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M/s. Muthoot Exchange Co. Pvt. Ltd. Versus The Assistant Commissioner of Income-tax Circle-1 (2) Kochi.

Disallowance under the head Branding Expenses - liability to deduct tax on the payment made u/s 195 - whether expenses paid to a company established in the United Kingdom and having no permanent establishment in India, and are in the nature of reimbursement of expenses? - Held that:- No doubt the branding expense has been incurred outside India and as is evident from various records available and also the application made under the FEMA regulation in Form 15CA. It is also not the case of the Ass .....

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nsidered view, the assessee company is not liable to deduct tax on the payment made. The assessee company has also been earning income and incurring expense which would establish that the expenses have been laid out and expended in the course of carrying on of the business. - Decided in favour of assessee - Disallowance u/s 14A r.w.r. 8D - Held that:- It is a fact that assessee has not earned any exempt income during the year. These investments have been exclusively in the shares of foreign .....

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AIN, AM: This appeal of the assessee arises from the order of the Ld. CIT(A)-II, Kochi dated 15/11/2014 for the AY 2011-12. 2. The assessee has raised the following grounds of appeal:- 1. The officers below are not justified in denying and confirming disallowance of ₹ 57,51,630/- under the head Branding Expenses paid to a company established in the United Kingdom and having no permanent establishment in India, and are in the nature of reimbursement of expenses. 2. The officers below failed .....

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vation in para 6.3.4 that the cost is inbuilt into even so called passive investment are incidental administrative expenses on collecting information research etc. which helps in arriving at a particular investment decision, and these expenses relating to earning of income are embedded in the indirect expenses, are devoid of merits. 3. The brief facts of the case are that the assessee is engaged in the business of currency exchange and inward money remittance. For the AY 2011-12, the assessee ha .....

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) and both the issues disputed were confirmed by Ld. CIT(A) vide order dated 15/11/2014. The addition of ₹ 57,51,613 u/s. 40(a)(ia) was confirmed. Furthermore, the addition u/s. 14A was also confirmed. 5. During the relevant AY, the assessee has debited business promotion expense of ₹ 57,51,613/- to the Profit and Loss A/c. On enquiry on the nature of the expense, the assessee explained that these are payments to a sister concern by name M/s. Muthoot Global Transfers Pvt. Ltd. UK in .....

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Expenses). The bill does not carry any registration no. of the Muthoot Global. It is merely in the format of a letter in letterhead. Therefore, the authenticity of the expenditure is under question. 6. Further the assessee also furnished the basis of the billing as follows: Note on branding expenses paid by M/s. Muthoot Global Transfers Pvt. Ltd., U.K. The assessee is engaged in the business of purchase and sale of foreign currencies and also inward and outward money transfer business. During t .....

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o M/s. Muthoot Global Transfers Pvt. Ltd., UK towards expenses incurred by them for the above mentioned activities, as per invoice issued by them. 7. Details of marketing activities performed by Muthoot Global Transfers, UK are:- About the products and services of Muthoot exchange company Pvt. Ltd., India. Money transfer services available to India through Muthoot Exchange Branches both inward and outward remittances. Foreign exchange services. Payment of educational expenses/fee from India to U .....

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ovided by Muthoot Exchange. Muthoot Global Staff attended the events and explained the products and services of Muthoot Exchange India. 8. According to the Assessing officer, the basis of billing is reimbursement of expense incurred. The least minimum expected is that the assessee should have insisted split up of expenditure incurred, proof for having spent it etc. Therefore assessee was asked to furnish proof of expenditure incurred by Muthoot Global on behalf of the assessee,. Despite calling .....

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in UK. The brand promotion, services rendered by it could not be accepted at face value. The assessee mentioned that it had no employee/agent/independent monitoring agency to monitor the performance of Muthoot Global before paying the rebranding expenses. 10. The assessee was asked to furnish country wise remittance of income and currency exchange income figures for F.Y. 2009-10, FY. 2010-11 and FY 2011-12. The intention being if there is a definitive positive revenue impact attributable to thes .....

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its revenue from a region vis-avis the money spent on business promotion activities. The assessee appears to have not undertaken such an exercise. Besides it has not been able to furnish the necessary information despite repeated requests and granting sufficient time period. 11. Accordingly, the Assessing Officer concluded that expenses were not paid out or expended for the purpose of business and therefore this is not permissible for deduction under section 37(1) of the Income tax Act. That ap .....

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assessee has not produced any detailed break up of any kind of business promotion expenses and it is a consolidated payment of 78,000 UK pounds that were paid. The assessee company has claimed to have paid this amount for Brand Building, but in the remittance form submitted to bank for making this payment, this amount has been shown as only some other remittance to the company in UK and not any payment of professional fee for brand building or any kind of reimbursement of business promotion expe .....

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13. We have heard the rival submissions and perused the facts of the case. The Ld. Counsel for the assessee reiterated that the company has been registered under laws of UK. Merely because it is a group company it cannot be stated that there is a business connection in India. He further submitted before us the copies of Balance sheet as on 31/03/2011 of the company and drew our attention to Profit and Loss Schedule 5 which deals with the investment in overseas company. It has been clearly mentio .....

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India to UK. The targeted customers are NRIs residing in the United Kingdom Immigrant Indian workers in the UK Foreigners and Indians travelling to India and UK. 14. He further submitted that the entire service of M/s. Muthoot Global Transfers is centred in UK and it is only for these services, actual expenses are reimbursed. The assessment of company is in UK and they have no Permanent establishment in India. According to the representation, the amount paid to the overseas company is not taxab .....

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rein the fact that TDS was not liable to be deducted on account of amount not chargeable to tax in India has been stated. It was only after that department has issued permission in Form 15C. Now they have taken a different stand when it comes to the assessment. Reference was also drawn to the decision of Hon ble Delhi High Court in the case of CIT vs. DLF Commercial Project wherein it has been held that there is no obligation to deduct tax at source on reimbursement of expenses since it does not .....

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ed income. So much so, no disallowance is called for u/s. 14A. 17. According to the Assessing Officer expenditure incurred have to be divided into 2 categories which are related to the exempted stream of Income and other related to taxable stream of income. The Assessing Officer is of the view that it is not necessary that there would be exempted income earned during the year. According to him exempted income appearing in sec. 14A includes positive income, nil income and negative income (loss). .....

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rom the own interest free fund. The assessee also could not establish himself that there is no nexus between the expenditure and the investment made with relation to any sequential cash flow along with any identifiable banking transaction. Accordingly, she concluded that the provisions of Sec. 14A are attracted. 19. On behalf of the assessee, reliance was placed on the judgment of Hon ble High Court of Punjab and Haryana in CIT vs. Lakhani Marketing Company to the effect that disallowance u/s. 1 .....

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on of Hon ble Bench is given. 20. We have heard the rival submissions and perused the records. The first issue is with regard to allowabiltiy of Branding Expense incurred outside India. The learned representative finally concluded to draw our attention to an article issued by the IT department on tax treatment of dividend from foreign company which has been annexed on P1 and P2 of paper book No. 2; dividend received from an Indian company which has suffered dividend distribution tax is exempt fr .....

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suffered double taxation, then the tax payer can claim double taxation relief either as per the provisions of Double Taxation Avoidance Agreement (if any) entered into with that country (if any) by the Government of India or can claim relief as per section 91 (if no such agreement exists). 21. It was pointed out that the assessee has investment of ₹ 6.81 crores in the shares of foreign company as shown in schedule 5 of Balance Sheet. Since the dividends if any received from these investmen .....

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