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TMI Blog2016 (8) TMI 605X X X X Extracts X X X X X X X X Extracts X X X X ..... has been made mandatory for international transactions with Associated Enterprises (A.E.). Simply saying that these provisions do not apply to a domestic company transactions with its A.Es. for this particular A.Y. does not suffice. When the assessee has chosen to use these transfer pricing provisions to demonstrate its claim that the expenditure in question is at arm’s length and that the same is not excessive or unreasonable, the revenue authorities are bound to rebut this claim of the assessee with reasons before coming to a conclusion to the contrary. When these transfer pricing reports submitted by the assessee are not rejected, we have to conclude that the assessee has discharged the burden of proof that lay on it on this issue. On this ground also the assessee succeeds. In both the cases the assesses have filed detailed alternative submissions in support of its contentions as to why the payment made to Amway is reasonable and commensurate with the nature of services provided by them and to demonstrate that the disallowance is bad in law. We allow the appeals of the assessees in both the cases by deleting the disallowance made u/s 40A(2)(b) of the Act for the reason th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct for the following reasons. i. That a substantial portion of the revenue is being passed on to their sister concern, which is not commensurate with the services rendered. ii. The manpower and infrastructure has been created by Amway, is for the purpose of its own business but it is providing the same manpower and infrastructure to Amserve and providing services as per their agreement. However, it may be noted that it is not incurring any additional expenditure in creating and maintaining this infrastructure. iii. In the absence of break-up of data processing services, infrastructure services and customer facilitation services, it is not possible to ascertain as to what extent the resources of Amway were utilized in providing the services. iv. Comparison with similar transaction in respect of some unrelated parties is not possible. v. That Amway has been paying taxes on the amount received does not give unfettered rights to the assessee to make payments to its related party at its sweet will. vi. The contention that for invoking section 40A(2)(b) of the Act, learned AO has to look at the fair market value of the goods and services, legitimate business needs and b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant s case. In view of the above discussion, l agree with the findings of the AO that database charges paid during the year were excessive and unreasonable, The AO has given detailed reasons before computing the disallowance of ₹ 14,38,57,868/-. 4.1. He further held as follows: (a) The plea of the assessee that the data base is not static as number of distributors are added and deleted during the year is irrelevant for the reason that the data base for the F.Y. 2005-06 was new and the assessee has paid 39.38% of its total revenue to Amway. (b) The argument that despite payment of ₹ 34.25 crores during the year under consideration the assessee earned higher margins than in the industry, does not help in supporting the reasonableness of payment u/s 40A(2) of the Act. The assessee has paid only ₹ 29.39 crores in the next F.Y. (c ) The argument that Amway India has a very different business of direct selling and will not share its customers with everybody and that Amway India is only 50% shareholder in the joint venture will not make any difference. (d) For the A.Ys 2006-07, 2007-08, 2008-09 and 2010-11, the amount paid as data base char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(a) of the Income Tax Act, 1961, a prerequisite, in the complete absence of any valid material, for forming an OPINION that the assessee has incurred an expenditure which is excessive or unreasonable having regard to the fair market value of the goods, services or facilities. ii. The burden lay on the AO to establish by leading positive material that the expenditure incurred is an excessive or unreasonable having regard to the fair market value of the database. There is no material with the A.O. in this regard. iii. Section 40A(2)(a) could not be invoked unless the expenditure has been incurred with a motive of tax evasion and has resulted into or would even result in a loss of revenue as laid down in CBDT Circular No.6-P dt. 6.7.1968. iv. The Payee Company has paid taxes on substantially higher income and thus there is no loss to revenue. Hence it is wrong to hold that there is diversion of income to save tax. The transaction is tax neutral. v. Without prejudice and even otherwise, unless there is a clear finding supported by valid and tangible material that the fair market value of the database taken from the sister-concern, is excessive when compared with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racts the data on weekly/daily basis, as per its need and solicit insurance business. In addition to the use of the data base, the assessee was also entitled to make available the insurance promotion technology to Amway Distributors and their customers and also to