MDINDIA HEALTHCARE SERVICES (TPA) PVT.LTD,,PUNE vs. INCOME-TAX OFFICER,, PUNE

Briefly, in the facts of the case, the assessee had declared payments made to parties covered under section 40A(2)(b) of the Act in its tax audit report. The Assessing Officer noted that total payments made to Shri Brij Inderlal Sharma, director of the company was ₹ 1.08 crores. The assessee was asked to provide the nature of services rendered by the said director along with details of his contribution for earning incentives and compensation. It was explained that he was Chairman of the company and had vast experience in marketing and business techniques and he had founded the assessee company in the year 2000. His work profile was also explained before the Assessing Officer, which is reproduced under para 4 of assessment order. The Assessing Officer noted that huge amount of incentive or bonus of ₹ 80 lakhs was paid by assessee to its director. The Assessing Officer also noted that

Before the CIT(A), the contention of assessee was that the said incentive was authorized by the Board Resolution. It was further mentioned that the said incentive was offered to taxation by Shri Brij Sharma and disallowance in the hands of assessee company would amount to double taxation. It was also pointed out that managerial remuneration paid in the past year had been accepted by Assessing Officer and incentive paid to Shri Rajnish Sharma was also accepted. It was also pointed out that transaction was revenue neutral and reliance was placed on the decision of Hon'ble Supreme Court in the case of CIT Vs. Glaxo Smithkline Asia (P.) Ltd. reported in 195 Taxman 35 (SC). The assessee also pointed out that provisions of section 36(1)(ii) of the Act were not applicable. The CIT(A) refers to Audit Report’s Note 19.6 of Managerial Remuneration and also takes note of Resolution

The assessee is in appeal against the order of CIT(A).

The learned Authorized Representative for the assessee pointed out that the authorities below have failed to consider the factual aspects correctly. He pointed out that CIT(A) allowing deduction of ₹ 40 lakhs in the hands of assessee on the analogy the same incentive was paid to other director was wrong. The learned Authorized Representative for the assessee here pointed out that actually ₹ 90 lakhs was paid to other director i.e. Shri Rajnish Sharma. The learned Authorized Representative for the assessee referred to the chart under para 6.5 at page 17 of CIT(A)’s order and pointed out that total incentive was ₹ 1.70 crores i.e. ₹ 80 lakhs to Shri Brij Sharma and ₹ 90 lakhs to other director Shri Rajnish Sharma. The first plea raised by assessee was that the transaction was tax neutral as the rates of taxes in the hands of assessee company and directors were same, though admittedly, Shri Brij Sharma offered incentive in the year of receipt. In this regard, reliance was placed on the ratio laid down by Hon'ble Supreme Court in CIT Vs. Glaxo Smithkline Asia (P.) Ltd. (supra) and Pune Bench of Tribunal in Arihantam Infraprojects (P.) Ltd. Vs. JCIT (2016) 156 ITD 425 (Pune-Trib.). He further pointed out that the Tribunal

The learned Departmental Representative for the Revenue on the other hand, pointed out that the Resolution of payment of commission is placed at page 35 of Paper Book, under which ₹ 80 lakhs was paid to Shri Brij Sharma and ₹ 40 lakhs to Shri Rajnish Sharma.

The learned Authorized Representative for the assessee in rejoinder again referred to the chart mentioned in the order of CIT(A) and pointed out that in audited Balance Sheet, sum of ₹ 1.70 crores was debited as incentive to the directors though admittedly, in the Resolution there was some mismatch in the figures. He further stated that the said mismatch was never put to the assessee during appellate proceedings.

