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Before: Shri V. Durga Rao & Shri G. Manjunatha
O R D E R
PER V. DURGA RAO, JUDICIAL MEMBER:
This appeal filed by the Revenue is directed against the order of the ld. Commissioner of Income Tax (Appeals) 4 (i/c), Chennai, dated 26.11.2019 relevant to the assessment year 2015-16.
The assessee company is engaged in the business of providing risk assessment services and filed its return of income for the assessment year 2015-16 on 25.09.2015 admitting a total income of ₹.2,39,21,070/-. After following due procedure and considering the submissions of the assessee, the Assessing Officer has completed the assessment under section 143(3) of the Income Tax Act, 1961 [“Act” in short] dated 30.12.2017 assessing total income of the assessee at ₹.15,54,09,342/- after making addition of ₹.13,14,88,272/- by disallowing the referral fees payment made to Indus Ind Bank under section 37(1) of the Act.
2.1 The case of the assessee is that the assessee company, engaged in the business of providing risk assessment services, entered into business arrangement by way of agreement with Indus Ind Bank Ltd, during December 2013, whereby the assessee company was appointed as a "Preferred Partner" for the provision of assistance to Indus Ind Bank Customers in relation to Risk Advisory and Assessment Services. As per the said agreement, the services included risk assessment services for technical evaluation of projects (in relation to which a loan / facility is made available by the Bank) and referral charges. The agreement was entered from a period ranging from December 2013 to November 2014 and the expenses incurred thereon was amortized by the assessee over a period 1 year from December 2013 to November 2014, as per the tenure of the agreement.
2.2 It was submitted by the assessee before the Assessing Officer that since the contractual obligation was beyond the financial year period, the prepaid expenses was amortized over the period of the agreement and the revenue expenditure is recognized in the books in the relevant financial year, accordingly. The assessee had accounted the aforesaid payment as Business Promotion Referral Charges. Expenses amortized during the financial year 2013-14 was treated as expenditure towards Marketing Promotion (₹.5 Crores) and the balance was treated as prepaid expenses under "Prepaid Expense" in the balance sheet of the Company during the financial year 2013-14. During the financial year 2014-15, the prepaid expenses were amortized crediting the Prepaid Expenses and debiting the relevant revenue expenditure. During the financial year 2014-15, the assessee has claimed a sum of ₹.13,14,88,272/- as "referral charges" paid to M/s. Indus Ind Bank Ltd. On examination of the financial statements furnished by the assessee, the Assessing Officer has noticed that a sum of ₹.13,14,88,272/- has been claimed as Business Promotion & referral charges during the year under consideration. The assessee was asked to explain the nature of such a claim and also produce supporting documentary evidences in support of the claim. In response to the same, the assessee filed a written submission before the Assessing Officer, which is reproduced as under: The payment to IBL was made upfront for an amount of Rs. 15 Crores based on the agreement towards Marketing Promotion & Referral Charges for a period from December 2013 to November 2014. Accordingly the payments were accounted as prepaid expenses and amortized over the agreement period (1 year). The books of accounts of the company are maintained under MERCANTILE SYSTEM of accounting. The revenue and expenses are recognized on accrual basis. Under Mercantile system, when the expenses are incurred during a contractual period, the same is amortized over the said period. The same is an allowable expenditure under the provisions of Section 37 of the IT Act. It is to be noted that there is no change in the system of accounting policy followed by the Company during the relevant previous year. In respect of the queried payments, the Company has entered into a business arrangement by way of agreement with IBL, during December 2013, whereby the Company was appointed as a "Preferred Partner" for the provision of assistance to Indus Ind Bank Customers in relation to Risk Advisory and Assessment Services, including risk assessment services for technical evaluation of projects (in relation to which a loan/ facility is made available by the Bank) and referral charges. Payment of Rs. 15 Crores after deduction of applicable TDS had been remitted and the same was treated as prepaid expenses in the books of accounts, amortized over a period 1 year from December 2013 to November 2014, as per the tenure of the agreement: Since the contractual obligation is beyond the financial year period, the prepaid expenses is amortized over the period of the agreement, viz., one year from December 2013 to November 2014 and the revenue expenditure is recognized in the books in the relevant financial year, accordingly. The payment had accounted as Business Promotion & Referral Charges. Under the mercantile system of accounting, expenses amortized during the FY 2013-14 treated as expenditure towards Marketing Promotion (Rs. 5 Crores) and the balance is treated as prepaid expenses under "Prepaid Expense" in the balance sheet of the Company, during FY 2013-14. During
