AI Drafter 
TaxTMI 
TaxTMI 
2016 (8) TMI 605
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.... 5,61,56,010/-. The Assessing Officer (hereinafter referred to as the AO) passed an order u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') determining the total income at Rs. 20,00,13,880/- inter alia making a disallowance u/s 40A(2)(b) of the Act of data processing charges paid to M/s Amway India Enterprises Pvt.Ltd. (Amway for short). 2.1. M/s Amsure Insurance Agency Ltd. ('Amsure' for short) is a company which derives income from the business of providing services as a corporate insurance agency. This Company filed its return of income on 29.10.2009 declaring income of Rs. 3,61,16,150/-. The assessment was completed u/s 143(3) of the Act on 30.12.2011 determining total income at Rs. 34,43,66,150/- inter alia making a disallowance u/s 40A(2)(b) of the Act on payment made for data base charges paid to M/s Amway India Enterprises Pvt.Ltd. ('Amway' for short). 3. Aggrieved both the assesses are in appeal. The A.O. has made a disallowance u/s 40A(2)(b) of the Act for the following reasons. i. That a substantial portion of the revenue is being passed on to their sister concern, which is not commensurate with the services rendered. ii. The manpo....
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.... of the appellant company. Moreover, in the case of Glaxo Smithkline Asia (P) Ltd., the issue involved was of transfer pricing, which is not the case, in the case of the appellant company not only this payment to Amway India is not comparable with any other independent concern, but its own conduct on account of percentage of payment of total revenue as database charges to Amway India differs from year to year. The appellant has not provided the break-up as to what extent the resources of Amway in respect of data processing services, infrastructure services and customer facility services are used by the appellant company. The Hon'ble Supreme Court in the case of Upper India Publishing House (P) Ltd. v CIT, (1979) 117 ITR 569 (SC) has held that whether a particular expenditure is excessive and reasonable or not is essentially a question of fact and it does not involve any question of law. In view of the above, the case of Glaxo Smithkline Asia (P) Ltd. is totally distinguishable on facts from the appellant's case. In view of the above discussion, l agree with the findings of the AO that database charges paid during the year were excessive and unreasonable, The AO has given detailed r....
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.... AO/CIT(A) erred in ignoring the transfer pricing report submitted by the appellant to justify the arm's length nature of the transaction for payment of Data Processing Charges to M/s Amway India Enterprises (4). That on facts and in law the orders passed by Assessing Officer {herein above referred to as the "AO") and the Commissioner of Income Tax (Appeals) {herein above referred to as the "CIT(A)"} are void ab intio and bad in law. (5). That the appellant craves for leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. 6. We have heard Shri C.S.Aggarwal, the Ld.Counsel for the assessee and Shri Ravi Jain, Ld.CIT, D.R. on behalf of the Revenue. 7. The arguments of Shri C.S.Agarwal, the Ld.Sr.Advocate representing the assessee are as follows. i. That the Learned DCIT acted without jurisdiction for invoking the provisions of section 40A(2)(a) of the Income Tax Act, 1961, a prerequisite, in the complete absence of any valid material, for forming an "OPINION" that the assessee has incurred an expenditure which is "excessive or unreasonable" having regard to the fair market ....
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....nditure incurred of Rs. 34,25,00,000 is not merely highly arbitrary but also lacks any judicial acceptance. x. Rule of Consistency has not been followed. xi. Lastly the disallowance made has resulted in to double taxation for the same very income -Once in the hands of the assessee and another in the hands of its associate enterprise. xii. He also relied on a number of case laws which we would be dealing during the course of our findings as and when necessary. 8. The Ld.CIT, D.R. Shri Ravi Jain on the other hand vehemently opposed the contentions of the Ld.Counsel for the assessee. He made oral as well as written submissions. The gist of his arguments is: (a) A perusal of the agreements demonstrate that the assessee has been granted license for use of the data base, only to promote and sell insurance policies to its distributors and their customers, which is accessed by the assessee on a real time basis. The assessee extracts the data on weekly/daily basis, as per its need and solicit insurance business. In addition to the use of the data base, the assessee was also entitled to make available the insurance promotion technology to Amway Distributors and their customers....
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....f CIT vs. NEPC India Ltd. reported in 303 ITR 271 (Madras H.C.) and CIT vs. Shatrunjay Diamonds (2003) 261 ITR 258 (Bombay H.C.). 9. He relied upon the order of the A.O. as well as that of the Ld.CIT(A) and also relied on certain other case laws which we would be discussing as and when necessary, during the course of our finding. 10. In response the Ld.Counsel for the assessee filed written submissions. He argued that under the section a disallowance can be made only when the A.O. is of the opinion that, the expenditure incurred is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made. He submitted that, in the case on hand the AO has not done such an exercise as admittedly there is no comparative data available. He submitted that the disallowance was made on an arbitrary basis. 90% of the expenses incurred were disallowed on adhoc basis. He submitted that the A.O. ignored that the assessee benefitted from, the goodwill, data and net work of Amway and the unique features of the data base of Amway. He submitted that the A.O. ignored and disregarded the evidence produced by the assessee and that the p....
