TMI Blog2017 (1) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... f transportation and staff welfare expenses - Held that:- The Assessing Officer shall re-examine the documents furnished by the assessee and shall make disallowance only to the extent of vouchers not produced by the assessee in respect of expenditure claimed. If the assessee is able to produce the relevant documentary evidence, no disallowance is to be made under this head. Accordingly, ground Nos. 3 and 4 raised in the appeal for assessment year 2007-08 is allowed for statistical purpose. - ITA Nos. 254 to 258/PN/2015, ITA Nos. 269 to 273/PN/2015 - - - Dated:- 23-12-2016 - SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM For The Assessee : Shri Percy Pardiwala For The Revenue : Shri P.L. Kureel ORDER PER VIKAS AWASTHY, JM : These appeals by the assessee and the Revenue are directed against the order of Commissioner of Income Tax (Appeals)-5, Pune dated 23-12-2014 common for the assessment years 2007-08 to 2011-12. 2. The brief facts of the case as emanating from records are: The assessee company is engaged in the business of manufacture and sale of auto components viz. mirrors, parking brake, washer systems, gear shifters, cables, etc. The assessee en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20% to 10% in assessment year 2007-08 and confirmed the disallowance of transportation and welfare expenditure in assessment years 2008-09 and 2009-10 at 10%. Against the findings of Commissioner of Income Tax (Appeals), both, the assessee and the Revenue are in appeal before the Tribunal. The assessee has assailed the order of Commissioner of Income Tax (Appeals) in disallowing remaining 75% of the administrative expenditure and confirming 10% disallowances on account of transportation and welfare expenses. The Revenue on the other hand has assailed the order of Commissioner of Income Tax (Appeals) in allowing 25% of the administrative expenses to the assessee. 3. The grounds raised by the assessee in its appeal for assessment year 2007-08 are as under : The appellant objects to the order dated 23 December 2014 passed by the Commissioner of Income-tax (Appeals) - 5, Pune [ CIT(A) ] for the aforesaid assessment year on the following among other grounds: 1. The learned CIT(A) erred in confirming the disallowance of administrative service charges paid to Tata Autocomp Systems Ltd. ( TACO ) to the extent of ₹ 36,02,323 under section 40(A)(2)(a) of the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business expediency ... The appellant objects to the above observations. 3. The learned CIT(A) erred in confirming the disallowance of transportation and staff welfare expenses to the extent of ₹ 359,883 on adhoc basis. 4. The learned CIT(A) erred in making the following observations, which are contrary to the facts of the case and in law: a) .....the appellant has not satisfied the assessing authority regarding the business expediency of incurring the impugned staff welfare expenditure ... b) .....many of these expenses were either not explained or amounted to personal expenditure ... c) .....the appellant could not have been said to have discharged the onus cast upon him to prove that the expenditure was wholly and exclusively incurred for business purposes ... d) .....from the details produced such expenditure is clearly in the nature of personal or non-business expenditure ... The appellant objects to the above observations. 5. Each one of the above grounds of appeal is without prejudice to the other. 6. The appellant reserves the right to amend, alter or add to the grounds of appeal. The assessee has rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Audit, review of existing processes; x. Setting up of Information Technology Infrastructure, review etc.; xi. Overall Monitoring of Operations of group companies. 5.1 The services were provided by TACO to the assessee out of business expediency. The ld. AR pointed that the examination of documentary evidence would clearly prove beyond doubt that the services rendered by TACO are directly linked to the activities carried out by the assessee. The authorities below have erred in disallowing the legitimate business expenditure of the assessee by invoking the provisions of section 40(A)(2)(a) of the Act. The ld. AR further pointed that TACO had entered into such Administrative Support Agreement with various other Tata Group companies for providing administrative services on similar lines. TACO is charging fee @ 2% of the total turnover and in some cases 1% of total turnover depending upon the services rendered by it. The ld. AR pointed that the Co-ordinate Bench of the Tribunal in the case of Tata Johnson Controls Automotive Limited Vs. The Dy. Commissioner of Income Tax in ITA No. 1450/PN/2011 for assessment year 2006-07 decided on 09-12-2015 had accepted the claim of assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come Tax (Appeals) reduced the disallowance from 20% to 10% in assessment year 2007-08 and upheld the disallowance of 10% in assessment years 2008-09 and 2009-10. The observations of the Commissioner of Income Tax (Appeals) on this issue are against the facts of the case and documents on record. 