance u/s 040A(2)(b) can come into play when the payment is excessive or unreasonable and the foundation of disallowance thus must rest on categorical findings that the payments for services is indeed excessive or unreasonable vis-a-vis fair market value of the services in the case before us. Therefore, we are of the considered view that the impugned disallowance was indeed uncalled for on the facts of this case. In this view of the matter, we uphold the grievance of the assessee. The grievance of the AO, which is only against the quantum of disallowance, is thus rendered academic and is only fit to be dismissed summarily. Regarding disallowance of ₹ 20 lakhs paid to its holding company towards professional and consultancy charges - HELD THAT:- While there is no finding about the fair market value of these services, all the relevant details are not on record as well. No evidence of actual third party expenditure are placed on record before us either. In these circumstances, and having taken note of learned counsel’s agreeing to file requisite details before the AO, if need be, we deem it fit and proper to remit the matter to the file of the AO for adjudication de novo after assessee’s furnishing specific particulars and complete details about the professional and consultancy charges paid to third party for sharing common supporting staff. The AO will examine the issue afresh and pass necessary orders after hearing the assessee. Grounds of appeals raised by both the parties are thus allowed for statistical purposes. Regarding, disallowance in principle but restricted the same to 20 per cent of the royalty paid - HELD THAT:- In the present case, learned Departmental Representative does not dispute that both the companies i.e., the assessee and parent companies are taxed at the same rate and have sufficient taxable profits. This is also so stated by the assessee in the statement of facts, which have not been controverted before us. The disallowance u/s 040A(2)(b) can come into play when the payment is excessive or unreasonable and the foundation of disallowance thus must rest on categorical findings that the payments for services is indeed excessive or unreasonable vis-a-vis fair market value of the services in the case before us. we are of the considered view that the impugned disallowance was indeed uncalled for on the facts of this case. In this view of the matter, we uphold the grievance of the assessee. The grievance of the AO, which is only against the quantum of disallowance, is thus rendered academic and is only fit to be dismissed summarily. Regarding, granting relief of ₹ 5,00,000 on account of travelling and conveyance expenses - HELD THAT:- The amount of ₹ 5,00,000 as reversal of the entry is reflected as opening adjustments in the travel and conveyance account. We thus see no infirmity in the approach adopted by the CIT(A). We, therefore, confirm the order of the CIT(A) on this issue and decline to interfere in the matter.
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