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TMI Blog2023 (11) TMI 282X X X X Extracts X X X X X X X X Extracts X X X X ..... uch 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 anythi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 1,00,00,000/- made by the AO being the amount of services charges paid to Sarabhai Common Services, a division of the holding company, without giving an opportunity to examine additional evidences to the AO?. 3. On the facts and in the circumstances of the case and in law the learned CIT (A) erred in deleting the addition of Rs. 4,56,56,380/- being the value of unaccounted production and sale of Streptomycin and Tetracycline without appreciating the fact that the assessee could not produce any evidence before the AO to prove the captive consumption as directed by the Hon'ble ITAT? 3.1 Whether on the facts and in the circumstances of the case, the Ld.CIT(A) is justified in deleting the addition of Rs. 4,56,56,380/- made by the AO being the value of unaccounted production and sale of Streptomycin and Tetracycline, without giving an opportunity to examine additional evidences to the AO. ? 4. The appellant craves leaves to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal. It is prayed that the order of the CIT(A) on the above issues be set-side and that of the Assessing Officer be restored. 3. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partment carried the matter to the ITAT against the order of the CIT(A). In the Departmental appeal, the grounds pertained to the following additions which were deleted by the CIT(A): i) Disallowance of Rs. 33,65,154/- of corporate service charges paid to Ambalal Sarabhai Enterprises Ltd., the holding company of the appellant. ii) Disallowance of Rs. 26,47,252 being the amount of reimbursement of salary of staff of holding company deputed to the appellant. iii) Disallowance of Rs. 1,00,00,000 out of service charges paid to Sarabhai Chemical Ltd., a division of Ambalal Sarabhai Ltd. us.40A(2)(b) of the Act. iv) Disallowance of Rs. 50,00,000 being the service charges paid to Sarabhai Chemicals u/s.40A(2)(b). v) Disallowance of interest of Rs. 32,31,270 on account of interest free advances given to a subsidiary company. vi) Addition of Rs. 4,56,56,380 for the alleged unaccounted production sale of Streptomycin and Tetracycline. 5.1 The Hon'ble ITAT, Ahmedabad Bench vide order dated 23.3.2012 in respect of the Departmental appeal, set aside the some issues back to the AO. While doing so, they have made certain observations and directions in their order. The L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices debited to ASE Ltd and Rs 2,02,886 paid to BOEPL (Business Executives Organisation Pvt Ltd - another group company). These details are available on page 23 of the PB filed before the CIT(A) ITAT in the original appeal as well as before the AO in the set aside assessment and before me in the present faceless appeal. The debit notes for the same are from pages 17 to 22 of the PB. Page 24 of the PB is the details of Where allocation of service charges for the AY 2003-04, which the assessee has filed to strengthen his claim that these expenses are charged to all group companies every year and that the basis of charge every year is the same. Pages 10 to 14 of the PB are the agreements providing the authority for such charge. I find that that the assessee vide letter dated 17/02/1997 addressed to the then DCIT (Asst) Special Range 7, Ahmedabad has submitted the agreement outlining the scope of services rendered by the parent company to the assessee. The services rendered by ASE Ltd include proposals for foreign collaboration, finance and banking, insurance, legal taxation, secretarial services and Management Audit. The agreement is at pages 10 to 13 of the PB. Page 14 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... needs to be adjudicated against the assessee. 9. In response, the counsel for the assessee submitted that even the ITAT in Para 7 of its order has specifically noted that corporate expenses have been recovered from the assessee and other group companies in the ratio of turnover. Further, it was submitted that even in the assessment order dated 28-03-2013, the assessing officer has admitted that the evidences in the form of debit notes have been filed by the assessee, but the claim of the assessee has been denied primarily on the ground that assessee has not given comparative position of earlier years. It was submitted that Ld. CIT(Appeals) in the second round of litigation vide order dated 19-09- 2022 has amongst various other things also observed that assessee has discharged the burden by providing the details of allocation for assessment year 2003-04 and this has been consistently followed by the Department. Accordingly, in view of the aforesaid facts, there is no infirmity in the order of Ld. CIT(Appeals) so as to call for any interference. Further, the counsel for the assessee submitted that records of the assessee were washed out in floods and further the matter being very ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led for the details of expenses incurred by SCS and the basis of expenses apportioned to different units. 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 us 40A(2)(b). In first appeal, the CIT(A) noted that the appellant was not having its own infrastructure facility for such services and had used the facility from SCS, who supplied such facilities to various units and companies located in the said campus. It was also explained before the CIT(A) that there was no profit element involved in the charges recovered by SCS. It was stated that the transactions are genuine and bona fide and that it was not open to the AO to disregard the transactions shown in the books. The appellant had also explained to the Ld. CIT(A) that section 40A(2)(b) could be invoked in a case where there is tax evasion as clarified by the Circular dated 6.7.1968. The CIT(A) was of the view that the charges are recovered for actual services at cost and there was no basis for invoking section 40A(2)(b). The CIT(A) further held that the AO has to prove that the payment is excessive or unreasonable havi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examine the FMV of services provided, which could only be done if comparative rates of similar service provided by SCS is examined. From the details before me, it is evident that SCS provides services only to its group concerns and not to others, and further that there is no difference in rates charged. To my mind therefore there is no case to invoke sec 40A(2)(b). Lastly, it must be remembered that the AO has made an ad hoc disallowance. Based on this discussion, I delete the disallowance of Rs 1,00,00,000 and allow ground 3. 