TaxTMI 
TaxTMI 
2018 (1) TMI 844
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.... to M/s Talbros Automative Components Ltd. Which is clearly in violation of the section 40A (2)(b) of the I.T. Act and no reasonableness has been proved by the assessee with regard to the fair market value of the services/facilities, legitimate needs of the business and benefits accrued for the services/facilities for which the payment is made and no such services was needed by the assessee company uptill A.Y. 2007-08 also." 4. At the outset, ld. counsel for the assessee submitted that, this issue stands covered in favour of the assessee by the judgment of the Tribunal in assessee's own case for the Assessment Year 2010-11. He further submitted that the ld. CIT (A) too has followed the said Tribunal order. 5. On the other hand, ld. D.R. strongly relied upon the order of the Assessing Officer. 6. After considering the relevant finding given in the impugned orders as well as the order of the Tribunal, we find that Assessing Officer had noted that the assessee had paid 'management fees' worth Rs. 1,23,27,262/- to its sister concern, namely, M/s. Talbros Automotive Components Ltd. The Assessing Officer has made the addition after observing and holding as under:- i. Th....
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....eing discussed about contravention of provisions of section 40A of the IT Act' 1961, i.e., non-adhering of the statute and the entire arrangement of affairs from view of reasonability. viii. The case laws relied upon by the assessee are very old and general in nature and are mainly related to the provisions of section 37(1) & 36(1 )(iii) except one namely CIT vs. Padmani Packaging (P) ltd. [2006] which is with reference to provisions of section 40A(2). In the said case law, only the issue paying higher commission expenses was discussed. In the judgement of Romesh Kumar vs. CIT [2014], the issue has been decided in favour of revenue for the commission expenses issue. In view of above facts, the management fees paid by the assessee company worth Rs. 1,23,27,262/- are being disallowed and are added to the total income." 7. The ld. CIT (A) following the order of the Tribunal for the assessment year 2010-11 has deleted the said addition. 8. We find that the Tribunal has discussed this issue in detail and has finally concluded in the following manner:- We heard the rival submissions and perused the material on record. It appears from the assessment order that the ....
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....rough excessive or unreasonable payments relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases. 14. In CIT Vs. Edward Keventer (P.) Ltd. [1972] 86 ITR 370, the Calcutta High Court considering identical provision in 1922 Act, it was held that the section places two limitations in the matter of exercise of the power. The section enjoins the Assessing Officer in forming any opinion as to the reasonableness or otherwise of the expenditure incurred must take into consideration (i) the legitimate business needs of the company and (ii) the benefit derived by or accruing to the company. The legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman. It is not for the Assessing Officer to dictate what the business needs of the company should be and he is only to judge the legitimacy of the business needs of the company from the point of view of a prudent businessman. The benefit derived or accruing to the company must also be considered from the angle of a prudent businessman. The term "benefit" to a company in relat....
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.... on this in her order, and even the assessee company in its ground of appeal to CIT(A) has admitted that the proper allocation of expenses to Haridwar Unit (Tax Exempt) from Bawal unit have not been made in its books of account and admitted to allocate Rs. 3,70,168/- to Haridwar Unit. This shows that the assessee company has not followed the act to properly allocate the expenses to its tax exempt unit. The criterion of taking the product ratio for allocation of the expenses between the units was very vague and unreasonable. As it is turnover which bears a proportionate relation with the expenses rather than no. of products." 11. So far as the first issue is concern, admittedly it is similar to the ground raised in the assessment year 2009-10, and therefore, the finding given therein, that it is covered by the order of the Tribunal for the assessment year 2010-11, we hold that ld. CIT (A) has rightly followed the order of the Tribunal in deleting the said addition and accordingly, ground no.1 raised by the Revenue is dismissed. 12. Now so far as the issue raised in ground no.2 is concern, the brief facts are that the assessee company is having two units, one at Bawal which is ....
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....encashment 41631.24 156612.76 Repair & maintenance 642308.52 2416303.5 Rent paid for residence of directors 298028.85 1121156.2 Rates & taxes 45759.21 172141.79 Insurance 118077.33 444195.67 Travelling 221013.24 444195.67 Sales Promotion expenses 55454.97 208605.03 Packing freight & forwarding 455677.11 1714213.9 Printing & stationary 64567.02 242894.98 Postage, telephone & courier 143457.72 539674.28 Remuneration to Auditors 114450 430550 Management consultancy fees 9412043.13 35407210 Miscellaneous expenses 1286671.26 4840334.7 Foreign exchange fluctuation 1178849.49 4434719.5 Bank charges 26357.73 99155.27 14. Accordingly, he made the disallowance on account of excess expenditure claimed in the taxable unit at Rs. 1,20,30,861/- 15. Ld. CIT (A), first of all noted that assessee is maintaining separate books of account and separate bank accounts for both the units and all the expenses pertaining to each unit have been debited to that unit. He also took note of the fact that in Bawal Unit, there are 10 major customers and 185 products which are b....
