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2016 (8) TMI 605 - ITAT DELHI

2016 (8) TMI 605 - ITAT DELHI - TMI - Disallowance made u/s 40A(2)(b) - excessive or unreasonable expenditure - transactions with relative or associate concern - Held that:- In the case on hand the adhoc disallowance made by the A.O. in our view is arbitrary and without any basis. The A.O. has not given a finding as to what as per him, is the fair market value. Even if it is assumed that the payment made is excessive and unreasonable, such arbitrary and baseless, adhoc disallowances cannot be up .....

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transfer pricing report is not acceptable. The methodology of determining the ALP has been laid down in the Act and has been made mandatory for international transactions with Associated Enterprises (A.E.). Simply saying that these provisions do not apply to a domestic company transactions with its A.Es. for this particular A.Y. does not suffice. When the assessee has chosen to use these transfer pricing provisions to demonstrate its claim that the expenditure in question is at armís length and .....

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ts contentions as to why the payment made to Amway is reasonable and commensurate with the nature of services provided by them and to demonstrate that the disallowance is bad in law. - We allow the appeals of the assessees in both the cases by deleting the disallowance made u/s 40A(2)(b) of the Act for the reason that the assessee has proved that the price paid is at armís length and not excessive or unreasonable and as the disallowance made on ad-hoc basis is arbitrary. There is no evasion .....

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hese appeals are filed by the Assessees against the order of Ld.CIT(A)-IV, New Delhi dated 26.8.2013 and 13.9.2013 for the Assessment Year (hereinafter referred to as the A.Y.) 2009-10. As the issues arising in both these appeals are common, for the sake of convenience they are heard together and are disposed of by way of this common order. 2. Facts in brief:- M/s Amserve Consultants Ltd. ( Amserve for short) is a company and derives income from the business of providing advisory and consulting .....

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Pvt.Ltd. (Amway for short). 2.1. M/s Amsure Insurance Agency Ltd. ( Amsure for short) is a company which derives income from the business of providing services as a corporate insurance agency. This Company filed its return of income on 29.10.2009 declaring income of ₹ 3,61,16,150/-. The assessment was completed u/s 143(3) of the Act on 30.12.2011 determining total income at ₹ 34,43,66,150/- inter alia making a disallowance u/s 40A(2)(b) of the Act on payment made for data base charg .....

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to Amserve and providing services as per their agreement. However, it may be noted that it is not incurring any additional expenditure in creating and maintaining this infrastructure. iii. In the absence of break-up of data processing services, infrastructure services and customer facilitation services, it is not possible to ascertain as to what extent the resources of Amway were utilized in providing the services. iv. Comparison with similar transaction in respect of some unrelated parties is .....

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her resources were being used exclusively for the purpose of providing services to Amserve; this results in a scenario where it is also not possible even to approximate the cost in the hands of Amway, not to mention the impossibility of arriving at any certain figure in this respect. viii. Alternatively, where there are no exclusive employees or resources of Amway utilized in processing services to Amserve, the attributable costs should be reduced by Amway from its own expenses for arriving at i .....

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). However, in the appellant's case under consideration, it is an admitted fact that the appellant and Amway India are not only related but Amway India has substantial interest in the appellant company by way of 50% of the shares of the appellant company. Moreover, in the case of Glaxo Smithkline Asia (P) Ltd., the issue involved was of transfer pricing, which is not the case, in the case of the appellant company not only this payment to Amway India is not comparable with any other independe .....

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icular expenditure is excessive and reasonable or not is essentially a question of fact and it does not involve any question of law. In view of the above, the case of Glaxo Smithkline Asia (P) Ltd. is totally distinguishable on facts from the appellant s case. In view of the above discussion, l agree with the findings of the AO that database charges paid during the year were excessive and unreasonable, The AO has given detailed reasons before computing the disallowance of ₹ 14,38,57,868/-. .....

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ss of payment u/s 40A(2) of the Act. The assessee has paid only ₹ 29.39 crores in the next F.Y. (c ) The argument that Amway India has a very different business of direct selling and will not share its customers with everybody and that Amway India is only 50% shareholder in the joint venture will not make any difference. (d) For the A.Ys 2006-07, 2007-08, 2008-09 and 2010-11, the amount paid as data base charges range from 27.08% to 40% and whereas the charges are as high as 59.63% of the .....

