TMI Blog2016 (5) TMI 280X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 rendered by Preroy AG, in our opinion, it is wholly irrelevant whether the services, for which billing is done by Preroy AG, are for the purposes of business of the assessee. As regards learned counsel’s contention that the income in question, in the hands of Preroy AG, has been brought to tax in India, and, therefore, it cannot be said that no services are rendered, we are of the view that merely because an income has been taxed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 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 ₹ 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 Appellant. (c) In observing that PAG has only one client all over the world ie the Appellant. (d) In observing that evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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, only bills and invoices for services but that did not constitute any evidence about the services having been rendered. Coming to the invoices raised on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... KP(STPL) is requesting to SKP (PAG). Similarly Shri SKP (PAG) makes a recommendations to Shri SKP (STPL) who may or may not act on such recommendation, 5.11 While submitting its bill vide invoice no. 31 (running invoice no.1996- 24) dated 3.10.1996, the narration of the services rendered is as under : DEFENCE SERVICES OPPORTUNITY Billing for services 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 featu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic discussion or whether they were in connection preparation and conduct of presentation giving demonstration of some product. It is highly unlikely that all such services have same cost. It may be mentioned that as per the agreement between PAG STPL all out of pocket expenses incurred by PAG to provide these services shall be reimbursed by STPL on a actual 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had claimed that its income are exempt in India as the fees receipt by the assessee company (PAG) are business profit under article 7 of the Treaty. No fees have been included services and the assessee has no P.E. in India, from the above findings of the A.O in the case of PAG clearly show that both PAG and STPL are basically controlled by only one person 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he foreign companies have entered into joint venture with STPL on the advice given by PAG is not acceptable as it is not supported by any agreement or documents. Only invoices raised by PAG and the summary given for nature of so called services claimed to have rendered by PAG are not sufficient to prove that PAG was actually engaged in providing consultancy 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee only. Take for example, invoice no. 1 dated 1st November 2014 for US $ 10,000. The narration on the invoice and the supporting documents in this regard are as follows: OKS India- Carl Bechem GmbH, Hagen Negotiation on behalf of STPL in March 1994, in respect of development of a proposal for the manufacture of speciality grease 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 becaus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the capacity as director of the assessee company, and, yet billing for the work done in the course of trips so undertaken at the cost of the assessee company, has been done in the name of Preroy AG. There is nothing on record to show that these foreign trips were undertaken by SKP at the cost of Preroy AG or in the course of his work as director 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rates to be agreed by the parties on a case to case basis and that the fees in respect of any assignment will be agreed upon by the parties before PAG commence work on the said assignment . There is, however, no evidence lead before us which suggests that the fees for any assignment was agreed to before any assignment commenced. There 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court s full bench decision in the case of Ram Bahadur Thakur Ltd Vs CIT [(2003) 261 ITR 390 (Ker FB)], the action of the authorities below deserves to be confirmed. We, therefore, confirm the stand of the authorities below and decline to interfere in the matter. 17. Ground no. 2 is thus also dismissed. 18. In the result, the appeal for the assessment year 1995-96 is dismissed. 19. As regards appeal for the assessment years 1996-97 and 1997-98, learned representatives fairly agree that the barring for the quantum of disallowances, which is of ₹ 1,00,49,742 and ₹ 1,21,42,602, in respect of fees paid to Preroy AG, and of ₹ 8,04,904 and ₹ 9,11,057, in respect of foreign travel expenses of Mrs Neeta Premchand, for the assessment year 1996-97 and 1997-98 respectively, all the material facts and circumstances are the same. Whatever we, therefore, decide for the assessment year 1995-96 will apply mutatis mutandis for these two assessment years as well. 20. In the result, the appeals for the assessment years 1996-97 and 1997-98 are also dismissed. 21. In the result, all the three appeals are dismissed. Pronounced in the open court today on the 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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