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....it. Therefore, Foreign Exchange Fluctuation can be apportioned in the ratio of cost as under: - Head Cost Foreign Exchange Fluctuation Haridwar Unit Bawal Unit (FEF) Cost FEF Cost Raw Material 166003649 4962865 0 0 166003649 Tools etc. 13841900 579174 1389692 58145 12452271 Bought- out-parts 12622032 102231 0 0 12622032 TOTAL 192467581 5644270 1389692 58145 191077952 (Note:- Also FEF amounting to Rs. -30699./- pertains to export from Bawal unit.) d) Therefore, if at all some allocation is to be done, it could only be Rs. 3,70,168/- (278825 + 33198 + 58145) from Bawal unit to Haridwar unit, of course, this is without prejudice to our claim that , no further allocation is required considering the facts of the case. 14.1 At this juncture, it would be relevant to take note of the fact that in the assessment year 2012-13 also, similar allocation has been done by the Assessing Officer on turnover basis for following expenses:- Expenses allocated as per turnover Head of expense Hardiwar Unit Bawal Unit Disallowance of excess expenses debit....
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....aterial is transferred to Haridwar unit. It is only semi-finished product which is transferred to Haridwar unit. The total cost of import includes cost of raw material, tools and dies and Bought- out-parts. Bought-out-parts and raw material are used only in Bawal unit. It is only tools and consumables, a minor part of which, are transferred to Haridwar unit. Therefore, Foreign Exchange Fluctuation can be apportioned in the ratio of cost as under: - HEAD COST Forex Fluctuation Haridwar Unit Bawal Unit Raw-material 246030203 7421011 Cost / FEF 51168714 / 1543402 Cost / FEF 194861489 / 5877609 Tools, etc. 18566994994 1040811 576139 / 32297 17990855 / 1008514 Brought out parts 25072272 1663626 0/0 25072272 / 1663626 TOTAL 234055632 10125448 51744853/1575699 237924349/8549749 d) Therefore, if at all some allocation is to be done, it could be only be Rs. 22,03,072/- (5,92,873 + 34,500/- + 15,75,699/-) from Bawal Unit to Haridwar Unit-------. 14.3 Ld. CIT (A), accordingly, confirmed the addition of Rs. 22,03,072/- on account of allocation of expenses. 15. Before us th....
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....allowable under 40A (2)(b), then allocation of this expenses should also be directed. 18. Ld. Counsel, on this issue submitted that the assessee has allocated management fees to Hardwar unit in A. Y. 2012-13. The first year of Hardwar unit was A. Y. 2011-12. The management fees was not allocated in A. Y. 2011-12 on the following grounds:- i) Since A. Y. 2011-12 was the first year of Hardwar unit which was commissioned on 31/03/2010, the management decided to run the plant on its own. This unit was dedicated unit for the new plant of M/s Hero Moto Corp which was opened in Hardwar. There was no other client for Hardwar unit. ii) In A.Y. 2011-12, the Hardwar unit purchased intermediate product from Bawal unit and further did remaining manufacturing to get final product. Therefore, all the processes for manufacturing were not done in Haridwar unit which is very clear from page 128 of the paper book which shows that raw material consumed in Haridwar unit is Nil. For partial manufacturing, the staff at Hardwar unit was competent enough and no need was felt for guidance either from M/s. Nippon Leakless Corporation, Japan or from M/s. Talbros Automotive components Ltd.....
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....mmon, but he too appears to have not examined the accounts of the units as to which expenditures are identifiable qua each unit. Therefore, we are of the opinion that the matter should be restored back to the file of the Assessing Officer for a limited purpose to examine:- * Firstly, to identify the expenditure qua each unit from the separate ledger accounts; and if the expenditures debited are attributable for the particular unit, that is, the expenditure pertains to Bawal unit only then same should be allowed from the profits of Bawal Unit or vice-versa for the Haridwar unit and in that case no allocation should be made for such expenditures. * Secondly, only in case where expenditures are not identifiable and are common in nature that alone should be considered for the allocation purpose. * Lastly, after identifying the common expenditure, the details of which would be provided by the assessee, the Assessing Officer will also examine as to whether the allocation key should be based on 'product ratio' or 'turnover ratio', because, there could be certain expenses, for example, sales promotion, packing and freight etc., definitely the same should be alloc....