$~4 & 5
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: November 27, 2014
+ ITA 490/2014
THE COMMISSIONER OF INCOME TAX-II
..... Appellant
Through: Mr.Rohit Madan,Sr.Standing
Counsel with Mr.Ruchir Bhatia,
Mr.Akash Vajpai, Advs.
versus
JUBILANT SECURITIES PVT.LTD.
..... Respondent
Through: Ms.Kavita Jha, Adv.
+ ITA 491/2014
THE COMMISSIONER OF INCOME TAX-II
..... Appellant
Through: Mr.Rohit Madan,Sr.Standing
Counsel with Mr.Ruchir Bhatia,
Mr.Akash Vajpai, Advs.
versus
JUBILANT SECURITIES PVT.LTD.
..... Respondent
Through: Ms.Kavita Jha, Adv.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J (ORAL)
1. These two appeals filed by the revenue pertain to the
Assessment Year 2009-10 and arise out of one order of the Income Tax
Appellate Tribunal (`Tribunal' in short) dated 09.01.2014. The
revenue has possibly preferred two appeals as two cross appeals were
disposed by the Tribunal by the said impugned order.
2. Two issues have been raised in the present appeals. First issue
relates to the deletion of addition of Rs.25,19,529/- made by the
Assessing Officer on account of service charges paid to M/s. Jubilant
Enpro Pvt. Ltd. and the second issue relates to direction of the Tribunal
affirming the order of the Commissioner of Income Tax (Appeals)
restricting the disallowance under Section 14A of the Income Tax Act,
1961 (`Act' in short) read with Rule 8D of the Income Tax Rules,
1962 (`Rules', in short) to Rs. 62,96,037/- as against disallowance of
Rs. 1,02,40,167/- made by the Assessing Officer.
First Issue:-
3. The respondent-assessee had paid service charges of
Rs.95,84,561/- to a group company M/s. Jubilant Enpro Pvt. Ltd., who
had provided services under a Memorandum of Understanding dated
January 05, 2006. M/s. Jubilant Enpro Pvt. Ltd. was also providing
similar/identical services to other group companies of the respondent
assessee. As per the terms of payment agreed between the respondent
assessee and M/s. Jubilant Enpro Pvt. Ltd., reimbursement or payment
for services provided, was to be made by the assessee and group
companies upon the apportionment of cost incurred by M/s. Jubilant
Enpro Pvt. Ltd. The apportionment was done, on the basis of the rigs
deployed. The Assessing Officer felt that this was not the correct
method of apportionment of cost and the service charges paid to M/s.
Jubilant Enpro Pvt. Ltd. He made an addition by disallowing
expenditure of Rs.25,19,529/-, observing that the apportionment should
not have been done on the basis of number of rigs but on the basis of
revenue generated. The aforesaid finding was affirmed in the first
appeal by the Commissioner of Income Tax (Appeals).
4. The said finding has been reversed by the Tribunal in the
impugned order. The Tribunal, accepting the plea of the assessee, has
observed that the services rendered by M/s. Jubilant Enpro Pvt. Ltd.
were in the nature of assistance and support services like assistance in
relation to obtaining work, submissions of bids and subsequent
negotiations, advising current developments, advising regarding Visas
and labour permits, advice on importation and exportation of material
vessels equipments rigs etc. The aforesaid work and obligation
undertaken by M/s. Jubilant Enpro Pvt. Ltd. was dependant upon the
number of rigs and this would determine cost apportionment of the
support services which were given and provided to the recipients. The
services were not dependent upon the size of the rigs or the turnover.
The contention of the respondent assessee that the apportionment of
cost should not be made on the basis of the turnover, but, on the basis
of number rigs was accepted. The aforesaid findings are findings of
fact and there is no reason or ground to hold that the said findings are
perverse. Noticeably, M/s. Jubilant Enpro Pvt. Ltd. had provided
services to other sister concerns of the respondent assessee. The
amount and quantum paid by the assessee and other group companies
is not in dispute. Any disallowance in the hands of the respondent
assessee would necessarily mean increase of expenditure incurred by
the sister concern, as there is no dispute about the cost incurred by M/s.
Jubilant Enpro Pvt. Ltd. Otherwise also, it would result in reduction or
lower income earned by M/s. Jubilant Enpro Pvt. Ltd. The Assessing
Officer did not invoke Section 40A(2) of the Act, or hold that the
payment made were disproportionate to the market value of the
services rendered. Engaging services of M/s. Jubilant Enpro Pvt. Ltd.
had helped the assessee and other group companies to reduce costs, as
for the common services they did not engage employees or consultants
separately. This is clear from the submission made and findings of the
Tribunal that there was commonality in the nature of services and
therefore, the respondent assessee and other sister concerns had
established and taken services from one cost centre i.e. M/s. Jubilant
Enpro Pvt. Ltd. The respondent company and others had agreed to pay
for the services by way of reimbursement of expenses. In view of the
aforesaid position, we do not think, in the present appeals, the first
issues requires admission.
