TaxTMI 
TaxTMI 
2018 (6) TMI 1695
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....nst inclusive method of service tax payments in respect of inputs services thereby holding the impugned expenditure to be eligible for deduction. Its last grievance is that lower appellate authority has erred in adopted consistency on the issue whereas the relevant facts are totally different in the impugned assessment year vis-à-vis these in other assessment years considered in lower appellate findings under challenge. 3. We come to the relevant facts first. This assessee is a company engaged in corporate insurance business. It mainly derived commission income of Rs.212,51,34,690/- in the relevant previous year from M/s Reliance Life Insurance Company Limited. The Assessing Officer took up scrutiny in its case. He came across assessee's payment in question made to "GTFS" as service charges other than operating expense reimbursement of Rs.128,33,65,679.83. He sought to know the relevant basis thereof. He was of the view that mere making of impugned payment as per relevant agreement was not sufficient reason to accept the same. He considered an addendum to the agreement dated 09.04.2010 prima facie indicating absence of any realistic basis in the impugned payments. Earlier....
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....8,33,65,793/-.This meant that there was no justification to pay the impugned expenditure any more. The Assessing Officer also considered assessee's premium collected of Rs.1114.54 crores for (both fresh as well as renewable) to remark that only its working strength deserved credit for the same. He doubted genuineness of impugned payment in this backdrop of facts. More particularly in view of assessee's payment of Rs.26,47,20,000/- made to the payee on the last date of financial year coming to 31.03.2011 as an artificial liability to reduce its taxable income without availing any services from the said recipient. The Assessing Officer further considered its extensive recruitment drive as well increase in staff strength from 334 in April 2010 to 704 in March, 2011. He therefore observed that assessee's impugned claim had passed over almost 90% of receipt over and above operating expenses to "GTFS" (sister concern) without involving any business expediency therein. All this detailed reasoning resulted in impugned disallowances being made in assessee's hands. 7. The CIT(A) reverses Assessing Officer's action making the disallowance in question with the following discussion:- ....
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....ts and circumstances of the case, has apparently taken an alternative route by surrendering a part of its profits while ensuring a rapid growth of this business, thus off-setting the depression in profits. The appellant has hired the services of a concern that has specialized in the services that were required by the appellant for the implementation of the agreement with RUC. This service provider was Golden Trust Financial Services (GTFS). The appellant entered into an agreement with GTFS and sacrificed a large part of its profits, gaining in the bargain a simplification of its own operations, thereby a cut down on its operational costs and saving on money as well as time that would have been spent on the development of these proficiencies. The appellant was able to achieve a very rapid growth in consequence. This is reflected as under: Business performance and commission earned by the appellant company for the financial years 2008-09 2009-10 and 2010-11 Financial Year Premiums collected (Rs. In crore) Commission earned (Rs in crore) 2008-09 326.52 (fresh premium) 101.54 2009-10 755.48 (First and Renewal) 204.26 2010-11 1114.56 (Fresh and ....
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....ure (including information technology, i.e, software, hardware, networking etc.) These branches and other infrastructure were provided at the disposal of the appellant company, HISL, by GTFS. Now, it is clear that GTFS was providing crucial support to the appellant company for the services that the latter had to provide to RUC. for which, in turn, the appellant company was paid commission. Against this crucial, specialized and extensive support GTFS was entitled to remuneration/Service charges from HISL on two counts for providing the above mentioned two services: (i) One for performing its obligations as pure agent (ii) (ii) Another for making available necessary service through the necessary infrastructure to HISL. Now, the modus operandi of this entire business process was as follows: PAYMENT FLOW FOR THE ENTIRE BUSINESS PROCESS The work flow in this case is that the principal, RUC, gets its business from HISL. In order to ensure the efficiency of works by HISL, the latter employs the services of GTFS. GTFS, in turn gets the-work done through the intervention of i. Its skills, ii. Infrastructure and (iii) The pers....
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.... (iii) Rs. 4,00,00,000/- (Rs four crore) and applicable all taxes for making available necessary services through infrastructure. At the relevant time the applicable rate of service tax on service tax charges was 10.3%. Accordingly the assessee company has paid the following amounts to GTFS: (i) Rs. 61,76,80,000 (rupees sixty one crore seventy six lacs eighty thousand., i.e. Rs. 56,00,00,000/- plus service tax of Rs. 5,76,80,000/- (by applying the service tax rate of 10.3% on Rs. 56,00,00,000) for performing the functions as pure agent. (ii) Rs. 4,41,20,000/- (Rs four crore forty one lacs twenty thousand) i.e. 4,00,00,000/- plus service tax of Rs. 41,20,000/- (b y applying service tax rate of 10.3% on 4,00,00,000/-) for making available necessary services through the infrastructure. In this way the assessee company aid paid to GTFS in total Rs. 66,18,00,000/- (Rupees sixty six crore eighteen lacs) i.e. Rs. 61,76,80,00/- (Sixty one crore seventy six lacs eighty thousand) for performing the functions as pure agent plus 4,41,20,000/- for making available necessary services through infrastructure. GTFS, being an independent entity, ha....
