Ita/817/2018 Of The Pr. Commissioner Of Income Tax, Cit (A) v. M/S. Manipal Health Systems Pvt. Ltd

I.T.A No.817/2018 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 12 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) 5 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) 2 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 ITAT[1] 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 AO[3] made disallowances of Rs. 66,54,726/- under Section 40A(2) of the Income Tax, Act 1961[4] for the service charges paid to its holding company, M/s. MEMGIIPL[5]. On appeal, the CIT(A)[6] partly allowed assessee's appeal and confirmed the disallowance. On further appeal, the ITAT has Brief facts of the case are, assessee is a 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: Brief facts of the case are, assessee is a 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 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; 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. 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 6 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 7 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. 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 7 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