2017 (8) TMI 290 - HC - Income Tax

Shared Services Cost - allowable business expenses - reimbursement of expenses to its Holding Company - whether expenses made do not appear to be reasonable and are on the higher side? - TDS liability - Held that - The Tribunal has considered that the present year was the first year of its operation, and therefore, during the year under consideration, the revenue was not very large, whereas it had to incur large cost to establish itself in the market. The assessee has incurred expenditure so that people can know it in the market and its services and get business which could earn its revenue. The said finding of fact appears to be plausible one. Even on reimbursement to the Holding Company of estimated cost of expenses, it could not have been subjected to tax as income as considered by this court of in M/s. C.U. Inspections (I) Pvt. Ltd. 2015 (8) TMI 1398 - BOMBAY HIGH COURT . The Tribunal has given opportunity to the assessee as well as the Assessing Officer to verify the deduction of tax at source and if the Assessing Officer finds that tax has already been deducted at source in respect of expenditure which requires deduction of tax at source by the Holding Company, then no disallowance can be made with reference to such expenditure in hands of the assessee for reimbursement to the Holding Company. It is for the Assessing Officer to verify the same.

Summary

Issues:
1. Allowability of Shared Services Cost as business expenditure
2. Reimbursement of Shared Service Costs to Holding Company
3. Direction to Assessing Officer regarding Shared Service Costs deduction

Analysis:

Issue 1: Allowability of Shared Services Cost as business expenditure
The appellant claimed ?1.34 Crores as allowable business expenditure, contending it was for business purposes. The Commissioner of Income Tax (Appeals) found that expenses were allocated on an estimate basis, not actual. The Tribunal, however, held that the expenses were genuinely incurred for business and thus allowable. The appellant argued that without evidence of expenses by the Holding Company, the Tribunal erred in directing the Assessing Officer to consider it as expenditure. Additionally, TDS was not deducted, invoking Section 194(1) of the Act.

Issue 2: Reimbursement of Shared Service Costs to Holding Company
The respondent argued that the Assessing Officer did not dispute the reimbursement entries, emphasizing the high initial expenses due to the first year of operation. The Tribunal found no error, considering the negative income shown and the agreement's provision for reimbursing actual costs only. The Tribunal's decision was based on the reasonable interpretation of the agreement clauses.

Issue 3: Direction to Assessing Officer regarding Shared Service Costs deduction
The Assessing Officer disallowed the expenses as unreasonable and exaggerated. However, the Tribunal justified the high costs in the initial year for market establishment. The Tribunal directed the Assessing Officer to verify TDS deduction by the Holding Company. If TDS was deducted, no disallowance could be made in the appellant's hands. The Tribunal's decision was supported by a previous court ruling.

In conclusion, no substantial question of law arose, leading to the dismissal of the appeal without costs. The judgment highlighted the importance of substantiating expenses, interpreting agreement clauses, and considering the context of business operations for expense deductions.