Tribunal decision: Appeal partly allowed, referral fee issue remanded. Provident Fund disallowance deleted.

The Tribunal partly allowed the appeal. The issue of referral fee was remanded to the CIT(A) for fresh adjudication, emphasizing the need to determine if services were rendered by the bank and to consider transfer pricing issues. The disallowance of employees' contribution to Provident Fund under Section 43B was deleted, following the precedent that contributions made before the due date for filing the return of income are allowable deductions.

---

---

Issues Involved:
1. Disallowance of claim of referral fee.
2. Disallowance of employees' contribution to Provident Fund (P.F) under Section 43B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Claim of Referral Fee:

The assessee, engaged in insurance activities as a corporate insurance agent, declared an income from agency commission of Rs. 5.86 crores for the assessment year 2003-04. During the assessment proceedings, the Assessing Officer (AO) noted that the assessee had debited professional charges amounting to Rs. 2.61 crores, including a payment of Rs. 2.58 crores to Citi Bank, NA as referral fees. The assessee claimed that this payment was for using Citi Bank's database to sell policies, supported by a service level agreement. However, the AO disallowed the claim citing several deficiencies in the agreement, such as it being on plain paper, unsigned by witnesses, and lacking an arbitration clause.

The AO concluded that the agreement had no legal binding force and asserted that no services were rendered by Citi Bank, NA. Alternatively, the AO argued that the payment was not at Arm's Length, suggesting only 10% of the insurance commission received should be considered as referral fee. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's disallowance, focusing on the lack of evidence for services rendered rather than the Arm's Length Price under Transfer Pricing provisions.

The Tribunal considered the rival submissions and relevant material. It noted that while the agreement lacked certain formalities, enforceability under the Indian Contract Act does not necessarily require stamp duty or witnesses. However, the assessee failed to produce the original agreement or other supporting evidence to prove the agreement's validity and the services rendered. The Tribunal emphasized that the primary onus is on the assessee to establish that the expenditure was laid out wholly and exclusively for business purposes. The Tribunal found that the authorities had focused more on the agreement's validity than on the actual rendering of services.

In the interest of justice, the Tribunal set aside the issue to the CIT(A) to reconsider whether services were rendered by Citi Bank, NA and to adjudicate the Transfer Pricing issue by considering suitable comparables and the most appropriate method.

2. Disallowance of Employees' Contribution to Provident Fund (P.F) under Section 43B:

The AO disallowed the employees' contribution to P.F. as the payment was not made before the due date defined in the explanation to Section 36(1)(va). The CIT(A) allowed the employer's contribution but confirmed the disallowance of the employees' contribution.

The Tribunal considered the relevant material and submissions. The assessee relied on a decision of the Tribunal in the case of Hindustan Construction Co. Ltd. Vs DCIT, which held that if the payment is made before the due date for filing the return of income, it is allowable. The Tribunal noted that there are divergent views on this issue but followed the decision in Hindustan Construction Co. Ltd., which allowed the deduction if the payment was made before the due date for filing the return of income.

The Tribunal concluded that the employees' contribution to P.F. paid before the due date for filing the return of income is allowable as a deduction. Consequently, the addition made under Section 43B was deleted.

Conclusion:

The appeal was partly allowed. The issue of referral fee was remanded to the CIT(A) for fresh adjudication, while the disallowance of employees' contribution to P.F. was deleted.

---