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.... payer as expenses for the same services are not allowed. After due consideration of this aspect, I would tend to agree with appellant on this count. However, the other aspects also need further examination. After examining the material on record, I find that the AO has nowhere doubted any of the individual claims of expenses. He has not been able to bring on record, anything from the books or from the material on record that the said expenses were bogus in nature. The easiest way to check the bona fides of these expenses would have been to examine if the payments made to GTFS were bona fide business ex-penses or not. But the AO has not doubted these expenses in terms of the item 3 of the three types of payments to GTFS listed above. The AO has not doubted that payments were made to the tune of Rs. 128 crore odd on account of reimbursements of payments made by GTFS on account of incentives/ other expenses etc. If there was any doubt as to these payments or the purpose of the said payments or their quantum by GTFS to Network, then this could easily have been verified from the books of GTFS, which was, during the same period, being scrutinized for the same assessment year in....
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....ns. If it distributed all its receipts to the Network then all this would not be possible. It is evident from the above discussions as well as the material on record, in addition, of course, from considerations of business expediency, that GTFS was receiving three i. Commission for serving as a pure agent ii. Payment for making available its infrastructure iii. Reimbursement of commission/incentives/other expenses disbursed to members of Network for obtaining business. This was on account of the three kinds of services that it was admittedly providing, that is, business intervention through the supply of i. its skills, ii. its infrastructure and iii. providing of the persons who are part of Network. It is the persons who constitute the Network who obtain the actual business through clients who are interested in buying insurance policies. The payment in respect of the first two items are obviously governed by the agreement and their addenda. The first addendum increased the amount of remuneration on account of the phenomenal growth posted by the appellant company. Thereafter, this was marginally decreased ....
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....sumptions. The assumption of suppression of suppression of profits by posting of expenses is something that could have been buttressed by examining the affairs of GTFS also which being scrutinized during the same period as discussed earlier. This has not been done. The AO has merely made a cursory mention of a possibility that the two entities, that is, the appellant and GTFS, belonged the same group and that GTFS was working exclusively for the appellant. The AO has not brought on record any evidence to support this assumption, much less establish it beyond doubt. In these circumstances, it is difficult to agree with the findings of the AO on this count also. Examination of the relevant material on record brings forth the following aspects in relation to the AO's suspicion that the two concerns, the appellant, and GTFS were in reality sister concerns: That GTFS did not appear to be a group company of HSIL. The corporate office of both the companies was at different postal addresses. Both the companies had different directors, shareholders and partners and none of these being common for both the entities. Details of the two entities is as below: Height Insuran....
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....ly has no attempt been made at the assessment stage to establish this, but, in fact, such a thing is not borne out by facts. The circumstances, as discussed above, have shown that there was an amount' of business expediency in the appellant's decision of employing the services of a specialized agency like the GTFS. The AO has nowhere doubted the specialized knowledge base, the infrastructure - software as well as hardware - or the virtual army of specialized manpower at the disposal of GTFS. In fact he has admitted that payments to the Network persons were genuine. Even then if there was any doubt that might have existed, it was easy to verify these facts from the scrutiny proceedings that were underway for GTFS in the same period. No doubt has been raised as to the actual expertise available with GTFS. The payments to Network have been accepted along with the purpose for which they were made; the growth of business and the cause for it have been accepted; the nexus between the expertise and the support provided by GTFS and the growth of business of the appellant, as contended by the appellant has not been doubted, the actual payments and the genuineness of these payments h....
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....ment with GTFS provides that the latter would allow the appellant company to use its offices as well as the infrastructure available within these offices. The appellant, during appeal proceedings has explained the reason for increase in the number of personnel and the deployment of such staff by saying that that premium collection during the assessment year 2011-12 was 1,114.56 crores as compared to Rs. 755.48 crores in the assessment year 2010-2011. With the increase in volume of business and in anticipation of further increase in volume of business, staff strength of HISL was increased to 704 in March 2011 from 336 in the beginning of the financial year. He has explained that the -employees of HISL were posted in the branch offices of GTFS located at various places all over India. Their primary duty was to explain the policy details to those who were intending to get insured and guide them in their insurance requirements. The employees of HISL collected the proposal Forms and premium from those intending to get insured and perform necessary preliminary underwriting and thereafter sent the proposal Forms to the principal Insurance Company Reliance Life Insurance Company Limited (R....
