TaxTMI 
TaxTMI 
2016 (10) TMI 1
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.... has erred in making various erroneous and unsubstantiated observations (which ignore the facts submitted before him and/or are contrary to the facts on record) in the impugned Order to buttress his stand vis-a-vis the disallowance of marketing and development fees. I:3 The Commissioner of Income-tax (Appeals) erred in making the disallowance without providing an opportunity to the Appellant to showcause why the said disallowance should not be made. I : 4 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the marketing and distribution fee i incurred by it wholly and exclusively for the purpose of its business and the stand taken by the Commissioner of Income-tax (Appeals) is misconceived, erroneous and not in accordance with law. I:5 The Appellant submits that the Assessing Officer be directed to allow the marketing and distribution fees paid by it to QIEF while computing the Appellant's total income for the year under consideration. 2 : 0 Re.: Disallowance of advertising expenditure of Rs. 3,77,14,278/-: 2 : I The Commissioner of Income-tax (Appeals) has erred in confirming the action of the Assessi....
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....and since the payee did not have a Permanent Establishment (PE) in India, such amounts were not taxable in India. The Assessing Officer however, noted that since QIEF was a group concern; its directors are residents in India; and, QIEF operates an administrative back-office in India and, therefore, QIEF has a PE in India, which rendered such payments liable to tax in India. Therefore, according to the Assessing Officer, assessee was required to deduct tax at source (TDS) on the payment of Rs. 3,26,05,689/- made to QIEF and assessee not having deducted such TDS, the impugned sum was disallowable under section 40(a)(i) of the Act. Be that as it may, the aforesaid basis of disallowance is not relevant for the present, inasmuch as, the CIT(A) disagreed with the Assessing Officer on the aspect of applicability of section 40(a)(i) of the Act, instead he has retained the disallowance on a different ground. As per the CIT(A), the impugned expenditure does not qualify for deduction under section 37(1) of the Act. The reasons which weighed with the CIT(A) to hold so can be summarized as follows. Firstly, according to CIT(A), assessee had failed to demonstrate that the infrastructure availabl....
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....e East and Asian clients. Furthermore, our attention has also been drawn to Pages 39 to 42 of the Paper Book, wherein is placed agreement with QIEF relating to marketing services for the clients located in USA. Ld. Representative for the assessee pointed out that the aforesaid material was very much before the lower authorities and there was no justification to disbelieve the same and hold that the requisite services were not provided by QIEF to the assessee. It was also canvassed that the agreement between assessee and QIEF has been duly acted upon and, therefore, it cannot be disbelieved by the Revenue and in this regard reliance was placed on the judgment of the Hon'ble Calcutta High Court in the case of CIT vs Arun Dua, 186 ITR 494(Cal). Emphasizing on the adequacy of infrastructural and other facilities available with QIEF to render services to assessee, Ld. Representative for the assessee also referred to Pages 242 to 298 of Paper Book, wherein is placed copies of the Annual Accounts of QIEF for years ending 31/12/2010 and 31/12/2011. By referring to the relevant portions, it is sought to be emphasized that the said concern is carrying on requisite levels of business, inasmuc....
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....fore, we proceed to examine the basis on which the CIT(A) has sustained the disallowance. As per the CIT(A) the expenditure does not qualify for deduction under section 37(1) of the Act. Shorn of other aspects of section 37(1) of the Act, what has been invoked by the CIT(A) in the present case is that the impugned expenditure cannot be considered to have been incurred 'wholly and exclusively for the purposes of the business' of the assessee company. The efficacy of such a conclusion is required to be judged having regard to the reasons advanced by the CIT(A), which we do hereinafter. 7.1 On the issue of availability of infrastructure with QIEF, in our view, the CIT(A) has merely brushed aside the material and evidence which the assessee sought to put-forth before him. In Para 1.13(a) of the order, the CIT(A) observes that assessee had failed to show the infrastructure available with QIEF to render services to assesseecompany. Such an observation by the CIT(A) is a bland assertion because the material which was before him, and which has also been placed in the Paper Book filed before us, clearly shows that it is not a case where QIEF could be said to be a concern without adequate i....
