Management fee paid to holding company - disallowance under section 40A(2) 

Facts:

Assessee paid management fees to it's group holding company for a host of services of which 50% was disallowed by the AO citing that the services were uncalled for and assessee had inhouse department rendering similar services thus incurred unnecessarily, without bringing factually how these were excessive vis a vis market pricing. CIT(A) sustained the additions. On further appeal -

Held in favour of the assessee based on group company's decision which had allowed similar charges, the disallowance under section 40A(2) was uncalled for. 

Ed. Note: In domestic taxation the tax arbitrage issue does not arise in management fees while in cross border taxation it brings in that added dimension. Nonetheless there are a number of decisions in cross border as well as in domestic taxation space that have held that the AO cannot sit in the armchair of the business to judge and tell what expense was required or otherwise. That is uncalled for. Even while sustaining additions under section 40A(2) law mandates AO to manifest it being excessive. The principle of ALP is thus universal on this without an iota of doubt. 

Case: Manipal Hospitals (Dwarka) (P) Ltd. v. Asstt. CIT 2024 TaxPub(DT) 708 (Bang-Trib)