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TMI Blog2016 (10) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SINGH, JUDICIAL MEMBER For The Appellant : S/Shri J.D.Mistry/Niraj D. Seth For The Respondent : Shri Amit Kumar Singh ORDER PER G.S. PANNU,AM: The captioned appeal filed by the assessee pertaining to assessment year 2011-12 is directed against an order passed by CIT(A)-15, Mumbai dated 29/05/2015, which in turn arises out of an order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short the Act ) dated 20/03/2014. 2. In this appeal assessee has raised the following Grounds of Appeal:- 1:0 Re.: Disallowance of ₹ 3,26,05,268/- paid to QIEF Management LLC for 'marketing support services': I :I The Commissioner of Income-tax (Appeals) has erred in holding that the marketing and distribution fees paid by the Appellant during the year to QIEF Management LLC are not allowable u/s.37(1) of the Income-tax Act, 1961. I:2 The Commissioner of Income-tax (Appeals) has erred in making various erroneous and unsubstantiated observations (which ignore the facts submitted before him and/or are contrary to the facts on record) in the impugned Order to buttress his stand vis-a-vis the disallowance of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e shall deal in seriatim. The appellant is a company incorporated under the provisions of the Companies Act, 1956 and is carrying on the business as SEBI registered Portfolio Manager and Advisory Services. For the assessment year under consideration, it filed return of income declaring a total income of ₹ 29,65,75,840/-, which was subject to scrutiny assessment, whereby the total income has been determined at ₹ 36,68,95,810/- after making certain disallowances, which have further been affirmed by the CIT(A). Not being satisfied with the order of the CIT(A), assessee company is in appeal before the Tribunal on the above stated Grounds of appeal. 4. The first issue relates to a disallowance of ₹ 3,26,05,689/- representing marketing and distribution fee paid to QIEF Management LLC, Mauritius ( in short QEIF ). On being asked by the Assessing Officer to justify such expenditure, assessee had explained that the payment was made for marketing and distribution services rendered by QIEF and since the payee did not have a Permanent Establishment (PE) in India, such amounts were not taxable in India. The Assessing Officer however, noted that since QIEF was a group conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the findings of the CIT(A) on lack of infrastructure with QIEF, which was a Mauritius based company. It was explained that QIEF had a 100% subsidiary, Q India Corp. based in USA. By referring to Page -338 of the Paper Book, it is sought to be canvassed that the US subsidiary of QIEF had on its rolls one Mr. Arvind Rangarajan, based in America, whose profile demonstrates expertise in India-related research and investment efforts. Apart therefrom, it has also been pointed out that Page 339 of the Paper Book contains a list of clients referred by QIEF alongwith the corresponding fees earned by the assessee from such clients, which clearly demonstrates that a substantial portion of assessee s income is on account of clients referred by QIEF. Furthermore, Ld. Representative for the assessee has referred to Pages 34 to 35 of Paper Book, wherein is placed a copy of the agreement with QIEF dated 01/07/2008 pertaining to rendering of marketing services to non-USA and non-Canada based clients, including Europe, Middle East and Asian clients. Furthermore, our attention has also been drawn to Pages 39 to 42 of the Paper Book, wherein is placed agreement with QIEF relating to marketing services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) of the Act primarily for the reason that assessee could not establish rendering of services by QIEF to the assessee company on the basis of any evidence. 7. We have carefully considered the rival submissions. Pertinently, the dispute before us pertains to the allowability of expenditure incurred by the assessee on fee paid to QIEF for marketing support services. The Assessing Officer as well as the CIT(A) have found it expedient to disallow the expenditure, albeit on different grounds. The Assessing Officer disallowed it on the ground that the requisite tax was not deducted at source and hence such expenditure was to be disallowed under section 40(a)(i) of the Act. This position did not find favour with the CIT(A) as according to him tax was not required to be deducted at source on the impugned amount, as it was not liable to be taxed in India in the hands of QIEF. On this aspect of the matter, there is no appeal preferred by the Revenue and, therefore, such finding of CIT(A) has attained finality. Therefore, we proceed to examine the basis on which the CIT(A) has sustained the disallowance. As per the CIT(A) the expenditure does not qualify for deduction under section 37(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e institutional investors such as sovereign funds, pension funds, etc. in Europe, Middle East and Asia and also to private sector institutional clients in USA. In our considered opinion, the assertions which have been made by the assessee before the lower authorities as well as