2013 (2) TMI 429 - AT - Income Tax

Tribunal reverses CIT(A) orders, emphasizes fair market value proof, upholds full TDS credit entitlement

The Tribunal allowed the appeal filed by the assessee, reversing the CIT(A)'s orders on all grounds. The Tribunal emphasized the need for the AO to ... Credit of TDS allowed proportionally - disallowance as appellant has failed to correlate the job income returned vis-à-vis the vendor cost/job order cost - CIT restricted the TDS credit to the extent of the revenue credited to the profit and loss account over the receipt as per the TDS certificate - Held that:- Prescription of section 199 mandates allowing of credit for TDS in the year in which the income on which such tax deducted, is offered for taxation . As the assessee-offered the entire amount to tax in the instant year there is no justification in allowing only the proportionate part of the tax deducted at source. As the authorities below have followed the revision order of CIT for assessment year 2003-04 while taking the view that the credit will be given for TDS only to the extent of the amount credited in P&L account since, the view taken in assessment year 2003-04 is reversed by the Tribunal, set aside the order of CIT(A) and allow Ground taken by the assessee - in favour of assessee. Adhoc disallowance of common facility charges being 20% paid to its holding company - Held that:- AO has made no effort to demonstrate as to what would be fair market value of services and proceeded to disallow the same on adhoc 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. This approach, is contrary to the scheme of the Company. As decided in Indo Saudi Travel Services P. Ltd.,[2008 (8) TMI 208 - BOMBAY HIGH COURT], 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 and as in the present case DR does not dispute that both the companies i.e. the assessee and parent company are taxed at the same rate and have sufficient taxable profits. Thus 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) thus the impugned disallowance was indeed uncalled for on the facts of this case - in favour of assessee. Issues Involved:1. Restriction of TDS credit by the AO.2. Adhoc disallowance towards common facility charges.3. Adhoc disallowance towards royalty payment.Detailed Analysis:1. Restriction of TDS credit by the AO:The primary issue in this appeal was whether the Assessing Officer (AO) correctly restricted the TDS credit to the extent of revenue credited to the profit and loss account. The AO had observed discrepancies in the correlation of job income and vendor costs, leading to a denial of TDS credit aggregating to Rs. 95,46,324. The CIT(A) upheld this action, citing the assessee's failure to match job order costs with job income returned. However, the Tribunal noted that a similar issue had been addressed in the assessee's favor for the assessment year 2003-04, where it was held that the entire TDS amount should be credited if the income is offered for taxation. The Tribunal reversed the CIT(A)'s order, allowing the assessee's appeal on this ground.2. Adhoc disallowance towards common facility charges:The second issue concerned the disallowance of Rs. 24,98,602, which was 20% of Rs. 1,24,93,010 paid towards common facility charges to the holding company. The AO had disallowed 30% of the amount under section 40A(2)(b) of the Act, which was reduced to 20% by the CIT(A). The Tribunal referenced its decision for the assessment year 2005-06, where it was held that disallowance under section 40A(2)(b) requires a demonstration of excessive or unreasonable payments compared to the fair market value. Since the AO did not establish the fair market value or demonstrate that the payments were excessive, the Tribunal upheld the assessee's grievance and allowed the appeal on this ground.3. Adhoc disallowance towards royalty payment:The third issue involved the disallowance of Rs. 18,00,000, which was 20% of Rs. 90,00,000 paid as royalty to the holding company. The AO had initially disallowed 50% of the royalty payment, which was reduced to 20% by the CIT(A). The Tribunal referred to its previous decision for the assessment year 2005-06, noting that the royalty payment was based on a legitimate agreement and was not prima facie excessive. The AO had not determined the fair market value or shown that the payment was unreasonable. The Tribunal concluded that the disallowance was uncalled for and allowed the assessee's appeal on this ground.Conclusion:The Tribunal allowed the appeal filed by the assessee, reversing the CIT(A)'s orders on all grounds. The Tribunal emphasized the need for the AO to demonstrate the fair market value and reasonableness of payments before making disallowances under section 40A(2)(b) and upheld the assessee's entitlement to full TDS credit as per the income offered for taxation.