TMI Blog2018 (6) TMI 1695X X X X Extracts X X X X X X X X Extracts X X X X ..... on secured as already discussed at length in the CIT(A) s findings under challenge. Coupled with this is the clinching lower appellate authority s conclusion that these two entities are not group concerns at all. The assessee s directors names along with their respective stake holdings as well as payee firm s partners details reproduced hereinabove do not show any group(s) relationship before these. The Revenue s very fair in not involving section 40A(2)(b) of the Act even to prove the contrary. It is therefore a case of the assessee having availed both agency as well as infrastructure network of the payees GTFS carrying out in its corporate insurance agent business. Assessing Officer had invoked only section 37 in doubting genuineness of the impugned payments. Mr. Usman at this stage submits that CIT(A) ought to have applied section 40(a)(ia) disallowance as well since the assessee had not deducted TDS at the prescribed rate as per tabulation chart extracted forming part of CIT(A) s detailed discussion. We fail to agree with the Revenue s instant technical plea. The fact remains that the assessee has filed its payee s computation of income, income tax return as well as the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , FCA ORDER PER S.S.Godara, Judicial Member:- This Revenue s appeal for Assessment Year 2011-12 arises against Commissioner of Income Tax (Appeals)-14, Kolkata s order dated 31.08.2016 in case No. 188/CIT(A)-14/Wd-1(1)/2015-16, in proceedings u/s 143(3) of the Income Tax Act, 1961; in short the Act . 2. The Revenue s solitary grievance pleaded in the instant appeal seeks to revive section 37 r.w 40(a)(ia) disallowances / addition of ₹66,18,00,000/- pertaining to assessee s service charges paid to M/s Golden Trust Financial Services (GTFS) hereafter for having acted as its agent. It s next two averments are that the CIT(A) has erred in law as well as on facts in examining assessee s exclusive method of accounting in service tax receivable on output services as against inclusive method of service tax payments in respect of inputs services thereby holding the impugned expenditure to be eligible for deduction. Its last grievance is that lower appellate authority has erred in adopted consistency on the issue whereas the relevant facts are totally different in the impugned assessment year vis- -vis these in other assessment years considered in lower appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DS. Next came the addendum developments. The assessee s case was that its original agreement dated 16.04.2009 stipulated payments under the above two heads of ₹ 60 and 6 crores as revised to ₹56 and 4 crores and all the applicable taxes. The relevant service tax at that point of time was 10.3%. This increased the former figure to ₹61,76,800/- and later one to be ₹4,41,20,000/- to ₹576,80,000/- and 41,20,000; respectively aggregating to ₹66.18 crores in question. 6. All the assessee s above pleadings stood rejected in assessment order dated 31.03.2014. The Assessing Officer observed first of all that payee GTFS was not its exclusive agent. It provided the services in question to its other customers as well. He then was of the view that this payees had already received other operating expenses of ₹128,33,65,793/-.This meant that there was no justification to pay the impugned expenditure any more. The Assessing Officer also considered assessee s premium collected of ₹1114.54 crores for (both fresh as well as renewable) to remark that only its working strength deserved credit for the same. He doubted genuineness of impugned payment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts that emerge from this agreement are: 1. The appellant had to provide a variety of very specialized services to RLIC and for which it had to maintain data bank of specialized knowledge not only about the market with special potential to access such market, that is have an enormous virtual army of specialized individuals who would do actual market access on behalf of the appellant. 2. That the level of the quality of these services had to be maintained at top efficiency at all times. These two aspects indicate that the appellant would either have had to develop its own resources, which, through even a cursory perusal of the said agreement, clearly shows, would take an enormous amount of time, money and resources to develop - if the appellant wanted to develop these proficiencies in-house. The appellant, from a study of the facts and circumstances of the case, has apparently taken an alternative route by surrendering a part of its profits while ensuring a rapid growth of this business, thus off-setting the depression in profits. The appellant has hired the services of a concern that has specialized in the services that were required by the appellant for the implementation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had already entered into an agreement with its principal - RLIC and would be hard-pressed to provide competitive services to the principal. It could therefore hardly be expected that it would risk wasting time and money in the development