2013 (7) TMI 256 - AT - Income Tax

Traveling expenses disallowed - deduction was claimed by the assessee relying on clause 9.6 of the agreement whereas it was disallowed by the authorities below relying on clause 9.3 of the said agreement - Held that - As evident from the clauses of agreement, all the expenses and risks incurred by the licensee namely M/s Connell Bros. Co. (India) Pvt. Ltd. in connection with the manufacture, distribution and sale of the products were to be borne and paid for by M/s Connell Bros. Co. (India) Pvt. Ltd. The expenses in question on traveling however were incurred by the assessee as licensor and not by M/s Connell Bros. Co. (India) Pvt. Ltd. as licensee and the same, therefore were covered by clause 9.6 of the agreement which required the assessee as licensor to send from time to time its own representatives to visit the customers and promote the licensee s business with the said customers in an effort to assist the licensee with development of its business for the products. The said expenses therefore were to be borne and paid for by the assessee as per clause 9.6 of the agreement and the authorities below, were not justified in disallowing 50% of the traveling expenses of the assessee relying on clause 9.3 of the agreement which covered only expenses and risks incurred by the licensee. Traveling expenses claimed by the assessee were inclusive of foreign travel expenses which as stated specifically by the assessee in the written submissions filed before the CIT(A) were incurred for the purpose of visits of its employees to Hercules Inc. s offices and plants situated in USA, Korea, Singapore, Thailand etc. for obtaining on site training in order to enable them in assisting M/s Connell Bros. Co. (India) Pvt. Ltd. with regard to technology and marketing of its products. CIT(A) presumed that the said expenses were incurred for the purposes of training to the employees of M/s Connell Bros. Co. (India) Pvt. Ltd. and proceeded on this wrong presumption to confirm the disallowance made by the A.O. on account of traveling expenses. Moreover vide letter dtd. 13-12-2010 filed by the assessee before the CIT(A) as additional evidence, M/s Connell Bros. Co. (India) Pvt. Ltd. had clarified that traveling expenses incurred by the assessee were covered by clause 9.6 of the agreement and not by clause 9.3. In favour of assessee.

Summary

Issues: Disallowance of traveling expenses

Analysis:
1. The appellant, a company providing technical know-how for chemical products, contested the disallowance of Rs. 15,15,554/- in traveling expenses by the Assessing Officer (A.O.) and confirmed by the CIT(A) for A.Y. 2007-08.
2. The A.O. questioned the traveling expenses claimed, as the main income was royalty from another company, M/s Connell Bros. Co. (India) Pvt. Ltd., which was supposed to bear all product-related expenses as per the agreement.
3. The appellant argued that the traveling expenses were for promoting its business and not covered under the agreement's clause 9.3, which pertained to product expenses borne by M/s Connell Bros. Co. (India) Pvt. Ltd.
4. The CIT(A) upheld the disallowance, citing that the appellant's foreign travel expenses contradicted the agreement terms and were not solely for training M/s Connell Bros. Co. (India) Pvt. Ltd.'s employees.
5. The Tribunal found the traveling expenses were covered under clause 9.6 of the agreement, where the appellant was responsible for promoting the licensee's business, and not under clause 9.3, which dealt with product expenses borne by M/s Connell Bros. Co. (India) Pvt. Ltd.
6. The Tribunal noted that the foreign travel expenses were for on-site training to assist M/s Connell Bros. Co. (India) Pvt. Ltd. with technology and marketing, as clarified by additional evidence from M/s Connell Bros. Co. (India) Pvt. Ltd.
7. Consequently, the Tribunal disagreed with the previous disallowance and allowed the appeal, stating that the entire traveling expenses were incurred for business purposes and not subject to the adhoc 50% disallowance.

This detailed analysis highlights the dispute over the disallowance of traveling expenses, the arguments presented by both parties, the interpretation of the agreement clauses by the authorities, and the Tribunal's decision based on the agreement's specific provisions and the nature of the expenses incurred by the appellant.