TaxTMI 
TaxTMI 
2019 (4) TMI 709
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....estment research services to two overseas funds, namely, Lok I and Lok II. The two overseas funds had on the basis of inputs and details furnished by the respondent-assessee made investments in Indian micro-finance companies, health care and education services sector. For rendering the aforesaid services, the respondent-assessee was paid a fee by the two overseas funds. 3. During the year in question, the respondent-assessee under an agreement had paid Rs. 2,88,43,934/- to Lok Foundation, an associated entity registered in Mauritius. Respondent-assessee had justified this one-time payment stating that due to the efforts of one Donald Peck, co-founder of Lok Foundation, the total fund size of the investments in India had increased from US$ 36,550,000 in January 2011 to US$ 65,000,000 by the end of financial year. The payment, it was stated, was directly relatable to the substantial increase in the fund size, which had accordingly contributed to increased fee being charged and paid to the respondent-assessee. 4. Payment of Rs. 2,88,43,934/- to Lok Foundation was disallowed in the assessment order for the following reasons :- "The assessee vide its reply dated 24.02.201....
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....s, which is a tax heaven with an effective tax rate of around 3%. The assessee company is employing this ploy by which the profits are being siphoned off in the garb of consultancy fee to Lok Foundation situated in Mauritius where ultimately no tax or miniscule tax will be paid on this amount. The area of the operation of the assessee company is in India and the assessee is identifying the projects situated in India for which it is issuing advisory to the funds. I wonder how an entity based in Mauritius give any advisory to the assessee company regarding the projects situated in India. The provisions of Section 37(1) of the IT Act, 1961 are very clear that the expenditure should be made wholly and exclusively for the purposes of the business to be allowable in computing the income chargeable under the head Profits & Gains of Business or Profession. In view of the above discussion it is clear that the amount of Rs. 2,88,43,934/-spent as so called consultancy fee is not spent wholly and exclusively for the purpose of the business of the assessee, therefore, the same is disallowed and the income of the assessee is enhanced by Rs. 2,88,43,934/-. In view of the facts a....
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....ion. These details and particulars, though submitted to the Assessing Officer, were ignored and not referred to and considered in the assessment order. Further, the assessee had deducted tax at source @ 10% on the payment made to Lok Foundation and the same had been deposited with the Income Tax Department. 7. Having considered the facts, evidence and material on record, the CIT (Appeals) held as under:- "3.2 In order to decide the issue on hand, it is necessary to recapitulate the facts of the case. The appellant renders investment advisory services to certain Mauritius Funds called Lok Capital LLC I (Lok 1) and Lok Capital LLC II (Lok 2). The first Investment Advisory Agreement was entered into in September, 2006 and the second during the previous assessment year 2011-12 i.e. on 11.08.2010. The services to be rendered by the appellant include advice and comments on potential portfolio companies, potential disposition of investments, structuring of acquisitions and disposition of investments, advice on identification and arranging of process of finance along with review of all documents required, comments on the performance of portfolio companies and assistance in the ....
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....uestion is of a nature of expenditure described in sections 30 to 36 of the Act or that is capital or personal in nature. The grievance of the AO is that the amount has not wholly and exclusively expended for the purposes of business. This, as we have seen, is a fallacious grievance as the advisory/consultancy fees paid to LFM is directly connected to the funding of the two overseas funds, which in turn, directly influences the advisory fees received by the appellant. Thus the expenditure in question is fully covered within the purview of section 37(1). The other grievance of the AO is that the services have been rendered by LFM to the overseas funds whereas the appellant is rendering services to Lok II for investing in appropriate projects in India. This grievance is also not justified as the efforts of LFM in raising funds for Lok II directly impact upon the trading results of the appellant company and it is only when the funds are received that the appellant company is called upon to advice the focus areas for investment by the fund holders in India. So far as the remarks of the AO that the overseas funds should have paid the fund raising fee to LFM and not the appellant, in vie....
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....on. The contention that the consultancy fee was a ploy to siphon away the profits was rejected as an assumption or inference drawn by the Assessing Officer without any basis, observing that such comments should not be made without a firm foundation. 9. The aforesaid findings have been affirmed by the Tribunal observing that there was substantial increase in the advisory fee earned by the respondent-assessee from Rs. 4.7 crores in the preceding year to Rs. 9.21 crores in the current year. The increase was nearly 93%. In the facts and circumstances, one time consultancy fee of Rs. 2.88 crores to Lok Foundation, it was held was paid for the services rendered and business consideration. The reasons stated in the assessment order for not treating the expenditure as allowable under Section 37 of the Act was rejected. 10. In the present case, identity and existence of Lok Foundation was not doubted by the Assessing Officer. Actual payment of money was not doubted. What was questioned and doubted was the nexus between the expenditure and business of the respondent-assessee to hold that the expenditure was not 'wholly and exclusively' for the purpose of business as Lok Foundat....