2019 (5) TMI 1920 - AT - Income Tax

Allowable business expenditure - fees paid by the assessee to its group company - HELD THAT - As pointed out by the Ld. counsel the Ld. CIT (A) has decided the identical issue in favour of the assessee by following the order of the coordinate Bench rendered in the assessee s own case 2016 (10) TMI 1 - ITAT MUMBAI - As revenue has not pointed out any material change in the facts of the present case. Hence respectfully following the decision of the coordinate Bench passed in assessee s own case referred above we uphold the decision of the Ld. CIT(A) and dismiss the sole ground of appeal of the revenue. Addition u/s 40A(2) - Payment made to subsidiary company - HELD THAT - As has been held by the Hon ble Bombay High Court in the case of CIT vs. Vs. Dempo Company Pvt. Ltd. 2010 (10) TMI 711 - BOMBAY HIGH COURT only a Director of a company partner of a firm or member of the association or any family or any relative of such Director partner or member is a related person under sub- clause (ii) of clause (b) of sub-section (2) of section 40. A subsidiary company of the assessee is not a related person within the meaning of section 40A (2) the provisions of section 40A(2) do not attract in the present case. Since the issue involved in the present case are similar to the issue involved in the aforesaid case it can safety be concluded that the provisions of section 40A(2) do not apply in the present case. Hence we are of the considered view that the Ld. CIT (A) has wrongly confirmed the ad-hoc disallowance made by the AO with regard to payment of research fees made by the assessee to its sister concern. Since the authorities below have not denied the expenditure in question and allowed the expenses @ 5, 00, 000/- per month the only issue remains as to whether how much of the expenses is allowable. Since the AO has not justified its action by pointing out any cogent and convincing reason for disallowance of the remaining amount the Ld. CIT(A) ought to have set aside the findings of the AO. Hence following the principles of law laid down by the Hon ble jurisdictional High Court discussed above we allow this ground of appeal of the assessee and set aside the findings of the Ld. CIT (A). Revenue s appeal is dismissed and the assessee s appeal is allowed.

Summary

Issues Involved:
1. Disallowance of fees paid to sister concern for research under section 40A of the Income Tax Act, 1961.
2. Disallowance of marketing services fees paid to group companies.

Issue-wise Detailed Analysis:

1. Disallowance of Fees Paid to Sister Concern for Research:
The assessee company, engaged in providing advisory services, filed its return declaring a total income of ?26,38,21,490/-. During scrutiny, the Assessing Officer (AO) disallowed ?2,39,18,400/- out of ?2,99,18,400/- paid to its sister concern Quantum Asset Management Company Pvt. Ltd. (QAMC) for research fees, under section 40A of the Income Tax Act, 1961. The AO deemed the payment excessive and intended to enrich the group company without commensurate services. The CIT (A) confirmed this disallowance.

The assessee contended that the research fees were reasonable and necessary for providing investment management services. The assessee highlighted that QAMC generated ?13,13,72,237/- in research fees, including the amount paid by the assessee, and that QAMC paid taxes on this income at the same rate as the assessee.

The Tribunal noted that the AO's disallowance was based on the assumption that the payment was excessive without pointing out any tax evasion. The Tribunal referred to the Bombay High Court's judgment in CIT vs. Indo Saudi Services (Travel) Pvt. Ltd., which held that disallowance under section 40A(2) is not justified if the payment is reasonable and there is no tax evasion. The Tribunal also referred to CIT vs. Dempo & Company Pvt. Ltd., which clarified that a subsidiary company is not a related person under section 40A(2).

The Tribunal concluded that the provisions of section 40A(2) did not apply, as the payment was reasonable and there was no evidence of tax evasion. Consequently, the Tribunal set aside the CIT (A)'s findings and allowed the assessee's appeal.

2. Disallowance of Marketing Services Fees Paid to Group Companies:
The AO disallowed ?1,04,88,902/- out of ?2,24,88,902/- claimed as marketing services fees paid to group companies, considering it unreasonable. The CIT (A) deleted this disallowance, following the ITAT's decision in the assessee's own case for the AY 2011-12.

The revenue challenged this deletion, arguing that the CIT (A) was not justified in allowing the marketing and distribution fees as business expenditure. The assessee's counsel pointed out that the ITAT had decided the identical issue in favor of the assessee for the AY 2011-12. The Tribunal noted that the CIT (A)'s decision was based on the ITAT's earlier order, which held that the marketing and distribution fees paid to QIEF Management LLC were allowable business expenditure.

The Tribunal upheld the CIT (A)'s decision, stating that there was no material change in the facts of the present case compared to the earlier assessment year. The Tribunal dismissed the revenue's appeal, affirming that the marketing services fees were justifiable business expenditure.

Conclusion:
The Tribunal dismissed the revenue's appeal regarding the marketing services fees and allowed the assessee's appeal concerning the research fees, setting aside the CIT (A)'s disallowance. The Tribunal emphasized the importance of reasonable expenditure and the absence of tax evasion, aligning with established legal principles.