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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI VIJAY PAL RAO & SHRI S. JAYARAMAN
IT(TP)A Nos. 544 & 622/Bang/2011 Page 2 of 16 O R D E R Per Vijay Pal Rao, Judicial Member These cross appeals are directed against the order dated 15.03.2011 of CIT(A) for the assessment year 2003-04. First we take up the revenue’s appeal wherein the revenue has raised the following grounds.
IT(TP)A Nos. 544 & 622/Bang/2011 Page 3 of 16
Ground no. 1 is general in nature and does not require any specific adjudication.
Ground no. 2 is regarding deletion of addition made by the AO on account of sales commission. During the course of scrutiny assessment the AO asked the assessee to furnish the details of sales commission paid to the tune of Rs. 33,60,000/- and against what services rendered. In the absence of any evidence to support the sales commission paid as well as confirmation of services rendered or other evidence like agreement,
IT(TP)A Nos. 544 & 622/Bang/2011 Page 4 of 16 identity of persons receiving the sales commission the AO treated the said amount of Rs. 33,60,000/- as not a genuine expenditure and added to the income of the assessee. On appeal the assessee contented that a bill was raised by Shri Rakesh Gupta towards business promotion and development expenses at the rate of 11% on 6,40,00,000/-, the total order value of M/s. Khodayss System Limited. It was also claimed that this payment is also linked to the realization of debts. The assessee has pointed out that out of the said amount of Rs. 33,60,000/- the accrued selling expenses was Rs. 24 Lakhs and these were incurred during the ordinary course of business. The balance amount of Rs. 9,60,000/- was claimed to have been paid to Ms. Latha Gehani towards marketing services which is also incurred wholly and exclusively for the purpose of business. Thus the assessee claimed that this entire amount of Rs. 33,60,000/- is an allowable expenditure. The CIT(A) noted that Shri Rakesh Gupta has submitted the bill on 28.01.2003 much before the close of the accounting year quantifying the sales at Rs. 6,40,00,000/-. The CIT(A) further noted that the entire sales of the whole year was Rs. 6,23,65,360/- including exchange gain of Rs. 7,86,482/-. Further there was no material produced by the assessee to show any contract between the assessee and Mr. Rakesh Gupta regarding this sales commission at the rate of 11% of the total sales. The CIT(A) has also IT(TP)A Nos. 544 & 622/Bang/2011 Page 5 of 16 doubted the business of Rs. 6,40,00,000/- given by M/s. Khodayss System Limited when the total turnover of the year was only 6.24 crores.
Thus the CIT(A) held that it was premature for the assessee to book such expenditure and accordingly the disallowance made by the AO to the extent of Rs. 24 Lakhs was confirmed. As regards the expenditure of Rs. 9,60,000/- paid to Ms. Latha Gehani towards marketing expenses, the CIT(A) has directed the AO to allow the same.
The ld. DR has submitted that the assessee has not produced any evidence regarding the expenditure of Rs. 9,60,000/- paid to Ms. Latha Gehani. The CIT(A) has allowed the claim of the assessee without giving any finding whether the assessee has discharged its onus that the said expenditure has been incurred wholly and exclusively for the purpose of business of the assessee. The ld. DR has further contented that except a copy of bill that too was produced before the CIT(A) the assessee has not produced any other details or evidence to show that any service was actually rendered by Ms. Latha Gehani. Thus the ld. DR has submitted that the AO has disallowed the claim of the assessee for want of necessary evidence as well as the details of the recipient and further the assessee failed to prove that the service was actually rendered by the parties. He has relied upon the order of the AO.
IT(TP)A Nos. 544 & 622/Bang/2011 Page 6 of 16
On the other hand, the ld. AR of the assessee has submitted that the assessee has produced the invoice dated 20.01.2003 raised by Shri Rakesh Gupta of total amount of Rs. 70,40,000/- out of which the assessee has claimed only Rs. 24 Lakhs as accrued during the year under consideration in respect of sales made to M/s. Khodayss System Limited. He has further contented that when the assessee has produced bills raised by the parties regarding the expenditure in question then the assessee has discharged its onus to prove the genuineness of the expenditure incurred for the purpose of business of the assessee. He has further submitted that the order booked from M/s. Khodayss System Limited was executed in the next year and therefore the assessee provided only Rs. 24 Lakhs on proportionate basis on the sales effected during the year.