before us are borne out of record inasmuch as assessee has earned income through clients referred by QIEF, which is not disputed. Much has been made out by the CIT(A) that mere existence of an agreement between asessee and QIEP would not ipso-facto lead to the allowability of the impugned expenditure. In absolute terms, we have no quarrel with the said proposition advanced by the CIT(A) but the onus in the present case was on him to establish on the basis of evidence and material that the actual state of affairs was contrary to the agreement. In fact, the agreement between assessee and QIEF has been acted upon inasmuch as assessee has earned business thereupon and in return assessee made payments for the services rendered by the payee. In our considered opinion, having regard to the material and evidence on record, the CIT(A) has sought to disregard the agreement on a mere hypothetical basis, without any fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of ₹ 3,26,05,268/- representing payment made to QIEF for marketing support services. Thus, on this aspect assessee succeeds. 8. The second issue in this appeal relates to disallowance of advertisement expenditure of ₹ 3,77,14,278/-. In context of this dispute, the relevant facts can be summarized as follows. The Assessing Officer noted that the assessee-company had c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Rules, 1962; an agreement entered with M/s. Hansa Vision Pvt. Ltd. dated 15.2.2011 was also adduced as additional evidence by way of an application under Rule 46A of the Rules; that the Assessing Officer could not have questioned the business decision of the assessee to incur the impugned advertisement expenditure; that the non-filing of newspaper cuttings for the entire expenditure was because assessee had filed only sample copies of the newspaper cuttings and the invoices issued by M/s. Hansa Vision Pvt. Ltd.; that the expenditure was incurred by the assessee as a sponsor of Quantum Mutual Fund in order to attract prospective investors to invest in the various schemes of the Fund; that the sample advertisements itself show that the purpose was to attract prospective investors to invest in the schemes of Quantum Mutual Fund; that under such circumstances it could not be said that the expenditure was incurred for brand building ; that the name of the assessee was appearing in the newspaper advertisements as sponsor of the Mutual Fund and therefore it could not be said that the advertisements did not reflect the name of assessee-company; and, lastly that even if it was to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer canvassed that assessee had paid to a single entity , i.e. M/s. Hansa Vision Pvt. Ltd. for advertisement and promotion of Quantum Mutual Fund, which was a trust and a separate taxable entity exempt from tax and hence the advertisement expenditure ought to have been incurred by the Mutual Fund itself and not by the assessee-company acting as a sponsor. In sum and substance, the Assessing Officer reiterated his earlier position and also opposed the plea of the assessee for admission of additional evidence. It is noticed from the order of CIT(A) that assessee also furnished its say on the Remand report submitted by the Assessing Officer, which has been reproduced by the CIT(A) in para 2.5 of his order. The CIT(A) considered the rival stands and concluded as follows. Firstly, on the issue of admission of additional evidence under Rule 46A of the Rules, the CIT(A) declined the plea of the assessee. At this stage, we may notice that apart from other additional evidences, assessee produced before the CIT(A) an agreement dated 1.6.2011 entered with Quantum Asset Management Co. Pvt. Ltd., who managed the assets of Quantum Mutual Fund. The aforesaid agreement was produced by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenditure was falling within the tests laid down in Sec. 37(1) of the Act, it was pointed out that the wholly owned subsidiary of the assessee-company, i.e., QAMC was managing the assets of Quantum Mutual Fund which had various Mutual Fund schemes and the advertisement expenditure was incurred primarily for attracting investors for investing in the various existing schemes of the Fund. As a sponsor of the Mutual Fund, and as a holding company of QAMC, which was managing the assets of the Fund, assessee-company has a direct interest in the performance of the Mutual Fund. The learned representative for the assessee also referred to the SEBI (Mutual Funds) Regulations, 1996 to point out the locus standi of the assessee-company to incur such advertisement expenditure for attracting investors to invest in the Mutual Fund. In particular, attention was invited to Regulation 52(7) of SEBI (Mutual Funds) Regulation, 1996 to emphasize that any expenditure in excess of the limits specified in the Regulations was liable to be borne only by the concerned Asset Management Company or by the Trustees or sponsors of the Mutual Fund. The learned representative explained that in view of the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance was placed on the judgment of Hon'ble Delhi High Court in the case of Oriental Structural Engineers (P) Ltd., 35 Taxmann.com 210, order of Chennai Bench of Tribunal in the case of EIH Associated Hotels Ltd. (ITA No. 1503/Mds/2012 dated 17.7.2013), order of Mumbai Bench of Tribunal in the case of M/s. JM Financial Ltd. (ITA No. 4521/Mum/2012 dated 26.3.2014) and order of Delhi Bench of Tribunal in the case of Interglobe Enterprises Ltd. (ITA Nos. 1362 1032/Del/2013 dated 4.4.2014). For all the above reasons, the learned representative for the assessee submitted that the impugned expenditure has been unjustly disallowed by the lower authorities. 