In a recent judgment, ITAT Mumbai has opined that merely because an income has been taxed in the hands of recipient , does not mean that it is a deductible expenditure in the hands of the person making the payment instead the deduction is required to be examined and adjudicated upon in accordance with the law.
The ITAT lifted the corporate veil to observe that When the director was taking a meeting, and worked towards protecting his investment that is what he was expected to do in furtherance of legitimate business interests of the company. No claim can be made that while doing this work, director was wearing a different hat, i..e of another company therefore, the other company should be paid for the work so done.
Case Details:
ITA Nos.2802, 2803 & 2088/Mum/03
Assessment years: 1995-96, 96-97 and 97-98
Stock Traders Pvt. Ltd (STPL) vs. Assistant Commissioner of Income Tax
Date of Order/Judgment: 05/04/2016
Brief Facts of the Case:
The assessee (STPL) was is a company engaged in the business of financing and making investments. During the course of the scrutiny assessment proceedings, the Assessing Officer noted that the assessee had paid a sum of Rs.49,09,637 to a Switzerland based company (Preroy AG) towards rendering services to assessee for locating new business opportunities, recommend proposal for new projects and coordinate existing and new joint venture partners for technology transfers, equity participation and secure the support for new business strategies.
The Assessing Officer noted that Sushil K Premchand (SKP) who was a major shareholder and director in the assessee company, was also one of the two directors of PAG and 100% sharehold of PAG. According to AO there was no clinching evidence of the actual rendition of service by PAG to the assessee company except only bills and invoices for services, the invoices were also vague. The Assessing Officer disallowed the fees for consultancy charges paid to PAG with the following observation:
“…..the assessee company (PAG) having only one client in the whole world i.e. M/s. STPL from whom it has received fee for management consultancy. The assessee company (PAG) is a show of single individual Shri Premchand who holds 100% shares in the assessee company. This one man company has received from one group concern which is engaged in the same business in India. The assessee has no other business. This facts clearly leads to conclusion that the Indian Co. (STPL) is dependant agent of the foreign company. Since the foreign company has a dependent agent, it has permanent establishment in India. Even if the assessee’s income is treated as business income it will be taxable under article 7 of the Treaty.”
Aggrieved, assessee contested the matter in appeal. However, CIT(A) upheld the disallowance
Excerpts from ITAT Judgment:
We find that, as evident from the assessment orders of the PAG- which were placed before us in the paper-book, one hundred percent of the share in the PAG were owned by Shri Sunil K Premchand (SKP, in short) who is also a director, and majority shareholder, in the assessee before us. We have also noted that whatever evidence the assessee has lead, so far as the rendition of service by the PAG is concerned, refers to the involvement of SKP and inputs by him. There is nothing before us to establish, or even indicate, consultancy or advisory work done by any person other than SKP.
…… it is difficult to be persuaded by the contention that these services are required to be treated as rendered by the Preroy AG because, the director was also a one hundred percent owner and a director of Preroy AG, and because, at the point of time when he was doing all this work, he had discarded the hat of director in the assessee company to wear the hat of director of Preroy AG. That is the situation with respect of the entire work in respect of which Preroy AG is paid.
When SKP takes a meeting, as a director in the assessee company, and works towards protecting his investment in OKS India, that is what he is expected to do in furtherance of his legitimate business interests. The trouble, however, arises when a claim is made that while doing this work, SKP was wearing a different hat, i..e Preroy hat, and, therefore, Preroy AG should be paid for the work so done. We are unable to accept this claim, which, in our considered view, is too far fetched. Here is a director of the company rendering services to the company in which he is a director and a rank outsider commercial entity, owned by the director, is being paid for the work done by the director. It appears that the foreign trips, during which the work is claimed to have been done, were taken up in the capacity as director of the assessee company, and, yet billing for the work done in the course of trips so undertaken at the cost of the assessee company, has been done in the name of Preroy AG. There is nothing on record to show that these foreign trips were undertaken by SKP at the cost of Preroy AG or in the course of his work as director or owner of Preroy AG.
We find that, as evident from details of travelling expenses filed at pages 77 onwards in the paper book before us, the visit to Germany, Netherlands and UK, which lasted from 30th June to 12th July 1994, is stated to have been undertaken by SKP for attending “business meetings and representing STPL in a meeting with potential business partners”. When it comes to claiming the travelling expenses, the assessee travels as director in STPL (i.e. the assessee) to attend the business meetings, yet the assessee claims to have actually met the potential business partner in a different capacity, i.e. as a representative of Preroy AG, and seeks a deduction for fees paid to Preroy AG in respect of the same. The same is the position with respect to almost all the invoices.
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