participate in various Seminars and Conferences organised by Amway for its distributors, and it was allotted time to talk about various insurance products. This enabled the assessee to directly interact with the prospective customers. This made it easy for the assessee to sell insurance products because of the goodwill of M/s Amway India P.Ltd. for which it charges a fee. For this, the assessee is paying substantial payments to Amway India, year after year, for more or less the same data base with only minor changes. (b) A perusal of the agreement demonstrate that there is no exclusivity Clause in the agreement between Amway and Amsure and Amway is free to provide data base to any other third party. (c) Amway had not incurred any additional cost for creating the data base. Still huge amount is charged from Amsure on this account. No data or break-up has been given by the assessee to prove the expenditure of use of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the A.O. ignored that the assessee benefitted from, the goodwill, data and net work of Amway and the unique features of the data base of Amway. He submitted that the A.O. ignored and disregarded the evidence produced by the assessee and that the payment is made in pursuance of an agreement and the genuineness of the services is not doubted. 11 . Rival contents heard. On a careful consideration of the facts and circumstances of the case, orders of lower authorities and case laws cited, we hold as follows. 12. The assessee company Amserve Consultants Ltd. was established in the year 2004 as a joint venture between Amway India Enterprises P.Ltd. and Poland Life Assurance Co.Ltd., South Africa with a 50:50 share holding pattern. The assessee company is in the business of providing advisory, consultancy and business support services to companies engaged in insurance business. It earned income from service charges primarily from collection of forms, data entry and quality check services etc. It was engaged in policy processing and other related services for insurance business of Max New York Life Insurance Co. Ltd. Amserve had agreed to provide various data processing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e excessive or unreasonable shall not be allowed as a deduction. 12.4. The Central Board of Direct Taxes vide its circular no.6-B dated 6th July, 1968 at para 74 and 75 stated as follows. 74. It may be noted that the new provision is applicable to all categories of expenditure incurred in businesses and professions, including expenditure on purchase of raw materials, stores or goods, salaries to employees and also other expenditure on professional services, or by way of brokerage, commission, interest, etc. Where payment for any expenditure is found to have been made to a relative or associate concern falling within the specified categories, it will be necessary for the Incometax Officer to scrutinize the reasonableness of the expenditure with reference to the criteria mentioned in the section. The Income-tax Officer is expected to exercise his judgment in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases. (Emphasis ours). From this Circular of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 4 held as follows. 4. We have heard the learned advocates appearing for both sides. W7e have also perused the order passed by the Tribunal dated 21st Oct., 1999 which is impugned by the Revenue in the present appeals. We find that the following facts were established before the Tribunal and the same have been accepted by the Revenue even before us. (i) That the assessee apart from paying handling charges @9 1/2 per cent to its sister concern, have paid handling charges at the same rate to other agents viz., M/s A.K.Travels, M/s Om Travels and M/s Jet Age Travels. (ii) For asst. yrs. 1986-87 and 1987-88 the assessee had paid the handling charges @ 10 per cent to the sister concern of the assessee and such charges paid were considered to be reasonable by the appellant. (iii) For asst.yrs. 1989-90 and 1990-91 the assessee had reduced the payment of handling charges to 9 1/2 per cent to its sister concern. The AO has considered the payment of commission to the sister concern in the asst. yr. 1989-90 and allowed the claim after due scrutiny. For asst. yr. 1990-91 also the claim of the assessee @9 1/2 per cent has been allowed though the same has not been dealt w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the business or profession of the assessee or the benefit derived by or accruing to the assessee from such services is also to be kept in mind. After applying this test if it is found that the expenditure is excessive or unreasonable excess, excess or unreasonable portion of the expenditure is to be disallowed. We have also kept in mind the provisions of sub Section 2 (b) of Section 40-A of the Act as per which the burden is upon the assessee to establish that the price paid by it is not excessive or unreasonable as in this case Mr.SushilPandit was holding substantial portion of share namely 65 percent in the assessee company. When we apply the aforesaid principle in the facts of this case, we find that the assessee has been able to discharge the burden that the price paid by it to Mr. SushilPandit is not excessive or unreasonable. 