12. On the other hand, the ld. DR appearing for the Revenue has defended the action of the lower authorities by pointing out that the advertisement expenses was relatable to the activities of the Mutual Fund and not of the assessee and, therefore, the same has been rightly disallowed in the hands of the assessee. It was also pointed that the impugned expenses would have been justifiably incurred by QAMC, which was the Asset Management Company of the Mutual Fund and not by the assessee who was sponsor of the Fund. With regard to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved in the functioning of a Mutual Fund. 14. Now, the case of the assessee is that it has incurred advertisement expenditure so as to promote the various schemes launched by Quantum Mutual Fund. The assessee has explained that the expenditure has been incurred for attracting investors for investing in the existing schemes of Quantum Mutual Fund. It has also been sought to be pointed out that the Asset Management Company, i.e., QAMC is its 100% subsidiary. According to the assessee, it has a direct interest in the business of the QAMC, who in turn manages the assets of Quantum Mutual Fund. The aforesaid factual matrix is not in dispute and is also emerging from record. Having regard to the same, the moot question is as to whether the assessee was driven by considerations of commercial expediency or not while incurring the impugned expenditure on advertisement? No doubt, the expression commercial expediency is not amenable to a straightjacketed definition, but its meaning is required to be understood in the context of the facts and circumstances of each case. So however, in the context of a businessman, it would be safe to deduce that the expression commercial expediency would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Supreme Court emphasized that even in the context of Sec. 37(1) of the Act, the expression for the purposes of business would include an expenditure voluntarily incurred for commercial expediency and it would be immaterial if a third party also benefitted from the same. The following extract from the judgment of the Hon'ble Supreme Court is notable:- . once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their view point but that of a prudent businessman. In view of the aforesaid, we therefore do not find any merit in the stand of the income-tax authorities that the expenditure in q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvertisements 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. On this aspect of the matter, the learned representative for the assessee relied upon the judgment of the Hon'ble Bombay High Court in the case of Tata Sons (P) Ltd., 18 ITR 460 which has also been referred to by the Hon'ble Supreme Court in the case of Amalgamations (P) Ltd. (supra). In the case of Tata Sons (P) Ltd. (supra) assessee was managing agent of an another company and it was earning agency commission computed with reference to the net profits of the managed company. Assessee-company voluntarily paid certain sums to some of the officers of managed company as bonus, and such expenditure was claimed as deduction while computing its taxable business income. Such claim was upheld on the ground of commercial principles as according to the Hon'ble High Court, what the assessee had done was something, which had an objective of increasing the profits of the managed company, which in tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the same is governed by the terms and conditions approved by the Regional Director, Western Region, Mumbai under the proviso to Sec. 297(1) of the Companies Act, 1956. Such approval of the authority under the Companies Act, 1956 is dated 30.5.2011, which ostensibly explains the date of the agreement to be 1.6.2011. The agreement dated 1.6.2011, which was in turn based on the approval of a statutory authority under Companies Act, 1956, cannot be said to be an evidence lacking in bona fides. It also cannot be construed as an afterthought because the same is of a date prior to the date of filing of return of income by the assessee for the impugned assessment year and is in terms of conditions approved by a statutory authority. Be that as it may, in our view, the aforesaid material was only in support of assessee s primary assertion that the expenditure was incurred on considerations of commercial expediency . In our considered opinion, the aforesaid piece of evidence was quite germane for the purposes of appreciating the entire transaction in its proper perspective, and the CIT(A) erred in not considering such material to decide the controversy before him. 17. In any case, on th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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