FY 2014-15, the prepaid expenses was amortized crediting the Prepaid Expenses and debiting the relevant revenue expenditure. It is to be noted that various expenses including Insurance payments, maintenance charges, etc., are treated as prepaid expenses and amortized over the contractual period. Under the mercantile system of accounting, prepaid treatment of expenses is an allowable business expenditure under the provisions of Section 37 of the IT Act.” 2.3 The Assessing Officer has considered the detailed submissions of the assessee and in order to identify the true nature of such payments, the assessee was asked to furnish additional details and also show-cause why such expenses should be allowed in the absence of any connection established between such expenses and the revenue earned. The assessee was asked to furnish the following specific details: Information on whether the agreement entered into by the company with M/s. Indus Ind Bank Ltd. was extended? If extended, copy of the same. Details as to whether the referral fees/preferred partner fees have been paid in any year subsequent to AY 2015-16? Details of the revenue generated and the details of the customers the assessee has received through reference made by Indus Ind Bank Ltd (along with evidences) Out of the revenues generated of Rs.33,83,73,783/-, a sum of Rs.16,68,63,629/- has been generated from Mis. Cholamandalam MS General Insurance Company Ltd; i.e., the sister concern of the assessee. The details of how many customers referred by Mis. Indus Ind Bank Ltd out of the remaining sum. Rationale behind claiming a sum of Rs.13.12 Crores as referral fees where the revenue generated from the third parties is substantially low 2.4 In response to the show cause letter, the assessee furnished a reply dated 21.12.2017 before the Assessing Officer, which is reproduced as under:
The preferred partner agreement with Indus Ind Bank Limited (/BL) dated 12Dec-2013, was for one year term only. As per the terms of the agreement dated 12-Dec-2013, the agreement is for one year and payments made in pursuance of the said agreement till the period of the agreement. After considering the business outlook, potential and other considerations including servicing various commercial customers, we have entered into a fresh preferred partner agreement with IBL in the subsequent year also. : Query c) Details of revenue generated and details of customers Reply: 1) We provide services in the nature of Scientific Technical Consultancy in the field of Environmental, Health, Safety, Risk, Logistics Consultancy (EHS Consultancy) advising customers regarding the safety and security of their Plant and Machinery, property, assets, etc. The nature of services is generally provided to commercial, industrial, environment organization customers, etc., covering safety audit and risk exposure services. These services were basically provided either to the customers directly or to the general insurance companies providing various fire, engineering, liability, project insurance, etc. General Insurance companies, before underwriting the risks of the customer assets, usually avail our· services to assess 'the risks and exposures of such customers' insurance coverage. We had provided such Risk Exposure and other technical/consultancy services to Cholamandalam MS General Insurance Company Limited (Chola MS). Whenever Chola MS wishes to have such services done by us for Underwriting Chola MS customer's risks exposure, we provide the same and invoices are raised on Chola MS towards provision of such services. 2) We also wish to state that Chola MS has tied up with Indus Ind Bank Limited, as preferred insurance partner, for providing insurance services predominantly to the retail customers of IBL. However, IBL provides banking I financial services both retail customers and commercial customers including corporates. 3) It is in this respect we entered into preferred partner agreement with !BL, for providing referral and customer data for business risk services, both directly to their commercial customers and also wherever insurance coverage being provided by Chola MS to Indus Ind Bank commercial customers, we have provided risk exposure and other services during FY 2014-15. In this connection, we enclose the following documents for your reference: i) Specimen set of invoices raised on Cholamandalam MS Gen. Co. Ltd., for providing services, relating to the underwriting of insurance business to Chola MS commercial customers (ANNEXURE 1). ii) Specimen set of Risk Exposure Rating Score Card (RERS) in respect of various services carried out (ANNEXURE 2).