We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against claim of deduction on account of incentive paid to director Shri Brij Sharma. Admittedly, during the year under consideration, total incentive of ₹ 1.70 crores was paid to directors as against ₹ 1.20 crores paid in the preceding year. The said fact is mentioned in Audit Report’s Note No.19.6 Managerial Remuneration. The details are tabulated under para 6.5 at page 17 of appellate order. The aforesaid details declares the incentive of ₹ 1.70 crores for the year, out of which ₹ 80 lakhs was paid to Shri Brij Sharma and ₹ 90 lakhs was paid to Shri Rajnish Sharma. Though the authorities below and even the learned Departmental Representative for the Revenue before us has referred to the Resolution passed by the company,

The Hon'ble Supreme Court in the case of CIT Vs. Glaxo Smithkline Asia (P.) Ltd. (supra) and also the Hon’ble Bombay High Court in CIT. Vs. Indo Saudi Services (Travel) Private Limited (2009) 310 ITR 306 (Bom) in the facts before them, had held that where the commission has been paid to the directors and taxes have been paid by the said directors on its income, then no disallowance was warranted in the hands of assessee company. Hence, no disallowance was warranted under section 40A(2)(a) of the Act. This proposition was applied by the Tribunal in Arihantam Infraprojects (P.) Ltd. Vs. JCIT (supra) and vide para 21 it was observed as under:- “21. Another aspect to be kept in mind while allowing the claim of the assessee is that where the commission has been paid to the directors and the taxes have been paid by the said directors on its income, then no disallowance is warranted in the hands of the assessee company. The Hon’ble Bombay High Court in CIT. Vs. Indo Saudi Services (Travel) Private Limited (supra) have laid down the proposition that where the payee has been paid incentive commission, then there is no tax avoidance and hence, no disallowance under section 40A(2)(b) of the Act. Applying the same simili to the facts of the present case, the assessee company had paid the commission to the directors, who in turn had declared the same in their individual return of income, on which

Before parting, we may deal with the objections of Assessing Officer that the said incentive is not to be allowed as deduction in view of the provisions of section 36(1)(ii) of the Act. This issue was also dealt with by the Tribunal in Arihantam Infraprojects (P.) Ltd. Vs. JCIT (supra) and vide para 22, it was observed as under:- “22. The CIT(A) while disallowing the claim of assessee had found support from the ratio laid down by the Mumbai Special Bench of Tribunal in Dalal Broacha Stock Broking (P) Ltd. Vs. Addl.CIT (supra). The Delhi Bench of Tribunal in K.L. Concast Pvt. Ltd. Vs. Addl.CIT (supra) while deciding the issue of commission paid to the managing director and its allowability under section 36(1)(ii) of the Act, observed that where the commission was treated as part and parcel of salary by the assessee company as well as the managing director and tax deduction was made under section 192 of the Act treating the commission as part of salary, then the disallowance of commission paid to managing director was not justified by applying the provisions of section 36(1)(ii) of the Act. Reliance in this regard was placed on the ratio laid down by the jurisdictional High Court in AMD Metplast Pvt. Ltd. Vs. DCIT (supra). In view thereof, the reliance placed upon by the Revenue on ratio laid down by the Mumbai Special Bench of Tribunal in Dalal Broacha Stock Broking (P) Ltd. Vs. Addl.CIT (supra) was held to be not correct, in view of the decision of Hon’ble High Court, which was binding on all the subordinate Courts and Tribunals working within the jurisdiction of such High Court. The decision of Mumbai Special Bench of Tribunal is not binding, in view of the ratio laid down by the Hon’ble Delhi High Court in series of decisions as referred to by us in the paras hereinabove and consequently, we find no merit in the reliance placed upon by the CIT(A).”

The said issue was decided relying on the ratio laid down by the Hon’ble High Court of Delhi in AMD Metplast Pvt. Ltd. Vs. DCIT (2012) 341 ITR 563 (Del). In view of the dictate of the Hon’ble High Court of Delhi, it was held that reliance placed upon by the Revenue on the ratio laid down by Mumbai Special Bench of Tribunal in Dalal Broacha Stock Broking (P) Ltd. Vs. Addl.CIT (2011) 131 ITD 36 (Mum) (SB) was misplaced. It may be pointed out that the Assessing Officer in present case had also relied on the decision of Mumbai Special Bench of Tribunal and disallowed the claim in the hands of assessee. However, applying the dictate of Hon’ble High Court of Delhi in AMD Metplast

In the result, the appeal of assessee is allowed.