We have considered the rival submissions as well as relevant material on record. This issue is common in both the appeals filed by the revenue as well as by the assessee. Since the CIT(A) has disallowed the substantial claim of the assessee to the extent of Rs. 24 Lakhs paid to Shri Rakesh Gupta and allow the remaining amount of Rs. 9,60,000/- paid to Ms. Latha Gehani therefore both assessee as well as revenue have challenged the impugned order of the CIT(A) on this issue. The assessee has raised this issue in ground no. 3 of the assessee’s appeal. We find
IT(TP)A Nos. 544 & 622/Bang/2011 Page 7 of 16 that the AO has disallowed the entire claim of the assessee of Rs. 33,60,000/- for want of any evidence, confirmation of service rendered, any agreement, identity of persons receiving the sales commission. The CIT(A) has dealt with this issue in para 6.3 as under.
It is apparent from the finding of the CIT(A) that the proper record and facts have not been discussed and analyzed by the CIT(A). So far as the claim of Rs. 24 Lakhs paid to Shri Rakesh Gupta it is based on the business order of Rs. 6.4 crores from M/s. Khodayss System Limited
IT(TP)A Nos. 544 & 622/Bang/2011 Page 8 of 16 however the assessee has failed to show that any part of the said order was executed during the year under consideration. Thus in the absence of any agreement between the parties and further the execution of the sale to the said party M/s. Khodayss System Limited during the year under consideration it is not possible to believe the explanation of the assessee that the assessee has received the business of Rs. 6.4 crores from the said company M/s. Khodayss System Limited. Even otherwise no document has been placed before us to show any communication between the assessee and M/s. Khodayss System Limited regarding this transaction of the order received from M/s. Khodayss System Limited. Thus in the absence of any evidence to show that the assessee has received a business order of Rs. 6.4 crores from the said company and further in the absence of any agreement between the assessee and Mr. Rakesh Gupta regarding payment of sales commission we do not find any error or illegality in the orders of the authorities below qua this issue. Accordingly ground no. 3 of the assessee’s appeal is decided against the assessee.
As regards the claim of Rs. 9,60,000/- paid to Ms. Latha Gehani we find that the CIT(A) has not discussed any fact while allowing the claim of the assessee whereas the AO has disallowed the claim for want of evidence, agreement and identity as well as confirmation of rendering of service.
Since the order of the CIT(A) is silent and non-speaking on this issue
IT(TP)A Nos. 544 & 622/Bang/2011 Page 9 of 16 therefore in the facts and circumstances of the case we set aside this issue to the record of the AO for proper examination and verification of facts as well as evidence to be produced by the assessee.
Ground nos. 3 to 8 are regarding reallocation of expenses among three segments. The TPO while determining the arms length price in respect of international transactions noted that the assessee has shown income from three segments namely marketing support service, trading functions and AMC of local sales. However the direct expenses pertaining to the AMC segment was found to be allocated to AMC segment being cost of goods sold i.e. spares etc whereas the other cost like employees stock are only apportioned. Thus the TPO was of the view that the direct employee cost in the AMC segment was allocated at Rs. 1,62,63,063/- for 18 employees, while the salary of shared services unit it was shown at Rs. 6,52,056/- total amounting to Rs. 1,69,15,086/- out of the total employees cost of the assessee of Rs. 3,14,46,386/-. The TPO noted that the payment of 1.62 crores to 18 employees means that the average payment to each employee is about Rs. 9 Lakhs per annum and monthly salary comes to Rs. 75,000/- per employee. Considering the nature of work the employee would be rendering for AMC the payment of monthly salary of Rs. 75,000/- was found to be highly excessive. Similarly under the head administrative, selling and general expenses Rs. 1,35,05,176/-
IT(TP)A Nos. 544 & 622/Bang/2011 Page 10 of 16 were shown as pertaining to AMC segment out of the total expenditure under this head of Rs. 2,55,45,092/-. Thus the TPO found that out of the total cost of Rs. 5.69 cores Rs. 3.04 crores of operating cost was apportioned to AMC activity. The TPO has recomputed the allocation of the operating cost among three segments in proportionate to the revenue and then recomputed the arms length price of the international transactions. The TPO has allocated cost to the marketing, trading and AMC in the ratio of 32.80 : 57.77 : 9.43 respectfully being the ratio of sales revenue on these three segments. The CIT(A) has noted that the TPO has committed a mistake while allocating the total cost as the TPO has also included Rs. 2,54,97,120/- pertaining to the cost of goods sold which was pertaining to the marketing segment and therefore the said cost cannot be allocated. Thus the CIT(A) has held that if this mistake of the allocation of direct cost pertaining to marketing segment is set right the adjustment made by the TPO u/s. 92CA to the extent of Rs. 83,63,055/- will be restricted to Rs. 9,94,435/-. Similarly the employees cost reallocation made by the TPO in the ratio of the sales revenue was also found to be improper. The CIT(A) has noted that the actual employees cost in the trading segment was only Rs. 34,88,659/- as against the reallocated cost of Rs. 1,74,75,456/-. Thus the CIT(A) has held that if only actual cost of employees is taken into consideration then
IT(TP)A Nos. 544 & 622/Bang/2011 Page 11 of 16 the adjustment made by the TPO will not survive. Accordingly, the CIT(A) has reversed the finding of the TPO based on the recomputation of profits of the two segments having international transaction and deleted the adjustment made u/s. 92CA.
