TMI Blog2011 (4) TMI 877X X X X Extracts X X X X X X X X Extracts X X X X ..... ts staff - Decided in favor of the assessee Telephone expense to director's wife - Held that:- Assessee has not been able to establish as to how the payment made towards telephone expenses of directors' wives incurred voluntarily by the company can be said to be on the ground of commercial expediency and facilitating the carrying on of the business of the assessee - in favor of the assessee Business development expenses - Held that:- Nowadays, it is not uncommon that lunches and dinners are being arranged at directors' house where the customers of the company are invited to develop cordial relations with them - In this case, the amount is very nominal and it has not been proved that the parties were not arranged by the company but it was a personal party of a director - Decided in favor of the assessee - IT Appeal Nos. 2240 (Delhi) of 2006 and 2041 (Delhi) of 2009, - - - Dated:- 8-4-2011 - G.E. Veerabhadrappa, C.L. Sethi, JJ. Rajan Vohra, Preeti Goel, Nitin Narang and Ashish Kumar for the Appellant Ashok Pandey for the Respondent ORDER C.L. Sethi, Judicial Member 1. These two appeals, filed by the assessee, are directed against two separa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not recovered from the project company, namely BGLNG, the same would be reimbursed by BG by way of an adjustment against the advance remittances. It was submitted by the assessee before the Assessing Officer that the subject transaction is a cost sharing arrangement between the assessee and BGLNG rather than rendering of services by the assessee. It was further submitted that a mark up of 8 per cent on costs would have been appropriate only if assessee company had rendered any services to its associate enterprise. The assessee further clarified that 8 per cent mark up on cost has already been charged where assessee had rendered services to its associate enterprise. But, since it was merely a cost sharing arrangement, no contractual agreement was made to provide for mark up on disbursement of various amounts on behalf of BGLNG out of advances made by BG. The assessee further stated before the Assessing Officer that no adjustment in this regard has been made by the TPO while determining the arm's length price of the transactions entered into with the associate enterprise. 6. The aforesaid explanation has been considered by the Assessing Officer but he did not accept the same. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces and facilities in excess of its requirements. He pointed out that mark up of 8 per cent with regard to transactions of rendering services to its affiliates has been shown by the assessee. However, no mark up has been earned by the assessee in respect of the facilitation of disbursement of various expenses incurred on behalf of BGLNG out of the advances made by the BG group as no services were actually rendered by the assessee in that respect but only it was a case of cost sharing arrangement. He further submitted that a mark up on costs incurred in connection with cost sharing arrangement would have been appropriate only if the assessee had rendered services to its affiliates. He further submitted that assessee and his group company have contractually agreed not to provide for mark up on disbursement of various expenses on behalf of BGLNG out of advances made by the British Gas group. Under the cost sharing arrangement, the only function performed by the assessee with regard to project development was disbursal and facilitation of payments and coordination of the services for which the assessee has been reimbursed adequately under the service agreement and as such, there was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncluding that these expenses were disbursed by the assessee company on behalf of the group company in connection with services rendered by the assessee, the Assessing Officer has failed to examine and verify the nature and purpose of these expenses vis-a-vis nature of services rendered by the assessee with a view to determine as to whether these expenses are directly relatable to the services rendered by the assessee-company to its group company, in respect of which 8 per cent mark up was receivable. The terms of employment of expatriate employees and local employees have not been brought on record to determine whether works executed by employees were related to the services rendered by the assessee to its associates and/or whether they were working under the control and management of the assessee. The nature of work or activities, in the course of which the expenses in question were allegedly disbursed by the assessee for and on behalf of its associates, need to be examined and verified to ascertain whether expenses were related or connected to the services rendered by the assessee company. The question as to whether it was merely a cost sharing arrangement or whether the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roper to support its case. The matter shall remain open for fresh adjudication by the Assessing Officer as per law. We order accordingly. 14. Ground No. 3 is directed against CIT(A)'s order in upholding the action of the Assessing Officer in disallowing entertainment expenses and staff function expenses amounting to Rs.2,98,431. 15. The Assessing Officer has discussed this issue in para 6 of his order where the details of the expenses item-wise and amount-wise have been narrated. The Assessing Officer has disallowed these expenses merely by observing that these expenses are personal in nature and not wholly and exclusively for the purpose of business. He, accordingly, disallowed the expenses of Rs.2,98,431. 16. On an appeal, the learned CIT(A) confirmed the Assessing Officer's action. The CIT(A) has observed that these expenses were claimed by the assessee as staff welfare expenses but it is very unlikely that for the parties given by the CEOs, directors etc., staff of all the levels will be included. The CIT(A) further observed that token expenses incurred on account of farewell arranged in the office can be allowed but from the details, it was seen that the farewell e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in the light of the appellate order of CIT(A) dated 25-4-2005 pertaining to the assessment year 2001-02. 23. Hence, the assessee is in appeal before us. 24. We have heard both the parties and considered the material on record. 25. The learned counsel for the assessee has submitted that even expenditure incurred voluntarily on the ground of commercial expediency and in order to indirectly facilitate the carrying on of the business would be deductible under section 37 of the Act. However, the assessee has not been able to establish as to how the payment made towards telephone expenses of directors' wives incurred voluntarily by the company can be said to be on the ground of commercial expediency and facilitating the carrying on of the business of the assessee. The directors' wives are not in any way connected or related to any business activity of the assessee. We, therefore, do not find any merit in this ground and reject the same. The order of CIT(A) on this ground is thus upheld. 26. Now, we shall come to the appeal pertaining to the assessment year 2003-04. 27. Ground Nos.1 to 7 raised by the assessee have been summarized in the written synopsis filed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found by the Assessing Officer that assessee had incurred Rs.1,04,317 towards expenses incurred on account of holding parties at Nigel's residence on several occasions. The Assessing Officer disallowed the same by observing that these expenses were personal in nature and not wholly and exclusively for the purpose of business. 35. On an appeal, CIT(A) confirmed the Assessing Officer's action after following the order of learned CIT(A) passed in immediately preceding assessment year. 36. The learned counsel for the assessee has submitted that the issue involved in assessment year 2002-03 was regarding the disallowance of various expenses incurred on dinners, parties of farewell and arranging cricket matches. However, in the year under consideration, the expenses were incurred in connection with arranging dinner meeting at Nigel's and Phil's residence, the two directors of the assessee company. He further submitted that parties at directors' house were arranged for the purpose of establishing and maintaining business relationship with various customers and prospective customers. He, accordingly, submitted that expenses such as lunch, dinner or small parties and get together o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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