of such resources on its own and jeopardizing its contract with the principals. It instead hired the services of GTFS that was already there with the required framework constituting .infrastructure, man power, expertise and market reach to provide the said services for a fee. GTFS, it is submitted by the appellant, was liable to pay the incentives/other expenses to the Network on behalf of HISL. At the time of payments model amounts credited to the individual Network members, GTFS has duly deducted and deposited tax. HISL in turn reimburses GTFS these expenses, i.e., incentives/other expenses paid to the Network by the GTFS on behalf of HISL. In addition to the above, it was submitted by the appellant that GTFS was providing services through, (ii) 268 branches and other infrastructure (including information technology, i.e, software, hardware, networking etc.) These branches and other infrastructure were provided at the disposal of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. In this agreement on 16.4.2009, the remuneration/service charges ,to be paid to GTFS by HISL were fixed as follows: (i) ₹ 60,00,00,000/- (Rs sixty crore) and applicable all taxes for performing the function as pure agent - which is item number 1 above. (ii) ₹ 6,00,00,000/- (Rs six crore) and applicable all taxes for making available necessary services through infrastructure. This is for item number 2 above. The appellant informed during appeal proceedings as well as during assessment proceedings, that after taking into account all the circumstances of the business, this addendum agreement with GTFS was again revised on 9.4.2010, to be effective from 1.4.2010, for the financial year 2010-11. In this agreement, on 1.4.2010 the remuneration /service charges to be paid to GTFS by HISL was revised as follows: (i) ₹ 56,00,00,000/- (rupees fifty six crore) and applicable all taxes for performing the function as pure agent. (iii) ₹ 4,00,00,000/- (Rs four crore) and applicable all taxes for making available necessary services through infrastructure. At the relevant time the applicable rate of service tax on service tax charges was 10.3%. Accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from the records of the department itself. It was also pointed out by the appellant that the case of GTFS was scrutinized u/s 143(3) for the AY 2011-12, which was the instant assessment year under this appeal. He has also provided a copy of the scrutiny order of GTFS for the AY 2011-12 wherein it is clearly shown that some additions were made by the AO, but the receipts or transactions with respect to its business with HISL were accepted as such. The appellant has contended that the department thus has accepted the transactions outlined above when it scrutinized the accounts of GTFS, but surprisingly, had doubted the very same transactions in the hands of the present appellant. He has stated that it is strange that while the amounts, when shown as receipts in the hands of recipient for service rendered, are taxed readily by the department as having been received from the payer (the appellant); the same amounts, when claimed by the same payer as expenses for the same services are not allowed. After due consideration of this aspect, I would tend to agree with appellant on this count. However, the other aspects also need further examination. After examining the material on recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of disbursement of incentives/ other expenses. But GTFS, which has admittedly disbursed these amounts amongst the Network persons, would then be left with nothing for itself. GTFS is a gigantic concern with 268 branches and a huge amount of infrastructure, including hardware and software, mention of which has been made in the agreement between GTFS and the appellant, as mentioned supra. It has clearly been accepted as undisputed that GTFS was indeed providing comprehensive business support to the appellant which was the sole factor responsible for the exponential growth in the latter's business. It is only logical, in terms of business considerations to presume that for these services, GTFS would been charging something. It would be receipts from these charges that would enable GTFS to maintain its large number of branches, infrastructure, information and knowledge base as well as supportmechanism for its Network persons. If it distributed all its receipts to the Network then all this would not be possible. It is evident from the above discussions as well as the material on record, in addition, of course, from considerations of business expediency, that GTFS was receiving thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onus for establishing this lies upon the person making this, assertion. In this case, the, fact is that the AO has not doubted the quantum of such expenses or the fact that such payments were indeed made. He has not doubted the fact that services were also provided by GTFS to the appellant. What he has tried to suggest is that these payments were made as a part of an artificial construct to divert the profits of one company into another - presumably the profits of the appellant into GTFS. The other presumption by the AO is