Before us the ld. DR has submitted that the TPO has noted certain facts of excess allocation of cost in the AMC segment which shows that the assessee has artificially shown high profit margin in respect of the international transaction segments-marketing support and trading. Therefore the TPO reallocated the cost in the ratio of the turnover of all three segments and then computed the profit margins of each segment for the purpose of determining the arms length price of international transactions of the assessee. The ld. DR has relied upon the order of the TPO. On the other hand, the ld. AR of the assessee has supported the impugned order of the CIT(A) and submitted that the TPO has reallocated the total cost in the ratio of the turnover of each segment without taking into consideration the direct and indirect cost pertaining to each of the segment. Thus the ld. AR has submitted that the TPO committed a gross mistake in the reallocation of the cost without excluding the direct cost of the each segment.
IT(TP)A Nos. 544 & 622/Bang/2011 Page 12 of 16 11. Having considered the rival submissions as well as relevant material on record we find that the TPO has taken note of the fact that the employees cost allocated to the AMC segment was highly excessive in comparison to the other two segments. Further, the TPO has noted that the other indirect cost were also not properly allocated by the assessee while computing the operating margins for the purpose of bench marking its international transaction. The TPO then undertaken the exercise of reallocation of the total operating cost in the ratio of turnover of three segments. It is pertaining to note that the allocation of cost can be made only in respect of indirect common cost incurred in respect of all the segments. Therefore the allocation of the cost can be made only in respect of the indirect cost. The cost which is directly related to a particular segment cannot be reallocated. The same can be examined for the purpose of allowability and genuineness but not for the purpose of reallocation. Accordingly, we find that the action of the TPO in allocating the direct as well as indirect cost in the ratio of turnover of each segment is not proper and justified. Hence we do not find any error or illegality in the impugned order of the CIT(A) which has taken note of the fact that if the direct cost is taken out from the allocation then the adjustment made by the TPO will not survive. Hence we uphold the impugned order of the CIT(A) qua this issue.
IT(TP)A Nos. 544 & 622/Bang/2011 Page 13 of 16 12. Ground no. 9 is regarding disallowance of excess current liability towards head office account. The AO made an addition of Rs. 4,90,480/- towards current liability under the head office account on the ground that it is an excess liability. The assessee challenged the action of the AO before the CIT(A) and submitted that the expenditure which was yet to be cleared as on 31.03.2003 is an allowable expenditure. The CIT(A) accordingly held that un-cleared liability as on 31.03.2003 is an allowable expenditure except it is covered u/s. 43B.
We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The assessee has made a provision of Rs. 4,90,480/- as the liability of expenditure to the head office account yet to be cleared on 31.03.2003. We find that the assessee has claimed that this an ascertainable liability but yet to be cleared from the other side on 31.03.2003. There is no quarrel on the point that if the provision was made by the assessee as an ascertainable liability to be paid in future then it is an allowable expenditure. However this issue has not been examined by the AO as well as by the CIT(A) from this angle. Accordingly, in the facts and circumstances of the case we set aside this issue to the record of the AO to verify the relevant record as well as the actual liability paid or payable by the assessee after 31.03.2003 to the head office.
IT(TP)A Nos. 544 & 622/Bang/2011 Page 14 of 16 14. The assessee has raised the following grounds.
IT(TP)A Nos. 544 & 622/Bang/2011 Page 15 of 16
Ground nos. 1 and 2 are general in nature and does not require any specific adjudication.
Ground nos. 3 and 4 are regarding the disallowance of sales commission of Rs. 24 Lakhs. This issue has been dealt with by us while deciding the ground no. 2 of the revenue’s appeal and therefore the ground nos. 3 and 4 of the assessee’s appeal stands dismissed.
Ground nos. 5 and 6 are regarding disallowance of deduction u/s. 44C. At the time of hearing the ld. AR of the assessee has stated at bar that the assessee does not press these grounds and the same may be dismissed as not pressed. The ld. DR has raised no objection if ground nos. 5 and 6 are dismissed as not pressed. Accordingly, these grounds of the assessee’s appeal are dismissed being not pressed.
IT(TP)A Nos. 544 & 622/Bang/2011 Page 16 of 16 18. Ground no. 7 is regarding levy of interest u/s. 234B which is a consequential and mandatory in nature.
In the result the appeal of the revenue is partly allowed and the appeal of the assessee is dismissed.
Pronounced in the open court on this 18th day of April, 2017