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....our considered opinion, having regard to the material and evidence on record, the CIT(A) has sought to disregard the agreement on a mere hypothetical basis, without any factual support. 7.2 Before parting, we may mention two more aspects which were before the CIT(A) . In the course of the assessment proceedings, the only objection of the Assessing Officer was based on non-deduction of tax at source and in so far as the issue of section 37(1) of the Act was concerned, the Assessing Officer had no objection. It was only during the appellate proceedings that the CIT(A) show caused the assesseecompany on the aspect of section 37(1) of the Act. It is seen from the record that during the appellate proceedings, CIT(A) called for a remand report from the Assessing Officer on the issue of allowability of the expenditure under section 37(1), which was not a point raised in the assessment order. In such remand report, the Assessing Officer observed that the impugned expenditure was incurred during the course of normal business activity by the assessee and hence deductible under section 37(1) of the Act. Thus, impliedly the Assessing Officer reiterated the stand taken in the assessment order ....
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....of Rs. 3,77,14,278/-. In context of this dispute, the relevant facts can be summarized as follows. The Assessing Officer noted that the assessee-company had claimed advertisement expenditure of Rs. 3,97,53,486/- in the instant year as compared to Rs. 70,645/- in the immediately preceding assessment year. The Assessing Officer also noticed that an expenditure of Rs. 3,77,14,278/- was incurred by way of payment to M/s. Hansa Vision Pvt. Ltd. for placing advertisements in newspapers. On being asked to justify the claim of advertisement expenses, assessee furnished the detail of expenditure, sample copies of invoices raised by M/s. Hansa Vision Pvt. Ltd. and also photocopies of newspaper cuttings evidencing the advertisements placed. Assessee also explained that the advertisement expense was incurred in its capacity as the 'sponsor' of 'Quantum Mutual Fund' on the media campaign to promote the various schemes of the Fund. It was further canvassed that such expenditure was a routine business expenditure incurred in the course of regular business. The Assessing Officer has made varied observations in paragraphs 6.8 to 6.14 of the assessment order and has ultimately disallowed the entire ....
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....herefore it could not be said that the advertisements did not reflect the name of assessee-company; and, lastly that even if it was to be held that the expenditure was made for a group concern, it was pointed that the assessee-company had a direct interest in the business of the Quantum Asset Management Company (QAMC), which managed the assets of Quantum Mutual Fund and, therefore, such expenditure was allowable in the hands of the assessee. Reliance was sought to be placed on the following decisions - i) CIT v/s Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC) ii) CIT v/s Royal Calcutta Turf Club [1961] 41 ITR 414 (SC) iii) Eastern Investment Limited v/s CIT [1951] 20 ITR 1 iv) Campa Beverages (P) Ltd. v/s IAC [1990] 34 ITD 241 (Del.) v) CIT v/s Alfa Laval (I) Pvt. Ltd. [2005] 149 Taxman 29 vi) S.A. Builders v/s CIT [2007] 158 Taxman 74 to say that an expenditure incurred for the purposes of business is allowable even if some benefit arises to a third party. Apart from relying on the aforesaid decisions, assessee also relied on the following decisions for the proposition that the nature of the impugned advertisement expenditure could not be construed as having been in....
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....Asset Management Co. Pvt. Ltd., who managed the assets of Quantum Mutual Fund. The aforesaid agreement was produced by the assessee to show that it was also earning Management fees from Quantum Asset Management Co. Pvt. Ltd. and thus, the action of incurring expenditure on promotion of various schemes of Quantum Mutual Fund was on relevant considerations. The CIT(A) declined to admit such an evidence as, according to him, the agreement did not pertain to the impugned assessment year as it was dated 1.6.2011. With regard to the merits, CIT(A) concluded that the expenditure did not qualify for deduction u/s 37(1) of the Act as it was not laid out wholly and exclusively for the purposes of assessee's business. 10. Furthermore, the CIT(A) noted that as a sponsor of the fund, assessee was having substantial interest in the QAMC and would earn income by way of dividend from the QAMC or by way of increase in the capital net worth of such company. According to the CIT(A), both the possible gains accruing to the assessee-sponsor, whether by way of dividend or Long Term Capital Gain, would be exempt from tax under the Act. In such a situation, according to the CIT(A), the impugned expenditu....
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....ompany or by the Trustees or sponsors of the Mutual Fund. The learned representative explained that in view of the fact that the Mutual Fund could not charge expenses over and above the prescribed limits, any expenditure incurred over and above such limit was borne by the assessee-company. In fact, by referring to Regulation 52(4)(b) and 52(5) of the SEBI (Mutual Fund) Regulations, 1996 it was pointed out that 'advertisement expenditure' could not be incurred by the Mutual Fund but could only be borne by the Asset Management Company or trustee or sponsors of the Fund. Apart therefrom, the learned representative also pointed out that it was wrong on the part of the CIT(A) to have observed that the assesseecompany was entitled to earn only tax-exempt incomes from QAMC. In this context, reference was invited to the agreement dated 1.6.2011 with QAMC, a copy of which has been placed at pages 223 to 226 of the Paper Book, to show that assessee was entitled to earn Management fee also, which was a taxable receipt. The learned representative pointed out that the aforesaid crucial piece of evidence was put before the CIT(A), who had also called for a Remand report on such evidence, but sam....
