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TMI Blog2019 (4) TMI 709X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 appellat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Two Overseas funds named Lok I and Lok II to provide them with non-binding investment advisory services in consideration for advisory fee. In the light of these advisory agreements the assessee company entered into an agreement with Lok Foundation to help identify certain investors and influence them to participate in Lok II. Further, the assessee goes on to say that because of the efforts of the Donald Pact, co-founder of LF the total fund size increased from USD 36,550,000 in Jan 2011 to USD 65,000,000 by the end of the Financial Year. For this one time fund raising fee of ₹ 2,88,43,934/- have been paid by the assessee to the Lok Foundation, the assessee pleads that this consultancy fee is a allowable deduction of the assessee as it meets all test laid down by Section(sic) 37(1) of the IT Act, 1961. The assessee goes on to quote the judicial pronouncement in its favour. The reply of the assessee is considered. Basically, the entity Lok Foundation is helping the foreign funds in raising funds overseas as is clear from the assessee's own admission that because of the efforts of the LF the fund size has increased substantially. The Lok Foundation is not actually gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e particulars with a view to evade the tax. The reasons described above may be treated as my satisfaction note for initiating penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961 for filling inaccurate particulars for the above addition made. (Addition of ₹ 2,88,43,934/-) With these remarks total income of the assessee is computed as under:- Total income as per return of income 33,07,902/- Add: (as discussed above) Disallowance u/s 37(1) 2,88,43,934/- Total Income 3,21,51,836/- Rounded off 3,21,51,840 After discussion assessed at an income of ₹ 3,21,51,840/-. Issue notice of demand and challan. Charge interest as per the provisions of the Act. Give credit for taxes paid. Notice u/s 271(1)(c) of the Act issued for failure to furnish true particulars of income. 5. The Commissioner of Income Tax (Appeals), ('CIT (Appeals)', for short), deleted the addition, referring to several facts. Firstly, the respondent-assessee itself w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required, comments on the performance of portfolio companies and assistance in the preparation of annual audited accounts and quarterly reports. The advisory fee to be received by the appellant company, as per the agreements (clause 6.1) was calculated for the first five years at a certain percentage of the committed capital to the funds and thereafter as a percentage of the assets under management of the funds. The appellant entered into an agreement with Lok Foundation Mauritius (LFM) on 6.4.2011 in order to enlist its help in raising funds for Lok II, which would enable the appellant company to earn advisory fees from the said Lok II fund. As per the said agreement Lok Foundation Mauritius was to identify and introduce potential investors in Europe, UK and USA, review and assist in preparation of appropriate material to present plan to investors, assist with the negotiations to arrive at a commitment and move towards a closing and influence the process at each fund source to get a successful outcome. 3.3 From the discussion in the preceding paragraph, it is revealed that the advisory fees received or receivable from the two Mauritius Funds are directly and intensically con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verseas funds should have paid the fund raising fee to LFM and not the appellant, in view of the facts seated above and the accepted legal(sic) position that the reasonableness of an expenditure is to be adjudged from the point of view of the businessman [Walchand Co.. Pvt. Ltd.(SC)], the consultancy fee paid is an expenditure wholly and exclusively incurred for the purposes of business. Undoubtedly the fund raising of LFM also benefits the overseas fund but there are several decisions of the Supreme Court wherein it has been held that where a transaction has been entered into by an assessee as a part of legitimate and commercially expedient activity and in order to facilitate the carrying out of its business, it is immaterial that the third party also benefits from its transaction. This material is available at Paras 1.36 to 1.39 of the submission reproduced herein above and need not be reiterated 3.3.1 In passing, it may be mentioned that the appellant has raised objection to the remarks of the AO with regard to the consultancy fees being a ploy by which profits are siphoned off to LFM which is situated in Mauritius, so that no tax or miniscule tax would be paid. In fact, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure was not 'wholly and exclusively' for the purpose of business as Lok Foundation had not 'directly' rendered services to the respondent-assessee but to the foreign investors and accordingly the foreign investors and not the respondent-assessee should have paid Lok Foundation. This reason itself would accept that services were rendered by Lok Foundation. Appellate authorities have accepted that fee was paid to Lok Foundation for a gamut of services rendered outside India, namely to identify and introduce potential investors in Europe, UK and USA, review and assist in preparation of material, influence potential investors, assist in negotiations to arrive at a commitment, move towards a closing and get a successful closure. Respondent-assessee did not have a presence outside India and had not undertaken the said exercise. Expenditure of the said nature, if incurred by the respondent-assessee, would qualify for deduction as fully and exclusively for the purpose of business. Payments made by the respondent-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 orde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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