THE PR. COMMISSIONER OF INCOME TAX, CIT (A) vs. M/S. MANIPAL HEALTH SYSTEMS PVT. LTD.,

Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside the disallowance made under section 40A(2) of the Act in respect of service charges paid to the company, namely, MEMG International Pvt. Ltd., even though the conditions for invoking said provision are fully satisfied in the case of the assessee?

Heard Shri.E.I.Sanmathi, learned Standing Counsel for the Revenue and Shri.R.V.Easwar, learned Senior Advocate for the Assessee.

Brief facts of the case are, assessee is a multi-specialty hospital. Assessee filed its returns for the A.Y.2 2009-10. The AO3 made disallowances of Rs. 66,54,726/- under Section 40A(2) of the Income Tax, Act 19614 for the service charges paid to its holding company, M/s. MEMGIIPL5. On appeal, the CIT(A)6 partly allowed assessee's appeal and confirmed the disallowance. On further appeal, the ITAT has

Shri. Sanmathi, for the Revenue, praying to allow the appeal, submitted that:  the ITAT has erred in setting aside the disallowance made under Section 40A(2) of the Act by holding that the AO has not doubted the payment nor it is held as excessive;  the ITAT has also erred in setting aside the disallowance in respect of service charges paid to the company, namely, M/s. MEMGIIPL;  as per Section 40A(2) of the Act only "legitimate needs of the business" is allowable as expenditure and, as such, the AO has rightly made the disallowance.

Shri. Easwar, for the assessee, supporting ITAT’s order, submitted that assessee had entered into an

We have carefully considered the rival contentions and perused the records.

Undisputed facts of the case are, assessee has entered into a Service Agreement with its holding company M/s. MEMGIIPL. For the services rendered by the holding company, the assessee pays 0.5% of the Total Turnover as fees to M/s. MEMGIIPL.

Section 40A(2) reads as follows: 40A(1) xxxxx

It is clear from the above provision that where the payment is made to a related party, if in the opinion of the AO, the payment made is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made, it has to be disallowed. Therefore, the onus lies on the AO to bring on record the comparable values to disallow the charges paid by the assessee as unreasonable and excessive, when compared to fair market value.

Shri. Easwar submitted that the fair market value of the services is 2 to 2.5% and the same was not denied by the Revenue. In the instant case, admittedly, assessee has paid 0.5% of the Total Turnover as fees to M/s. MEMGIIPL.

We have perused the AO’s order. The AO has recorded that assessee company is ‘unduly benefitting’ the holding company and derives the legitimate profits of the

The ITAT has rightly held that the AO has not doubted the payment nor held the payment as excessive even though in terms of Section 40A (2) only ‘legitimate needs of the business’ is allowable as expenditure. Thus there is no material on record to support AO’s opinion. Therefore, we find no error in the order passed by the ITAT.

Hence, the following: ORDER (i) Appeal is dismissed. (ii) The questions of law are answered in favour of the assessee and against the Revenue.