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8377; 14,38,57,868/- paid by the appellant to M/s Amway India Enterprises. (1.1) That on the facts and in law, the CIT(A) erred in upholding the action of AO in and applying the provisions of section 40A(2) of the Act to the facts of instant case. (2) That on the facts and in law the AO/CIT(A) erred in holding: (a) that the appellant received only ₹ 2,700/- per policy as service income but paid service processing charges of ₹ 3,288/- per policy to M/s Amway India Enterprises Private .....

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ses (4). That on facts and in law the orders passed by Assessing Officer {herein above referred to as the AO ) and the Commissioner of Income Tax (Appeals) {herein above referred to as the CIT(A) } are void ab intio and bad in law. (5). That the appellant craves for leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. 6. We have heard Shri C.S.Aggarwal, the Ld.Counsel for the assessee and Shri Ravi .....

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ces or facilities. ii. The burden lay on the AO to establish by leading positive material that the expenditure incurred is an excessive or unreasonable having regard to the fair market value of the database. There is no material with the A.O. in this regard. iii. Section 40A(2)(a) could not be invoked unless the expenditure has been incurred with a motive of tax evasion and has resulted into or would even result in a loss of revenue as laid down in CBDT Circular No.6-P dt. 6.7.1968. iv. The Paye .....

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isions of s. 40A(2). vi. That the assessee otherwise to having let evidence to establish the fair market value of database obtained was at arm s length (TP report) no disallowance is permissible in law. The disallowance thus made on ad-hoc basis is highly arbitrary. vii. No disallowance could be made by invoking the provisions of section 40A(2)(a) even on the assumption that by incurring such expenditure third party has benefitted. Such a consideration is not a relevant consideration for the pur .....

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ncy and business prudence. ix. The disallowance has been made on a highly hypothetical ground and is without any basis. The disallowance so made is apparently based on subjective basis unsupported by any valid and tangible material. Thus the disallowance made of ₹ 30,82,50,000/- out of which disallowance sustained of ₹ 14,14,60,000 out of expenditure incurred of ₹ 34,25,00,000 is not merely highly arbitrary but also lacks any judicial acceptance. x. Rule of Consistency has not .....

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st of his arguments is: (a) A perusal of the agreements demonstrate that the assessee has been granted license for use of the data base, only to promote and sell insurance policies to its distributors and their customers, which is accessed by the assessee on a real time basis. The assessee extracts the data on weekly/daily basis, as per its need and solicit insurance business. In addition to the use of the data base, the assessee was also entitled to make available the insurance promotion techno .....

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ia, year after year, for more or less the same data base with only minor changes. (b) A perusal of the agreement demonstrate that there is no exclusivity Clause in the agreement between Amway and Amsure and Amway is free to provide data base to any other third party. (c) Amway had not incurred any additional cost for creating the data base. Still huge amount is charged from Amsure on this account. No data or break-up has been given by the assessee to prove the expenditure of use of resources of .....

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tify the legitimate business needs and benefits. (f) The Circular of the CBDT relied upon by the assessee is not applicable to the facts of the present case as payments made are unreasonable and excessive. (g) The case laws relied upon by the assessee relating to the Transfer Pricing study cannot be made applicable as the transactions of the assessee are domestic transactions undertaken in the F.Y. 2008-09 before the introduction of T.P. provisions to specified domestic transactions by the Finan .....

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atrunjay Diamonds (2003) 261 ITR 258 (Bombay H.C.). 9. He relied upon the order of the A.O. as well as that of the Ld.CIT(A) and also relied on certain other case laws which we would be discussing as and when necessary, during the course of our finding. 10. In response the Ld.Counsel for the assessee filed written submissions. He argued that under the section a disallowance can be made only when the A.O. is of the opinion that, the expenditure incurred is excessive or unreasonable having regard .....

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se of Amway. He submitted that the A.O. ignored and disregarded the evidence produced by the assessee and that the payment is made in pursuance of an agreement and the genuineness of the services is not doubted. 11. Rival contents heard. On a careful consideration of the facts and circumstances of the case, orders of lower authorities and case laws cited, we hold as follows. 12. The assessee company Amserve Consultants Ltd. was established in the year 2004 as a joint venture between Amway India .....

