Case Law Details

Case Name : M/s DQ Entertainment (International) Ltd Vs ACIT (ITAT Hyderabad)
Appeal Number : ITA No 62/Hyd/2013
Date of Judgement/Order : 30/10/2015
Related Assessment Year :
Courts : All ITAT (1730) ITAT Hyderabad (87)

Brief of the case:

ITAT Hyderabad held in M/s DQ Entertainment (International) Ltd Vs ACIT that if the effect of expenses has been given in the balance sheet then the upward TP adjustment could not be made because the same had not been charged to P&L account and so same could not be be added to the income of the assessee.

It further held that , if the assessee had paid management fees to its Associated Enterprise who had in turn paid fees to its Associated Enterprise then the same could not be denied on the basis that the ultimate services had not been rendered by the Associated Enterprise of the assessee because there was a MOU entered between the assessee and AE that all the third party cost if any, would be billed to the assessee. So, as in the above case ultimate services had been rendered by the Associated Enterprise of the Associated Enterprise of the assessee and the payment had been made by the assessee to its Associated Enterprise who in turn would pay to its Associated Enterprise.

It further held that , if there was any forex loss on the payment made in foreign currency of the management fees to its Associated Enterprise then the same could not be clubbed as management fees for calculating ALP.

Facts of the case:

Assessee was one of the leading producers of animation, visual effects, game art and entertainment content for India as well as global media and entertainment industry. The assessee had made payment of management consultancy services fees of Rs 3,19,23,085/- and reimbursement of commission of Rs 73,62,023/- which was added to the income of the assessee while making TP adjustment as TPO was of the view that the ALP of management fees was NIL So made upward TP adjustment and also added the reimbursement of commission.

Assessee filed an appeal with ITAT.

Contention of the assessee:

Assessee was of the view that as the reimbursement had been debited to the capital account because the company was having agreement with the shareholders that the IPO expenses would be debited to them. So as the same had not been debited to the profit & Loss account so the addition could not be made to the income of the assessee.

Moreover as far as management fees (which includes forex loss of $321000)was concerned assessee was of the view that the test of commercial expediency for determining whether the expenditure was necessary and reasonable had to be adjudged from the point of view of the business man and not of the revenue. Assessee relied on the decision of Hon’ble Delhi High Court in the case of CIT Vs. EKL Appliances [24 Taxmann.com 199] (Delhi) to submit that ‘Department cannot dictate to the taxpayer whether or not to incur any expenditure’. Assessee also relied on the decision of Ericsson India Pvt. Ltd., Vs.DCIT [25 Taxmann.com 472] (Delhi) to submit that ‘It is prerogative of the taxpayer to avail services from its AE and the Revenue cannot question the commercial expediency of such a decision’. So the above expenditure should be allowed.

Contention of the revenue:

Revenue was of the view that as no direct benefit could be obtained by the assessee so he treated the ALP of reimbursement of commission as NIL and added Rs 73,62,023/- to the income of the assessee.

Moreover the foreign exchange loss of $321000 was included in the total payment of $427000 of management fees so the same should not be allowed as a management fees because it had nothing to do with consultancy services. Rest of the expenses were routine expenses which were also not related with the management services so, the ALP of the management fees was to be NIL so the addition of Rs 3,92,85,108/- should be added to the income of the assessee. Further, the management services were not rendered by the Associated Enterprise of the assessee but actually were rendered by the Associated Enterprise of the Associated Enterprise of the assessee. So the ALP of the same should be NIL.

Held by ITAT:

ITAT held that as the expenses which were not charged by the assessee in its P&L account, the same could not be added back to the income of the assessee.

As far as foreign exchange loss in the management fees had been concerned the same could not be allowed considered as a part of management fees. That had to be bear by the Associated Enterprise to which it concerned. So the expense could not be claimed by the assessee as its expense.

Moreover the issue of balance amount of management fees was concerned the TPO could not take the ALP at NIL because there was agreement between the assessee and its Associated Enterprises that all the costs incurred by its Associated Enterprises would be recovered by the assessee.

So, the same should be allowed to the assessee.

Appeal of the assessee was partly allowed.

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