that the two entities, the appellant company and GTFS were part of the same group and that GTFS was exclusively and solely providing services to the appellant. Both these assertions have been made by the AO, and therefore the on onus for establishing their veracity lay with the AO, since there was nothing as per record to support either of these assumptions. The assumption of suppression of suppression of profits by posting of expenses is something that could have been buttressed by examining the affairs of GTFS also which being scrutinized during the same period as discussed earlier. This has not been done. The AO has merely made a cursory mention of a possibili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssumed that the appellant company and GTFS belonged to the same group and that the latter worked solely and exclusively for the appellant company - it must be realized that there are two assumptions that the AO has made here and that there is nothing on record to suggest that these assumptions are supported by any evidence - even in this case, the further assumption of the AO that the impugned expenses were posted merely to cut down on the profits of one company and post expenses somewhere else, has itself to be established through cogent reasoning and accompanying evidence. It has to be shown at least through circumstantial deduction and reasoning, that GTFS indeed did not provide any services for which the impugned payments were purportedly made. Not only has no attempt been made at the assessment stage to establish this, but, in fact, such a thing is not borne out by facts. The circumstances, as discussed above, have shown that there was an amount' of business expediency in the appellant's decision of employing the services of a specialized agency like the GTFS. The AO has nowhere doubted the specialized knowledge base, the infrastructure - software as well as hardware - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly observed that the payment to GTFS on account of the of infrastructural facilities- and service charges was not justified because these ties could have been performed by the appellant company itself, which had a large work-force of its own. The AO has not delved further into this aspect of the operations of the appellant company. He has not been able to say how and where this staff could have been employed had the said services - sourced to GTFS, not been sourced out and had been performed by the appellant company itself. It has been discussed earlier that GTFS had the- necessary expertise to handle the kind of work that had to be performed by the appellant company under its obligations cast by' the agreement with RLIC. Further the agreement with GTFS provides that the latter would allow the appellant company to use its offices as well as the infrastructure available within these offices. The appellant, during appeal proceedings has explained the reason for increase in the number of personnel and the deployment of such staff by saying that that premium collection during the assessment year 2011-12 was 1,114.56 crores as compared to ₹ 755.48 crores in the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... review any aspect of the business of CIA in so far as it relates to its work as CIA of RLIC, including books and records relating to RLI and any policyholders/. COIA shall provide all required information to the staff of RLIC auditing/monitoring the business activities of CIA. These stringent conditions themselves show that there had to be sufficient and well trained staff available at all the branches from which the appellant was conducting its business. All this has not been doubted by thee AO. The payment to GTFS was made for service charges, for the provision of infrastructure as well as reimbursement of payments made to Network persons. In this regard, the observations of the Apex Court in the case of (Sassion J. David Co. (P) Ltd. Vs. CIT (1979) 118 ITR 261 (S), are pertinent where it has been held that the assessee was to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction even though there was no compelling necessity to incur such expenditure. Further, within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions to examine the measure of business expediency or the quantum of the assessee s expenditure in relation to that item. This can be examined in special circumstances, when there is a special connection between the assessee and the person in respect of whom the said item of expenditure had been made. Say, if the two concerns were sister concerns. But this has to be established by the AO. We find that this is not the case here as has been discussed earlier. As regards the doubt raised on the bona fides of the expenditure incurred by the appellant company, especially in respect of the service charges paid to GTFS, the AO has raised the issue of thee bill being raised on the last day of the financial year. On the last day of the Financial Year, GTFS had raised a bill amounting to ₹ 264720000/- on the appellant. This was doubted by the AO by stating that this was not a genuine expense and that this was tantamount to siphoning of money to a group concern GTFS. In this regard