6. On the other hand Shri P.L. Kureel representing the Department vehemently supported the findings of Assessing Officer in disallowing the entire administrative fee paid to TACO and claimed as expenditure by the assessee. The ld. DR submitted that there was no justification of claiming such huge expenditure on account of administrative expenses. Business expediency for payment of such expenditure would be justifiable if it would have been initial years of set up, but once, the company is well established it cannot be said that the expenditure to the extent claimed by the assessee at a fixed percentage of turnover was incurred on account of business expediency. Especially, when the assessee had developed its own establishment, basic infrastructure, logistic and other resources to take care of its various business needs. The ld. DR vehemently defended the order of Assessing Officer in mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices charges have been paid by the assessee to TACO @ 2% of total turnover are in accordance with the Administrative Support Agreement dated 01-04-2006 between assessee and TACO (placed on record at pages 89 to 93 of the paper book). The assessee has further placed on record various documents at pages 94 to 221 of the paper book to substantiate the services rendered by TACO to the assessee over the period of time for smooth running of business. A perusal of agreement shows that services provided by TACO include : i. Support for Land Acquisition and Development; ii. Support for payroll and benefit Administration (Provident Fund superannuation, Gratuity); iii. Support for Liaison with Bank and Financial Institutions; iv. Support for Decisions regarding Capital Budgeting; v. Support for Legal and Taxation services; vi. Support for Human Resources Development Training facilities; vii. Communication infrastructure advisor services; viii. Support for manpower recruitment; ix. Support for maintaining Industrial Relations; x. Support for Provide Marketing and Distribution Network; xi. Support for liaison with Government Authorities; xii. Support for Ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid sum of ₹ 2,00,84,162/- to TACO and the question of its deductibility has arisen by way of present grounds of appeal raised. The Assessing Officer was of the view that since TACO was a related party, in view of the provisions of section 40A(2)(b) of the Act, the said expenditure has to be looked into accordingly. The assessee furnished certain information before the Assessing Officer. However, the Assessing Officer was of the view that there was no justification in the claim of assessee since the assessee had established its administrative set up and was also incurring expenditure on professional services and other expenses and there was no merit in the claim of assessee vis- -vis said expenditure being paid to TACO. The CIT(A) also referred to the provisions of section 40A(2)(a) of the Act and after considering the various evidences filed by the assessee, was of the view that certain services have been rendered by TACO and he was of the view that only 25% of the expenditure has to be allowed in the hands of assessee. Both the assessee and the Revenue are in appeal against the said order of CIT(A). 24. The first issue to be addressed in this regard is whether in or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gitimate needs of the business, the same is to be allowed as an expenditure in the hands of assessee. Though, under the Act, part of expenditure which is excessive or unreasonable having regard to the market value of the services, can be disallowed in the hands of assessee, but in order to invoke the said provisions of the Act, first step is to find out fair market value of the services, for such invoking of the powers, the Assessing Officer is not empowered to sit in the seat of businessman to decide the merits of quantum of claim to be allowed in the hands of assessee. The authorities below in the present case have not disputed the terms of agreement, but were of the view that remuneration paid at a percentage of turnover, in view of the assessee having established its business, was excessive. The contention of the assessee on the other hand was that for smooth running of its business, services were provided by TACO, which were as terms of the agreement. 26. We find similar issue of allowability of expenditure pursuant to agreement between the assessee and the third party, arose before Cochin Bench of Tribunal in Harrisons Malayalam Ltd. Vs. ACIT (supra) and the factual asp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diversified fields and assessee and other companies who are licensees availed, the expertise in the required field for the excellence in the corporate management as well as promoting business standards. He further submitted that if the assessee has to acquire this expertise, the cost of infrastructure will be 10 times more than the license fee paid and certainly it is in the nature of business expediency and the same is allowable. He further argued that the CIT(A) has not disputed the nature of the expenses as capital or revenue. The only reservation of the CIT(A) is that it is not an allowable expenditure. The Id. CA relied on the following precedents :- (i) CIT Vs. Delhi Safe Deposit Co. Ltd. (1982) 133 ITR 750 (SC) (ii) Sasoon J. David Co. Ltd. Vs. CIT (1979) 118 ITR 261 (SC) (iii) Bombay Steam Navigation Co. (1953) (P.) Ltdd. Vs. CIT (1965) 56 ITR 52 (SC) (iv) CIT Vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) 17 . 18 . 19 . 20. The authorities below have not disputed the terms of the agreement but it appears from the reasons given by the CIT(A) that the said payment was not required at all. The concept of business is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s before us and direct the Assessing Officer to delete the additions. 27. In the facts of the case before Cochin Bench of Tribunal, the remuneration was also fixed at prescribed rate on turnover as referred to in para 16 of the decision. 