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ve had agreed to provide various data processing services to Max New York Life Insurance Co. Ltd., and this included physical collection of completed proposal forms from the corporate agencies, organising detailed quality checks, data entry etc. 12.1. Amserve also entered into an agreement with Amway for data processing services vide agreement dt. 25.11.2005. The assessee avails data processing services from Amway India from 1st October, 2005 to 31st March, 2007. This includes arrangement for ph .....

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agreement with M/s Amway India Enterprise Ltd. on 24.10.2005 for the period 1.10.2005 to 31.10.2007 for the use of data base of Amway India Enterprises P.Ltd. which contain details of Amways Distributors, their status etc. Under this agreement the assessee Amsure was granted license by Amway for use of its data base for promotion and sale of insurance policies to its distributors and their customers. 12.3. On these facts we should examine the correctness of disallowance made u/s 40A(2) of the Ac .....

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lause (b) of this sub-section, and the [Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. 12.4. The Central Bo .....

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ve or associate concern falling within the specified categories, it will be necessary for the Incometax Officer to scrutinize the reasonableness of the expenditure with reference to the criteria mentioned in the section. The Income-tax Officer is expected to exercise his judgment in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in .....

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nsactions or whether the Transfer Pricing Regulations be extended to domestic transactions. In domestic transactions, the underinvoicing of sales and over-invoicing of expenses ordinarily will be revenue neutral in nature, except in two circumstances having tax arbitrage such as where one of the related entities is (i) loss making or (ii) liable to pay tax at a lower rate and the profits are shifted to such entity; Complications arise in cases where the fair market value is required to be assign .....

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methods provided under Transfer Pricing Regulations. The law can also be amended to make it compulsory for the taxpayer to maintain Books of Accounts and other documents on the lines prescribed in Rule 10D and obtain an audit report from his CA that proper documents are maintained; Though the Court normally does not make recommendations or suggestions, in order to reduce litigation occurring in complicated matters, the question of extending Transfer Pricing regulations to domestic transactions r .....

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the learned advocates appearing for both sides. W7e have also perused the order passed by the Tribunal dated 21st Oct., 1999 which is impugned by the Revenue in the present appeals. We find that the following facts were established before the Tribunal and the same have been accepted by the Revenue even before us. (i) That the assessee apart from paying handling charges @9 1/2 per cent to its sister concern, have paid handling charges at the same rate to other agents viz., M/s A.K.Travels, M/s Om .....

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er due scrutiny. For asst. yr. 1990-91 also the claim of the assessee @9 1/2 per cent has been allowed though the same has not been dealt with by the AO specifically in the order. (iv) For asst.yrs. 1993-94 and 1994-95 the assessment has been made by the AO under section 143(3) and handling charges paid to the sister concern @ 9.5 per cent have been considered to be reasonable and allowed. (iv) The sister concern of the assessee M/s Middle East International is also assessed to tax and income as .....

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the conclusion that the CIT(A) was wrong in disallowing half per cent commission paid to the sister concern of the assessee during the asst. yrs. 1991-92 and 1992-93. The ld.advocate appearing for the appellant was also not in a position to point out how the assessee evaded payment of tax by alleged payment of higher commission to its sister concern since the sister concern was also paying tax at higher rate and copies of the assessment orders of the sister concern were taken on record by the Tr .....

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t the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases. Thereafter it was held as follows. 7. The question whether the expenditure is excessive or unreasonable in a given case has to be examined keeping in mind the services (with which we are concerned in the present case) for which payment is made. In the process the legitimate needs of the .....

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r unreasonable as in this case Mr.SushilPandit was holding substantial portion of share namely 65 percent in the assessee company. When we apply the aforesaid principle in the facts of this case, we find that the assessee has been able to discharge the burden that the price paid by it to Mr. SushilPandit is not excessive or unreasonable. 12. It will also be useful to refer to the judgment of Allahabad High Court in Abbas Wazir (P.) Ltd. v. CIT [2004] 265 ITR 77/[2003] 133 Taxman 702 wherein the .....

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nter (P.) Ltd. [1972] 86 ITR 370 , the Calcutta High Court considering identical provision in 1922 Act, it was held that the section places two limitations in the matter of exercise of the power. The section enjoins the Assessing Officer in forming any opinion as to the reasonableness or otherwise of the expenditure incurred must take into consideration (i) the legitimate business needs of the company and (ii) the benefit derived by or accruing to the company. The legitimate business needs of th .....