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....Co. (P) Ltd. Vs. CIT (1979) 118 ITR 261 (S), are pertinent where it has been held that the assessee was to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction even though there was no compelling necessity to incur such expenditure. Further, within the jurisdictional High Court, in the case of Birla Cotton Spinning & Weaving Mills Ltd. Vs. CIT (1967) 64 ITR 568 (Cal), it was held that though the main objects of business is to earn profits, business purposes are wider than profit-making purposes. Business expediency does not require that expenses should be incurred only for earning immediate profits. Expenses incurred though not directly related to earning of income, may be allowable deductions if they are related to the carrying on of the business. As early as in the case of CIT Vs. Dhanrajgiri Raja Narasingiri (1973) 91 ITR 544 (SC) it was held that it was for the assessee to decide how best to protect has own interest. It is not open to Income-tax departmen....
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....nancial year. On the last day of the Financial Year, GTFS had raised a bill amounting to Rs. 264720000/- on the appellant. This was doubted by the AO by stating that this was not a genuine expense and that this was tantamount to siphoning of money to a group concern - GTFS. In this regard the appellant has submitted that HISL accounts for the bills as and when they are raised by GTFS. Out of Rs. 600000000/-, to be paid to GTFS, bills mounting to Rs. 264720000/- only were raised on the last day of the financial year. The appellant has stated that GTFS is also an income tax assessee and the same amount has also been credited in the books of GTFS and offered for taxations. The appellant has enclosed the Income Tax Return and Financial Statements of GTFS for the assessment year 2011-12 for ready reference. These were placed on Page Nos. 243 to 245 of the Paper Book attached with his written submissions. It was as early as in 1973 that the Apex Court, in Daulat Ram Rawat Mull (1973) 87 ITR 349, laid down the law for the onus when any party to a dispute disagreed with whatever was shown as apparent. The Supreme Court held that the onus of proving what was apparent was n....
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....ore him, have reached the conclusion arrived at by the tribunal/authority. In the present case, it cannot be said that the findings of the AO were based upon any cogent material. This issue becomes all the more serious in view of the undisputed fact that both, the appellant as well the recipient concern, GTFS were being scrutinized during the same period, for the same assessment year and within the same city of Kolkata. There was no dearth of material available with the AO. But from this material, no defect has been brought on record by thee AO to create the expression that the appellant or indeed GTFS was indulging in any creation bogus entries or booking false expenses. It has not even been explained as to how the alleged siphoning of funds was taking place - what was GTFS doing or what was the need for this siphoning GTFS has been subjected to scrutiny and an order u/s 143(3) passed in its case, wherein some additions have been made by the AO; but even after due consideration of the material during the scrutiny proceedings of GTFS, the AO of GTFS has not raised any doubts with regard to the expenses incurred by GTFS in relation to its dealings with either Network or the....
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....00.00 39,708,000.00 06-0910, 07-09-10 GTFS HEIGHT /SC/10- 11/04 Service Charges 11/10/010 44,120,000.00 40,000,000.00 4,120,000.00 4,412,000.00 39,708,000.00 11-10-10, 12-10-10, 27-10-10, 02-11-10 GTFT HEIGHT /SC/10- 1/05 Service Charges 10/01/2011 44,120,000.00 40,000,000.00 4,120,000.00 4,412,000.00 39,708,000.00 12-01- 11, 17- 01-11, 20- 01-11, 21-01-11, 03-02- 11, 24-02-11 GTFS HEIGHT /SC/10- 11/06 Service Charges 24/03/2011 44,120,000.00 40,000,000.00 4,120,000.00 1,103,000.00 43,017,000.00 24-03-11, 25-03-11, 11-04-11, 04-11, 04-05-11, 27-05-11 GTFS HEIGHT /SC/10- 11/07 Service Charges 31/03/2011 264,720,000.00 240,000,000.00 24,720,000.00 6,618,000.00 258,102,000.00 27-05-11, 06-06-11, 11-07-11, 25-07-11, 26-7-11, 29-07-11, 07-09-11, 20-09-11, 22-0911, 23-09-11, 26-09-11, 28-09-11, 29-09-11, 01-10-11 Total 661,800,000.00 Total 43,017,000. 00 618,783,000.00 any specific doub....
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....e circumstances, since this is a legally enforceable agreement casting unequivocal duties and liabilities upon the two parties, the expenses in the hands of the appellant cannot be ignored out of hand. These can undoubtedly be called into question, but this has to be done with material facts and cogent reasoning. This has not been done by the Assessing Officer in the instant case. The rejection of a legally enforceable agreement, out of hand and without ascribing any reasons for doing so, can hardly be upheld in law. During appeal proceedings, the appellant has also argued that the AO has been inconsistent in his treatment of the same kinds of expenses and the identical business arrangement between RLIC, the appellant company and GTFS, over the years. The appellant has submitted that its case had been scrutinized u/s 143(3) of the Act for the AY 2010-11 by the AO. In this year, the AO, under the same facts and circumstances and business arrangements, that had duly been explained to the AO for that AY, that is, 2010-11 had accepted the fact that the service charges paid by assessee to GTFS were bona fide. He in fact had gone further and had made certain disallowances based ....