12. It will also be useful to refer to the judgment of Allahabad High Court in Abbas Wazir (P.) Ltd. v. CIT [2004] 265 ITR 77/[2003] 133 Taxman 702 wherein the High Court held that even while invoking the provisions of section 40A(2) of the Act, the reasonableness of the expenditure for the purpose of business has to be judged from the point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Revenue does not dispute the fact that M/s Amway India Enterprises as well as the assessee are both assessed at the maximum marginal rate. The transaction is tax neutral. Under these circumstances it has to be held on facts that this payment is not made with an intention to evade tax. In fact the income of the Payee Company is much more than that of the assessee. Thus the Circular No.6P dt. 6th July,1968 read with the decision of the Hon ble Bombay High Court in the caseof Indo Saudi Services (P) Ltd. (supra) apply to the facts of this case. What is the amount that should have been paid for these services is to be decided by the Assessing Officer by keeping in view the requirements of business and the point of view of the business man. 13. It is further found that, in the case of Amserve Consultants, the AO chose to disallow 25% of the payments made for new policy business and 75% of payments made for renewal of policies. Similarly in the case of Amsure Insurance Agency, the AO disallowed 90% of the data base charges paid. Only 10% was allowed as reasonable. When the matter travelled to the Ld.CIT(A) 35% of the data base charges were allowed and the balance 65% was disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and against the Revenue. (ii) The Hon ble Supreme Court in the case of CIT vs. Walchand and Co. P.Ltd. 65 ITR 381 held that In applying the test of commercial expediency for determining whether expenditure was wholely and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be adjudged from the point of view of the business men and not of the Revenue. (iii) In the case of Principal CIT-II vs. Gujarat Gas Financial Services Ltd. 233 Taxman 532 (Guj.) it is held as follows. 13. As has been found by us in the preceding para of this judgement that the respondent company as well as the parent company, both are assessed to income tax at the maximum marginal rate and, therefore, it cannot be said that the service charge is paid to the respondent company at an unreasonable rate to evade income tax. Even the Ld.Counsel Mr.Bhatt for the revenue does not dispute this fact. 14. We are in agreement with the observations made by the Tribunal as well as the ratio laid down by the coordinate Bench of this Court in the case of Enviro Contro Associated P.Ltd. (supra) Ashok J Patel and Indo Saudi Services (Travel) P.Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssitates a finding about the fair market value of such services. There is no such finding in the present case. In these circumstances as also bearing in mind entirety of the case, we are of the considered view that the disallowance made by the A.O. was devoid of legally sustainable basis. The learned CIT(A) was thus quite justified in deleting the same. Ground no.2 is thus dismissed. (Emphasis ours). The proposition of law laid down by this Bench of the ITAT, when applied to the facts of this case, we have to come to a conclusion that the disallowance has to be deleted. (v) The Hon ble Gujarat High Court in the case of CIT vs. Enviro Control Associated P.Ltd. (2014) 43 taxmann.com 291 (Guj.) at para 12 held as follows. We are in complete agreement with the reasoning and observations made by the learned CIT(A) confirmed by the learned ITAT. In absence of any material before the Assessing Officer, such as comparative chart etc. to suggest that any excessive payment was made to M/s. Pollucon Engineers and the 10% ad hoc disallowance was made on the payment made under Section 40A(2)(b) of the Act to M/s. Pollucon Engineers solely on the ground that M/s. Pollucon Eng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave filed detailed alternative submissions in support of its contentions as to why the payment made to Amway is reasonable and commensurate with the nature of services provided by them and to demonstrate that the disallowance is bad in law. 15 . The Ld.Sr.D.R. relied on the findings in the order of the Ld.CIT(A) to rebut these alternative submissions. We do not propose to go into these arguments for the reason that we have already come to a conclusion that the disallowance is bad in law and the other contentions would become academic in these cases on hand. 16. In view of the above discussion we allow the appeals of the assessees in both the cases by deleting the disallowance made u/s 40A(2)(b) of the Act for the reason that the assessee has proved that the price paid is at arm s length and not excessive or unreasonable and as the disallowance made on ad-hoc basis is arbitrary. There is no evasion of tax also warranting invocation of S.40A(1) of the Act. Hence we delete the disallowance in both the cases to the extent confirmed by the Ld.CIT(A). 17. In the result both the appeals of the assesses are allowed. Order pronounced in the Open Court on 29th June, 2016. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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