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

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ITA/817/2018HC KarnatakaKAHC01051318201812 October 2023Bench: P.S.DINESH KUMAR,C.M. POONACHA8 pages
AI SummaryDismissed

What did the High Court hold?

The High Court dismissed the Revenue's appeal, confirming the ITAT's decision. It held that the Assessing Officer failed to provide comparable values or demonstrate that the service charges paid were excessive or unreasonable compared to the fair market value, as required by Section 40A(2).

What were the facts?

The assessee, a multi-specialty hospital, paid service charges to its holding company, M/s. MEMGIIPL. The AO disallowed these payments under Section 40A(2) as excessive, which the CIT(A) partly confirmed. The ITAT subsequently set aside this disallowance.

What were the issues?

Whether the ITAT was correct in setting aside the disallowance under Section 40A(2) when the Assessing Officer did not establish that the service charges paid to a related party were excessive or unreasonable compared to fair market value.

Which sections of the Income-tax Act were involved?

Section 40A(2)

AI-generated summary — verify with the full judgment below

I.T.A No.817/2018

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 12TH DAY OF OCTOBER 2023 PRESENT THE HON’BLE MR. JUSTICE P.S. DINESH KUMAR

AND THE HON’BLE MR. JUSTICE C.M. POONACHA

INCOME TAX APPEAL NO.817 OF 2018

BETWEEN:

1.

THE PR. COMMISSIONER OF INCOME-TAX, CIT (A) 5TH FLOOR, BMTC BUILDING 80 FEET ROAD, KORAMANGALA BENGALURU-560 095

2.

THE JOINT COMMISSIONER OF INCOME-TAX RANGE-5, PRESENT ADDRESS CIRCLE-2 (3) (1) 2ND FLOOR, BMTC BUILDING 80 FEET ROAD, KORMANGALA BENGALURU-560 095

…APPELLANTS

(BY SHRI. E.I. SANMATHI, STANDING COUNSEL)

AND:

M/S. MANIPAL HEALTH SYSTEMS PVT. LTD., NO.14, MANIPAL TOWERS OLD AIRPORT ROAD BENGALURU-560 008 PAN:AACCM 2872M …RESPONDENT

(BY SHRI. R.V. EASWAR, SENIOR ADVOCATE FOR SHRI. TATA KRISHNA, ADVOCATE)

I.T.A No.817/2018

THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 27.06.2018 PASSED IN ITA NO.1667/BANG/2016 FOR THE ASSESSMENT YEAR 2009-2010, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, BENGALURU IN ITA NO.1667/BANG/2016 DATED 27.06.2018 FOR ASSESSMENT YEAR 2009- 2010 ANNEXURE-C AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 2(3)(1), BENGALURU AND ETC.

THIS ITA, HAVING BEEN HEARD AND RESERVED FOR JUDGMENT ON 05.10.2023 COMING ON FOR PRONOUNCEMENT OF JUDGMENT THIS DAY, P.S.DINESH KUMAR J, PRONOUNCED THE FOLLOWING:-

JUDGMENT

This appeal by the Revenue, directed against the order dated June 27, 2018 in ITA No.1667/Bang/2016 passed by the ITAT1 has been admitted to consider ten questions of law. At the time of hearing, learned Advocates on both sides submitted that following two questions of law only arises for our consideration: 1. 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 by holding that the assessing authority has not doubted the payment nor it is held as excessive even though in terms of section 40A(2) only "legitimate needs of the business" is allowable as

1Income Tax Appellate Tribunal

I.T.A No.817/2018

expenditure and, as such, the assessing authority rightly disallowed it?

2.

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?

2.

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

3.

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

2Assessment Year 3Assessing Officer 4‘the Act’ for short 5 M/s.MEMG International India Private Limited 6Commissioner of Income Tax (Appeals)

I.T.A No.817/2018

allowed assessee’s appeal and set aside the disallowances made under Section 40A(2) of the Act. Hence, this appeal by the Revenue.

4.

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.

5.

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

I.T.A No.817/2018

agreement with its holding company M/s. MEMGIIPL and it is rendering consultancy services, finance, tax planning, project feasibility and marketing service. The fair market value is 2 to 2.5 % and assessee has paid 0.5% of the Total Turnover as fees to M/s. MEMGIIPL. With these submissions, he prayed for dismissal of this appeal.

6.

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

7.

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.

8.

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

(2) (a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the 2 [Assessing Officer] is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made

I.T.A No.817/2018

or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.

9.

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.

10.

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.

11.

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

I.T.A No.817/2018

company through a colorable device termed as service agreement. The AO has clearly made no efforts to demonstrate as to why payment made is excessive and unreasonable having regard to the market value of the services for which such payment was made. Thus, the disallowance made under Section 40A(2) of the Act is based on surmises and hence, unsustainable.

12.

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.

13.

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

I.T.A No.817/2018

(iii) Order dated June 27, 2018 in ITA No.1667/Bang/2016 passed by the ITAT is confirmed. No costs.

Sd/- JUDGE

Sd/- JUDGE

SPS

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