TaxTMI 
TaxTMI 
2016 (5) TMI 280
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....by the learned CIT(A), in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 1995-96. Grievances in this appeal, as set out in the memorandum of appeal, are as follows: "Aggrieved by the order passed by the Commissioner of Income-tax (Appeals) - XXXIII, Mumbai [hereinafter referred to as 'the learned CIT(A)'], under section 250 of the Income-tax Act, 1961 ('Act') and based on the facts and circumstances of the case, Stock Traders Private Limited [hereinafter referred to as 'Appellant'] respectfully submits that the learned CIT(A) erred in disposing the appeal of the Appellant, on the following grounds. 1. The CIT(A) erred in confirming the disallowance of the payment of professional fees of Rs. 4,509,637 to Preroy AG ('PAG'). 2. The CIT(A) erred in making the following erroneous observations and conclusions in gross violation of the principles of natural justice: (a) In observing that the Appellant has claimed income earned by PAG as exempt from tax in India. (b) In observing that PAG has no other business except that it receives professional fees from the Ap....
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....the assesse, by way of making impugned payments to PAG, were to protect and preserve the investments of the assessee, and since the assessee was engaged in the business of making investments, the expenses so incurred by the assessee were deductible under section 37(1) and in the light of Hon'ble Supreme Court's judgment in the case of CIT Vs Delhi Safe Deposit Co Ltd [(1982) 133 ITR 756 (SC)]. Reliance was also placed on the judgment of Hon'ble Bombay Court, in the case of CIT Vs Rajaram Bondekar [(1994) 208 ITR 503 (Bom)], in support of the proposition that the mere fact that expenditure incurred by the assessee benefits a third party would not lead to disallowance as long as the expenses are incurred wholly and exclusively for the purposes of the business of the assesses. These submissions, however, did not impress the Assessing Officer. He noted that Sushil K Premchand (SKP, in short) who is major shareholder and director in the assessee company, is also one of the two directors of PAG. He noted that the services, on behalf of PAG, were rendered by SKP but then there was no clinching evidence of the actual rendition of service. There were, according to the Assessing Officer, onl....
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....y OKS (1) . 8 to 11 Related to Joint Venture concern Cosatec 12 to 15 Related to business of Joint Venture DME India. 16 to 17 Related to business of Casoni F.L. Spa 18 to 22 Related to business of Johnson & Johnson 23 to 27 Related to Joint Venture ISS India 28 to 29 Related to A. Boss & Co. for export of handmade paper 30 Related to bnsmess of OKS 31 Related to unidentified Co. for Defence services 32 Related to Alfred Carcher Gmbh & Co. Cleaning System project 33. MIS Europe Limited - Data Security system 34. New Opportunity in USA. 5.9 From the details accompanying all 34 invoices following common features are observed : i) The nature of services stated to have been rendered are mentioned in very general and vague terms. All these invoices talk of rendering services in connection with the attending, discussing, negotiating, securing a commitment, presenting the case, establishing credibility, reviewing the need for f....
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....rendered in connection with discussions with a member of the Board of Directors of Swiss company that has developed a new product that permits ammunition free target practice (using laser technology), which is available for licensing to India, for consideration by STPL as a new project opportunity, amounting to US Dollars Ten Thousand only." 5.12 It is strange that the invoice talks of services rendered in connection with the discussion with a member of Board of Directors of Swiss Company. The company has not been mentioned. The members of the Board of the Directors has also not been named. However, literature of laser shot is enclosed along with the invoice. It is normal practice that whenever a new product is introduced in the market, the manufacturer, publishes brochures and pamphlets giving the new features and utility of the product. These brochures and pamphlets are freely available in the market. Anybody can have access to them. Since PAG has not mentioned any reference to the name of the company or to the member of the board of directors, it cannot be said that the discussion were actually held with that ember of that company for exploring the possibilities of STPL....
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....ctual basis. However, no such reimbursement has ever been asked for by PAG in relation to any of the invoices. This also is highly unbelievable that in any of 34 invoices no out of pocket expenses were actually incurred. Generally some incidental expenses are always incurred in any kind of activity. The incidental expenses can be nil only if there is actually no activity at all. The said agreement, of course, has an overriding clause in respect of out of pocket expenses that is to say either these expenses are to be reimbursed on actual basis or as credit before hand. However, once again, there is no evidence on record to show that PAG had agreed before hand - that is to say before the commencement of the assignment - not to claim out of pocket expenses in respect of that project This creates serious doubt regarding genuineness of the services because as per the agreement dated 2.1.1995, each invoice has to be prepared and approved on case to case basis before the invoiced activity commences. Obviously, neither the assessee nor PAG bothered to do so because both of them knew for sure that there was no services to be actually rendered and hence, there was no out of pocket expenses t....
