IMC GLOBAL TECHNOLOGY SERVICES PVT. LTD.,,PUNE vs. INCOME-TAX OFFICER,,

The assessee has raised the following grounds of appeal:-

The issue raised in the present appeal is against disallowance of Management Fees of ₹ 2,62,24,684/- paid by assessee to its holding company IMC Inc, USA on the ground that the assessee had failed to prove that any benefit had accrued from the expenses.

Briefly, in the facts of the case, the assessee for the year under consideration had filed return of income declaring total loss of ₹ 1.66 crores and book loss of ₹ 2.20 crores. The assessee company was incorporated on 27.04.2005 and was engaged in the business of IT Enabled Services. During the course of assessment proceedings, the assessee was asked as to why Management Fees paid of ₹ 3.23 crores should not be disallowed. In respect of Management Fees of ₹ 3.23 crores, the assessee pointed out that it had reimbursed various costs incurred by associated enterprises which were directly related to its business and there was no profit margin markup in respect of said expenses. Reference was made to Annexure – E to transfer pricing documentation, wherein the details of project based services rendered by associated enterprises were furnished. The assessee also referred to the details furnished of man hours spent by associated enterprises personnel on the activities of assessee. In part II of Appendix, the assessee claims to have

The CIT(A) upheld the order of Assessing Officer. The CIT(A) did not accept the plea of assessee as in the initial years, no such Management Fees was reimbursed by the assessee to its associated enterprises. The assessee claimed that in the initial years, no such payment was being made as the parent company was supporting the operations of assessee. However, where no expenditure was claimed in the preceding years, despite showing profits of around 37%, then the CIT(A) observed that the claim made for the first time in the year, where the company reported losses instead of profits was not acceptable. If the intention of parent company was to support the startup, then no such claim should be made in the year of loss. Further, the CIT(A) noted that sum of ₹ 2.62 crores was shown as outstanding as on 31.03.2010 under the head „Sundry Creditors‟ in the Balance Sheet. The CIT(A) was of the view that in case it was genuine payment, then the periodical payments or adjustments against receivables for the services should have been made by the assessee. Further, invoice numbers were continuous series from GS-001 to GS-0011 commencing from April, 2009 to March, 2010. The CIT(A) was of the view that this clearly showed the intention to book expenditure by way of Management Fees at the end of the year, by journal entries and claim loss under the head „Income from business‟. The CIT(A) further observed that Even otherwise, the appellant has not demonstrated with credible evidences that the expenditure in question was incurred wholly and exclusively for the purpose of business of appellant or for the projects of appellant except furnishing copies of the above said invoices raised by IMC Inc. The CIT(A) thus, upheld the

The assessee is in appeal against the order of CIT(A).

The learned Authorized Representative for the assessee pointed out that Management Fees of ₹ 2.62 crores paid by assessee to its holding company was disallowed by the Assessing Officer under section 37(1) of the Act, on the ground that no benefit arose to the company on payment of such Management Fees. It was pointed out that the Assessing Officer had allowed salary paid to Shri Rahul Chikto but had disallowed the Management Fees paid to associated enterprises. Referring to the order of CIT(A), the learned Authorized Representative for the assessee pointed out that the basis for disallowance was that no such expenditure was incurred in earlier years and expenses were booked through journal entries and further, no credible evidence of services rendered was provided by assessee. The learned Authorized Representative for the assessee here stressed that associated enterprise was rendering services to assessee right from initial years, but as support system, no charges were raised in initial years. An agreement was with effect from May, 2009 for charging Management Fees to the assessee from 01.04.2009. Our attention was drawn to copy of agreement placed at page 46 of Paper Book and it was pointed out that the said agreement was signed on 12.05.2009 but the start date of agreement was 01.04.2009 upto 31.12.2009. Thereafter, the said agreement was renewed from 01.01.2010 to 31.12.2010. Our attention was drawn to additional evidence filed before the CIT(A) i.e. document in support of rendering of services by staff of IMC Inc, USA, placed at pages 79 to 173 of Paper Book. The learned Authorized Representative for the assessee then,

The learned Departmental Representative for the Revenue placing reliance on the order of CIT(A) pointed out that no evidence of rendering services by the associated enterprises to the assessee were filed and hence, the disallowance.

