DELOITTE HASKINS & SELLS,GURGAON vs. ACIT, NEW DELHI

ORDER PER SUDHANSHU SRIVASTAVA, JM: This appeal is preferred by the assessee against order dated 12.10.2015 passed by the Learned Commissioner of Income Tax (Appeals)-20, New Delhi {CIT(A)} for Assessment Year 2010-11.

Deloitte Haskings & Sells vs. ACIT 2.0 The brief facts of the case are that the assesse is a Chartered Accountant Firm and derives income from profession.

The return of income for the year was filed declaring an income of Rs.9,37,46,160/-. The case was selected for scrutiny. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee had debited an amount of Rs.3,14,24,019/- towards subscription fees paid to Deloitte Touche Tohmatsu (DTT). The assessee was required to give complete details of subscription fees, explain the purpose of making the payment, produce original bills and produce copy of the agreement. The assessee was also asked to establish that the expenditure was incurred wholly and exclusively for the purpose of business and also to indicate if any tax was deducted at source. It was the submission of the assessee that the assessee firm is a part of global organization of professional service firms and the member firms are located all over the world and engaged in rendering professional services under the local laws of a particular country in the field of accounting, auditing, insolvency law, management consulting, taxation etc. It was further submitted before the Assessing Officer

Deloitte Haskings & Sells vs. ACIT that Deloittee Touche Tohmatsu (DTT) charges subscription fees to Deloitte Hasking & Sells, Mumbai and this firm in turn charges the member firms (including the assessee) the share of DTT subscription by way of debit notes. It was submitted that the subscription charges were charged on the basis of proportion of revenue earned by the assessee firm to the total revenue of the Deloitte Firms in India. However, the Assessing Officer was of the view that the subscription fee was not wholly and exclusively for the purpose of the business/profession and he proceeded to disallow the entire amount of subscription fee paid.

2.1 The Assessing Officer further noticed that the assessee firm had paid Rs.17,41,389/- to M/s Dua & Associates as legal fees. The assessee was required to explain the nature and purpose of the same. It was submitted by the assessee that this amount had been paid on behalf of the Mr. Deepak Roy (partner) to defend proceedings u/s 482 of the Criminal Procedure Code before the Hon’ble Allahabad High Court. The Assessing Officer was of the view that the fees paid were with reference to defending a criminal

Deloitte Haskings & Sells vs. ACIT case which could not be said to be related to the business of the assessee. Accordingly, the entire amount of professional fees paid was also disallowed by the Assessing Officer. The assessment was completed at an income of Rs.12,63,60,210/-.

2.2 Aggrieved, the assessee approached the Ld. First Appellate Authority challenging the two additions. However, both the disallowances were upheld by the Ld. CIT (A).

2.3 The assessee has now approached this Tribunal challenging to uphold the disallowances by raising the following grounds of appeal:

“1. That on the facts and circumstances of the case and in law, the learned AO erred in disallowing and the learned CIT (A) has erred in confirming the disallowance of subscription fees paid to Deloitte Touche Tohmatsu amounting to Rs.3,08,72,662/- by holding that the same is not in the nature of revenue expenditure and is also not expenses wholly & exclusively related to the business and therefore not allowable u/s section 37(1) of the Act.

learned CIT (A) has erred in confirming the disallowance of legal & professional fees of Rs. 17,41,389 paid to M/s Dua & Associates by holding that it is in the nature of personal expenses and not incurred wholly & exclusively for business purpose.

3.0 The Ld. Authorized Representative (AR) submitted that ground Nos. 1 & 2 of the assessee’s appeal pertained to the disallowance of subscription fees. It was submitted that this issue is covered in favour of the assessee by the order of this Tribunal in assessee’s case for Assessment Year 2009-10 in vide order dated 23.10.2018. The Ld. Authorized Representative explained the necessity of paying the subscription fees and further explained how the subscription fees is collected from the members/companies by Deloitte Haskins & Sells, Mumbai. The Ld. counsel for the assessee further submitted that in the case of DTT, the subscription fees received from the members have been taxed as its income. The Ld. counsel for the assessee further drew our attention to the decision of the co-ordinate bench in the case of Deloitte Haskins and Sells, Mumbai in ITA No.

