2016 (6) TMI 531 - AT - Income Tax

Tribunal disallows pre-operative professional fees for new business venture

GE Global Sourcing India Private Limited Versus Income Tax Officer – Range 3 (1) (4), Mumbai

The Tribunal upheld the decision to disallow professional fees paid to BMR Advisors Pvt. Ltd., determining the expenses were pre-operative and preparatory ... Allowance of consultancy and advisory services - non setting up of business - Held that:- In the instant case under appeal, the project for manufacturing and supplying of locomotives has not yet been set up , while only preparatory steps are taken by the assessee company by bidding for award of the contract by Rites Limited , Ministry of Railways in favour of the consortium partners which included assessee company also for setting up manufacturing facility at Marhowra, Bihar for manufacture and supply of locomotives to Indian Railways whereby bid documents has been filed with Rites Limited , Ministry of Railways and these expenses of ₹ 1,35,74,240/- paid to BMR on consultancy and advisory services in connection with this Indian Railway project are merely preparatory expenses incurred by the assessee company prior to setting up of business and hence cannot be allowed as revenue expenditure in the hands of the assessee company. Looking into all these facts and circumstances of the case we find no infirmity in the order of the ld. CIT(A) and we uphold and sustain the same for the reasons as indicated above. We order accordingly. - Decided against assessee Issues Involved:1. Disallowance of professional fees paid to BMR Advisors Pvt. Ltd.2. Non-appreciation of the nature of services provided by BMR.3. Levy of interest under sections 234B and 234C of the Income Tax Act.Detailed Analysis:1. Disallowance of Professional Fees Paid to BMR Advisors Pvt. Ltd.The primary issue in this case was whether the professional fees paid to BMR Advisors Pvt. Ltd. (BMR) could be considered a business expense. The assessee company argued that it incurred Rs. 1,35,74,240/- for consultancy and advisory services from BMR for a bid related to Indian Railways projects. The AO disallowed this expense, reasoning that it was not related to the company's existing business of providing sourcing services to its holding company, GE Global Sourcing LLC, USA. The AO noted that the expenses did not appear in the monthly invoice to the holding company, indicating they were not for business purposes. The CIT(A) upheld this disallowance, stating that BMR's services were not rendered to the assessee company and that BMR lacked expertise in the bidding process for Rites Limited. The Tribunal also agreed, concluding that the expenses were pre-operative and preparatory, related to a new line of business that had not yet commenced.2. Non-Appreciation of the Nature of Services Provided by BMRThe assessee company contended that the services provided by BMR were essential for understanding tax and regulatory implications for the Indian Railways project. The CIT(A) and the AO, however, found that the invoices from BMR lacked sufficient detail to establish a direct connection to the assessee company's business. The Tribunal upheld this view, noting that the expenses were related to a new business venture and not the existing business activities of the assessee company. It was further observed that these expenses were preparatory and related to a Special Purpose Vehicle (SPV) to be incorporated for the new project, thus not allowable as revenue expenditure.3. Levy of Interest Under Sections 234B and 234CThe assessee company also challenged the levy of interest under sections 234B and 234C of the Income Tax Act, arguing that it was not computed as per law. This issue was not elaborately discussed in the judgment, as the primary focus was on the disallowance of professional fees. The Tribunal's decision to uphold the disallowance implicitly supported the levy of interest, as the disallowed expenses affected the computation of taxable income.Conclusion:The Tribunal dismissed the appeal, upholding the CIT(A)'s decision to disallow the professional fees paid to BMR. The Tribunal agreed that the expenses were pre-operative and preparatory, related to a new business venture that had not yet commenced. Consequently, these expenses could not be classified as revenue expenditure allowable under the provisions of the Income Tax Act. The levy of interest under sections 234B and 234C was also implicitly upheld.