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2016 (5) TMI 280 - ITAT MUMBAI

2016 (5) TMI 280 - ITAT MUMBAI - TMI - Disallowance of the payment of professional fees to Preroy AG ('PAG') - Appellant has claimed income earned by PAG as exempt from tax in India - Held that:- The agreement merely states, at clause E 1, that “for the services rendered by PAG under this agreement, STPL shall pay fees to PAG at 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 .....

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le 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 thes .....

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y 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 in the hands of recipient of an income, does not mean that it’s a deductible expenditure in the hands of the person making the payment. The deduction is required to be examined a .....

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of this appeal. All the specific issues have been dealt with in this order anyway. - Decided against assessee

Disallowance in respect of the travelling expenses - Held that:- As no evidence has been lead before us to demonstrate and establish that the travel by director’s wife was “wholly and exclusively for the purposes of business of the assessee”, and in the light of Hon’ble Kerala High Court’s full bench decision in the case of Ram Bahadur Thakur Ltd Vs CIT [2003 (1) TMI 66 - KERA .....

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995-96, of ₹ 1,00,49,742 for the assessment year 1996-97 and ₹ 1,21,42,602 for the assessment year 1997-98) to Preroy AG (a Switzerland based company) . All the three appeals pertain to the same assessee, arise out of a common set of facts and were heard together. As a matter of convenience, therefore, we deem it appropriate to dispose of all the three appeals by way of this consolidated order. 2. We will first take up the appeal for the assessment year 1995-96. 3. This appeal, filed .....

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t') 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 .....

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on directors. (f) In observing that PAG is an agent of the Appellant. (g) In observing that consultancy services rendered by PAG to the Appellant are not supported by an agreement. (h) In observing that the nature of services provided by PAG to the Appellant could not be ascertained from the documentation submitted by the Appellant. (i) In observing that the Appellant's claim that all foreign companies have entered into a joint venture with the Appellant on the advise of PAG is not acceptabl .....

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f the scrutiny assessment proceedings, the Assessing Officer noted that the assessee has paid a sum of ₹ 49,09,637 to a Switzerland based company by the name of Preroy AG. As noted by the Assessing Officer, this fees was paid as the PAG was required to render services to assessee for locating new business opportunities, recommend proposal for new projects and coordinate existing and new joint venture partners for technology transfers, equity participation and secure the support for new bus .....

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contended by the assessee that the expenditure incurred by the assesse, by way of making impugned payments to PAG, were to protect and preserve the investments of the assessee, and since the assessee was engaged 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 .....

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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 the assessee, he noted that these invoices were also rather vague. It was noted that bill no .....

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d that the bills raised by PAG were quite general and vague which were for nothing but transfer of funds by the assessee to PAG were S K Premchand is main director in both the companies . The Assessing Officer also referred to, and relied upon, his orders for the assessment year 1997-98 which was already passed much before the impugned order, as this year, i.e. year before us, was carried in appeal before the CIT(A) and then remitted to the file of the Assessing Officer; what we are dealing with .....

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G is registered in Switzerland, by using this channel of payment for so called professional services, the assessee company is helping Shri SKP in siphoning off substantial profits to his overseas bank account . As regards the evidence for services rendered by the PAG, the Assessing Officer made specific observations as follows: 5.8 Let us now evaluate the evidently strength of the evidences submitted by the assessee company. The breakup of all 34 invoices raised by PAG during the previous year r .....

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ated 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. 5.9 From the details accompanying all 34 invoices following common features are observed : i) The nature of services stated to have been rendered are mentioned in very general and vague terms. All these invoices talk of rendering services in connection with the attending, discussing, negotiating, securing a com .....

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il K. Premchand, Managing Director bas been appended. iv) All the papers including the invoices the fax message, the itinerary details, Hotel booking, boarding passes etc. have relevant dates appearing on them. But none of the fifed note/recommendation has any date on it. It raises doubt whether they were ever actually sent or not. 5.10 Each file note/recommendation starts with the word at the request of the Board of STPL …….. . However, no evidence in any of the set of supporting .....

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be agreed by the parties on a case to case basis. The fees in respect of assignment will be agreed upon by the parties before FAG commenced work on the said assignment" It was stated by the assessee company that the requests were made by STPL orally. This fact was confirmed in assessment year 1995-96. Once again, it is interesting here to note that all the requests on behalf of STPL are made orally and the recommendations have also been communicated orally (as already mentioned none of the .....

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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 als .....

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that the discussion were actually held with that ember of that company for exploring the possibilities of STPL's entering into transaction with that company. 5.10 Similarly, invoice no.34 (running invoice no.1996-13) dated 23fd May 1996 reads as under : EXAMINATION OF NEW OPPORTUNBITIES FOR AINDIA DURING RECENT VISIT TO THE USA: Billing for services rendered in connection with meeting members of the senior management of two European companies at an international conference in Chicago in May .....

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g to STPL. As already mentioned that STPL had never requested SKP to go to Chicago. 5.13 All above facts considered together give a definite indication that actually no services have been rendered by PAQ to STPL. Moreover, credentials of PAG having expertise in relation to providing various consultancy services have also not been established. Another important fact seen from the details furnished by the assessee during this year as well as in earlier year is that the running invoice ( PAG appear .....

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e of US $ 10,000/- irrespective, whether the so called services were only in connection with the Telephonic 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 reimb .....

