TMI Blog2010 (10) TMI 1065X X X X Extracts X X X X X X X X Extracts X X X X ..... nreasonable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal filed by the assessee, the assessee is aggrieved of CIT(A) s upholding the disallowance of ₹ 22,62,328 towards common facilities charges, being 20 per cent of the ₹ 1,13,11,640 paid to its parent company. In the first ground of appeal filed by the Assessing Officer, the revenue has challenged relief granted by the CIT(A) in reducing the quantum of disallowance to 20 per cent of the amount paid to the parent company as against disallowance of 30 per cent resorted to by the Assessing Officer. As both of these grounds are interconnected, we will take up these grounds of appeal together. 3. The relevant material facts are as follows. The assessee is a domestic company engaged in the business of production and release of advertisements in various media for its clients. The assessee is a wholly owned subsidiary of TLG India Private Limited (TLG, in short), which, in turn, is a subsidiary of Leo Burnett Worldwide Inc. In the course of its assessment proceedings, the Assessing Officer noticed that the assessee has, inter alia, paid a sum of ₹ 1,13,11,640 to TLG India Pvt. Ltd. towards charges for common facilities. The Assessing Officer noted that these payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny so as to reduce its taxable income for the year. It was in this backdrop of analysis by the Assessing Officer that he proceeded to disallow 30 per cent of the expenditure incurred for common facilities by observing that the amount of expenditure can not be allowed in entirety and that no comparison with similar services for determining arms length price can be made in the absence of any concrete working/computation of the payments made by assigning cost to each item of services received from the holding company. Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the CIT(A) but without much success. While the CIT(A) upheld the disallowance in principle, he reduced its quantum from 30 per cent of the amount claimed for deduction to 20 per cent of the claim. None of the parties is satisfied - the assessee is aggrieved of the disallowance confirmed by the CIT(A) and the Assessing Officer is aggrieved of the partial relief granted by the CIT(A). Both the parties are thus in cross appeals before us. 4. We have heard the rival contentions and perused the material on record. The main thrust of learned counsel s submission is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. The scheme requires the Assessing Officer to establish the fair market value of the services for which payment is made and any amount that he finds to have been paid by the assessee in excess of such fair market value of the services alone can be disallowed under the said section. It is, therefore, condition precedent without resorting to the disallowance under section 40A(2)(b). So far as the expenditure being excessive or unreasonable having regard to the fair market services is concerned, that the fair market value of such services is to be determined first. Unless this benchmark is set, there cannot be any question of resorting to disallowance under section 40A(2)(b) for excessive payment vis-a-vis fair market value of services. In the case of Batlivala Karanai v. Asstt. CIT [2005] 2 SOT 379 (Mum.), a coordinate Bench of this Tribunal has observed as follows : Section 40A(2) provides that where the Assessing Officer is of the view that expenditure incurred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, 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. In any event, as learned counsel has rightly points out that the mere fact that the allocation of expenses has not been made on the basis of rigid and detailed formula does not by itself make the expense disallowable under section 40A(2)(b). 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 basis of allocation of expenses may be less than perfect, but what renders a deduction disallowable is its being excessive and unreasonable vis-a-vis the fair market price of such services. There is no finding about latter in this case. The disallowance under section 40A(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 befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 10 lakhs was to be allowed for possible expenses incurred in connection with payment to the professional of holding company in the course of business operation and the remaining amount of ₹ 47,74,968 was disallowed and added back to the assessee s income. When the assessee carried the matter in appeal before the CIT(A), the CIT(A) noted that till assessment year 2003-04, no such payment was made separately under the head legal and professional fees to the parent company and that even in assessment year 2004-05, payment was only ₹ 4,01,460. The CIT(A) further noted that expenditure in this year during the assessment year 2005-06 has increased by 13 times and that also without any supporting documents to substantiate the same. It was in this backdrop, that the CIT(A) upheld the disallowance in principle though reduced the quantum to ₹ 20 lakhs. None of the parties is satisfied - the assessee is aggrieved of the disallowance confirmed by the CIT(A) and the Assessing Officer is aggrieved of the partial relief granted by the CIT(A). Both the parties are thus in cross appeals before us. 10. Having heard the rival contentions and having perused the material on rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n entered into by the assessee with the parent company, TLG was to provide the assessee-company all such technique and proprietary material to be used by it for the purpose of its business in consideration of royalty to be paid to TLG. It was clarified by the assessee that this royalty payment is in line with the consideration paid by TLG India Pvt. Ltd., to its holding company Leo Burnett Worldwide Inc., which is approved by the Central Government. It was thus contended that the consideration paid by the assessee-company to TLG India Pvt. Ltd., is a reasonable payment and should be allowed as such. Copy of the agreement dated 19-4-2004 entered into by the assessee with TLG India P. Ltd., was also filed. As per the terms of the said agreement, the assessee company was allowed to use huge proprietary material such as BBS, Hot Button Research, Idol, Blurbs, MBTI etc., case studies in advertising industry, research papers, etc., and in consideration, the assessee was to pay an amount not exceeding 5 per cent of the gross capitalized billings of the company, as a royalty. The Assessing Officer noted that while at 5 per cent of the gross revenue, the assessee was to pay ₹ 2,90,59, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir expenses only through the medium of agreements and not through any bills, contracts or any evidence of payment. Therefore, the payment made to TLG by the assessee-company cannot be just accepted on its face value. In the absence of any bona fide basis or any specific services being rendered by the holding company to the assessee, I find the payment being made by the assessee to the holding company is completely unreasonable and excessive devoid of any commercial consideration and business motive. However, keeping in view the fat that M/s. TLG India Pvt. Ltd., is the holding company and has to discharge certain responsibilities towards the supervision, monitoring and reputation of the business of the assessee-company, I consider it fit to restrict the payment to 50 per cent of ₹ 1,20,00,000 thereby disallowing remaining ₹ 60,00,000 in the hands of the assessee. Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal but without much success. The CIT(A) upheld the disallowance in principle but restricted the same to 20 per cent of the royalty paid. None of the parties is satisfied - the assessee is aggrieved of the disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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. This approach, in our humble understanding, is contrary to the scheme of the Company. In any event, as noted by the Hon ble Jurisdictional High Court in the case of Indo Saudi Services (Travel) (P.) Ltd. (supra), the legal proposition that payment to a sister concern cannot be disallowed under section 40A(2)(b) of the Act unless tax avoidance motive is established, is also relevant. 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 under section 40A(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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