ITAT MUMBAI BENCH ‘G’
Global Innovsource Search Solutions (P.) Ltd.
versus
Income-tax Officer
IT Appeal Nos.7478 & 9245 (Mum) of 2010
[ASSESSMENT YEAR 2007-08]
JUNE 27, 2012
ORDER
Amit Shukla, Judicial Member
These are the cross appeals filed by the assessee as well as the department against the order dated 18-8-2010, passed by the CIT (A)-21, Mumbai for the quantum of assessment passed under Section 143(3) for the assessment year 2007-2008. In both the appeals, the issues are common which relates to dis allowance of Rs. 20,00,000/- made by the Assessing Officer towards reimbursement of expenses after invoking the provisions of Section 40A(2(b). The CIT(A) has given part relief for Rs. 10,00,000/- against which both the parties are in appeal.
2. The relevant facts in brief are that the assessee company is a wholly owned subsidiary of Innovsource Solutions Pvt. Ltd. and is engaged in the business of providing staffing service. The Company’s parent i.e. holding company is engaged in providing recruitment services. The Assessing Officer on going through the audited accounts, noticed that the assessee has claimed reimbursement of expenditure of Rs. 51,01,810/- which was sharted by the parent company. Before the Assessing Officer detail submissions along with documentary evidence were placed, in support of the expenses which was shared with the parent company. It was explained before him that certain resources like staff, office premises etc. have been used commonly both by the assessee company and its parent company, the expenses relating to these resources have been shared by the assessee company. This reimbursement of the share of expenses is evidenced by a written ‘memorandum of understanding’ between them. It was also brought to the notice of the Assessing Officer that the assessee’s case in the preceding year i.e. AY 2006-2007 was completed under Section 143(3), wherein such a reallocation and reimbursement of expenses have been accepted. The Assessing Officer rejected the claim of the assessee and held that expenses incurred by the parent company cannot be held to be wholly and exclusively for the purpose of the business and held that as per Section 40A(2)(b), the assessee is required to prove that expenses incurred through associate companies are reasonable and at arms length, considering the services rendered by the assessee. Since the assessee has failed to discharge the onus to prove the reasonableness of the expenditure, a sum of Rs. 20,00,000/- was disallowed out of Rs. 51,01,810/- considering it to be unreasonable and excessive.
3. Before the CIT(A), the assessee objected to the observations and findings of the Assessing Officer on various counts. The submissions made before the CIT(A) have been incorporated at page 2 & 3 of the appellate order. The sum and substance of the said arguments are that :
(i) The assessee is conducting the business activities from the premises which have been taken on rent by the parent company and the expenses shared are mainly overhead expenses. The expenses pertaining to both the parent and the assessee company have been identified as per the agreed norms given in the memorandum of understanding and such identified expenses were only to be shared and then it was subject to reimbursement.
(ii) The only expenses benefiting both the companies were identified and was shared as per the mutually agreed terms and such a sharing of expenses arose since the resources were belonging to the parent company which was incorporated earlier to the assessee company.
(iii) As per Section 40A(2)(b) only expenditure incurred in respect of which payment has been made to specified persons, which in the opinion of the Assessing Officer, is reasonable, can be disallowed, which in the case of the assessee will not apply as the expenditure has been incurred by the parent company and the assessee has simply reimbursed such expenses. There is no question of applying 40A(2)(b). The reimbursement was done on actual basis. It is not a case where parent company was rendering any service for which payment has been made by the assessee.
(iv) The entire arrangement of sharing of expenses is devoid of any tax consideration and is solely based on and guided by contractual arrangement and commercial and factual consideration. Therefore, such an adhoc dis allowance is not called for.
4. The CIT(A) accepted the contentions of the assessee and admitted that parent company had incurred cost for sharing of common office premises, staff etc. by the assessee and such expenses are attributable to the assessee company which amounts to Rs. 51,01,810/-. The CIT(A) has noted down the following details of expenses :-
