2011 (4) TMI 118 - HC - Income Tax

Addition - excessive or unreasonable expenditure - Payment to specified persons u/s 40A(2)(b) - Held that - The assessee had shown that the purchase price had been more or less the same in dollar terms in this and earlier years - By placing this material on record the assessee had discharged initial onus cast upon it. Thereafter the onus thus shifts on the department to demonstrate as to how the price was excessive or unreasonable - Decided in the favour of the assessee

Issues Involved:
1. Whether the ITAT erred in upholding the CIT(A)'s order deleting the addition made by the Assessing Officer under section 40A(2)(b) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Background and Relationship:
The assessee is a company jointly promoted by Samsung Electronics Company (SEC), Korea, and its Indian associates. SEC holds a 74% equity stake in the assessee-company and controls its operations, including appointing 5 out of 7 directors and designating the Managing Director. The assessee imports raw materials from SEC for manufacturing various products, with the value of imports being substantial (e.g., Rs. 131,27,62,956 in the assessment year 2000-01).

2. Assessing Officer's Position:
The Assessing Officer (AO) treated SEC, Korea, as a person specified under section 40A(2)(b) of the Income-tax Act due to its controlling stake in the assessee-company. The AO questioned whether the prices of imported raw materials were at arm's length or excessive. Despite the assessee's explanation that the prices were competitive and accepted by customs authorities, the AO disallowed 2% of the purchase price, presuming the prices to be excessive due to the parent-subsidiary relationship.

3. CIT(A) and ITAT Decisions:
The assessee appealed to the Commissioner of Income-tax (Appeals) [CIT(A)], who ruled in favor of the assessee, stating there was no basis for invoking section 40A(2) as the imports were at reasonable prices. The Income-tax Appellate Tribunal (ITAT) upheld this decision, dismissing the revenue's appeals.

4. Evidence from Customs Authorities:
During arguments, the assessee presented orders from the Commissioner of Customs, which confirmed that the prices of imported materials were at arm's length and not influenced by the relationship between SEC and the assessee. These orders, dated 13-4-1998, 23-3-2001, and 23-1-2003, supported the assessee's claim of reasonable pricing.

5. Assessing Officer's Oversight:
The AO ignored substantial evidence provided by the assessee, including consistent pricing over the years and acceptance by customs authorities. The AO's presumption of excessive pricing was based solely on the parent-subsidiary relationship without concrete evidence.

6. Legal Precedents:
The judgment referenced the Supreme Court case Upper India Publishing House (P.) Ltd. v. CIT, which established that whether an expenditure is excessive is a question of fact. Similarly, the Delhi High Court in Shriram Pistons & Rings Ltd. supported this view, making the applicability of section 40A(2)(b) an academic question in the absence of a finding of excessive expenditure.

7. Onus of Proof:
The appellant argued that the onus was on the assessee to prove the reasonableness of prices. However, the court noted that the assessee had discharged this onus by providing consistent pricing data and customs acceptance. The onus then shifted to the department to prove the prices were excessive, which it failed to do.

Conclusion:
The court concluded that the findings of fact by CIT(A) and ITAT that the prices were reasonable and not excessive were correct. Therefore, the provisions of section 40A(2)(b) were not applicable. The appeal was dismissed, affirming the decisions of the lower authorities.

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