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2023 (11) TMI 282 - AT - Income TaxAddition of corporate services charges paid - assessee paid service charges to its holding company for advisory services on corporate matters being provided by the management and senior executives of the holding company - AO disallowed the claim on the ground that the details of services rendered were not provided - CIT(Appeals) allowed the appeal of the assessee on the ground that this issue was covered in favour of the assessee for earlier assessment year - HELD THAT - CIT(Appeals) has correctly allowed the appeal of the assessee on this issue for the following reasons firstly, the assessee has filed comparative chart for assessment year 2003-04 to strengthen its claim that these expenses are charged to all group companies every year and that the basis of charge every is the same; secondly, the assessee has furnished the relevant agreements providing authority for such charge in which it has been clearly mentioned that the basis of charge is the ratio of turnover of each group company and that the costs would be allocated based on such turnover key; thirdly, with respect to direction of the ITAT to give a comparison, the assessee has duly furnished the comparison with assessment year 2003-04, wherein similar payments as for the impugned assessment year were made and therefore, in our considered view Ld. CIT(Appeals) has correctly observed that the directions of ITAT have been met and lastly, it is also fact that this matter is very old pertaining to assessment year 1994-95 and owing to floods at that time, it was not possible for the assessee to produce the complete factual records. Decided in favour of assessee. Addition u/s 40(A) - service charges paid to division of the holding company - According to the AO, these details were not submitted and he therefore made a lump sum addition of Rs. 1 crore, holding that the service charges were unreasonable - second round of appeal before Ld. CIT(Appeals), he allowed the appeal of the assessee - HELD THAT - CIT(Appeals) has correctly pointed out that the assessing officer has not brought anything on record to show/demonstrate that SCS has charged an unreasonable amount to the assessee for the aforesaid services - assessee has given a comparative basis for similar services charged by SCS to another group company and the said services were charged on the same rate to the assessee as well. Further, there is no basis for the assessing officer to make an ad hoc disallowance of Rs. 1 crore and the same was made on a purely ad hoc basis. In our view, CIT has also taken into consideration the fact that the assessee has been able to demonstrate that the services were charged by SCS to the assessee only by way of reimbursement of costs and no excessive sum was charged to the assessee for the aforesaid services. The assessing officer has not been able to bring anything conclusive to controvert the aforesaid findings made by Ld. CIT(Appeals) in the first round of appeal as well. In the recent case of Technip Energies Italy 2023 (3) TMI 204 - ITAT DELHI as held that AO cannot invoke Sec. 40A(2) without demonstrating excessive unreasonable expenses. Decided in favour of assessee. Unaccounted production and sale of Streptomycin and Tetracycline - assessee could not produce any evidence before the AO to prove the captive consumption as directed by the Hon'ble ITAT - CIT(A) deleted the addition - HELD THAT - Assessee has correctly submitted that the aforesaid details of captive consumption have been duly certified by the auditors of the company and the details thereof were filed before the assessing officer for his consideration. The aforesaid company being a pharmaceutical company, the accounts of the company are subject to audit under the Companies Act, Tax Audit and also there is Cost Audit of the accounts of the company. CIT(Appeals) in the instant facts has given a categorical finding that the assessing officer has confirmed the disallowance on the basis of an incorrect assumption of facts. While allowing the relief to the assessee on this issue, Ld. CIT(Appeals) made a specific observation that the reconciliation of quantities of 2 products was as per Encl 3 to Sch K of the TAR, which was filed along with original return - Decided in favour of assessee. Disallowance being salaries of employees deputed to the assessee by its holding company - assessee submitted that copies of secondment letters were produced on sample basis before the assessing officer for his verification - HELD THAT - As employees had not been deputed to the assessee company during the impugned year under consideration but the employees had been seconded to the assessee company during the earlier assessment years, following the principles of consistency, disallowance cannot be made for the impugned year under consideration since the employees had not been seconded during this year but had been seconded in the earlier years and they continue to be employed by the assessee during the impugned year under consideration. Also observed that the assessee had furnished copies of secondment letters on sample basis before the assessing officer for his verification. The contents of the aforesaid secondment letters have not been disputed by the assessing officer. Accordingly, assessee has reasonably discharged its onus, wherein copies of secondment letters were furnished before the assessing officer for his verification. Further, the matter being very old pertaining to assessment year 1994-95, it would not be possible for the assessee to produce complete records, especially in the light of the fact that during the impugned year under consideration the records of the assessee were destroyed owing to floods - Decided in favour of asssessee.
Issues Involved:
1. Deletion of addition of Rs. 33,65,154/- for corporate services charges paid to Ambalal Sarabhai Enterprises Ltd. 2. Deletion of addition of Rs. 1,00,00,000/- for service charges paid to Sarabhai Common Services. 3. Deletion of addition of Rs. 4,56,56,380/- for unaccounted production and sale of Streptomycin and Tetracycline. 4. Disallowance of expenses of Rs. 19,47,252/- for salaries of employees deputed from Ambalal Sarabhai Enterprises Ltd. Issue-wise Comprehensive Details: Issue 1: Deletion of Rs. 33,65,154/- for Corporate Services Charges The assessee paid service charges to its holding company for advisory services. The AO disallowed the claim due to lack of details. The CIT(A) allowed the claim based on consistency with earlier years and provided evidence. The ITAT remanded the case to the AO to examine the basis of expenses. The AO confirmed the addition again, but the CIT(A) deleted it, noting the consistent basis of allocation and the inability to provide records due to the age of the case. The ITAT upheld the CIT(A)'s decision, finding no infirmity in the observations made. Issue 2: Deletion of Rs. 1,00,00,000/- for Service Charges to Sarabhai Common Services The AO disallowed Rs. 1 crore out of service charges paid to Sarabhai Common Services, citing lack of evidence for the rate's reasonableness. The CIT(A) deleted the addition, noting the charges were at cost and consistent with other group companies. The ITAT remanded the case to the AO for further examination. The AO confirmed the addition again, but the CIT(A) deleted it, noting that the assessee provided comprehensive details and the charges were consistent across group companies. The ITAT upheld the CIT(A)'s decision, finding no basis for the AO's ad hoc disallowance. Issue 3: Deletion of Rs. 4,56,56,380/- for Unaccounted Production and Sale The AO added Rs. 4,56,56,380 for unaccounted sales of Streptomycin and Tetracycline based on discrepancies in Schedule K of the Annual Accounts. The CIT(A) deleted the addition, noting the discrepancies were due to captive consumption. The ITAT remanded the case to the AO for further examination. The AO confirmed the addition again, citing lack of documentary proof for captive consumption. The CIT(A) deleted the addition again, noting the reconciliation provided by the assessee and the AO's failure to follow ITAT's directions. The ITAT upheld the CIT(A)'s decision, finding no error in the observations made. Issue 4: Disallowance of Rs. 19,47,252/- for Salaries of Deputed Employees The AO disallowed Rs. 19,47,252/- for salaries of employees deputed from Ambalal Sarabhai Enterprises Ltd., citing lack of evidence. The CIT(A) confirmed the disallowance, noting the assessee provided deputation letters for only 11 out of 25 employees. The ITAT upheld the CIT(A)'s decision, noting the assessee's inability to prove deputation for all employees. The assessee argued the matter was old and records were destroyed in floods, but the ITAT found the CIT(A)'s decision reasonable given the evidence provided. Conclusion: The ITAT dismissed the Department's appeal and allowed the assessee's cross objection, upholding the CIT(A)'s decisions on all issues.
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