Phillip (India) Pvt. Ltd. Vs ACIT (ITAT Mumbai)
Conclusion: Service fees and membership & subscription fees were incurred for the purpose of business and to set up a transaction meant for overseas capital market, therefore, this expenditure could be treated preliminary expenditure for the purpose of business.
Held: During the assessment proceeding, AO observed that assessee had debited an amount under the head service fees and membership & subscription fees respectively and the expenditure debited by assessee in this heads amounted to 44.45% of the total expenditure debited to the Profit & Loss Account. Therefore, AO treated this expenditure as capital expenditure. Assessee submitted that the expenditure debit to profit and loss account were wholly and exclusively for the purpose of business and these expenditures did not provide any enduring benefit to assessee and it did not fall in any of the nature of expenditure described in section 32 & 36. Therefore, this expenditure would invariably fall u/s 30 or 37 of the Act as revenue expenditure. It was held that these expenditure was incurred in order to facilitate the clients in India and it had direct relevance to the business carried on by assessee, but however there was no assets installed by the assessee except facilitating the installation to the clients. It might look capital in nature, but it was the cost incurred by assessee to facilitate the transactions between the clients and group concerns. There was no direct enduring benefit to assessee, it could be termed as incurred for the purpose of business and to set up a transaction meant for overseas capital market. Therefore, this expenditure could be treated preliminary expenditure for the purpose of business and therefore this transaction might increase the business/ trade for the assessee in the subsequent year. Accordingly, AO was directed to allow one fifth (1/5th) of the expenditure in this assessment year and balance in the next 4 assessment years treating this similar to the treatment as preliminary expenditure.
FULL TEXT OF THE ITAT JUDGEMENT
The present appeal has been filed by the assessee against the order of Ld. Commissioner of Income Tax (Appeals)-12 Mumbai, in short `Ld. CIT(A)’ dated 29.01.13 for AY 2009-10.
2. The brief facts of the case are that assessee filed its return of income for the year under consideration on 13.09.09 declaring a total income of Rs. 2,62,58,734/- under normal provision of Income Tax Act and declared book profit of Rs. 2,29,48,069/- u/s The return was processed u/s 143(1) of the I.T. Act, resulting in refund of Rs. 1,21,26,010/-. Thereafter the case was selected for scrutiny and notices u/s 143(2) and 142(1) were served upon the assessee. In response, AR of the assessee attended and furnished the details as called for.
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.
4. 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 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. 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 Fees debited, the assessee stated that this will result into availability of wider experience, which further strengthens the facts that the benefits is of enduring in nature,
e) The assessee in its reply has stated that the main test for claiming a expenses u/s, 37(1) is an element of commercial expediency. But the assessee: has forgotten the fact that even expenditure which are capital in nature can also be for commercial expediency. For commercial expediency, assessee can ‘incur both capital as well as revenue expenses.
f) The fact that these charges are capital in nature is further strengthened from the fact that in the earlier years as well as in subsequent years the expenses booked under these heads is less than 3% of the total debits; in the Profit & Loss account. However, in the year under consideration these charges account for nearly 45% of the total debits in the profit and loss account.
g) As per the submission of the assesses, if these charges paid are necessary and vital for day to day running of the company, then why it is the case that such huge expenditure is not incurred in the earlier years as well in the later years. If it is for day to day running of the business then these expenses will be required every year in similar propositions normally.
h) On comparing the account of the . assesses over various years shows that the turnover of the company has increased by more than 10% whereas expenses incurred under these heads has decreased by more than 90%, clearly stating 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 6,21,20,104
Rounded off 6,21,20,100
7. Assessed u/s, 143(3) of the Income-tax Act, 1961 at Rs. 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 wanting to buy / sell foreign securities which it refers to the overseas MF Global Group entities. During the year under concern, the appellant has received services from following MF Group: entities for which it had made payments to them as given below :-