the appellant has submitted that HISL accounts for the bills as and when they are raised by GTFS. Out of ₹ 600000000/-, to be paid to GTFS, bills mounting to ₹ 264720000/- only were raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the test expounded in Dhirajlal Girdhrilal (supra) and Daulat Ram Rawat mull (supra) and also read the order as a whole, we reach the affirmative opinion in favour of the appellant-Revenue. It is the aforesaid test, which has been applied by us in our conclusion recorded above. As similar view is echoed by the Hon'ble Delhi High Court iin its decision of 1st June, 2012, ITA No. 562 of 2008 in the case of Commissioner of Income Tax Versus Sunaero Limited. Similarly, in CIT versus S.P. Jain (1973) 87 ITR 370 (S), the apex court has held that a factual conclusion is regarded as perverse when no person duly instructed or acting judicially could act upon the record before him, have reached the conclusion arrived at by the tribunal/authority. In the present case, it cannot be said that the findings of the AO were based upon any cogent material. This issue becomes all the more serious in view of the undisputed fact that both, the appellant as well the recipient concern, GTFS were being scrutinized during the same period, for the same assessment year and within the same city of Kolkata. There was no dearth of material available with the AO. But from this material, no defect has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Date Nature of Bill raised Date of Bill GROSS AMAOUNT Basic Value Service Tax Tds-Deducted Net Amount Paid Date of payment GTFS HEIGHT /SC/10- 11/01 Service Charges 01/07/2010 132,360,000,00 120,000,000,00 12,360,000.00 13,236,000.00 119,124,000.00 01-7-10, 02-07-10, 03-07-10 GTFS HEIGHT /SC/10- 11/02 Service Charges 10/08/2010 88,240,000.00 80,000,000.00 8,240,000.00 8,824,000.00 79,416,000.00 16/08/10 GEFTS HEIGHT /SC/10- 11/03 Service Charges 06/09/2010 44,120,000.00 40,000,000.00 4,120,000.00 4,412,000.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonnel, on the last day of the financial year. The AO has however not doubted this bill or he payment made in respect of this bill. There seems to be some inconsistency in the treatment that the AO has given to various items of the expenses incurred by the appellant company. This differential treatment has been made without ascribing any reasons or offering any explanations. In his submission, the appellant has given detailed reasons for employing the services of GTFS and the reason why the latter was paid such a hefty fee. The agreement between the appellant and its principal provides the scope of work to be undertaken by the appellant and the agreement between the appellant - and GTFS spells out the terms of work as well as payments for these works, that are to be undertaken by GTFS. The bills as well as ledger accounts were produced by the appellant before the AO. The books etc. - as per the assessment order of GTFS produced by the appellant during .appeal proceedings - of GTFS were examined by the AO of that entity. Nothing to show that the bills so raised were for anything but the bona fide purpose of the business of the appellant and of GTFS has been found. In these circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... again, the said expenses have been accepted under identical circumstances. The appellant further provided a copy of the assessment order - once again passed after scrutiny u/s 143(3) - for the AY 2013-14. The said order has been passed after accepting the said service charges and other expenses incurred by the appellant under the same set of identical circumstances. This order was passed on 21.3.2016. The appellant has provided a comparative chart of the various expenses incurred by the appellant company in respect of GTFS over several years and the treatment provided to them under scrutiny assessment u/s 143(3) of the Act. This is as under: Comparative hart of following expenses Expense type Assessment year 2010-11 Assessment year 2011-12 Assessment Year 2012-13 Assessment Year 2013-14 Reimbursement Expenses paid to GTFS 1,151,33 2,152.00 1,283,36 5,793.00 653,034 568.00 3696,631 306.00 Reimbursement Expenses paid to GTFS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween the same parties, the stand should be same as made earlier. It has been held that in deciding upon legal issues, whether based on a set of facts . or on an issue of law, what is relevant is not the 'personality of officers adjudicating ~ but the institution of adjudication itself. If it is conceded that simply because of the change in the personnel who adjudicated, it is open to them, on same set of facts, to a conclusion totally contradictory to the conclusion which had been reached by earlier such adjudicating personnel, it will not only shake the confidence of the public in judicial procedure as such, but it will totally destroy such confidence that will be destructive of the institutional integrity itself. However, the principle of res judicata has to be applied with caution in the case of Income Tax. The Hon'ble Bombay High Court, in H.A. Shah and Co. vs. CIT (1956) 30 ITR 618 (Bom.) has held that the principle of