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..... Sec.40 'A' of the Income Tax Act reads as follows. Expenses or payments not deductible in certain circumstances. 40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession". (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any personreferred to in clause (b) of this sub-section, and the [Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. 12.4. The Central Board of Direct Taxes vide its circular no.6-B dated 6th July, 1968 at para 74 and 75 stated as follows. 74. It may be noted that the new provision is applicable to all categories of expenditur....
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....ed to make it compulsory for the taxpayer to maintain Books of Accounts and other documents on the lines prescribed in Rule 10D and obtain an audit report from his CA that proper documents are maintained; Though the Court normally does not make recommendations or suggestions, in order to reduce litigation occurring in complicated matters, the question of extending Transfer Pricing regulations to domestic transactions require expeditious consideration by the Ministry of Finance and the CBDT may also consider issuing appropriate instructions in that regard." (Emphasis ours). The Hon'ble Apex Court has laid down that fair market value of a transaction between associate domestic Enterprises can be determined by using Transfer Pricing Methodologies and study. 12.6. The Hon'ble Bombay High Court in the case of CIT vs. Indo Saudi Services (P) Ltd. (2009) 219 CTR 562 Bombay at para 4 held as follows. "4. We have heard the learned advocates appearing for both sides. W7e have also perused the order passed by the Tribunal dated 21st Oct., 1999 which is impugned by the Revenue in the present appeals. We find that the following facts were established before the Tribunal and the same....
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....rred to the CBDT Circular no.6P dated 6.7.1968 at para 11 as under. "11. We may also refer to the scope of S.40A(2) as explained by CBDT in Circular no.6P, dated 6.7.1968. The CBDT clarified that while examining the reasonableness of expenditure the AO is expected to exercise his judgement in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases." Thereafter it was held as follows. "7. The question whether the expenditure is excessive or unreasonable in a given case has to be examined keeping in mind the services (with which we are concerned in the present case) for which payment is made. In the process the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to the assessee from such services is also to be kept in mind. After applying this test if it is found that the expenditure is excessive or unreasonable excess, excess or unreasonable portion of the expenditure is to be disallowed. We have also kept in mind ....
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....onsidered judiciously, dispassionately without any bias of any kind from the view-point of a reasonable and honest person in business. The aforesaid judgment of Calcutta High Court was affirmed by the Apex Court in CIT v. Edward Keventer (P.) Ltd. [1978] 115 ITR 149 . In the same line is the judgment of Bombay High Court in the case of CIT v. Shatrunjay Diamonds [2003] 261 ITR 258/ 128 Taxman 759." (Emphasis ours). 12.8. In this judgement at para 7, the Jurisdictional High Court has laid down that the burden is upon the assessee to establish that the price paid to a related party by it, is not excessive or unreasonable. Thus the argument of the Ld.Counsel for the assessee that this burden of proof is on the Revenue is contrary to the propositions of law laid down by the Jurisdictional High Court. 12.9. In the case on hand the Revenue does not dispute the fact that M/s Amway India Enterprises as well as the assessee are both assessed at the maximum marginal rate. The transaction is tax neutral. Under these circumstances it has to be held on facts that this payment is not made with an intention to evade tax. In fact the income of the Payee Company is much more than that of t....
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....nditure could be gone into only for the purpose of determining whether, in fact, the amount was spent. Once it is established that there was a nexus between the expenditure and the purpose of the business, the Revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case. We need not go into any hypothetical issue in this case in view of the accepted position that the factum of services rendered by the CDL has not been refuted by the Revenue. It needs no reiteration that the settled position in law is that no businessman can be compelled to maximise his profits. The obvious answer to the first question is in the affirmative, in favour of the assessee and against the Revenue." (ii) The Hon'ble Supreme Court in the case of CIT vs. Walchand and Co. P.Ltd. 65 ITR 381 held that "In applying the test of commercial expediency for determining whether expenditure was wholely and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be adjudged from the point of view of the....
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....the benchmark to be set as to what is a fair market value of the services question and then the expenditure in excess of the said benchmark is to be disallowed but then such benchmark cannot be in terms of percentage of payment by the assessee. For this reason alone, the impugned disallowance indeed deserves to be disallowed. We have also noted that in the present case, there is no dispute about the facts of service being rendered and there is no benchmark set for as to what would constitute a fair market value of the services in question. Unless there is a clear finding that the market value of the services taken from the sister-concern is less than the price at which the services are obtained, there cannot be an occasion to apply the disabling provisions of s. 40A(2). This exercise, therefore, necessitates a finding about the fair market value of such services. There is no such finding in the present case. In these circumstances as also bearing in mind entirety of the case, we are of the considered view that the disallowance made by the A.O. was devoid of legally sustainable basis. The learned CIT(A) was thus quite justified in deleting the same. Ground no.2 is thus dismissed." ....