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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 ..... siness 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. Payment of membership and subscription charges disallowed - HELD THAT:- These expenses are renewable and recurring in nature and only in this assessment year, assessee has borne the above said expenditure for its business purposes. As per the submission of the assessee, for the subsequent assessment years, these costs were diverted to its clients. Since these expenditure was incurred in order to facilitate the clients in India and it has direct relevance to the business carried on by the assessee, but however there is no assets installed by the assessee except facilitating the installation to the clients. It may look capital in nature, but it is the cost incurred by the assessee to facilitate the transactions between the clients and group concerns. There is no direct enduring benefit to the assessee, it can be termed as incurred for the purpose of business and to set up a transaction meant for overseas capital market - this expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assesses has been considered but not found tenable for the following reasons:- a) Such a huge expenditure under this head was neither incurred by the Assessee in A.Y.2008-09 nor in subsequent A.Y. 2010-11 A.Y. 2011-12, b) The Membership and Subscription Fees are expenses associated with the Lease Line/Connectivity Fees, whereby these connectivity lines are used by the customers. These Lease Lines /Connectivity can be used for number of years. c) The assesses states that to harmonize the time zone, this facility, with respect to Membership and Subscription Fees, have been paid, In this regard it is pertinent to note that the time zone will not vary at all and accordingly this scheme of arrangement, for which Membership and Subscription Fees have been paid will be. utilized by the assessee for longer period resulting into enduring benefit d) With respect to Service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 6,21,20,104 Rounded off 6,21,20,100 7. Assessed u/s, 143(3) of the Income-tax Act, 1961 at ₹ 6,21,20,100/-. Credit for pre-paid taxes and computation of tax is as per ITNS 160A enclosed separately is charged u/s. 234A, 234B, 234C and 234D as per the provisions of the Act. Demand Notice issued accordingly. 4. Aggrieved with the above order of AO, assessee preferred appeal before Ld. CIT(A) and assessee made a detail submission before him on account of service charges, which is reproduced below:- 3.2 Regarding the 1st issue of service fees in the submission filed, the appellant has stated that it is in the business of identifying potential customers wan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roup 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 relationships, risk credit committee attendance, business development, managing rating agency service, managing guarantee monitoring cash flow, cash management, corporate activities in compliance, tax planning and financial reports etc. As these expenses are on account of commercial expediency they should be regarded as having incurred for the purpose of business and revenue in nature. This is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired 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 clients. It has been agreed between the parties that the appellant will bear the cost relating to membership and subscription charges for trading terminals and the related software installed and used by the group entities and therefore the expense has been incurred by the appellant. These expenses are very important for earning the primary so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 above mentioned expenditure as service fees. Under the circumstances, the expenses cannot be termed as revenue expenses. The appellant has stated that the services are consumed in the year and therefore are revenue expenses. However, the nature of services extended clearly show that they were for the training of the appellant&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 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 a payment once for all, resulting in an enduring benefit to the institution ........ and the Hon'ble Kerela High Court in the case of Framatone Connector OEN Ltd. v/s DCIT (2006) [205 CTR (Ker) 250] in which Supreme Court decision in Punjab State Industrial Development Corporation Ltd, v/s. CIT (1997) 140 CTR ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 capital, assessee should be allowed to claim depreciation and in this respect, he relied on the decision in the case of Swaws Credit Corporation India vrs. DCIT 327 ITR 323. 11. On the other hand, Ld. DR brought to our notice para 3.11 3.12 and 4.5 of the order of Ld. CIT(A) and reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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, Ground No.1 raised by the assessee is allowed. 15. With regard to payment of membership and subscription charges, we notice that customers in India who are doing business with its group concerns are basically dealing in overseas capital market. Due to ad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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