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a company in relation to its business, it must be remembered, has a very wide connotation and may not necessarily be capable of being accurately measured in terms of pound, shillings and pence in all cases. Both these aspects have to be considered judiciously, dispassionately without any bias of any kind from the view-point of a reasonable and honest person in business. The aforesaid judgment of Calcutta High Court was affirmed by the Apex Court in CIT v. Edward Keventer (P.) Ltd. [1978] 115 ITR .....

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laid down by the Jurisdictional High Court. 12.9. In the case on hand the Revenue does not dispute the fact that M/s Amway India Enterprises as well as the assessee are both assessed at the maximum marginal rate. The transaction is tax neutral. Under these circumstances it has to be held on facts that this payment is not made with an intention to evade tax. In fact the income of the Payee Company is much more than that of the assessee. Thus the Circular No.6P dt. 6th July,1968 read with the dec .....

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policies. Similarly in the case of Amsure Insurance Agency, the AO disallowed 90% of the data base charges paid. Only 10% was allowed as reasonable. When the matter travelled to the Ld.CIT(A) 35% of the data base charges were allowed and the balance 65% was disallowed. No basis or factual justification whatsoever is given by the revenue authorities in both these cases for this ad-hoc disallowance. The factum of rendering of services is not in dispute. The requirement of payment of fees is also .....

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be noted that in the present case the question that has been raised by the Revenue is not one relating to the expenditure being not for the purposes of the business. It is an question of the appropriate amount which would have been paid as commission. In fact the Assessing Officer himself has allowed to the extent of ₹ 4,35,854 holding, inter alia, "the payment of ₹ 1.75 per M. T. to Cement Distributors Limited is very much on the excessive side". This in our view was impe .....

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en the expenditure and the purpose of the business, the Revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case. We need not go into any hypothetical issue in this case in view of the accepted position that the factum of services rendered by the CDL has not been refuted by the Revenue. It needs no reiteration t .....

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be adjudged from the point of view of the business men and not of the Revenue. (iii) In the case of Principal CIT-II vs. Gujarat Gas Financial Services Ltd. 233 Taxman 532 (Guj.) it is held as follows. 13. As has been found by us in the preceding para of this judgement that the respondent company as well as the parent company, both are assessed to income tax at the maximum marginal rate and, therefore, it cannot be said that the service charge is paid to the respondent company at an unreasonable .....

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rd to the transaction between the relatives and associates is concerned, the same shall be treated as bona fide case unless the officer finds it that one of them is trying to evade payment of tax. As already stated, in the case on hand, there is not even an allegation that the assessee has evaded payment of tax. (iv) In the case of Minda Acoustic Ltd. vs. ACIT (2015) 69 SOT 162 the ITAT Delhi Bench at para 21 held as follows. 21. We have heard the rival contentions, perused the material on recor .....

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the ground that the payment is excessive or unreasonable having regard to the fair market value and the services for which the payment is made but then there is no finding by the A.O. as to what according to him is fair market value of the services in question. A disallowance under section 40A(2), on percentage basis, is inherently contrary to the Act in as much as it is a condition precedent for invoking section 40A that the benchmark to be set as to what is a fair market value of the services .....

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ing that the market value of the services taken from the sister-concern is less than the price at which the services are obtained, there cannot be an occasion to apply the disabling provisions of s. 40A(2). This exercise, therefore, necessitates a finding about the fair market value of such services. There is no such finding in the present case. In these circumstances as also bearing in mind entirety of the case, we are of the considered view that the disallowance made by the A.O. was devoid of .....

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the reasoning and observations made by the learned CIT(A) confirmed by the learned ITAT. In absence of any material before the Assessing Officer, such as comparative chart etc. to suggest that any excessive payment was made to M/s. Pollucon Engineers and the 10% ad hoc disallowance was made on the payment made under Section 40A(2)(b) of the Act to M/s. Pollucon Engineers solely on the ground that M/s. Pollucon Engineers to whom the payment was made, was run by the wife of the Director of the ass .....

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iven a finding as to what as per him, is the fair market value. Even if it is assumed that the payment made is excessive and unreasonable, such arbitrary and baseless, adhoc disallowances cannot be upheld. On this ground also the assessee has to succeed. 14.2. We now take up the issue as to whether the assessee has discharged the burden of proof that lay on it that, the expenditure paid by it to its sister concern, is not excessive or unreasonable. As already held, the Hon ble Delhi High Court i .....

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