Deloitte Haskings & Sells vs. ACIT 5096/Mum/2011 vide order dated 30.11.2016 wherein an identical issue arose for consideration before the bench where the subscription fees paid by Deloitte Haskins and Sells, Mumbai to DTT was disallowed u/s 40A (ia) of the Act. It was submitted by the Ld. counsel for the assessee that disallowance was directed to be deleted. The Ld. counsel for the assessee further relied upon the decision of the co-ordinate bench in the case of Deloitte Haskins and Sells, Kolkata in and 588/Kol/2016 vide order dated 11.07.2018. It was submitted by the Ld. Counsel for the assessee that similar subscription fees was paid by the Kolkata firm which was disallowed by the Assessing Officer and was subsequently allowed by the Tribunal. The Ld. Counsel for the assessee further relied upon the decision of the Co-ordinate Bench in the cases of other sister consultancy firms who have paid subscription fees to their parent body. The Ld. Counsel for the assessee concluded by stating that the fees have been incurred wholly and exclusively for the purposes of business and have to be allowed.

Deloitte Haskings & Sells vs. ACIT 3.1 With respect to Ground No.3 of the appeal, the Ld. Authorized Representative submitted that this ground pertained to disallowance of legal & professional fees amounting to Rs.17,41,389/- paid to M/s Dua & Associates. The Ld. Authorized Representative submitted that during the Financial Year 2009-10, the assessee had debited to the Profit & Loss Account a sum of Rs.17,41,389/- The said amount was in the nature of legal charges paid to M/s. Dua & Associates. It was submitted that the assessee was the Statutory Auditor of a company u/s.226 of the Companies Act, 1956. The Statutory Audit Report was issued u/s.227 of the Companies Act, 1956 and was signed by Mr. Deepak Roy as partner of the firm. It was submitted that inspection was carried out by the Registrar of Companies under the provisions of the Companies Act in respect of the financial accounts of the client Company and the report of investigations conducted by the Inspector of the Company Law Authorities contained certain observations about the inaccuracies / errors of omission in the financial statements and the audit report. Thereafter, a criminal complaint was instituted against Mr. Deepak Roy in the court of Hon’ble Chief Judicial

Deloitte Haskings & Sells vs. ACIT Magistrate, Meerut by the Registrar of Companies, Uttar Pradesh and Uttaranchal under section 233 of the Companies Act and the Hon’ble Court, on the basis of complaint, issued summons to Mr. Deepak Roy, the partner of the firm. It was submitted that Mr. Deepak Roy filed a miscellaneous petition before the Hon’ble High Court of Allahabad to challenge the summons issued by the Chief Judicial Magistrate, Meerut. The Ld. AR further submitted that the Hon'ble High Court heard the petition and granted stay against the proceedings before the Chief Judicial Magistrate, Meerut observing that on perusal of the complaint it is noticed that willful incorrect reporting is not alleged and, therefore, no offence is made out. The Hon’ble High Court stayed further proceedings on the ground that in absence of charge of willful/erroneous reporting there does not appear to be an offence under section 227 of the Companies Act, 1956. The Ld. AR submitted that the assessee firm had appointed M/s. Dua & Associates for defending the above criminal proceeding against Mr. Deepak Roy who had signed the audit report issued by the assessee firm and accordingly paid Rs.17,41,389/- as professional fees and deducted applicable TDS

Deloitte Haskings & Sells vs. ACIT there from. It was submitted that expenditure incurred for defending criminal proceedings against the partner of the firm for his actions as partner is not his personal expenditure. Mr. Deepak Roy had signed the Audit Report as a partner of the firm and, therefore, to save the reputation and goodwill of the firm, expenditure was incurred by the assessee and, therefore, the aforesaid expenditure was incurred wholly and exclusively for the purpose of profession of the assesses. Reliance was placed on the decision of Gujarat Agro Oil Enterprises Ltd. v. CIT [2002] 125 Taxman 912 (Guj) in support of his contention. The Ld. Authorized Representative concluded the arguments on the issue by saying that the professional fees were paid to defend the criminal complaint because the goodwill and reputation of the assessee firm was at stake and it was incumbent on the assessee firm to protect itself from such Acts. It was also submitted that it is the partner of the firm who signs the audit report and, therefore, the partner is not signing in his personal capacity but in capacity of the partner of the firm and, therefore, the company has to defend Acts which have been done in furtherance of the duties as the partner of the firm.