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....rson Shri S.K. Premchand who holds 100% shares in PAG and also one of the directors in STPL. It is also interesting to note that PAG has no other business except it receives professional fees from STPL. It has only one client all over the world i.e. its associate company STPL only. Evidence brought on record by the assessee does not show any past history of Swiss Company (PAG) having any technical expertise as STPL is the only company to which PAG claims to have rendered technical services. Both the companies have common directors and Indian Company has given no basis on which the alleged commission has been paid. There is no evidence to show that services have been rendered by the agent PAG nor any evidence to show that any work has been done by the PAG. No evidence has been brought on record by the appellant to show that business was procured due to the active involvement of the agent. Any agent who has to earn commission/professional fee has to put in some efforts to get the business but the appellant has brought nothing on record to show whether any effort was put in by the said agent. I have gone through the documents/papers furnished by the appellant. The appellant has furnis....
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....tancy services to STPL. In the case of Laxminarayan Madanlal vs. CIT 86 ITR 439 the Apex Court has held that mere existence of an agreement to pay commission does not bind A.O to allow the deduction. The mere existence of an agreement between the assessee and its selling agent or payment of certain amounts as commission does not bind the ITO to hold that the payments were made exclusively and wholly for the purpose of the assessee's business despite the existence of such agreement/payment, it is open to the ITO to consider the relevant facts and determined for himself whether the commission said to have been paid is properly deductible u/s. 37(1). In the case of Assam Pesticides and Agro Chemicals Vs. CIT (Guwahati) 227 ITR 846 the Hon'ble Court has held that mere payment by itself would not entitle an assessee for deduction of the said expenditure unless the same was proved to be paid for commercial considerations. The onus of proof at all relevant times rest upon the assessee. In the case of Swadeshi Cotton Mills 63 ITR 57 (SC) the Apex Court has held that additional commission to Directors in addition to monthly remuneration for extra commercial reason is not allowable a....
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....se at OKS plant in Mysore Supporting documents a) Preroy's file note setting out a summary of services rendered and the recommendations made to STPL b) Sushil's fiile note on the meeting at OKS Munich on March 7,1994 discussing several issues such as 1993-94 sales of OKS 'grease plant' issue, financing situation of STPL, Bechem Product pricing etc c) Corporate Brouchers of OKS and Carl Bechem 10. Clearly, the work is done by SKP, the meeting is taken by the SKP and it pertains to the investments of the assessee is OKS. When a meeting is taken by director of the company, analysis is done by the director of the company and the recommendations are made by director of the company, it is difficult to be persuaded by the contention that these services are required to be treated as rendered by the Preroy AG because, the director was also a one hundred percent owner and a director of Preroy AG, and because, at the point of time when he was doing all this work, he had discarded the hat of director in the assessee company to wear the hat of director of Preroy AG. That is the situation with respect of the entire work in respect of which Preroy AG is paid....
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....irector or owner of Preroy AG. Take, for example, the meeting at KLM lounge at Amsterdam on 1st July 1994 referred to earlier in this paragraph. We find that, as evident from details of travelling expenses filed at pages 77 onwards in the paper book before us, the visit to Germany, Netherlands and UK, which lasted from 30th June to 12th July 1994, is stated to have been undertaken by SKP for attending "business meetings and representing STPL in a meeting with potential business partners". When it comes to claiming the travelling expenses, the assessee travels as director in STPL (i.e. the assessee) to attend the business meetings, yet the assessee claims to have actually met the potential business partner in a different capacity, i.e. as a representative of Preroy AG, and seeks a deduction for fees paid to Preroy AG in respect of the same. The same is the position with respect to almost all the invoices. Take for example, invoice no. 11 for US $ 10,000 with the narration as "negotiation in respect of extending relationship between OKS-Munich and Inchem, to include OKS- India" which "make available to OKS India speciality gear oil products not available from existing technology part....
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....e is hardly any basis for the billing work done. There seems to a charge of US $ 10,000 on every billing point. There is no evidence for any work done by a person other than SKP and the SKP has done this work, during his visits abroad, in the capacity of director in the STPL (i.e. the assessee)- as is clearly discernible from the details of foreign travelling expenses on record. The justification for the impugned payment does not, in our considered view, does not exists, as there are no independent services rendered by the assessee. Learned counsel for the assessee has laid lot of emphasis on the contention that the assessee was in the business of making investments and, therefore, even expenses incurred in connection with the business of his subsidiary, OKS India , will also be eligible for deduction as these expenses are to protect his investment. There does not seem to be any issue with the legal principles embedded in this proposition but this proposition will be relevant only when we come to a conclusion that legitimate and genuine business expenses are so incurred for the services rendered by Preroy AG. We are yet to reach this stage. As there are no independent services rend....