ACIT vs Mitsui & Co. India Pvt Ltd (ITAT Delhi) [ITA No. 765/Del/2020]
The assessee company is in the business of general trading of materials and equipment needed for industrial projects; commission agent acting as a middleman between buyers and sellers who want to import, export or engaged in off-shore or domestic trading activities; and provides services, i.e. information about the Indian market generally and for specific sectors which fall under the different verticals of the Mitsui group. The case was selected for scrutiny assessment.
As the assessment process progressed, the assessing authority became aware of some overseas transactions the assessee company had engaged in. These transactions were sent to the transfer pricing officer (or “TPO”) for the purpose of transfer price adjustment. The TPO issued a ruling on October 23, 2017, in which it said that no unfavourable conclusions had been reached regarding international transactions. When drafting the assessment, the AO saw that the assessee had not used suo moto disallowance under section 14A of the Act to exempt revenue as it had done the year prior.
AO by invoking the provision of Rule 8D(ii) of the Income tax Rules, 1962 made disallowance amounting to INR 1,45,94,554/-. Further, the AO made disallowance on adhoc basis amounting to INR 63,11,221/- out of staff welfare expenses. The AO also made addition of INR 5,12,23,226/- in respect of remuneration paid to Mitsui & Co. India Pvt. Ltd. on the basis that the assessee could not substantiate rendition of any service for which remuneration was paid.
The AO further made disallowance by invoking the provision of section 40(a)(i) of the Act on the ground that the assessee was liable to deduct tax of INR 12,60,84,939/- at the payment made to Mitsui Japan of INR 51,27,74,699/-. Thus, he assessed the income of the assessee company at INR 89,14,27,020/- against the disclosed income at INR 30,65,23,320/-. CIT(A) partly allowed the appeal. CIT(A) confirmed the addition in part out of staff welfare expenses. Rest of the additions were deleted. Being aggrieved, both revenue and assessee has preferred the present appeal.
The ITAT after hearing the Ld. Authorized Representatives of the parties and perused the material available on record and gone through the orders of the authorities below. The issue relates to adhoc disallowance out of staff welfare expenses. Ld.CIT(A) has partly allowed relief to the assessee and the same has been confirmed by us in Revenue’s appeal. The assessee has challenged confirmation of part disallowance of expenses. The submissions of the Ld. Counsel for the assessee in this regard are that the lower authorities have made and confirmed the addition purely on adhoc basis. Such approach of the lower authorities is contrary to the settled legal position.
It is contended that the bills and invoices of staff welfare expenses were duly submitted to lower authorities. The AO has not pointed out any defect or discrepancy in respect of the expenditure claimed for staff welfare. The expenditure is otherwise, 1% of total Revenue which is not excessive. The expenditure is related to staff welfare measures to and instill of feeling of team work.
CIT(A) merely affirmed the action of AO without pointing out as to how the remaining expenses are not for business purpose. It is well settled that the AO should not resort to adhoc disallowance. If the expenditure is not incurred for business purpose, there has to be a specific finding in this regard unless expenditure for personal use and business purpose are mixed and cannot be segregated. In the case in hand, this is not the case, we therefore, direct the AO to delete the impugned addition.
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