28. Next aspect of the issue, where the payments have been made to TACO, on which taxes have been paid by TACO, disallowance made in the hands of assessee would result in double taxation. Admittedly, the concern TACO has furnished Nil return of income under normal provisions, but has paid taxes under section 115JB of the Act. The Hon ble Bombay High Court in CIT Vs. Indo Saudi Services (Travel) (P.) Ltd. (2008) 219 CTR 562 (Bom) have considered facts of that case, which read as under:- 3. The relevant facts giving rise to the present appeals are briefly set out hereunder:- (i) The assessee s business is that of being general sales agents of Saudi Arabian Airlines. The assessee earned commission @ 12 per cent from Saudi Arabian Airlines on the tickets booked/sold by them. The assessee appointed several agents including their sister concern, viz., M/s Middle East International and paid incentive commission to such agents, by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee and such charges paid were considered to be reasonable by the appellant. (iii) For asst.yrs. 1989-90 and 1990-91 the assessee had reduced the payment of handling charges to 9 1/2 per cent to its sister concern. The AO has considered the payment of commission to the sister concern in the asst. yr. 1989-90 and allowed the claim after 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 assessed for the asst. yr. 1991-92 is ₹ 9,38,510 and for asst.yr. 1992-93 is ₹ 14,65,880 and the said assessment orders have been placed on record. (v) Under the CBDT Circular No. 6-P, dated 6th July, 1968 it is stated that no disallowance is to be made under section 40A(2) in respect of the payments made to the relatives and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management , experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treating the cost of such services at zero is confirmed . All these evidences were before the DRP, but there is not even a whisper about what was the nature of these documents, why does the DRP find these documents to be not satisfactory, what is the kind of evidence that was necessary to prove the factum of services having been availed, and what precisely is the reason that these documents cannot be relied upon. The soul of an order is in its reasoning, and unless the reasons for coming to a conclusion in the order are not set out, it is not possible to do a meaningful scrutiny of the order, but we find no reasoning at all in the order passed by the DRP. We may in this regard refer to the observations made by Hon'ble Supreme Court in the case of Union of India v. MohanLal Capoor AIR 1974 SC 87, wherein Their Lordships have, inter alia, observed as follows: If the statute requires recording of reasons, then it is the statutory requirement and, therefore, there is no scope for further inquiry. But even when the statute does not impose such an obligation it is necessary for the quasi-judicial authorities to record reason as it is only visible safeguard against possible in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of the said services, we find no merit in the orders of authorities below in invoking provisions of section 40A(2)(a) of the Act. Accordingly, we modify the order of CIT(A) and direct the Assessing Officer to allow the expenditure in totality in the hands of the assessee as the said expenditure has been laid down in terms of the agreement agreed upon between the parties and is for carrying on of the business of the assessee more efficiently and is allowable as business expenditure. The grounds of appeal No.2 and 3 raised by the assessee are allowed and ground of appeal No.2 raised by the Revenue is dismissed. The Co-ordinate Bench of the Tribunal upheld the commercial exigency as well as reasonableness of the administrative service charges paid by the assessee therein to TACO. The Tribunal allowed the expenditure in totality in the hands of the assessee. 11. Subsequently, in the case of Tata Toyo Radiator Pvt. Ltd. Vs. The Dy. Commissioner of Income Tax (supra), identical issue was raised and the grounds assailing the findings of Commissioner of Income Tax (Appeals) on the issue were also similar. The Co-ordinate Bench by following the order rendered in the case of Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uchers in respect of the expenditure claimed to prove the genuineness of the expenditure. However, the assessee was unable to produce the supporting documents. The Assessing Officer disallowed 20% of the total expenditure claimed in the assessment year 2007-08 and on the same premise the Assessing Officer disallowed 10% of the total expenditure claimed under the head Transport and other Welfare expenses in assessment years 2008-09 and 2009-10. The contention of the ld. AR is that the assessee could not produce only two vouchers in the assessment year 2007-08. The Assessing Officer in an arbitrary manner made disallowance of 20%. In assessment years 2008-09 and 2009-10 the Assessing Officer has not pointed any defect, yet ad hoc disallowance of 10% of the expenditure was made by the Assessing Officer. In the subsequent assessment years no disallowance has been made in respect of such expenditure. In first appeal, the Commissioner of Income Tax (Appeals) has reduced the disallowance from 20% to 10% in assessment year 2007-08 and has upheld the disallowance of 10% in assessment years 2008-09 and 2009-10. We are of the considered view that this issue needs a revisit to the file of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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