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2016 (6) TMI 531 - ITAT MUMBAI

2016 (6) TMI 531 - ITAT MUMBAI - [2016] 49 ITR (Trib) 93 - Allowance of consultancy and advisory services - non setting up of business - Held that:- In the instant case under appeal, the project for manufacturing and supplying of locomotives has not yet been set up , while only preparatory steps are taken by the assessee company by bidding for award of the contract by Rites Limited , Ministry of Railways in favour of the consortium partners which included assessee company also for setting up man .....

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any. Looking into all these facts and circumstances of the case we find no infirmity in the order of the ld. CIT(A) and we uphold and sustain the same for the reasons as indicated above. We order accordingly. - Decided against assessee - I. T. A. No. 4610 / Mum/ 2013 - Dated:- 13-6-2016 - Shri C. N. Prasad, Judicial Member And Shri Ramit Kochar, Accountant Member For the Assessee : None Fore the Revenue : Shri S. Senthil Kumaran, DR ORDER Per Ramit Kochar, Accountant Member This appeal, filed by .....

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appeal raised by the assessee company in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called the Tribunal ) read as under:- On the facts and circumstances of the case, the learned CIT(A) has: 1. erred in confirming action of the Assessing Officer in disallowing the professional fees paid to BMR Advisors Pvt. Ltd ('BMR'), an independent third party consulting firm on the ground that the expenses have not been incurred for the purpose of business of .....

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eholder in the assessee company .The assessee company has said to have received an income of ₹ 9,13,79,857/- on account of service charges from the holding company for providing vendor and supply related information to its holding company. 4. It was observed by the AO from the perusal of the P&L account for the year ended on 31st March, 2009 shows an amount of ₹ 1,65,31,483/- had been debited as legal and professional charges by the assessee company. From the details submitted by .....

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ssessee company was asked by the AO to submit the details about the narration in the invoice Professional fee for the services rendered to GE in relation to the IR project and how these expenses pertained to the business of the assessee company.The AO asked the assessee company to submit copies of the contract entered into by the assessee company with BMR . The assessee company submitted that it is engaged in the business of providing sourcing services in relation to requirements of transportati .....

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explained that the assessee company had paid 1,35,74,240/- to BMR for consultancy and advisory services for upcoming Indian Railways(IR) business project as stated above. The assessee company submitted that no agreement was entered into with BMR . The assessee company submitted that for availing these services from BMR for which there is no agreement other than invoices raised giving details of services rendered. The assessee company submitted that these expenses were incurred during the course .....

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olding company M/s GE Global Sourcing LLC, USA. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, the assessee company had furnished copy of service agreement dated 16th January, 2001 between the assessee company and the holding company M/s GE Global Sourcing LLC, USA which was for providing services to the holding company. It was observed that in consideration for payment of services contemplated in the agreement, the holding company GE Global shall pay .....

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y which does not pertain to their business of sourcing for the holding company . In this endeavor as per the services agreement the assessee company is in receipt of a fee which is the cost plus 5%. The assessee company was captive service provider to the holding company . The A.O. further observed that the professional fee payment of ₹ 1,35,74,240/- paid to BMR Is not a business expense of the assessee company and is not incurred for company s business purposes. The assessee company has n .....

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from income of original objectives of providing services to the holding company. It was observed from the computation of account furnished by the assessee company for financial year 2008-09 that the assessee company expanded the scope of its present business of infrastructure projects to manufacture and supply of train locomotives etc. For this purpose, the assessee company incurred an expenditure of ₹ 1,35,74,240/- towards professional charges paid to consultants for assisting in the bid .....

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ssessee company has obtained necessary approvals/clearance from the corporate law/government authorities and the proposal was cleared on technical parameters. Except for the professional fees of ₹ 1,35,74,240/- to BMR, no other expenses had been claimed by the assessee company. The details of services received from BMR stated about only of advice and research on government regulations and rules rendered by BMR The invoices of BMR are not at all descriptive about the services rendered in re .....

