2022 (6) TMI 1455 - AT - Income Tax

Disallowance u/s 37(1) - expenditure on account of group management fee paid to associate enterprises - no evidences regarding actual occurrence of the management service fees for which the foreign parent company has charged - HELD THAT - What can be concluded is that assessee has failed to produce any cogent evidence before the Ld. AO or Ld. First Appellate Authority to indicate that the expenditure incurred was for the purposes of the business. Assessee company is a advertising agency in Gurgaon and engaged in providing advertising communication and marketing solutions to its clients both domestic and international. The company is closely held company with 99.76% of the shares being held by the Holding Company . Thus certainly the assessee must be in possession of quite relevant commercial and accounting documents which may indicate that there was valid expenditure on as many as ten heads which were claimed to be the areas of expert services. However no evidence to that effect was led. AO has rightly relied the judgment of Cushman and Wakefield Indian (P.) Ltd. 2014 (5) TMI 897 - DELHI HIGH COURT to hold that in spite of the case of assessee being covered by transfer pricing provision that does not restrict or in any way by pass the functions of the TPO when AO goes for determining u/s 37(1) of the Act that whether the business expenditure claimed is expended wholly and exclusively for the purposes of business or not. Decided against assessee.

Summary

Issues:
1. Disallowance of expenditure on account of management service fees.
2. Failure to produce evidence to justify the genuineness of the claimed expenditure.
3. Interpretation of transfer pricing laws in relation to disallowance of expenditure under Section 37(1) of the Income Tax Act.

Analysis:
1. The appeal was filed against the order passed by the Ld. Commissioner of Income Tax (Appeals) upholding the addition of management service fees to the assessee's income under Section 37(1) of the Income Tax Act. The Ld. AO disallowed a sum paid to an associate concern for expert services, reducing the total loss assessed. The appellant challenged the order on various grounds, claiming the fees were genuine and necessary for business. However, both the Ld. AO and the Ld. First Appellate Authority dismissed the appeal due to lack of convincing evidence supporting the business-related nature of the expenditure.

2. The appellant failed to provide substantial evidence before the authorities to establish that the expenditure was incurred for legitimate business purposes. Despite being an advertising agency with access to relevant commercial and accounting documents, the appellant could not substantiate the claimed expenses related to expert services. The Ld. AO justified the disallowance under Section 37(1) based on the absence of concrete proof linking the expenditure to business activities, citing a precedent to emphasize the exclusive business purpose requirement.

3. The Tribunal observed that the appellant's case revolved around the legality and genuineness of the disallowed expenditure on management service fees. The appellant's failure to furnish detailed evidence, such as invoices and specifics of services provided, led to the dismissal of the appeal. The Tribunal upheld the lower authorities' decisions, emphasizing the need for expenditures to be wholly and exclusively for business purposes. The judgment highlighted the importance of substantiating claimed expenses and complying with transfer pricing provisions, even when assessing under Section 37(1) of the Act.

In conclusion, the Tribunal dismissed the appeal, emphasizing the lack of merit in the grounds raised by the appellant and underscoring the necessity for concrete evidence to support claimed business expenditures.