Deloitte Haskings & Sells vs. ACIT The Ld. Authorized Representative also submitted that the Assessing Officer’s reliance on the judgment of Swadeshi Cotton Mills Company Ltd. vs. CIT reported in 100 ITR 59 (Allahabad Full Bench) was misplaced and was misapplication of law.

4.0 Per contra, the Ld. SR. Department Representative (DR) placed extensive reliance on the observations and findings of both the lower authorities and submitted that these observations should be give due consideration by the Bench while deciding the issue.

5.0 We have heard the rival submissions and also perused the material on record. As far as the issue of disallowance of subscription fees is concerned, we agree with the contentions of the Ld. Authorized Representative that this issue stands covered by the order of the Co-ordinate bench of this Tribunal in Assessment Year 2009-10 in vide order dated 23.10.2018.

The relevant observations and findings of the Tribunal are contained in paragraphs 11 to 17 of the said order and the same are being reproduced herein under for ready reference:

Deloitte Haskings & Sells vs. ACIT “11. We have given thoughtful consideration to the orders of the authorities below. It is not in dispute that the assessee has been paying subscription charges since Assessment Year 2007- 08. It appears that this payment of subscription charges has been questioned only in the year under consideration. The observations of the Assessing Officer while disallowing the claim of subscription charges have been mentioned elsewhere.

Deloitte Haskings & Sells vs. ACIT fees. As mentioned elsewhere, in the case of DHS Mumbai in assessment years 2003-04, 2004-05 and 2005-06, payment made to DTJ-was disallowed u/s 40A(ia) of the Act. Thereafter, DHS Mumbai started deducting tax at source to avoid unnecessary litigation. But this has nothing to do with the subscription charges paid by the assessee to DHS Mumbai as its share of contribution.

"ARTICLE 1 NAME, DOMICILE AND PURPOSES 1.1 Name and Domicile. A Verein is hereby established with domicile in Zurich, Switzer land, under the name of Deloitte Touche Tohmatsu ("Verein"). The Verein consists of members that Deloitte Haskings & Sells vs. ACIT are professional firms ("Member Firms"). The Member Fir ms are engaged in rendering professional services, to the extent they may lawfully be performed under Local Laws (§7.1), in the fields of accounting, auditing, insolvency, law, management consulting, taxation and related services ("Professional Services"). The Verein is governed by these Articles, by the Supplementary Agreement among the Member Fir ms supplementing these Articles ("Supplemental Agreement"), and by the applicable provisions of the Swiss Civil Code. 1.2 Purposes. The purposes of the Verein shall be:

(b) The amount allocated to each Member Fir m shall be based upon aggregate revenues and such other f actors, if any, as Delotte Haskins and Sells IT A No.: 5096/Mum/2011 ITA No.: 5097/Mum/2011 ITA No.: 5094/Mum/2011 may be determined by the Board of Directors and approved by the Member Firms. and Article 12 deals with dissolution, which reads as under:-

12.1 By Resolution a dissolution of the Verein shall occur if a resolution to that effect is, adopted by the Member Finns. 12.2 Distributions. Upon dissolution of the Verein, any liquidation proceeds shall be applied in the following order: payment or discharge of all liabilities of the Verein, • including any unpaid principal of and accrued interest on any loans and advances made by the Member Firms to the Verein; and payment of any remaining balance to each Member • Finn in the proportion that its allocated , contributions to budgeted operating expenses of the Verein bear to the total budgeted operating expenses of the Verein for the then current Fiscal Year, less any unpaid portion of the Member Finn's contribution outstanding on the date of dissolution"

Deloitte Haskings & Sells vs. ACIT

From the reading of above Articles, it is seen that the association constitutes of Member firms which are engaged in rendering of professional services and the purpose of Verein is to further the international cooperation and cohesion among the member firms; to assure that practices of the Members shall conform to professional standards of highest quality; to advance the international and national leadership of the Member firms in rendering professional services, etc. Each Member contributes towards the budgeted operating expenses of Verein in such proportion which has been Delotte Haskins and Sells ITA No.: 5096/Mum/2011 ITA No.: 5097/Mum/2011 allocated to them. The amount allocated to the each Member firm is based on aggregate revenues and other factors as illustrated therein. In pursuance of such allocation, invoices were issued by DTT to assessee in India allocating the DTT's operational budget. This is evident from certificate of the Chartered Accountant given at page 67. While making the said payment, the assessee had not deducted t h e &TDS inter alia on the ground that, firstly, the relationship between "the DTT and its Member is based on principle of mutuality", therefore, the Verein itself does not earn any income or renders any kind of professional services and the expenses are made through contribution by its Deloitte Haskings & Sells vs. ACIT members; and secondly, the reimbursement of expenses is based on allocation made by the DTT which in turn is on the basis of actual expenses.