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....mpugned assessment year and one after the impugned assessment year - being passed on 10.3.2015 and 21.3.2016 respectively, it seemed strange that under identical circumstances, the AO first did not accept the stand of the appellant and disallowed service charges, while in the order passed on the next date mentioned above, the AO not only accepted the very same expenses on account of service charges, but in fact made certain disallowances based on this payment of service tax. In the very next order, the AO once again accepted the bona fides and genuineness and business purpose of the very same service charges. The appellant has submitted that once the AO had taken one stand in one year, it was forbidden that he change it in another year in the interest of consistency. I have examined this aspect of the issue. What the appellant is appealing to is the principle of res judicata from jurisprudence. This simply means that if on any fact and/or law, one particular view is taken then subsequently. if any issue on a similar fact and/or law is to be decided between the same parties, the stand should be same as made earlier. It has been held that in deciding upon lega....
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....the effect of legal decisions establishing the law would be a different matter. If, for instance, the validity of a taxing statute is impeached by an assessee who is called upon to pay a tax for a particular year and the matter is taken to the High Court or brought before this Court and it is held that the taxing statute is valid, it may not be easy to hold that the decision on this basic and material issue would not operate as res judicata against the assessee for a subsequent year". In Radhasoami Satsang vs. CIT (1992) 193 ITR 321 (SC) the Apex Court while examining this principle in detail, made the following observations: " We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year". In South India ....
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....matter of fact that the instant impugned order u/s 143(3) was passed before similar orders were passed for the other two assessment years. Therefore, it cannot be denied that the impugned order was present before the AO at the time of passing the remaining two orders. Despite this the AOs in the other two cases have, after examining the issue - even commenting upon it - accepted the facts to be true. This fluctuating stand of the AO seems to indicate that he was making pure surmises and conjectures and was changing his opinion based on the same facts from year to year. There is nothing on record to indicate that the AO in the case of the impugned order, was in the knowledge of any extra information or that any extra-efforts on terms of inquiries had been made by the AO. There is no law "point that had either arisen or brought to the notice of or relied upon by the AO. From a study of the material on record and the impugned assessment order, it appears that the AO has formed an opinion based on a set of facts that remained unchanged for the other two assessment years. There does not appear to be any material on record to show that this opinion emanated from any persuasive set of fac....
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.... I find that on each and every count, the order of the AO does not stand the tests laid down by law and legal opinion as opined by legal authorities. In these circumstances, I find that I cannot uphold the findings of the AO as regards the subject matter of this ground. The ground is accordingly allowed. 8. Mr. Usman ( CIT-DR) reiterates Revenue's main plea that CIT(A) has erred in law as well as on facts in deleting the impugned disallowance of Rs.66.08 crores of commission paid to M/s GTFS. The assessee on the other hand strongly supports the CIT(A)'s findings under challenge. There is no dispute that the lower authority's discussion extracted in preceding paragraph has considered the entire issue threadbare in view of the relevant clauses in the agreement payer-payee business relations between the two parties instead of group relationship, the payer M/s Reliance Life Insurance Company's business process involving four tier system of service as well as corresponding payments, payee GTFS's agency and infrastructure made available to the assessee on year-to-year basis as well as various addendum developments (supra). Learned CIT DR is fair enough in not doulting assessee's agree....
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....ess of the impugned payments. Mr. Usman at this stage submits that CIT(A) ought to have applied section 40(a)(ia) disallowance as well since the assessee had not deducted TDS at the prescribed rate as per tabulation chart extracted forming part of CIT(A)'s detailed discussion. We fail to agree with the Revenue's instant technical plea. The fact remains that the assessee has filed its payee's computation of income, income tax return as well as the corresponding assessment order sufficiently indicating that the impugned payment had been duly assessed as his case in its hands. Section 40(a)(ia) 2nd proviso inserted in the Act by way of the Finance Act, 2012 with effect from 01.04.2013 prescribe non application of the impugned provision in case the assessee's concerned is not an assessee in default as per section 201(1) 1st proviso. Hon'ble jurisdictional high court's decision in DCIT vs. Tiripati Construction GA No.2146 of 2016 has concluded that the said proviso is a curative one having retrospective effect from 01.04.2005. We therefore decline the Revenue's arguments seeking to invoke u/s 40(a)(ia) of the Act. We further hold that hon'ble jurisdictional high court's land mar....