TaxTMI 
TaxTMI 
2020 (4) TMI 757
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....ended and furnished the details as called for. 3. During the assessment proceeding, AO observed that assessee has debited an amount of Rs. 2,89,29,114 and Rs. 69,32,256/- under the head service fees and membership & subscription fees respectively. He further observed that similar expenditures were not debited in the earlier AY 2008-09. Therefore, it is one time payment of the assessee during the year under consideration and he observed that the expenditure debited by the assessee in this heads amounts to 44.45% of the total expenditure debited to the Profit & Loss Account. Further, Assessee was show cause to explain as to why this expenditure cannot be treated as capital expenditure. In response, assessee submitted that the expenditure debit to profit and loss account are wholly and exclusively for the purpose of business and these expenditures do not provide any enduring benefit to the assesse and it does not fall in any of the nature of expenditure described in section 32 & 36 of the Act. Therefore, this expenditure will invariably fall u/s 30 or 37 of the Act as revenue expenditure. After considering the submission of the assessee, AO made the addition with the following o....
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....eased by more than 10% whereas expenses incurred under these heads has decreased by more than 90%, clearly stating the facts that these expenses have resulted into increasing the service base of the company, If these are revenue: expenses, then with the increase in turnover the same should also increase/decrease proportionately not irrationally. 5.6 In view of the above facts and circumstances of the case, the sum of Rs. 2,89,29,114/- expended as Service Fees, and Rs. 69,32,256/- as Membership and Subscription Fees are capital in nature as it provides, and has provided enduring. benefit to the assessee company. Accordingly, the sum of Rs, 3,58,61,370/- is treated as capital expenditure. Moreover, depreciation on the same cannot be given as it does not falls with the purview of section 32 of the Act, Hence, the sum of Rs. 3,58,61,370/- is added back to the total income of the assessee. Penalty proceedings u/s,271(1)(c) read with Explanation 1 thereto are initiated separately for filing of inaccurate particulars of income thereby concealing the income. 6. Subject to above the total income of the assessee company is computed under:- Total Income (As Per Computatio....
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....lanning and such other general management administrative service. 3.6 The charge of the services was particularly the allocation of the salary compensation of the personnel who were involved in providing these services. The services were related to the ongoing operational activities and did not bring into existence in the capital asset to the appellant nor did the result into any benefit of enduring nature for the appellant. 3.7 The appellant has incurred expenditure amounting to Rs. 2,89,29,114/- towards payment for services received from the aforementioned MF Global overseas group entities. The appellant considers this expenditure which was incurred for the purpose of ongoing business activities to be deductible u/s 37 (1) of the IT Act. These transactions were covered by transfer pricing provisions under the Act and have been reported in the Accountant's report on Form No. 3 CD EB for the year under consideration 3.8 However, effective from financial year 2009-10 on account of the change in the global management, it was decided to withdraw the contract for providing common services to group entities. Therefore, the appellant is not borne expenditur....
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....se. 5. With regard to membership & subscription charge, assessee made a detail submission before Ld. CIT(A), which is reproduced below:- 4.1 The appellant is in the business of identifying potential local customers that it refers to overseas MF global group entities. 4.2 These customers open accounts with overseas group entities for entering into transaction and overseas capital markets. 4.3 As a part of the agreement with the group entities besides identifying potential customers the appellant is responsible for- * Appraising the customers from credit risk perspective * Assisting in completing the required documentation between the customer and the group entity Liasoning for the same * Transmitting on behalf of the customers, the execution order in respect of purchase or sale of commodities of foreign currency on international markets to group entities. 4.4 The customers in India who are transacting in overseas capital markets are in different time zones, This causes difficulties in placing orders etc. and resultant delays. It only involves a lot of administrative & operational costs and therefore to avoid the time ....
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....the appellant at the time of incurring this expense would need to be seen. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. Capital expenditure is, therefore, closely akin to the concept of securing tangible or intangible property or rights of a lasting or enduring benefit to the enterprise. 3.12 By its own accounts the assessee has stated that it has incurred the expenditure A concerned to gain an advantage in the marketing field of its business by usage of the expertise available with the personnels of the global group by paying extra compensation over and above the salaries they were receiving albeit by way of contract decided by the global management of the MF Group. It has also been stated that such an expenditure would have helped the appellant in his business in the current and future years, The reason for termination of the contract was not because the appellant did not require it or was not eager to exploit the expertise of the personnels but because the global management decided to discontinue it. However, the advantage gained in the year when the services was avai....
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....llant that from the next assessment years, the customers have directly been paying the charges and therefore it is to be assumed that the expenses are revenue in nature. However, no proof to establish this statement has been submitted by way of bill etc. No proof of termination of agreement made by which the appellant was made responsible for the payment have been furnished to show that the appellant is no more liable for these charges. Besides as stated earlier on in this order it is the intention of the appellant at the time of making the expenditure that needs to be seen. From the details before me, it is clear that the expenses have been incurred by the appellant in the concerned year for availing a membership benefit of the trading terminals for advancing its own business in the current year and in the future taking into account its customer base and their needs. I find that the appellant's case is covered by the principles pronounced by the Hon'ble High Court of Delhi in CJT v/s Engineers India Ltd. (1999) [155 CTR (Del) 394] wherein the Hon'ble Court has held that admission fees paid to an engineering concern, to acquire membership of a research organisation was ....
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....he circumstances of the case, in disallowing a sum of Rs. 69,32,256 on account of membership and subscription charges for trading terminals, and treating the same as capital expenditure. ' The Appellant craves leave to add, alter, vary, omit, substitute or amend the grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Honourable Members of the Income Tax Appellate Tribunal to decide this appeal according to law. 8. Before us, Ld. AR submitted the facts and findings of revenue authorities with regard to service charges, he brought to our notice para 3.2 of the order of Ld. CIT(A). He submitted that Ld. CIT(A) had not considered and appreciated the extended service of group entities. These are revenue expenditures and allowable expenditure. He relied on following case law:- i) Empire Jute Co. Ltd. vrs. CIT 124 ITR 0001 ii) OCL India Ltd. vrs. ACIT 304 ITR 262 (del) 9. With regard to Ground no. 2, Membership & Subscription Charges, he brought to our notice para 4 and 4.5 of the order of Ld. CIT(A) and para 5.4(b) of the order of AO. Further he brought to our notice page 25 of the paper book, assessee h....
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....AR brought to our notice financial statement for subsequent assessment years i.e. AY 2010-11 and brought our notice comparable data and we notice that no doubt assessee has incurred service fees to the extent of Rs. 2,89,29,114/- and in the same year, assessee has also incurred employee cost to the extent of Rs. 3.99 crores and in the subsequent assessment year, assessee has incurred only Rs. 15,42,181/- towards service charges, whereas assessee has incurred employee cost of Rs. 5.15 crores. It clearly shows that assessee has stopped utilizing the services of group entities and started employing its own staff and relevant services extended to its customers by utilizing its own staff. There is considerable increase in the employees cost shows that there is shift in the management decision. Even otherwise assessee has submitted the analysis of making payments to its sister concern and submitted the relevant documents treating this as international transaction. Since the transaction involved is only to the extent of Rs. 2.89 crores, therefore AO may not have referred this case to TPO, just because it is not coming under TP study and there is abnormal increase in the cost, does not mea....