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.... the Asset Management Company of the Mutual Fund and not by the assessee who was sponsor of the Fund. With regard to the earning of taxable Management fee from QAMC, the ld. DR pointed out that such income earned by the assessee over the years was less than the expenditure incurred by the assessee on advertisement, etc., and it would not defeat the invoking of Sec. 14A of the Act. According to him, the incomes that assessee was liable to earn in future on account of dividend and Long Term Capital Gain from QAMC were indeed exempt from tax and thus, invoking of Sec. 14A of the Act was justified in order to disallow the impugned advertisement expenditure. 13. We have carefully considered the rival submissions. The crux of the controversy in this ground revolves around as to whether the advertisement expenditure incurred by the assessee could be construed to have been incurred "for the purposes of the business" within the meaning of Sec. 37(1) of the Act. The appellant-company has established a Mutual Fund, i.e., Quantum Mutual Fund as a sponsor in terms of SEBI (Mutual Fund) Regulations, 1996. A Mutual Fund is set-up in the form of a Trust, which has a sponsor, trustees, Asset Manag....
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....er, in the context of a businessman, it would be safe to deduce that the expression "commercial expediency" would suggest that expenditure is incurred with a sense of prudence for the purposes of business. In fact, it is a trite law that in order to determine the allowability of business expenditure, legal obligation to incur the expenditure is not the requirement, but it would suffice if the expenditure was incurred on the ground of commercial expediency. If we examine the impugned advertisement expenditure incurred by the assessee as a sponsor of the Mutual Fund and as a holding company for the Asset Management Company of the Mutual Fund, it could not be said that assessee was devoid of any locus standi. In fact, there can be no denying the fact that the purport of the expenditure was to increase assessee's own earnings inasmuch as the Management fee which the assessee is entitled to earn from QAMC is also dependent on the level of average assets of the Fund managed by QAMC. The aforesaid becomes clear from the agreement of the assessee with QAMC, a copy of which has been placed in the Paper Book at pages 223 to 226. In fact, the agreement dated 1.6.2011 enumerates the role and r....
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....e aforesaid, we therefore do not find any merit in the stand of the income-tax authorities that the expenditure in question is not laid out for the purposes of assessee's business, merely because it could benefit another entity also. 15. We may also refer to the reliance placed by CIT(A) on the judgment of Hon'ble Supreme Court in the case of Amalgamations (P) Ltd., 226 ITR 188 (SC). According to the CIT(A), the ratio of the above decision justifies the inference that the impugned expenditure was not incurred for the purposes of assessee's business. We have perused the judgment of Hon'ble Supreme Court in the case of Amalgamations (P) Ltd. (supra) and find that the same has been unjustly applied in the present case inasmuch as the facts and circumstances in the case before the Hon'ble Supreme Court stood on an entirely different footing. The assessee before the Hon'ble Supreme Court was a bulk shareholder in several companies and it was rendering services to its subsidiaries in various areas of finance, liaisoning, export promotion etc. The Directors of the subsidiary companies were earning remuneration from the respective companies in terms of the limits fixed und....
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....the assessee had done was something, which had an objective of increasing the profits of the managed company, which in turn would increase its own share of commission income. The Hon'ble Supreme Court in the case of Amalgamations (P) Ltd. (supra) considered the judgment of Hon'ble Bombay High Court and observed that there was a direct nexus between the increased profits of the managed company and the managerial commission payable to the assessee since such agency commission was calculated as a prescribed percentage of the net profits of the managed company. In our considered opinion, the parity of reasoning in the case of Tata Sons (P) Ltd. (supra) is clearly attracted in the present case too. There can be no gain saying that-better the performance of the Mutual Fund and the Asset Management Company, better would be the returns of the assessee-company. Therefore, in our view, the CIT(A) has erred in holding that the advertisement expenditure is not laid out wholly and exclusively for the purposes of the appellant's business. Having regard to the aforesaid discussion, we reverse the stand of the lower authorities on this aspect. 16. The other plea of the Revenue, based on t....