Revenue cannot judge fee paid for business development services with respect to the benefit derived by the assessee in terms of increased turnover– ITAT
ABCAUS Case Law Citation:
ABCAUS 1261 (2017) (05) ITAT
The appellant assessee had challenged the order passed by CIT(A), confirming the confirming the disallowance of consultation fees of Rs. 5507987/– made by the Assessing Officer (‘AO’) in assessment order passed on 25/11/2010 under section 143(3) of the income tax act, 1961 (the Act’)
Assessment Year : 2008-09
Date/Month of Pronouncement: May, 2017
Brief Facts of the Case:
The assessee was a limited company engaged in the business of information technology enabled services who filed its return of income declaring loss of Rs. 30497885/–. During the course of scrutiny proceedings it was noted by the AO that assessee had debited a sum of Rs. 5507987/– in profit and loss account by consultant fees. The assessee was asked to submit the details of such payment and assessee submitted that the assessee company has engaged services for consultants for business development outside India and they have been paid the fees.
Assessee supported its contention by submitting the details of the amount paid and copy of the agreement.
However, according to the AO, the turnover of the assessee as compared to the turnover of earlier years had increased insignificantly though assessee has spent Rs. 55 lakhs for consultant. Therefore, according to AO, the above sum paid by the assessee was unreasonable and hence, same was disallowed.
Assessee aggrieved with the order of the AO, preferred an appeal before the CIT (A) who confirmed the disallowance for the reason that there was no increase in the turnover during the year
Observations made by the Tribunal:
The Tribunal noted that the consultation fee was paid on the basis of agreement entered into by the assessee with them. On verification of the agreements and the evidence placed for the rendition of the services, it was apparent that those consultants had made efforts for the business development of the assessee. The parties to whom the consultation fee was paid were exclusively working for the assessee and were also not engaged in any other business till the continuation of the agreement.
It was observed that the assessee had further, given the details of the services provided by the consultants with respect to various presentation and client development made. In view of this, it was apparent that assessee had entered into service contracts with those parties who had rendered those services and who had also been remunerated in terms of the agreement entered into.
The ITAT opined that the reasons given by the AO for disallowing the consultancy fee paid was that increase in the turnover of the assessee despite paying such sum was insignificant. It was apparent that the business development activities did not convert immediately into the revenue model and it might take time. In any case, revenue cannot judge the compensation that assessee has paid for those services with respect to the benefit derived by the assessee. The expenses may be incurred for deriving benefit in future which may always not be immediately converted into monetary terms.
It was observed by the Tribunal that AO should have merely examined whether the assessee had incurred those expenditure wholly and exclusively for the purposes of the business or not. As it was not been negated by the AO that expenses were incurred by the assessee wholly and exclusively for the purposes of the business but the resultant increase in the turnover is insignificant, as there is no such provision in the income tax act applying this logic for making disallowance.
It was observed that CIT(A) had questioned the rendition of the services by those parties which had been proved by the assessee by placing cogent material. Just because of the reason that in this year they are supposed to be paid at the fixed rate due to nominal increase in the business, it could not be said that policy of remunerating a consultant was incorrect.
The ITAT also noted that importantly the assessee was paying commission to such parties in past years as well as in subsequent years, however the revenue had not questioned allowance of these expenditure on the basis of increase or decrease in turnover or on rendition of services.
The order of the lower authorities was reversed and the AO was directed to allow the expenditure of Rs. 5507987/– and delete the disallowance.