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TMI Blog2010 (10) TMI 1065X X X X Extracts X X X X X X X X Extracts X X X X ..... ief granted by the CIT(A) in reducing the quantum of disallowance to 20 per cent of the amount paid to the parent company as against disallowance of 30 per cent resorted to by the Assessing Officer. As both of these grounds are interconnected, we will take up these grounds of appeal together. 3. The relevant material facts are as follows. The assessee is a domestic company engaged in the business of production and release of advertisements in various media for its clients. The assessee is a wholly owned subsidiary of TLG India Private Limited (TLG, in short), which, in turn, is a subsidiary of Leo Burnett Worldwide Inc. In the course of its assessment proceedings, the Assessing Officer noticed that the assessee has, inter alia, paid a sum of Rs. 1,13,11,640 to TLG India Pvt. Ltd. towards charges for common facilities. The Assessing Officer noted that these payments fell within purview of section 40A(2)(b) of the Act, the assessee was, accordingly, required to furnish full details regarding the nature of this payment. It was submitted by the assessee that the payments for common facility mainly represents corporate allocation of payroll costs of top management of the organization L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g arms length price can be made in the absence of any concrete working/computation of the payments made by assigning cost to each item of services received from the holding company. Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the CIT(A) but without much success. While the CIT(A) upheld the disallowance in principle, he reduced its quantum from 30 per cent of the amount claimed for deduction to 20 per cent of the claim. None of the parties is satisfied - the assessee is aggrieved of the disallowance confirmed by the CIT(A) and the Assessing Officer is aggrieved of the partial relief granted by the CIT(A). Both the parties are thus in cross appeals before us. 4. We have heard the rival contentions and perused the material on record. The main thrust of learned counsel's submission is that the Assessing Officer has proceeded on erroneous assumption that the excessive claim for deduction of common facility expenses has been made on tax consideration whereas since both the companies i.e., the assessee-company and its parent company are having sufficient taxable profits, the deduction is tax neutral from the overall group per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt that he finds to have been paid by the assessee in excess of such fair market value of the services alone can be disallowed under the said section. It is, therefore, condition precedent without resorting to the disallowance under section 40A(2)(b). So far as the expenditure being excessive or unreasonable having regard to the fair market services is concerned, that the fair market value of such services is to be determined first. Unless this benchmark is set, there cannot be any question of resorting to disallowance under section 40A(2)(b) for excessive payment vis-a-vis fair market value of services. In the case of Batlivala & Karanai v. Asstt. CIT [2005] 2 SOT 379 (Mum.), a coordinate Bench of this Tribunal has observed as follows : "Section 40A(2) provides that where the Assessing Officer is of the view that expenditure incurred by the assessee, in respect of which payment is made to the specified persons, is excessive or unreasonable having regard to the market value of goods, services or facilities for which the payment is made, or the legitimate needs of the business of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formula does not by itself make the expense disallowable under section 40A(2)(b). It is essential to bear in mind that the fact the company to which the payment has been made is a parent company of the assessee and commercial realities do not dictate rigidity a in such approach in intra group dealings. The basis of allocation of expenses may be less than perfect, but what renders a deduction disallowable is its being excessive and unreasonable vis-a-vis the fair market price of such services. There is no finding about latter in this case. The disallowance under section 40A(2)(b) can come into play when the payment is excessive or unreasonable and the foundation of disallowance thus must rest on categorical findings that the payments for services is indeed excessive or unreasonable vis-a-vis fair market value of the services in the case before us. In view of these discussions, and bearing in mind entirety of the case, we are of the considered view that the impugned disallowance was indeed uncalled for on the facts of this case. In this view of the matter, we uphold the grievance of the assessee. The grievance of the Assessing Officer, which is only against the quantum of disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment was made separately under the head 'legal and professional fees' to the parent company and that even in assessment year 2004-05, payment was only Rs. 4,01,460. The CIT(A) further noted that expenditure in this year during the assessment year 2005-06 has increased by 13 times and that also without any supporting documents to substantiate the same. It was in this backdrop, that the CIT(A) upheld the disallowance in principle though reduced the quantum to Rs. 20 lakhs. None of the parties is satisfied - the assessee is aggrieved of the disallowance confirmed by the CIT(A) and the Assessing Officer is aggrieved of the partial relief granted by the CIT(A). Both the parties are thus in cross appeals before us. 10. Having heard the rival contentions and having perused the material on record, we are unable to find much substance in assessee's grievance. We have noted that the assessee has not been able to furnish specific particulars and complete details about these third party payments and the basis of allocation. While there is no finding about the fair market value of these services, all the relevant details are not on record as well. No evidence of actual third party expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approved by the Central Government. It was thus contended that the consideration paid by the assessee-company to TLG India Pvt. Ltd., is a reasonable payment and should be allowed as such. Copy of the agreement dated 19-4-2004 entered into by the assessee with TLG India P. Ltd., was also filed. As per the terms of the said agreement, the assessee company was allowed to use huge proprietary material such as BBS, Hot Button Research, Idol, Blurbs, MBTI etc., case studies in advertising industry, research papers, etc., and in consideration, the assessee was to pay an amount not exceeding 5 per cent of the gross capitalized billings of the company, as a royalty. The Assessing Officer noted that while at 5 per cent of the gross revenue, the assessee was to pay Rs. 2,90,59,527, the assessee has actually paid a sum of Rs. 1,20,00,000 and that there is no working to support such payment. There is no justification to support the quantum of payment made by the assessee. The Assessing Officer further noted that fixing the royalty at 5 per cent with reference to gross receipt is quite unrealistic and erratic. It was also observed by the Assessing Officer that just because the parent company h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and excessive devoid of any commercial consideration and business motive. However, keeping in view the fat that M/s. TLG India Pvt. Ltd., is the holding company and has to discharge certain responsibilities towards the supervision, monitoring and reputation of the business of the assessee-company, I consider it fit to restrict the payment to 50 per cent of Rs. 1,20,00,000 thereby disallowing remaining Rs. 60,00,000 in the hands of the assessee." Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal but without much success. The CIT(A) upheld the disallowance in principle but restricted the same to 20 per cent of the royalty paid. None of the parties is satisfied - the assessee is aggrieved of the disallowance confirmed by the CIT(A) and the Assessing Officer is aggrieved of the partial relief granted by the CIT(A). Both the parties are thus in cross appeals before us. 14. Having heard the rival contentions and having perused the material on record, we are of the considered view that the impugned disallowance indeed deserves to be deleted. We have perused the agreement dated 19-4-2004 between TLG India P. Ltd., and the assessee-company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t payment to a sister concern cannot be disallowed under section 40A(2)(b) of the Act unless tax avoidance motive is established, is also relevant. In the present case, learned Departmental Representative does not dispute that both the companies i.e., the assessee and parent companies are taxed at the same rate and have sufficient taxable profits. This is also so stated by the assessee in the statement of facts, which have not been controverted before us. The disallowance under section 40A(2)(b) can come into play when the payment is excessive or unreasonable and the foundation of disallowance thus must rest on categorical findings that the payments for services is indeed excessive or unreasonable vis-a-vis fair market value of the services in the case before us. In view of these discussions, and bearing in mind entirety of the case, we are of the considered view that the impugned disallowance was indeed uncalled for on the facts of this case. In this view of the matter, we uphold the grievance of the assessee. The grievance of the Assessing Officer, which is only against the quantum of disallowance, is thus rendered academic and is only fit to be dismissed summarily. 15. Ground N ..... X X X X Extracts X X X X X X X X Extracts X X X X
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