In a recent decision, the Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) has provided relief to Piramal Enterprises by instructing the Assessing Officer ( AO ) to reassess the disallowance of payments received as consultancy fees and corporate service charges.
The Commissioner of Income Tax Appeals [CIT (A)] was found to have erred in directing the AO to permit payments made to Piramal Enterprises Limited (PEL) for consultancy fees and corporate service charges, based on a comparison with similar payments made by other group companies to PEL.
The AO had initially disallowed Rs. 1,23,84,303/- on account of royalty and professional/management services, arguing that these payments were deemed unreasonable, excessive, and of a general nature. Notably, the AO had disallowed royalty at a rate of 0.2% of turnover and 25% of other fees paid on an ad-hoc basis.
However, the Tribunal highlighted that the issue concerning royalty payments had previously been settled in favor of the assessee for the assessment year 2008-09. These payments were made in accordance with a longstanding agreement dating back to 1995. The services rendered were also duly described in the agreement.
Furthermore, the Tribunal’s prior ruling favored the assessee, directing royalty payments to another entity, NPIL, at a rate of 0.5% of turnover. Thus, the ITAT concluded that the issue of royalty payments should also be resolved in favor of the assessee, leading to the deletion of the disallowance made by the AO and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].
However, regarding the matter of consultancy and professional charges paid by the assessee to NPIL, the CIT(A) issued specific directions for further verification. The AO was tasked with comparing these payments with those made by other group companies to PEL, the flagship company.
The bench Rifaur Rahman (Accountant Member) and Kuldip Singh (Judicial member) has instructed AO to disallow any excess payments made by NPIL compared to other group companies if found to be more. Turnover was suggested as a basis for determining excessiveness. If no excessiveness was found based on turnover, the disallowance under Section 40A(2)(b) of the Income Tax Act, 1961 was to be removed.
Given that the issue of royalty payments had already been decided in favor of the assessee, the ITAT directed the AO to review the consultancy and professional charges. The AO was given a period of six months from receipt of the order to verify the matter and decide, providing an opportunity for the assessee to be heard.
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