We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against claim of deduction of management fees paid by the assessee to its holding company IMC Inc, USA. The assessee though, was established in 2005-06 but no management fees were being paid by the assessee to its associated enterprise till last year. It was only during the year under consideration, the assessee had booked management fees expenses of ₹ 3.32 crores. The said expenditure included salary paid to one Shri Rahul Chikto, who was helping in the operations of assessee company and the Assessing Officer allowed the claim to the extent of ₹ 61,32,462/-. The balance amount of ₹ 2.62 crores was paid to parent company. But the Assessing Officer was of the view that the amount paid was huge especially when the business of assessee resulted in losses during the year under consideration. Hence, he disallowed said sum of ₹ 2.62 crores. Another point which was raised by the authorities below was the benefit test that the said

In this regard, we find support from the ratio laid down by the Hon‟ble High Court of Delhi in Hive Communication Pvt. Ltd. in Income Tax Appeal No.306/2011, wherein it has been held that the legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman. It was further held by the Hon‟ble High Court that it was not for the Assessing Officer to dictate what the business needs of the company should be; it is businessman who can only judge the legitimacy of the business needs of the company from the point of view of prudent businessman. Hence, the benefit derived and accruing to the company must also be considered from the angle of prudent businessman. The Hon‟ble High Court clearly held that the term “benefit” to a company in relation to its business has a very wide connotation and it was difficult to accurately measure these benefits in terms of money separately. The said principle laid down by the Hon‟ble High Court has been applied by the Delhi Bench of Tribunal in McCann Erickson India P. Ltd. Vs. Addl.CIT (supra) to hold whether the benefits derived by the assessee, in view of the evidences

The Pune Bench of Tribunal in Emerson Climate Technologies (India) Limited Vs. DCIT (supra) applying the said ratio had decided the issue of allowability of support service charges paid to associated enterprises and had held as under:- “23. The next stand of the TPO is two-fold; as to what benefits have been received by the assessee against the said support services and intricacy value of services given by the associated enterprises. The said aspect is linked to the issue of whether there is any need for services and in the absence of its establishing the same, whether the TPO / Assessing Officer is correct in determining the arm's length price of transactions at Nil. The assessee had entered into an agreement with its associated enterprises for availing the services because of business benefits arising from such an understanding. Law does not require the assessee to demonstrate the need for availing the services. The assessee is best person to arrange its affairs to conduct the business in the manner it wants and Revenue cannot step into the shoes of businessman to decide what is necessary for the businessman and what is not. The TPO is not empowered to question the decision of assessee to avail support services from the associated enterprises. The decision taken by the assessee in the course of carrying on its business is commercial decision and the TPO cannot question such commercial wisdom of assessee‟s decision. The second linked issue which has been raised is that the assessee did not benefit from such support services where the assessee has shown losses during the year. 24. The Mumbai Bench of Tribunal in Dresser-Rand India (P) Ltd. Vs. Addl.CIT (supra) had held that We have further noticed that the TPO has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by so stretch of logic, it can have any role in determining ALP of that service. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same.”

The Pune Bench of Tribunal in Emerson Climate Technologies (India) Ltd. Vs. DCIT (supra) had also held as under:- “19. The assessee thus, filed documentary evidence to demonstrate that it had availed services in the field of Human Resources, Marking and Product, Finance, Business Development and Management and other services i.e. support for new product, marketing material, training material and technical

Applying the said ratio to the facts of the present case, we first hold that the assessee as part of its agreement with its holding company, agreed to pay management fees and such payment of management fees cannot be brushed aside on the ground that no benefit has arisen to the assessee company for reaching such conclusion. The Assessing Officer had raised two fold objections that no such payment was made in earlier years and payment during the year has resulted in losses. The reason for non-payment in earlier years was that the holding company was supporting operations of the assessee, in order to allow the assessee to establish its business modules but on a later date, the parties agreed to reimbursement of services provided by associated enterprises by way of management fees. The basis for raising invoices by the holding company was the posting of labour time sheets for the month. It is very clearly mentioned in the agreement entered into between the parties which is available on Paper Book, wherein it is provided that holding company IMC Inc, USA would provide management services to the assessee on three accounts;

