No disallowance can be made u/s 40A(2)(b) unless AO brings on records any comparable case as to fair market value of similar services:

AO made disallowance u/s 40A(2)(b) which was deleted by the both the lower appellate authorities. On further appeal, the Hon’ble High Court observed that assessee had explained the AO the circumstances in which payment was made to sister concern and there was nothing unreasonable about such payment. AO made the said disallowance without referring to any comparable case to find out fair market value of similar services and what would be the reasonable amount for such work. Further, AO had accepted such payment in earlier years. It was held that the question as to whether any expenditure is excessive or unreasonable is a question of fact and hence was not required to be considered by the Hon’ble High Court.

[G.K. PATEL & CO. - TAX APPEAL NO.1580 of 2011 - GHC]