2019 (3) TMI 1458 - AT - Income Tax

Disallowance of Management Fees paid to its holding company IMC Inc, USA- Allegation that assessee had failed to prove that any benefit had accrued from the expenses - bills are serially numbered and booked at close of the year - HELD THAT - The liability of assessee was to make payments to its holding company on the basis of invoices raised by holding company on monthly basis; copy of invoices are also placed. The perusal of said invoices would reflect the breakup under the head Services and Labour , under which names of personnel providing the services are written and different amounts payable to each of them are mentioned. Further details are given in respect of travel of the persons, if any telecommunication of computer charges and delivery expenses under the head Travel / other expenses . Such are the details which were available from month to month and the amounts in each month vary. The objection of authorities below in this regard was that though invoices have been raised but the same were serially numbered and also that the amounts were due to be paid at the close of the year. We find no merit in the stand of authorities below. It is an understanding between the parties, which has to be looked into and the expenses have to be allowed on accrual basis specially where the assessee is following mercantile system of accounting. Merely because the amounts were due at the close of the year, would not disentitle the assessee from claiming the said expenditure. coming to the next aspect of the disallowance of assessee on the ground whether any services were availed or not. The assessee in this regard has furnished additional evidence before the CIT(A), copies of which are placed at pages 79 to 173 of Paper Book. The said evidence is in the form of various emails exchanged between employees of the assessee and personnel of holding company. We have gone through the said evidence and we are of the view that the assessee had established its case of availment of said services. Following the same parity of reasoning in the case of Emerson Climate Technologies (India) Ltd. Vs. DCIT 2017 (12) TMI 1568 - ITAT PUNE and EATON FLUID POWER LIMITED VERSUS THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-8, 2018 (6) TMI 1266 - ITAT PUNE , we hold that entire expenditure booked under the Management Fees is to be allowed as deduction in the hands of assessee. The grounds of appeal raised by assessee are thus, allowed.

Summary

Issues Involved:
1. Disallowance of Management Fees paid by the assessee to its holding company.
2. Assessment of whether the expenses were incurred wholly and exclusively for business purposes.
3. Examination of the benefit test in relation to the expenses claimed.

Issue-wise Detailed Analysis:

1. Disallowance of Management Fees:
The primary issue in the appeal is the disallowance of Management Fees amounting to ?2,62,24,684/- paid by the assessee to its holding company, IMC Inc, USA. The Assessing Officer (AO) disallowed this amount on the grounds that the assessee failed to prove any benefit accrued from these expenses. The AO noted that the assessee had not paid such fees in prior years and had shown margins of around 37%. The disallowance was upheld by the CIT(A), who noted that the claim was made for the first time in a year when the company reported losses instead of profits. Additionally, the CIT(A) observed that the sum was shown as outstanding under 'Sundry Creditors' and questioned the genuineness of the payment.

2. Assessment of Business Purpose:
The assessee argued that the expenses were incurred wholly and exclusively for business purposes, which is allowable under section 37(1) of the Income-tax Act, 1961. The assessee provided evidence such as agreements, invoices, and details of services rendered by the associated enterprises. The assessee emphasized that the fees were reimbursed at actual costs without any profit margin. The Tribunal noted that the assessee had demonstrated the availing of services through various evidences, including emails and account extracts, and established that the expenses were indeed incurred for business purposes.

3. Examination of the Benefit Test:
The Tribunal addressed the issue of the benefit test, which questions whether the expenses resulted in any benefit to the assessee. The Tribunal referred to previous judgments, emphasizing that the AO cannot sit in judgment of the business module of the assessee and its intention to avail services from its associated enterprises. The Tribunal cited the Hon’ble High Court of Delhi's ruling in Hive Communication Pvt. Ltd., which held that the legitimate business needs must be judged from the viewpoint of the company itself and not by the AO. The Tribunal concluded that the fulfillment of the benefit test cannot be questioned, and the expenses should be allowed as they were incurred for business purposes.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the entire expenditure booked under the Management Fees is to be allowed as a deduction. The Tribunal emphasized that the business decisions of the assessee regarding the availing of services from its holding company should not be questioned by the AO. The grounds of appeal raised by the assessee were thus allowed, and the disallowance of ?2,62,24,684/- was overturned.