However both the authorities, Assessing Officer as well as CIT (A), instead of adjudicating the issue whether the subscription fees paid by the assessee to DTT Switzerland is taxable under the Act in India or not, have proceeded to disallow the payment on the premise that even if there existed a doubt regarding changeability of Income Tax, the assessee should have any way deducted the tax and should have complied with the provision of section 195 and 197. In support, strong reliance has been placed on the decision of ITAT Mumbai Bench in the case of Arthur Andersen & Co. and Hon’blee Supreme Court judgment in the case Transmission Corporation Andhra Pradesh (supra)."

Deloitte Haskings & Sells vs. ACIT allocated to various Indian entities of a common global network on the basis of the revenue by OHS, Mumbai, of which the assessee is a member. The total subscription is paid by OHS, Mumbai after deduction of tax at source (TDS) to DTT towards utilization of common knowledge systems, common information technology systems and better access for clients of uniform and high quality services by the Indian members of the network. The assessee‘s contribution/share of Rs.48,95,212/- comprised it share of Rs.31,86,534/- for the relevant previous year and differential share of Rs.17,08,679/- paid for the earlier years being the difference between the contribution payable on the basis of the revenue and contribution already paid earlier for those years and was claimed in line with the cash system of accounting followed by the assessee. The assessee produced debit notes issued by DHS, Mumbai as supporting evidence. The assessee has to pay subscription fees through Delloite, Haskins and Sells, Mumbai (DHS, Mumbai) for this purpose to DTT. However, as DHS Mumbai makes the payment after deducting TOS and the assessee only reimburses its share of expenses, tax was not required to be deducted again in respect of its reimbursement of share of expenses of Rs.48,95,212/- to OHS, Mumbai. We note that it is not the case of the AO that the expenses were not Deloitte Haskings & Sells vs. ACIT genuine. It is also not the case of the AO that the expenses were not incurred Page / 6 M/s. Deloitte Haskins & Sells IT Nos .587 & 588/ Kol/ 2 0 16 Assessment Years : 2 0 10- 11 Si 2 0 11 -1 2 wholly and exclusively for the purposes of business or profession. The assessee has claimed the expenses in accordance with its cash system of accounting and the AO has not disputed the system of accounting. The AO has concluded that the assessee had paid for the professional services rendered by OHS, Mumbai without specifying the nature and details of services rendered by OHS, Mumbai. The assessee has furnished copies of debit notes issued by OHS, Mumbai mentioning the amount debited as "being your share of OTT Operational Budget (Subscription Fee) & Tech, Subscription Fees paid to Deloitte Touch Tohmatsu, New York" which have not been questioned by the AO. The assessee has also furnished evidence to prove that the assessee is a member of the global network of OTT, enjoys certain advantages as a result of the membership and has paid its contribution of; the subscription to the membership of the global network. –

Deloitte Haskings & Sells vs. ACIT of Karnataka in the case of CIT vs. Kalvani Steels Ltd. [2018] 91 taxmann.com 359 (Karnataka), held as follows:

"11. This provision makes it clear that deduction at source shall be on such income not otherwise. The primary factor to attract section 194J is the ingredient of "income comprised therein". If no income is reflected in the balance sheet and P&L A/c of HSL towards the reimbursement charges paid on cost to cost basis by KSL and ML, it ceases to have the character of income. As such, the assessee cannot be treated as the assessee in default in not deducting tax at source u/s 194J of the Act. The arguments of the Revenue that the fees paid by the assessee is towards technical services is imaginary one not established with substantial materials."

