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2016 (10) TMI 1 - AT - Income TaxDisallowance of marketing and distribution fee paid to QIEF Management LLC, Mauritius - Held that - The invoking of section 40A(2)(b) of the Act to disallow a portion of the expenditure in assessment year 2012-13 does not lend any support to the inference of the CIT(A) that the expenditure has not been made wholly and exclusively for the purpose of assessee s business because what is envisaged by section 40A(2)(b) is to disallow an expenditure which is found to be unreasonable or excessive in relation to it s market value. Invoking of section 40A(2)(b) of the Act to disallow a portion of the expenditure is an altogether different dimension than invoking section 37(1) of the Act to say that the expenditure is not laid out wholly and exclusively for the purposes of business. In fact, under such a situation, it was all the more onerous on the part of the CIT(A) to demonstrate as to why the entire expenditure was disallowable under section 37(1) of the Act, having regard to the stand of the Assessing Officer in the remand report as well as in the assessment for assessment year 2012- 13. The said burden, in our view, has not been discharged by the CIT(A) in the present case and, therefore, we are unable to acquiesce to the same. As a consequence, we hereby set-aside the order of the CIT(A) on this aspect and direct the Assessing Officer to delete the addition representing payment made to QIEF for marketing support services. Disallowance of advertisement expenditure - whether the advertisement expenditure incurred by the assessee could be construed to have been incurred for the purposes of the business within the meaning of Sec. 37(1) of the Act? - Held that - It is the assessee-company which has set-up the Mutual Fund as a sponsor and is also the holding company for the Asset Management Company, which in turn is managing the assets of the Mutual Fund. The income-earning apparatus of the assessee includes a stream of income from such an activity in which assessee has a deep interest, may it be the affairs of the Asset Management Company or the Mutual Fund. No doubt, the advertisements are intended to secure investors for investing in the schemes of the Mutual Fund, which is a separate entity, so however, the incurrence of such expenditure vis- -vis assessee s business cannot be discounted even if its incurrence would result in a benefit to a third party. There can be no gain saying that-better the performance of the Mutual Fund and the Asset Management Company, better would be the returns of the assessee-company. Therefore, in our view, the CIT(A) has erred in holding that the advertisement expenditure is not laid out wholly and exclusively for the purposes of the appellant s business. Having regard to the aforesaid discussion, we reverse the stand of the lower authorities on this aspect. Addition u/s 14A - Held that - The factual matrix of the assessee-company not having earned any exempt income in the instant year has not been controverted by the Revenue and, therefore, on this limited point itself we find no reason to uphold invoking of Sec. 14A of the Act by CIT(A) in this year in order to disallow the impugned expenditure on advertisement. Disallowance for brand building expenditure - complete newspaper cuttings of advertisements not having been filed - Held that - As we find no specific determination by CIT(A) on this aspect. In any case, we find that before the CIT(A), assessee had assailed the aforesaid position in a detailed manner and in the absence of any rebuttal of the same by the CIT(A), it can only be inferred that the CIT(A) acquiesced to the same. Nevertheless, we find that factually there is nothing on record to show that the expenditure has been incurred with the objective of brand building inasmuch as the advertisements are intended to canvas investors to invest in the schemes of the Quantum Mutual Fund. Therefore, on facts also, we find no support for the plea of the Assessing Officer. Insofar as the nonfurnishing of some of the newspaper cuttings is concerned, before the CIT(A) assessee had explained it properly and we find that there are no credible reasons to disbelieve the assessee on this aspect, as the sample newspaper cuttings clearly support the invoices raised by M/s. Hansa Vision Pvt. Ltd. In conclusion, having regard to the aforesaid discussion, we deem it fit and proper to set-aside the order of CIT(A) and direct the Assessing Officer to delete the addition of ₹ 3,77,14,278/- out of advertisement expenditure. Assessee appeal allowed.
Issues Involved:
1. Disallowance of ?3,26,05,268/- paid to QIEF Management LLC for 'marketing support services'. 2. Disallowance of advertising expenditure of ?3,77,14,278/-. Detailed Analysis: 1. Disallowance of ?3,26,05,268/- paid to QIEF Management LLC for 'marketing support services': The assessee company challenged the disallowance of marketing and distribution fees paid to QIEF Management LLC, Mauritius. The Assessing Officer (AO) disallowed the expenditure on the grounds that QIEF had a Permanent Establishment (PE) in India, necessitating tax deduction at source (TDS) under section 40(a)(i) of the Income Tax Act, 1961. However, the Commissioner of Income-tax (Appeals) [CIT(A)] disagreed with the AO on the TDS aspect but upheld the disallowance under section 37(1) of the Act, stating that the expenditure was not incurred wholly and exclusively for business purposes. The tribunal noted that the CIT(A) failed to consider the evidence provided by the assessee, which demonstrated that QIEF had the necessary infrastructure and had referred clients to the assessee, contributing significantly to its income. The tribunal also noted that the CIT(A) disregarded the agreement between the assessee and QIEF without substantial evidence. The tribunal concluded that the CIT(A) did not justify why the entire expenditure was disallowed under section 37(1) and directed the AO to delete the addition of ?3,26,05,268/-. 2. Disallowance of advertising expenditure of ?3,77,14,278/-: The assessee also contested the disallowance of advertising expenditure incurred for promoting Quantum Mutual Fund, of which it was the sponsor. The AO disallowed the expenditure, arguing that it was not incurred for the assessee's business but for a group company, and also considered it as capital expenditure for brand building. The CIT(A) upheld the disallowance, suggesting that the expenditure was for earning tax-free incomes and thus not allowable under section 14A of the Act. The tribunal found that the advertisement expenditure was indeed incurred for attracting investors to the Quantum Mutual Fund, which was managed by the assessee's wholly-owned subsidiary, QAMC. The tribunal emphasized that the expenditure was incurred for commercial expediency and was directly related to the assessee's business interests. The tribunal also rejected the application of section 14A, noting that the assessee did not earn any exempt income during the year. Additionally, the tribunal found no basis for the AO's claim that the expenditure was capital in nature or unsupported by evidence. Consequently, the tribunal directed the AO to delete the addition of ?3,77,14,278/-. Conclusion: The tribunal allowed the appeal of the assessee, directing the deletion of disallowances related to both the marketing support services and the advertising expenditure. The tribunal emphasized the importance of commercial expediency and the relevance of the provided evidence in determining the allowability of business expenditures.
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