TaxTMI 
TaxTMI 
2016 (7) TMI 7
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....e by the appellant company to Shri Bharat Cemco Pvt. Ltd. were reasonable and not excessive and hence, no disallowance u/s 40A(2)(a) was warranted. 4] The learned CIT(A) ought to have appreciated that the appellant company had given various reasons for decrease in net profit ratio in the current year and in the absence of any evidence that the payments made to Shri Bharat Cemco Pvt. Ltd. were excessive, the disallowance made was not justified at all. 5] Without prejudice to the above grounds, the appellant company submits that the disallowance' made is very excessive and the same may kindly be reduced substantially. 6] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal. 3. The issue arising in the present appeal is against application of provisions of section 40A(2)(a) of the Act in respect of sub-contract payments made by the assessee resulting in disallowance of Rs. 67,66,710/-. 4. Briefly, in the facts of the present case, the assessee was engaged in the business of hiring of earthmoving / mining machinery, besides carrying on the business of contractor and manufacture and sale of cement, concrete pipes and trading in cement....
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.... account of sub-contracting of KIOM work to one of its partners M/s. Shri Bharat Cemco Pvt. Ltd., a company which was having 50% share in the assessee firm. Since the payment was made to one of partners of the assessee firm, the assessee was asked to furnish the details of these development expenses and also to justify the payment made to the partner having regard to the market value of services, which were received by the assessee on account of outsourcing of work. The assessee in reply, submitted the copies of terms of sub-contract dated 10.01.2007 agreed upon between the assessee and its partner, which are reproduced at pages 5 and 6 of the assessment order. The explanation of assessee in this regard was that as per the terms of contract, the assessee had handed over all its plant & machinery to the partner for its operation at KIOM site at Hospet. Since the entire work of Hospet site was handed over to one of the partner, the Assessing Officer was of the view that the assessee should not have spent any amount of expenditure on the Hospet site in addition to the development expenses paid to the partner. The Assessing Officer was of the view that the direct expenses debited under....
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....tion with the provisions of section 40A(2)(a) of the Act and hence, the disallowance was worked out at Rs. 67,55,710/- i.e. 8% of Rs. 8.44 crores. The Assessing Officer held that the said excess payment was to be disallowed in the hands of assessee and hence, addition of Rs. 67,55,710/- was made. 5. The CIT(A) upheld the order of Assessing Officer holding that the assessee had failed to substantiate its claim of having made payment to the said lowest bidder of advertisement in the local newspapers. 6. The assessee is in appeal against the order of CIT(A). 7. The learned Authorized Representative for the assessee pointed out that the entire work was sub-contracted by the assessee to the concern M/s. Bharat Cemco Pvt. Ltd. The entire machinery owned by the assessee was also given to the said concern. However, the financial charges to be paid on loan taken for purchase of said machinery along with depreciation were claimed as expenditure over and above the sub-contract payments made by the assessee. Our attention was drawn to the Profit and Loss Account placed at page 57 of the Paper Book, under which the total contract was for Rs. 10.65 crores and the sub-contract payments were to....
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....res was paid to the said concern. Admittedly, the sub-contractor is related party as defined under section 40A(2)(b) of the Act. The issue arising before us is whether the payments made to the said related party is excessive keeping in mind the market rate of services to be provided by the contractee. 10. Under the provisions of section 40A(2)(a) of the Act, it is provided that where excessive payments are made to related party with regard to fair market value of services rendered by the said related party, then the excessive payment is to be disallowed in the hands of payer. The terms of contract between the assessee and NMDC which was awarded the contract are available on record and are not disputed. Further, there is an agreement to sub-contract the work by the assessee to M/s. Shri Bharat Cemco Pvt. Ltd., under which admittedly, the charges paid were lesser than the amount awarded to the assessee, as per the work contract issued in favour of NMDC. The assessee for the year under consideration had prepared separate financial statements for the two divisions, under which it was carrying on its work i.e. Kolhapur and Hospet divisions. The issue arising before us is relatable to t....