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of the Act. 5. Aggrieved by the assessment orders dated 28.12.2011 passed by the A.O. u/s 143(3) of the Act, the assessee company has filed its first appeal before the learned CIT(A). 6. Before the learned CIT(A) , the assessee company reiterated its submissions as were made before the A.O.. It was submitted that the assessee company is engaged in the business of providing sourcing services to GE Global Sourcing LLC, USA in relation to the requirements of transportation, oil and gas and energy b .....

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, deeds, things, services in relation thereto. The assessee company made a bid for a contract with the Ministry of Railways in relation to a manufacturing facility at Marhowra, Bihar for manufacturing and supplying locomotives to the Indian Railways. The relevant copy of bid document submitted with the Ministry of Railway is filed by the assessee company before the learned CIT(A) for the first time as additional evidence which could not be filed before the A.O. The said documentary proof also co .....

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e offered by the different Indian States for the said project to minimize overall tax cost. For this purpose, the assessee company engaged the services of BMR for consulting, advisory and other services like advice on various customs, excise and transfer pricing laws for manufacture and supply of locomotives to Railways and taxation etc. . For the above services rendered, the BMR raised invoices amounting to ₹ 1,35,74,240/- and the copies of the invoices capturing the details of the servic .....

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n new objective without any concrete proposals , though the assessee company claimed that it is one of the object of the assessee company. The assessee company submitted that the professional charges paid to BMR are wholly and exclusively incurred for the purposes of business of the assessee company . Since it was for the infrastructure projects, which is separate from the sourcing business , the expenses were not included in the costs covered while invoicing to GE Global Sourcing LLC USA. It wa .....

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not be considered as having any bearing on the issue under consideration. The A.O. reported that the BMR is not rendering service to the assessee company, hence, the expenses cannot be attributed specifically to the business income of the assessee company. The copy of remand report was sent by learned CIT(A) to the assessee company for its comments and in response to the remand report the assessee submitted its reply. The assessee company had filed the following additional evidences before learn .....

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t only to support the existing facts. It was submitted that in view of the new business, the assessee company made a bid for a contract with Ministry of Railways in relation to setting up of manufacturing facility at Marhowra, Bihar for manufacturing and supplying locomotives to the Indian Railways. The main objects of the assessee company was amended to insert clause 4A of the MOA as one of the objects of the assessee company was to engage in the business of infrastructure business, including b .....

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y. The relevant draft agreement and the relevant request for qualification were submitted. It was submitted that the Indian Railways contract is to be entered between the Director - Mechanical Engineering Works, Ministry of Railways and Marhowra Diesel Locomotive Company Limited which was to be incorporated as a Special Purpose Vehicle(SPV) by the proposed bidder/consortium companies and hence the A.O. s comments that different concerns are parties to the agreement is untenable. It was submitted .....

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t of the assessee company and not any other GE group company. The learned CIT(A) rejected the contentions of the assessee company after admission of the additional evidence submitted by the assessee company. The learned CIT(A) held that the payment made by the assessee company is nowhere for the purpose of business of the assessee company. The BMR has rendered services to GE group and not to the assessee company. It was also held by the learned CIT(A) that based on facts on records , the said BM .....

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d on behalf of the assessee company. As per the order sheet entries, the appeal was adjourned several times earlier since 2014 as the assessee company was not appearing despite several notices issued by the Registry to the assessee company. Therefore, we proceed to dispose of this appeal after hearing the learned D.R. 9. The learned D.R. submitted that the payment has been made to BMR which is a Chartered Accountant Firm. As rightly pointed out by the lower authorities, the payment was not for t .....

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its holding company along with mark up of 5%. The assessee company has amended the object clause in MOA during the relevant previous year and contemplates to enter into an entirely different line of business which is an altogether different source of income vis-à-vis existing business of the assessee company of rendering sourcing services to GE Global Sourcing LLC USA, by proposing to set up a manufacturing facilities for manufacturing and supplying locomotives to Indian Railways at Marh .....

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ites Limited, Ministry of Railways in consortium with bid partners for setting up manufacturing facility for manufacturing and supplying of locomotives to Indian Railways and not even the bids have been awarded to the assessee company and its consortium partners by Rites Limited, Ministry of Railways by the end of the previous year. Marhowra Diesel Locomotive Company Limited was proposed to be incorporated as a Special Purpose Vehicle(SPV) by the proposed bidder/consortium partners to implement .....

