TaxTMI 
TaxTMI 
2026 (2) TMI 1366
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....ork India Private Limited, is engaged in the business of media services, including media consultancy and strategy. For the Assessment Year 2014-15, the assessee filed its return of income on 22.12.2014 declaring total income of Rs. 20,76,320/-. The case was selected for scrutiny and the assessment was completed by the Assessing Officer under section 143(3) of the Act determining the total income at Rs. 1,42,70,810/- after making, inter alia, disallowances under section 40(a)(ia) and under section 37(1) read with section 40A(2)(b). The CIT(A) confirmed the additions. 3. The issue involved in the grounds of appeal before us relates to the disallowance of salary recharge and reimbursement of expenses amounting to Rs. 62,50,720/- under section 37(1) read with section 40A(2)(b) of the Act. The relevant facts, as emerging from the assessment order, are recorded hereunder. 4. The Assessing Officer observed from the details of expenses claimed under the head "salary and wages" that the assessee had debited an amount of Rs. 46,23,220/- paid to M/s. Aegis Media India Pvt. Ltd. and Rs. 16,27,500/- paid to M/s. Carat Media Services Pvt. Ltd., which were described by the assessee as "sala....
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.... Carat Media Services Pvt. Ltd. to assist the assessee in achieving its business targets, and also to provide details of services provided by the assessee to its clients through such personnel, in order to examine whether there was any duplication of expenses. 9. In reply, the assessee submitted that no specific person was deputed by the group concerns exclusively for the assessee company and that the salary recharge related to centralised finance, IT and administration departments. The assessee further stated that it was part of a multinational group having five entities in India, namely M/s. Aegis Media India Pvt. Ltd., M/s. Posterscope Outdoor Advertising Pvt. Ltd., M/s. Carat Media Services India Pvt. Ltd., M/s. Doosra Brand Communications Pvt. Ltd. and M/s. Vizeum Media Services India Pvt. Ltd., and that in order to minimise duplication of expenses, Aegis and Carat recruited common employees on their payroll and such employees provided services to all five entities. It was stated that the cost of such centralised departments was charged to each entity on the basis of revenue of each entity. 10. On examination of the above explanation and the material on record, the Asses....
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....g Pvt. Ltd. Those disallowances were confirmed by the CIT(A). However, the assessee has not challenged those disallowances before the Tribunal and the present appeal is confined only to the disallowance of salary recharge and reimbursement of expenses amounting to Rs. 62,50,720/- under section 37(1) read with section 40A(2)(b). 15. In appeal before the CIT(A), the assessee reiterated that the salary recharge represented common employee cost for centralised services availed by the assessee from group entities. It was contended that both M/s. Aegis Media India Pvt. Ltd. and M/s. Carat Media Services Pvt. Ltd. were domestic companies assessed to tax at the same rate as the assessee and that the salary recharge had been duly offered to tax in their hands. It was further submitted that details of employees in respect of whom salary cost was recharged had been furnished and that the expenditure was incurred wholly and exclusively for the purposes of business. 16. The CIT(A), however, did not accept the said explanation. He noted that during the assessment proceedings the Assessing Officer had specifically called upon the assessee to furnish the names and addresses of the personnel ....
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....e Appellant in its income liable to tax. 1.4 The Learned CIT(A) erred in not appreciating the fact that the Appellant submitted the details of employees employed by M/s. Aegis Media India Pvt. Ltd. and M/s Carat Media Services Pvt. Ltd in respect of whom salary cost was recharged by the Appellant for centralized services availed. 1.5 The Learned CIT(A) grossly erred in not appreciating the fact that these are common employee cost, and the learned AO has not disallowed the said expenditure by stating that the same are not incurred for the purpose of business. The Appellant craves to add, alter, amend, substitute and/or modify in any manner whatsoever modify all or any of the foregoing grounds of appeal at or before the hearing of the appeal. 18. During the course of hearing before us, the learned Authorised Representative (AR) reiterated the factual submissions made before the lower authorities and drew our attention to the documents placed in the paper book. It was submitted that copies of the cost sharing agreements entered into between the assessee and the group entities had been filed, which clearly evidenced that employees were shared for rendering....
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....pointed out that as per clause 23 of the tax audit report and the related party disclosures, M/s. Aegis Media India Pvt. Ltd. held 100 per cent ownership interest in the assessee during the relevant year, whereas no such substantial interest existed in the case of M/s. Carat Media Services India Pvt. Ltd. Consequently, according to the learned Authorised Representative, payments made to Carat Media could not be subjected to disallowance under section 40A(2) at all. 21. It was further submitted that even in respect of payments made to M/s. Aegis Media India Pvt. Ltd., the third and crucial condition prescribed in section 40A(2), namely, that the expenditure should be excessive or unreasonable having regard to the fair market value of the services, the legitimate business needs of the assessee or the benefit derived therefrom, had not been satisfied. The learned AR pointed out that the Assessing Officer had not recorded any finding that the salary reimbursement was excessive or unreasonable with reference to the fair market value of the services or the benefit derived by the assessee. On the contrary, the Assessing Officer had merely doubted the arrangement on the ground that the ....
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....re both the assessee and the payee concern are assessed to tax at the same rate, and there is no allegation of tax evasion, disallowance under section 40A(2) on the ground of excessive or unreasonable payment is not justified. It was submitted that in the present case also both Aegis and Carat were taxable at the same rate as the assessee and, therefore, there was no motive or effect of tax evasion in making the impugned payments. 25. The learned Departmental Representative (DR), on the other hand, relied upon the orders of the Assessing Officer and the CIT(A). He submitted that the assessee had sought to place reliance on additional documents in the form of audited annual accounts and income-tax returns of M/s. Aegis Media India Pvt. Ltd. and M/s. Carat Media Services India Pvt. Ltd. for the relevant period, as reflected in the list of documents filed. It was pointed out that these documents, were not produced before the Assessing Officer or before the CIT(A). The learned DR accordingly submitted that, to the extent reliance is placed on these additional documents, the matter may be restored to the file of the Assessing Officer for verification of the same and for examining whe....
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....ite specific requisition, the assessee could not bring on record material to demonstrate the actual nature of services rendered by such employees or the basis of quantification and charging of such services. He also noted that the agreements relied upon did not specify clear terms for charging salary or the mechanism of apportionment and, therefore, upheld the action of the Assessing Officer under section 37(1) read with section 40A(2)(b). 30. At this stage, it is necessary to examine the scope of section 40A(2). The provision permits disallowance of expenditure only where the Assessing Officer is of the 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 the benefit derived by the assessee therefrom. Thus, the formation of an opinion that the expenditure is excessive or unreasonable is a sine qua non for invoking section 40A(2). On perusal of the assessment order, we find that the Assessing Officer has not recorded any finding that the amount of salary recharge is excessive or unreasonable with reference to the fair market....