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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 the services because as per the agreement dated 2.1.1995, each invoice has to be prepared and approved on case to case basis before the invoiced activity commences. Obviously, neither the asse .....

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id to have been incurred wholly and exclusively for the business of the assessee company. Accordingly expenses of ₹ 1,21,42,602/- are not allowable expenditure u/s.37(1). 5. It was in this backdrop that the Assessing Officer disallowed the fees for consultancy charges paid to PAG. Aggrieved, assessee carried the matter in appeal before the learned CIT(A) but without any success. Learned CIT(A) upheld the disallowance. In her short order, learned CIT(A) reasoned as follows: 3.9 I have caref .....

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the whole world i.e. M/s. STPL from whom it has received fee for management consultancy. The assessee company (PAG) is a show of single individual Shri Premchand who holds 100% shares in the assessee company. This one man company has received from one group concern which is engaged in the same business in India. The assessee has no other business. This facts clearly leads to conclusion that the Indian Co. (STPL) is dependant agent of the foreign company. Since the foreign company has a dependen .....

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oth 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 wh .....

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sional fee has to put in some efforts to get the business but the appellant has brought nothing on record to show whether any effort was put in by the said agent. I have gone through the documents/papers furnished by the appellant. The appellant has furnished a statement indicating the list of projects undertaken by the appellant wherein it claims that PAG had rendered consultancy services during the F.Y. under consideration. The names of some foreign companies with whom the appellant has entere .....

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ce have also been filed but all these papers does not prove the nature of services rendered by PAG. These letters/correspondence are personal in nature. Thus, it could not be ascertained as to what was the nature of services rendered by PAG to STPL. The only relevant document is invoices which have been raised by PAG to STPL. It is interesting to note that for every kind of services PAG claims to have charged 10,000 $ only irrespective of the fact whether the so called services were only in conn .....

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invoices. All supporting evidence consisting of mainly zerox copies of FAX messages sent, copies of receipt of hotel booking, copies of boarding passes of Air Travel and some pamphlets relating to certain products do not prove the nature of technical services rendered by PAG. The claim of the assessee that all the 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 .....

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ind 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 f .....

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ught on record by the appellant does not show any past history of the Swiss Company having any technical expertise as STPL is the only associate company to which PAG claims to have rendered technical services where both the companies have common directors and the Indian Company has given no basis on which the alleged commission/professional fee has been paid. In the result the findings of the A.O is upheld and this ground of appeal is dismissed." 6. The assessee is not satisfied and is in f .....

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r evidence the assessee has lead, so far as the rendition of service by the PAG is concerned, refers to the involvement of SKP and inputs by him. There is nothing before us to establish, or even indicate, consultancy or advisory work done by any person other than SKP. In pictorial terms this flow of advisory work could be explained as follows 9. Even in the situation described above, there could possibly be no objections to the situation in which the services are rendered by Preroy AG in its own .....

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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 1993-9 .....

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required to be treated as rendered by the Preroy AG because, the director was also a one hundred percent owner and a director of Preroy AG, and because, at the point of time when he was doing all this work, he had discarded the hat of director in the assessee company to wear the hat of director of Preroy AG. That is the situation with respect of the entire work in respect of which Preroy AG is paid. The evidence in support of rendition of services, whether during the assessment year 1995-96 or .....

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the Preroy AG is paid, is the work done by SKP. There is no evidence for any independent work done by Preroy AG. A lot of emphasis is placed on the work done in connection with OKS India and the fact that the assessee had substantial stakes in this entity. Learned counsel has taken pains to emphasize the fact that the assessee is in the business of investments and the work done to protect his investments in these companies is also for the purposes of his business of making investments. The occa .....

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, and, therefore, Preroy AG should be paid for the work so done. We are unable to accept this claim, which, in our considered view, is too far fetched. Here is a director of the company rendering services to the company in which he is a director and a rank outsider commercial entity, owned by the director, is being paid for the work done by the director. It appears that the foreign trips, during which the work is claimed to have been done, were taken up in the capacity as director of the assesse .....

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penses 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 bu .....

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s . This bill is supported by SKP s boarding passes at Zurich and Munich ad report on Inchem visit on 18th August 1994. In the details of travelling expenses, however, SKP has justified his Germany trip, probably with a stopover at Zurich, on the ground that he represented STPL at business meetings with joint venture partners in Germany . When SKP was representing the assessee in the meeting with the joint venture partners, there cannot be any question for the payment of the same presence, of th .....

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with the services as follows: C1. PAG shall render any or all the services under this agreement at any place outside the territory of the Republic of India, depending on the requirements of STPL. C2. PAG shall make endeavour to locate new business opportunities and partners of STPL and recommend proposals for new projects, and negotiate, coordinate with existing and new joint venture partners or technology transfers, equity participation etc, and secure their support for, and approval of, new bu .....

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STPL shall pay fees to PAG at 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 f .....

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as 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 .....

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he hands of recipient of an income, does not mean that it s a deductible expenditure in the hands of the person making the payment. The deduction is required to be examined and adjudicated upon in accordance with the law, and, when we do so, we donot find legally sustainable merits in the claim of the assessee. 13. As regards the observations made by the CIT(A), which have been challenged in this appeal, we are not inclined to deal with the same individually. What matters is that the disallowanc .....

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