2019 (4) TMI 709 - HC - Income Tax

Expenditure allowable u/s 37 - amount paid to Lok Foundation , an entity registered in Mauritius - fee paid to Lok Foundation for a gamut of services rendered outside India - AO alleged that the consultancy fee was a ploy to siphon away the profits - wholly and exclusively for the purpose of business - HELD THAT - Payments made by the assessee for the efforts and services rendered by a third person, in the present case by Lok Foundation, cannot be rejected as held in the assessment order as non-business expenditure on the ground that the foreign investors should have made that payment Lok Foundation. This is untenable and unacceptable. The efforts had benefitted the assessee in the form of increased investment in India resulting in increase in the advisory fee being paid to the assessee. AO should not have commented and decided on who should have paid commission. The investors may or may not be interested in paying fee to Lok Foundation. The assessee would be justified in making payment to expand and increase their business and income, which would be an expenditure wholly and exclusively for the purpose of business. Another reason given by the AO was that Mauritius was a tax haven in which tax was payable only @ 3%. He did not advert to the other facts including increase in investment, deduction of tax at source on payment made to Lok Foundation, and also the documents placed and relied upon by the assessee with reference to the services rendered by Lok Foundation. The said documents and factum have been taken into consideration by the first appellate authority. AO had not bothered to even take on record and into consideration the factum that TDS @ 10% had been deducted. Thus, money remitted to Lok Foundation was taxed in India on gross receipt basis without reference to and deducting any expenditure incurred. Further, the Assessing Officer did not refer the question of quantum of fee paid to Lok Foundation to the Transfer Pricing Officer. Findings are primarily findings of fact, drawing inference and conclusions after referring to and based upon evidence and material on record. The findings as recorded are not illogical and perverse, which require interference. We would not reappraise the evidence as a normal appellate court while exercising jurisdiction under Section 260 of the Act - Appeal dismissed.

Summary

Issues Involved:
1. Delay in re-filing the appeal.
2. Disallowance of consultancy fee paid to Lok Foundation.
3. Nexus between the consultancy fee and the business of the respondent-assessee.
4. Allegation of tax evasion by routing payments through a tax haven.
5. Non-referral to the Transfer Pricing Officer for arm's length determination.
6. Findings of fact by the appellate authorities.

Detailed Analysis:

1. Delay in Re-filing the Appeal:
The court condoned a delay of 57 days in re-filing the appeal as the application was not opposed by the counsel for the respondent. The application was allowed without further contest.

2. Disallowance of Consultancy Fee Paid to Lok Foundation:
The Assessing Officer (AO) disallowed the payment of ?2,88,43,934/- to Lok Foundation, citing that the foundation did not provide direct services to the respondent-assessee but to the overseas funds. The AO argued that the payment did not meet the criteria of being "wholly and exclusively for the purposes of the business" under Section 37(1) of the Income Tax Act, 1961. The AO also suggested that the payment was a ploy to siphon off profits to a tax haven.

3. Nexus Between the Consultancy Fee and the Business of the Respondent-Assessee:
The Commissioner of Income Tax (Appeals) [CIT(A)] and the Tribunal both found that the consultancy fee paid to Lok Foundation was directly connected to the increase in the fund size of Lok II, which in turn increased the advisory fee earned by the respondent-assessee. The CIT(A) noted that Lok Foundation provided services such as identifying and introducing potential investors, assisting in negotiations, and preparing presentation materials, which were crucial for increasing the committed capital of the funds. The Tribunal affirmed these findings, observing a 93% increase in advisory fees earned by the respondent-assessee due to the increased fund size.

4. Allegation of Tax Evasion by Routing Payments Through a Tax Haven:
The AO's claim that the payment to Lok Foundation was a tax evasion tactic was rejected by the CIT(A) and the Tribunal. The CIT(A) emphasized that the AO did not provide sufficient evidence to substantiate this claim. It was also noted that the respondent-assessee had deducted tax at source at 10% on the payment made to Lok Foundation, which was deposited with the Income Tax Department, thereby negating the tax evasion argument.

5. Non-referral to the Transfer Pricing Officer for Arm's Length Determination:
The appellate authorities criticized the AO for not referring the matter to the Transfer Pricing Officer (TPO) to determine whether the consultancy fee paid to Lok Foundation was at arm's length. The CIT(A) pointed out that the AO failed to examine the issue of comparables and did not provide a firm foundation for his remarks regarding tax avoidance.

6. Findings of Fact by the Appellate Authorities:
The Tribunal upheld the findings of the CIT(A), stating that the payment to Lok Foundation was for legitimate business purposes and was directly related to the increase in advisory fees earned by the respondent-assessee. The Tribunal also noted that the AO's comments on who should have paid the consultancy fee were irrelevant and that the payment was justified as a business expenditure. The High Court affirmed these findings, stating that they were based on evidence and were not perverse or illogical.

Conclusion:
The High Court dismissed the appeal, agreeing with the findings of the CIT(A) and the Tribunal. The court found no merit in the Revenue's arguments and saw no reason to remand the matter for fresh consideration. The appeal was thus dismissed, and the findings of the lower appellate authorities were upheld.