14. The Department is in appeal before us against the aforesaid relief provided by Ld. CIT(Appeals). Before us, the Ld. DR submitted that the assessee has not been able to produce conclusive evidence to prove that reasonable amount had been charged by SCS to the assessee for the aforesaid services during the impugned year under consideration. In response, the counsel for the assessee submitted that Ld. CIT(Appeals) in the appellate order has correctly observed that same rate has been charged by the SCS to another group company and accordingly, the assessee has been able to reasonably explain the basis for the aforesaid expenses. Further, it was submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3/199 Taxman 271 (Allahabad) (Mag.) ; 4. CIT v. Nestle India Ltd. [2011] 11 taxmann.com 106/199 Taxman 321 (Mag.)337 ITR 103 (Delhi). 15.1 Accordingly, looking into the instant facts and the judicial precedents on the subject, we are of the considered view that Ld. CIT(Appeals) has correctly allowed the appeal of the assessee and no interference is called for in the order passed by Ld. CIT(Appeals). 16. In the result, ground number 2 of the Department s appeal is dismissed. Ground number 3: Ld. CIT(Appeals) erred in deleting the addition of Rs. 4,56,56,380/ - being the value of unaccounted production and sale of Streptomycin and Tetracycline without appreciating the fact that the assessee could not produce any evidence before the AO to prove the captive consumption as directed by the Hon'ble ITAT 17. The brief facts of the case are that during the course of assessment proceedings, AO referred to Schedule K of the Annual Accounts wherein details of opening stock, production and sales of products were given and on the basis of such details, he observed that there is a discrepancy of quantity of Streptomycin and Tetracycline. He therefore, worked out difference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounted sales worked out by him and contention of the assessee that it is explained by captive consumption of these two products and if this is found correct, then no addition is called for. 18. The AO, in the set aside assessment, held that as per Sch. K it was noticed that the production includes captive consumption which is a general remark given at the heading of point no. 17. The AO further noted that Enclosure-3 of tax audit report claimed to contain details of captive consumption of two products, was not found in the file along with the Audited Accounts. Therefore, the AO did not accept the claim that Enclosure-3 was submitted along with the tax audit report and held that the captive consumption of Streptomycin and Tetracycline claimed by the assessee is not supported by documentary proof. The AO therefore retained the original addition of Rs 4,56,56,380. 19. In the second round of appeal, Ld. CIT(Appeals) deleted the additions on this issue with the following observations: 8.6 In the set aside assessment, the AO did not find Enclosure-3 of tax audit report claimed to contain details of captive consumption of two products, therefore held that this was not file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . I therefore delete the addition of Rs 4,56,56,380 and allow ground 4. 20. The Department is in appeal before us against the aforesaid relief provided by the Ld. CIT(Appeals) on this issue. Before us, the Ld. DR relied on the fact that assessee has simply given an expression that the aforesaid discrepancy is on account of captive consumption, but the details of the same have not been furnished by the assessee and the assessee has not been able to demonstrate that the apparent discrepancy is on account of captive consumption itself. In response, the counsel for the assessee submitted that the AO confirmed the addition only on the ground that enclosure 3 is not found on the file. However, it was submitted that the AO has overlooked the fact that these facts were on record before the Ld. CIT(Appeals) as well as before ITAT in the first round of appeal itself. Accordingly, it was submitted that the additions have been confirmed by the AO on an incorrect assumption of facts. Accordingly, it was submitted that looking into the instant facts, Ld. CIT(Appeals) has not erred in facts and in law in allowing the appeal of the assessee on this issue. 21. We have heard the rival content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all mentioned. The assessee also maintains the attendance register of such seconded employees including their leave account, etc. Therefore, it was held that there was no reason for the Assessing Officer to deviate from the stand taken by the Assessing Officer in earlier years and make such disallowance. Accordingly, the CIT(A) held that the amount of service charges represented reimbursement of employees cost deputed to the work of the appellant and the letters addressed to them regarding deputation clearly established that services were rendered by the deputed employees to the assessee. On this basis, as well as the fact that there was no such disallowance in the past AYs, the CIT(A) deleted the addition. 24. In the Departmental appeal before the ITAT, the Hon'ble ITAT set aside the matter back to the AO for verification and examination that the staffs were deputed and whether they have rendered any services to the assessee company. 25. In the second round before the assessing officer, he confirmed disallowance to the extent of ₹ 19,47,252/-, which was confirmed by Ld. CIT(Appeals) with the following observations: 6.6 Before me, the assessee has filed the det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to floods during the impugned year under consideration, it is not possible for the assessee to produce the complete records. However, secondment letters, on sample basis were produced before the assessing officer for his verification, which clearly establish the fact that the employees were in fact seconded to the assessee company and the nature of services rendered were also given in the said secondment letters. In response, DR placed reliance on the observations made by Ld. CIT(Appeals) and Assessing Officer in their respective orders, while partly confirming the addition. 27. We have heard the rival contentions and perused the material on record. In our considered view, looking into the facts of the instant case, the addition deserves to be deleted for the following reasons: firstly, the aforesaid 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. It were the same employees who had been seconded to the assessee company during the earlier assessment years, who continued to be in the employment of the assessee company during the imp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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