Moreover, we note that Coordinate Bench of ITAT Kolkata in the case of CIT vs. Ernst & Young (P.) Ltd. [2014] 49 taxmann.com386 (Kolkata-Trib.) upheld the same principle on the identical issue under consideration, wherein it was held as follows:

"The two concerns, namely, EY&S LLP and Ernst and Young U.K. LLP, were set up by member firms of Ernst and Young for providing resources to obtain best methodologies at a lower cost which in the present days of globalization

Deloitte Haskings & Sells vs. ACIT is imperative for any professional firm. Development of such methods by any one concern would have been cost prohibitive apart from lacking uniformity and mutual compatibility. Accordingly, arrangement was arrived at for such services to be developed in a pool by the said two concerns to which the member firms would have access to it and reimbursing their respective shares of cost incurred therefor. Such reimbursement was agreed on the basis of respective turnover of the member firms. These facts are not denied by the revenue and these are reimbursement of expenses. Once these are reimbursement of expenses, the assessee is not liable to deduct TDS u/s 195. Accordingly, the order of the Commissioner (Appeals) is to be confirmed." Therefore, we note that the said amount of Rs.48,95,212/- was towards the reimbursement of the expenses, which was in fact incurred on behalf of the assessee and there was no profit element. That being so, we decline to interfere with the order of Ld. CIT (A) deleting the aforesaid addition. His order on this addition is, therefore, upheld and the Ground No.1 raised by the Revenue in and ground No.2 raised by Revenue in ITA No.588/Kol/2016, are dismissed. “ 17. Considering the facts of totality, in the light of the decision of the Co-ordinate bench (supra) we have no hesitation in Deloitte Haskings & Sells vs. ACIT setting aside the findings of the Ld. CIT (A). The Assessing Officer is directed to delete the addition of Rs.2,16,68,412/-. Ground No.1 with its sub grounds is allowed.”

5.1 We also note that the Ahmedabad Bench of ITAT also reached a similar conclusion by dismissing the Departmental Appeal on the issue for Assessment Years 2013-14 & 2014-15 in 01.10.2019. Further, a similar view was taken again by the co- ordinate Bench in Delhi in assessee’s own case for assessment years 2011-12 and 2012-13 in and 3716/Del/2017.

Respectfully following the decisions of the Co-ordinate Benches (supra), we allow the grounds 1 and 2 raised by the assessee and direct the Assessing Officer to delete the disallowance.

5.2 As far as Ground No.3 of the assessee’s appeal pertaining to legal and professional fees is concerned, it is seen that the undisputed facts are that Shri Deepak Roy is a partner in the assessee firm and he was carrying on auditing on behalf of the assessee firm. It is also undisputed that the Registrar of Companies had conducted an investigation and alleged professional

Deloitte Haskings & Sells vs. ACIT misconduct on the part of Shri Deepak Roy and had instituted a criminal complaint against Shri Deepak Roy. To defend the partner Shri Deepak Roy, the assessee firm had engaged M/s Dua & Associates to challenge the criminal proceedings against him and had debited the fee paid as legal and professional expenses. The only question for our consideration is whether the fees paid for defending the act of a partner can be considered to be an act committed during the ordinary course of business of the firm and whether the said expenditure can be said to have been incurred for the purpose of the business of the assessee. In this context, it is seen that the assessee firm is a firm of Chartered Accountants and Shri Deepak Roy, while working in the capacity of the partner of the firm, had signed an audit report. The Registrar of Companies, Uttar Pradesh and Uttaranchal lodged a complaint against Shri Deepak Roy in terms of Section-233 of the Companies Act, 1956 and it was under these circumstances that the assessee company decided to defend the case of Mr. Deepak Roy. Although, the assessee company was defending a case which was in the name of the partner Mr. Deepak Roy, it cannot be said that defending the said

Deloitte Haskings & Sells vs. ACIT case was not a part of the business activity for the company in as much as the reputation and goodwill of the assessee company was at stake. It is also beyond the doubt that the criminal complaint was filed against Mr. Deepak Roy in a matter which was related to the business of the company. In such circumstances, it is our considered view that the impugned expenditure incurred by the assessee company towards defending the suit in the name of the partner is deductible business expenditure. Accordingly, we set aside the order of the Ld. CIT (A) on the issue and direct the deletion of this amount.

6.0 In the final result, both the appeals stand allowed for statistical purposes.

Order pronounced on 29th January, 2021.