Now, coming to the next aspect of the disallowance of assessee on the ground whether any services were availed or not. The assessee in this regard

The Pune Bench of Tribunal in the case of Emerson Climate Technologies (India) Ltd. Vs. DCIT (supra) while deciding the issue of allowability of advisory support services had held as under:- “30. The next issue on which the arm's length price of international transactions was adopted at Nil was the observations of Assessing Officer that no payment for initial year was shown as part of international transactions declared by the assessee, in the said year. The assessee explained that it had received invoices after close of the year in September, 2008 which was for earlier year and also for the year under consideration. Since the invoice was received in the year under consideration, the assessee had booked the expenditure during the year. In view thereof, where the invoices for services charged were raised by the associated enterprises in the month of September, 2008 and where the books of account of assessee for the financial year 2007- 08 had already been closed, then the transaction for earlier year could not be accounted for or be reported during the earlier year. Accordingly, there is no merit in the contention of AO/TPO in this regard. Thus, the ground of appeal No.2 raised by the assessee is allowed.”

Similar issue also arose before Pune Bench of Tribunal in Eaton Fluid Power Ltd. Vs. ACIT (supra), wherein also similar document of evidencing the availment of services and also the basis of cost for sub services was filed and the Tribunal held that where the assessee had demonstrated that it had availed services by way of various evidences, then the said expenditure is to be allowed in the hands of assessee. The Tribunal also decided linked issue of whether any benefits had been received by the assessee against the said support services and whether there was any need for services and held as under:- “29. Now, coming to the issue of transfer pricing adjustment made by TPO on account of services availed by the assessee from its associated enterprises and taking the value of said international transactions at Nil. In the first instance, we hold that TPO cannot sit in the judgment of business module of assessee and its intention to avail or not to avail any services from its associated enterprises. The role of TPO is to determine the arm's length price of international transactions undertaken by the assessee and whether the same is at arm's length price when compared with similar transactions undertaken by external entities or internal comparables…… 30. The second aspect which needs to be considered in the present case is the services availed by assessee from its associated enterprises. The assessee is a group concern of worldwide Eaton group of companies and the intention to avail the said services is to carry out his business on worldwide platform. The total turnover of assessee for the year was ₹ 173 crores and the services availed from associated enterprises were intermingled to the extent that the Tribunal in earlier years has directed that for benchmarking international transactions undertaken by the assessee, import of raw materials for manufacturing purpose and export of finished goods should be aggregated. The information technology services availed by the assessee also relate to aforesaid business carried on by the assessee and hence, we find merit in the plea of assessee in aggregating the same with other international transactions undertaken by the assessee with its associated enterprises. Accordingly, we hold so. In any case, the assessee in the reasons for filing additional evidence has pointed out that information was filed before the TPO along with agreement and certificate of Eaton China, but thereafter, no other query was raised by TPO or any clarification was sought in respect of information technology services availed. The assessee thus, was under the bonafide belief that the documents and explanation furnished by it has been accepted. Further, the assessee before us has pointed out that though it is filing additional evidence but because of confidentiality clause, such information cannot be shared as it would affect the business transactions of assessee. We have gone through the additional evidence filed by the assessee and we are of the view that the assessee has established its case of availment of said services in the field of information technology. In addition, the assessee has also filed certificate from its associated enterprise dated 22.04.2011 i.e. during the course of TP proceedings, under which there is certification of factum of provision of services by Eaton China to the assessee and also basis for charging of such charge i.e.

Following the same parity of reasoning, we hold that entire expenditure booked under the Management Fees is to be allowed as deduction in the hands of assessee. The grounds of appeal raised by assessee are thus, allowed.

In the result, the appeal of assessee is allowed.