Second issue:-
5. On the second issue also, the appeal preferred by the revenue is
without merit. By our last order dated 16.10.2014, we had asked the
learned counsel for the revenue to take instructions on whether any
appeal was filed against the order of the Tribunal for the Assessment
Year 2008-09 and examine whether interest accrued on loan of Rs. 5
Crores given to a third party was shown or treated as taxable income in
the hands of the respondent assessee.
6. Learned Sr.Standing Counsel for the revenue has not been able
to obtain instructions but on behalf of the respondent assessee, a copy
of the order dated 26.10.2012 relating to the Assessment Year 2008-09
passed by the Tribunal has been placed on record. As per the findings
recorded in the said order, the interest on loan of Rs.5 Crores had
been utilized for giving loan of the same amount to another party.
Further, the loan to the third party had earned taxable income.
Therefore, the interest on such loan proportionate to utilization, was
excluded from the total interest for the purpose of Clause (ii) of Sub-
Rule (2) to Rule 8D of the Rules.
7. When we examine the order of the Commissioner of Income Tax
(Appeals) who had accepted the assessee's contention in the present
Assessment Year, it is obvious that this factual position is correct. The
Commissioner of Income Tax (Appeals) has recorded and held that
interest of Rs.47,08,000/- was incurred exclusively towards earning of
taxable income and therefore should be excluded from the total interest
of Rs.1,23,27,915/-, while computing the disallowance under Clause
(ii) to Rule 8D(2) of the Rules. Thereafter, the Commissioner of
Income Tax (Appeals) recomputed the disallowance under the said
Clause (ii) to Rule 8D(2) as under:
(A). Interest expenditure claimed in the P&L A/c 76,19,915/-
(B). Average value of investment 32,70,93,142/-
(C). Average value of assets 44,20,94,179/-
(D). Relatable interest (A"B/C) (76,19,915 " 32,70,93,142/
44,20,94,179) = Rs. 56,37,762/-.
8. For the sake of clarity, we record that the assessee in the present
case has himself followed Sub-Rule (ii) Clause (ii) of Rule 8D of the
Rules for computing the disallowance in respect of interest paid.
9. We notice that the Assessing Officer while computing the
disallowance under Rule 8D had treated the Direct Administrative
Expenses incurred by the assessee for earning of exempt income as
`NIL'. However, the assessee in the revised computation, had
quantified the Administrative Expenses incurred for earning of exempt
income at Rs.6,58,275-. When we add Rs.56,36,875/- and Rs.
6,58,275/-, the resultant figure is Rs.62,95,150/-. Disallowance of
Rs.62,95,150/- has been upheld by the Tribunal, affirming the order of
the Commissioner of Income Tax (Appeals). In the Assessment Order,
no ground or reason has been given, why the Assessing Officer was
not satisfied with the disallowance of Rs.6,58,275/-, why and for what
reason on examining the accounts, the said disallowance was not
appropriate and reasonable. Noticeably, the assessee had filed an
application under Section 154 of the Act during the course of the
assessment proceedings, revising the disallowance from Rs.93,43,343/-
to Rs.62,95,150/-. The reason for reworking of the disallowance is
decipherable when we refer to the chart reproduced by the
Commissioner of Income Tax (Appeals) in paragraph 6. The assessee
had wrongly computed the figure of Rs.93,43,343/- by taking the total
interest at Rs.1,27,27,103/-, i.e. without excluding interest of Rs.
47,08,000/-, which was incurred on loan utilized for earning of taxable
income.
10. The other reason why we are not inclined to interfere is that
disallowance made by the Assessing Officer under Clause (iii) to Rule
8D(2) was Rs.16,35,466/-, as against the disallowance made by the
assessee of Rs.6,58,275/-. The Assessing Officer had not made any
disallowance on account of direct expenses. The difference between
the two amount is Rs.10 lakhs. Thus, the quantum of tax involved
would be rather low.
11. Learned counsel for the assessee has also stated that the order for
the Assessment Year 2008-09 has been accepted by the revenue and
has attained finality.
12. In view of the aforesaid factual position, we are not inclined to
entertain the present appeal on the second issue also.
The appeals are accordingly dismissed.
SANJIV KHANNA, J
V. KAMESWAR RAO, J
NOVEMBER 27, 2014/akb
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