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nto an existence altogether new source of income as set out above , these expenses cannot be allowed as revenue expenditure as per provisions of Section 3 and 4 of the Act. Moreover as per facts emerges from records, these expenses are also relatable to the Special Purpose Vehicle(SPV) to be incorporated by the proposed bidder/consortium partners which included assessee company for setting up of a new manufacturing facilities at Marhowra, Bihar for manufacturing and supplying of locomotives to I .....

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siness of the assessee company and are in-fact preparatory expenses prior to setting up of business by SPV. Even if it is considered to be borne by the assessee company and not to be borne by SPV, then also the new projects has not yet been set-up and in any case these expenses are pre-operative expenses and preparatory expenses relatable to the new manufacturing facility to be set up at Marhowra , Bihar for manufacturing and supplying of locomotives to Indian Railways and cannot be classified a .....

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coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.]" "Charge of income-tax. 4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for th .....

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e source or paid in advance, where it is so deductible or payable under any provision of this Act.' Section 4 of the Act is a charging section which stipulates that the income shall be charged to tax in respect of the assessment year on prescribed rates in accordance with and subject to provisions of the Act in respect of the total income of the previous year of every person. While previous year is defined to be financial year immediately preceding assessment year and in case of a business o .....

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by the Hon'ble Bombay High Court has drawn a distinction between the setting up of business and the commencement of business as under: 'Now, turning to our statute, the deductions claimed are under Section 10(2) and they are in relation to a business and in order that those deductions can be allowed, the business must be carried on by the assessee. In this case it is not disputed that the business was carried on in the relevant previous year which is the financial year 1946-47, but the i .....

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us year the expenses incurred in the business can be claimed as permissible deductions. Any expenses incurred prior to the setting up of a business would obviously not be permissible deductions because those expenses would be incurred at a point of time when the previous year of the business would not have commenced. We must therefore look at the decision of the Tribunal as really referring to the setting up of the business in the language of Section 2(11) and not expenses connected with the com .....

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ng different, however slight the difference, from any other expression. English language is full of nuances and if possible we must give a different meaning to the expression "setting up" from the expression "commenced". Mr. Joshi very strongly relied on a judgment of Mr. Justice Rowlatt reported in Birmingham and District Cattle By-products Co. Ltd. v. Commissioners of Inland Revenue [1919] 12 Tax Cas 92. In that case the assessee company was incorporated on the 20th of June .....

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ts tax a question arose as to the computation of average amount of capital employed by the company during the accounting period and the company contended that it commenced business on the date of its incorporation, viz., on the 20th of June, 1913, and that the pre-war standard should be based on the profits shown by revised accounts for the period 20th June, 1913, to 30th June, 1914, and Mr. Justice Rowlatt held, upholding the view of the Commissioners, that the business of the company had comme .....

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it could be said that the assessee company had commenced business, and this is what the learned Judge says at page 97 : "Referring to their minutes having looked round, and having got their machinery and plant, and having also employed their foremen, and having got their works erected and generally got everything ready, then they began to take the raw materials and to turn out their products." Therefore if this case were to be applied to the present assessee, then we would be driven t .....

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viz., "commencing of the business." It seems to us, that the expression "setting up" means, as is defined in the Oxford English Dictionary, "to place on foot" or "to establish," and in contradistinction to "commence". The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an .....

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ound-nuts and produce oil. But prior to this there was a period when the business could be said to have been set up and the company was ready to commence business, and in the view of the Tribunal one of the main factors was the purchase of raw materials from which an inference could be drawn that the company had set up its business; but that is not the only factor that the Tribunal taken into consideration. The Tribunal has as pointed out in the statement of the case, scrutinised the various det .....

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idence. As we have often said we are not concerned with the sufficiency of evidence on a reference. It is only if there is no evidence which would justify the decision of the Tribunal that a question of law would arise which would invoke our advisory jurisdiction which after all is a very limited jurisdiction. We will, therefore redraft the question submitted by the Tribunal as follows: "whether there was evidence before the Tribunal to hold that the assessee company set up its business as .....

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