estoppel or res judicata does not strictly apply to the Income Tax authorities . The same court has however, qualified this by saying that: An earlier decision on the same question cannot be reopened if that decision is not arbitrary or perve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e changed in a subsequent year . In South India Trust Association vs. Telugu Church Council (1996) 2 SCC 520, the Apex Court has taken the view that the rule of res judicata is rests upon considerations of public policy. It is in the interest of public at large that finality should be attached to the judicial decisions. It was also held to be in the public interest that individuals should not be vexed twice over with the same kind of litigation. In the case of Municipal Corporation of City of Thane vs. Vidyut Metallics Ltd Anr. (2007) 8 SCC 688, the facts were that in earlier litigation, the court had considered the evidence of Quality control Manager who was described as an expert on the point and accepting his evidence, the court had held that the goods imported by the company were ferrous in nature and not non ferrous and the company was right in paying octroi under item 71. It was thus concluded that this was a fundamental factor and the nature of goods imported by the company was directly and substantially in issue, on the basis of which the decision was taken. The Apex Court after examining these facts, observed that in taxation matters, the strict rule of res j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated from any persuasive set of facts or cogent reasoning. Such an opinion therefore loses much of the force of law and if not backed by any other circumstances supporting it - as is the case here - becomes difficult to uphold as an unequivocal finding of fact and law. During appeal proceedings, the appellant has placed reliance on the following authorities: Supreme Court of India Aluminium Corporation Of India ... vs Commissioner Of Income-Tax, West ... on 29 August, 1972 Equivalent citations: 1973 AIR 520, 1973 SCR (1)1097 Author: K Hegde Bench: Hegde, K.S. PETITIONER: ALUMINIUM CORPORATION OF INDIA LTD. Vs. RESPONDENT: . COMMISSIONER OF INCOME-TAX, WEST BENGAL DATE OF JUDGMENT29/08/1972 BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. REDDY, P. JAGANMOHAN; 'KHANNA, HANS RAJ CITATION: 973 AIR 520 1973 SCR (1)1097 CATOR INFO : RE 1975 SC 5 (23) RF 1986 SC 98 (18) R 1986 SC1483 (4) ACT: Income Tax Act 1922 s. 10(2) (xv) 66-Expenditure laid out wholly and exclusively for business-Commission payable to selling agents in a case where sales are not actually effected through selling agents-Construction of agreement-Expenditure on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377;56 and 4 crores; respectively by way of addendum dated 09.04.2010. Mr Usman fails to rebut the fact that original sum of ₹66 crores hereinabove fixed at first instance has nowhere been disputed at any stage. Both parties including assessee and its payee reduced the said sum to ₹60 crores only and further included ₹10.3% service charges component. We fail to understand as to how this inclusion attracts genuineness cloud on already agreed sum of ₹60 crores. The assessee had earlier agreed to pay ₹66 crores (net) which was reduced to ₹60 crores culminating in ultimate payment of ₹66.18 crores because of service charges element eeing included therein. 9. Mr. Usman vehemently contends that the assessee had already paid an amount of ₹128.33 crores as operating expenditure to the very payee. He turns the impugned sum of ₹66.18 crores to be highly exorbitant. We posed a specific query as to whether the said operating expenditure included any commission agency services or infrastructure usages or not. There is no such material on record to this effect. It emerges therefore that the assessee has been following its consistent pract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has further concluded that the section 40(a)(ia) does not apply in case of short deduction of TDS than the prescribed rate. 11. Learned CIT DR next reiterates Revenue s two remaining averments that the assessee has followed exclusive method of its inbound receivables as against inclusive method for impugned expenditure whilst claiming service tax component (supra). Learned counsel representing assessee clarifies that this assessee is not registered under the service tax regime. What it has done it is to claim the impugned expenditure after making the actual payment which is duly allowable under the Act. It has further not claimed any benefit arising out of its exclusive method as well. We therefore reject Revenue s instant argument. 12. Learned CIT-DR s lastly contends that the argument that CIT(A) has erred in both law as well as on facts in adopting judicial consistency on the issue of the impugned payments of ₹66.18 crores despite the facts involved in the relevant previous year are altogether different than in preceding and succeeding assessment years. There is no material on record pin-pointing any such distinction on facts summarized in the lower authorities fin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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