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TMI Blog2020 (4) TMI 757X X X X Extracts X X X X X X X X Extracts X X X X ..... r. 3. During the assessment proceeding, AO observed that assessee has debited an amount of Rs. 2,89,29,114 and Rs. 69,32,256/- under the head service fees and membership & subscription fees respectively. He further observed that similar expenditures were not debited in the earlier AY 2008-09. Therefore, it is one time payment of the assessee during the year under consideration and he observed that the expenditure debited by the assessee in this heads amounts to 44.45% of the total expenditure debited to the Profit & Loss Account. Further, Assessee was show cause to explain as to why this expenditure cannot be treated as capital expenditure. In response, assessee submitted that the expenditure debit to profit and loss account are wholly and exclusively for the purpose of business and these expenditures do not provide any enduring benefit to the assesse and it does not fall in any of the nature of expenditure described in section 32 & 36 of the Act. Therefore, this expenditure will invariably fall u/s 30 or 37 of the Act as revenue expenditure. After considering the submission of the assessee, AO made the addition with the following observations:- 5.4 The submission of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the facts that these expenses have resulted into increasing the service base of the company, If these are revenue: expenses, then with the increase in turnover the same should also increase/decrease proportionately not irrationally. 5.6 In view of the above facts and circumstances of the case, the sum of Rs. 2,89,29,114/- expended as Service Fees, and Rs. 69,32,256/- as Membership and Subscription Fees are capital in nature as it provides, and has provided enduring. benefit to the assessee company. Accordingly, the sum of Rs, 3,58,61,370/- is treated as capital expenditure. Moreover, depreciation on the same cannot be given as it does not falls with the purview of section 32 of the Act, Hence, the sum of Rs. 3,58,61,370/- is added back to the total income of the assessee. Penalty proceedings u/s,271(1)(c) read with Explanation 1 thereto are initiated separately for filing of inaccurate particulars of income thereby concealing the income. 6. Subject to above the total income of the assessee company is computed under:- Total Income (As Per Computation) 262,58,734 Add: Disallowance of Service Fees & Membership & Subscription Fees (Para 5) 3,58,61,370/- Total Income 6, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in providing these services. The services were related to the ongoing operational activities and did not bring into existence in the capital asset to the appellant nor did the result into any benefit of enduring nature for the appellant. 3.7 The appellant has incurred expenditure amounting to Rs. 2,89,29,114/- towards payment for services received from the aforementioned MF Global overseas group entities. The appellant considers this expenditure which was incurred for the purpose of ongoing business activities to be deductible u/s 37 (1) of the IT Act. These transactions were covered by transfer pricing provisions under the Act and have been reported in the Accountant's report on Form No. 3 CD EB for the year under consideration 3.8 However, effective from financial year 2009-10 on account of the change in the global management, it was decided to withdraw the contract for providing common services to group entities. Therefore, the appellant is not borne expenditure in the subsequent year. 3.9 The services rendered are related to day to day operations of the appellant. The service pertain to day to day running of the business such as activities of managing bank relationsh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntities. 4.2 These customers open accounts with overseas group entities for entering into transaction and overseas capital markets. 4.3 As a part of the agreement with the group entities besides identifying potential customers the appellant is responsible for- * Appraising the customers from credit risk perspective * Assisting in completing the required documentation between the customer and the group entity Liasoning for the same * Transmitting on behalf of the customers, the execution order in respect of purchase or sale of commodities of foreign currency on international markets to group entities. 4.4 The customers in India who are transacting in overseas capital markets are in different time zones, This causes difficulties in placing orders etc. and resultant delays. It only involves a lot of administrative & operational costs and therefore to avoid the time difference etc. and streamline trading and clearing services to customers the customers are given an online connectivity with the overseas group entities so that they can communicate directly with the respective entity. The respective overseas group: entities have installed terminals to carry out trades of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a lasting or enduring benefit to the enterprise. 3.12 By its own accounts the assessee has stated that it has incurred the expenditure A concerned to gain an advantage in the marketing field of its business by usage of the expertise available with the personnels of the global group by paying extra compensation over and above the salaries they were receiving albeit by way of contract decided by the global management of the MF Group. It has also been stated that such an expenditure would have helped the appellant in his business in the current and future years, The reason for termination of the contract was not because the appellant did not require it or was not eager to exploit the expertise of the personnels but because the global management decided to discontinue it. However, the advantage gained in the year when the services was available to the appellant, as pointed out by the assessing officer, have translated into a benefit for the appellant in the future years. This has not been rebutted by the appellant. Therefore., it can be deduced from the statement of the appellant that the intention of the appellant was always to gain an enduring benefit for itself by expanding the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o show that the appellant is no more liable for these charges. Besides as stated earlier on in this order it is the intention of the appellant at the time of making the expenditure that needs to be seen. From the details before me, it is clear that the expenses have been incurred by the appellant in the concerned year for availing a membership benefit of the trading terminals for advancing its own business in the current year and in the future taking into account its customer base and their needs. I find that the appellant's case is covered by the principles pronounced by the Hon'ble High Court of Delhi in CJT v/s Engineers India Ltd. (1999) [155 CTR (Del) 394] wherein the Hon'ble Court has held that admission fees paid to an engineering concern, to acquire membership of a research organisation was revenue expenditure as the initial payment did not ensure any lasting benefit to assessee by way of flow of technical information, and the assessee had to pay yearly subscription to get the technical information, However, payment made for getting institutional membership in a club is capital expenditure because once the assessee pays the amount to a club for membership, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come Tax Appellate Tribunal to decide this appeal according to law. 8. Before us, Ld. AR submitted the facts and findings of revenue authorities with regard to service charges, he brought to our notice para 3.2 of the order of Ld. CIT(A). He submitted that Ld. CIT(A) had not considered and appreciated the extended service of group entities. These are revenue expenditures and allowable expenditure. He relied on following case law:- i) Empire Jute Co. Ltd. vrs. CIT 124 ITR 0001 ii) OCL India Ltd. vrs. ACIT 304 ITR 262 (del) 9. With regard to Ground no. 2, Membership & Subscription Charges, he brought to our notice para 4 and 4.5 of the order of Ld. CIT(A) and para 5.4(b) of the order of AO. Further he brought to our notice page 25 of the paper book, assessee has incurred this expenses only during this year and in the subsequent assessment year onwards, assessee has directed its clients to install and subscribe directly. There is no cost to the assessee. This subscription does not give enduring benefit to assessee. Therefore, he relied on the decision in the case CIT vrs. Engineers India Ltd. 239 ITR 237. 10. Further he pleaded that in case, these expenses are considered as cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reas assessee has incurred employee cost of Rs. 5.15 crores. It clearly shows that assessee has stopped utilizing the services of group entities and started employing its own staff and relevant services extended to its customers by utilizing its own staff. There is considerable increase in the employees cost shows that there is shift in the management decision. Even otherwise assessee has submitted the analysis of making payments to its sister concern and submitted the relevant documents treating this as international transaction. Since the transaction involved is only to the extent of Rs. 2.89 crores, therefore AO may not have referred this case to TPO, just because it is not coming under TP study and there is abnormal increase in the cost, does not mean that assessee has not incurred this expenditure for its business. Therefore, in our considered view, these transactions are revenue in nature and having direct relevance to its business and incurred to extend the services to its customers in the overseas market with the help of its group concerns are only a revenue expenditure and eligible to be claimed as deductible expenditure under section 37 of the Income Tax Act. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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