2012 (6) TMI 79 - AT - Income Tax

Disallowance u/s 40A(2) - payments of commission to relatives and sister concerns - excessive or unreasonable - held that - so long as there is no intention to evade tax and so long as the commission is not shocking, the said commission has to be accepted, particularly in the light of the wordings of sec. 40A(2) of the Income-tax Act and it is not the quantum alone that govern such cases but the fair market value of the goods, services, legitimate needs of the business or profession of the assessee would be guiding factor in terms of sec. 40A(2) of the Income-tax Act.

Summary

Issues:
1. Disallowance of service fees paid to an associate entity under section 40A(2) of the Income-tax Act.
2. Disallowance of sales commission paid to the same associate entity under section 40A(2) of the Income-tax Act.

Analysis:
1. The Revenue challenged the deletion of disallowance of service fees paid to the associate entity, arguing that the explanation provided by the assessee was too general and lacked specificity regarding the services rendered by the entity. The Assessing Officer disallowed the amount, considering it superfluous expenditure unrelated to the business of the assessee. The CIT(A) relied on CBDT Circular and judicial precedents to rule in favor of the assessee, noting that the entity was a tax-paying entity with positive income, and there was no intention to evade tax. The CIT(A) deleted the disallowance based on these grounds, emphasizing the fair market value of services and legitimate business needs.

2. The Revenue also contested the deletion of disallowance of sales commission paid to the same associate entity. The Revenue argued that the explanation provided by the assessee was insufficient to justify the payment. The CIT(A) considered the details provided by the assessee, including agreements, email correspondence, and TDS certificates, to support the nature of services rendered. The CIT(A) concluded that the disallowance was not justified, citing relevant judicial precedents and the positive income status of the associate entity. The CIT(A) emphasized the need to assess the reasonableness of payments based on fair market value and benefits derived by the assessee.

3. The Tribunal upheld the CIT(A)'s decision, emphasizing the need to determine whether the payments to the associate entity were excessive or unreasonable under section 40A(2) of the Income-tax Act. The Tribunal noted that the assessee had provided sufficient evidence of services rendered and agreements in place. Relying on judicial precedents and the fair market value principle, the Tribunal affirmed the deletion of disallowances. The Tribunal highlighted the importance of considering the legitimate needs of the business and benefits derived from the payments. Ultimately, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision based on the evidence presented and legal principles applied.