4. Consequent to the tie up with Indus Ind Bank Limited, we have provided risk exposure and other services to Chola MS towards underwriting their commercial customers insurance (including IBL commercial Customers for whom Chola MS provided insurance services). The same can be ascertained from the following table: Fin Year Revenue from Chola MS 2012-13 26,352,463 2013-14 81,202,936 2014-15 166,863,629
a. It is submitted that consequent to our preferred partner tie up with IBL, the revenue generation from services rendered to Chola MS (who are providing insurance services to Indus Ind Bank commercial customers) has increased substantially. b. We also wish to state that pursuant to the preferred Partner Agreement with Indus Ind Bank Limited, we have rendered our services to various new customers during the year and provide specimen list of such customers details hereunder: Client Name Study/Services Rs. BasellPolyolefins India Pvt Ltd. Safety Requirement Study 742,900 Sree Jayajothi Cements Ltd. The Professional Fee for 1,305,000 (My Home Industries Ltd.) Monitoring the Safety Activities during Shut Down SAB Miller India Electrical Safety Audit 1,250,000 Mahanagar Gas Limited QRA 1,057,628 Tata Consulting Engineers Ltd. QRA studies & Report for the 452,500 entire STF Area AAR Technical Services India HAZOP Study 645,000 Ltd. TT Techno Park Management Consultancy Services for 800,000 Services India Pvt. Ltd. extending technical support in obtaining consent to operate from TNPCB DLF Cyber City Pressurization of Staircases 4,708,475 Mechanically or Naturally Pressurized Staircase
Radiance Reality Developers Environmental Clearance 665,000 India Ltd. Consultancy Services Deutsche Bank Property Risk Audit Services 1,251,300 Alstom Transport India Limited CMRL – Track Infrastructure 950,000 Project AAM India Manufacturing Consultancy charges – ETP & 569,690 Corp. Pvt. Ltd. Waste Water System Dodsal Engineering and HAZID, HAZOP & SIL Studies 4,045,439 Construction Pte. Ltd. Pyramid E & C SIL Verification 412,965 Fare Portal India Pvt. Ltd. Safety Audit including 350,000 Thermography Malcolm Pirine Consulting Water Assessment Studies 600,000 Engineer India Pvt. Ltd. Castrol India Limited Electrical and Safety audit 600,000
Query d) How many customers have been referred by Indus Ind Bank Limited Reply: Indus Ind Bank Limited referral details of their customers/parties periodically. We enclose specimen set of referral list of potential customers, provided by Indus Ind Bank Limited during the relevant period (ANNEXURE 3). From the list of referred potential business customers, the list of some of the customers to whom we have rendered services during the relevant year is furnished in reply to Query (c) herein above. Query e) Rationale behind payment of referral fees Reply: Being in the service industry, preferred partner tie up with Indus Ind Bank enables the Company to have its business servicing in a longer term and outlook for our risk exposure services to be provided to the customers of the Bank Spread across India. Businesses are carried out not alone looking into immediate impact and benefit. Indus Ind Bank has all India network of branches and service various-spectrum of its commercial customers including. Corporate, mining, construction, traders, etc., and as a measure of providing risk exposure services to their potential commercial customers, we have entered into a preferred partner agreement. Periodically /BL provides customer data base, which are being pursued and taken up for business by us".
2.5 The Assessing Officer has examined the details filed by the assessee and not satisfied with the explanations given by the assessee and came to a conclusion that the assessee was not able to furnish the details of the revenue earned out of the expenditure made as ‘referral fees’. Again, the Assessing Officer has asked the assessee the details in respect of the revenue generated. The assessee has submitted before the Assessing Officer that Chola MS General Insurance had tied up with Indus Ind Bank Limited, as preferred insurance partner, for providing insurance services predominantly to the retail customers of Indus Ind Bank Ltd. The assessee admitted that it was against this background, that they entered into preferred partner agreement with Indus Ind Bank Ltd, for providing referral and customer data for business risk services, both directly to their, commercial customers and also wherever insurance coverage being provided by Chola MS General Insurance to Indus Ind Bank commercial customers.
2.6 The Assessing Officer has asked the assessee again to provide the details of independent customers received by the assessee through reference made by Indus Ind Bank Ltd. The Assessing Officer has also asked the assessee to provide evidence in respect of the same. The assessee has submitted before the Assessing Officer that they have rendered services to various new customers during the year and provided a specimen list vide letter dated 21.12.2017 which is already reproduced as part of the order in para 3.3. Further, the assessee was asked to provide complete list of new customers received through reference made by Indus Ind Bank Ltd. Accordingly, the assessee provided list of customers, which was reproduced in page 9 of the assessment order. From the list of customers, the Assessing Officer that the customers referred by Indus Ind Bank vide its letter dated 17.06.2014 does not match and observed that the assessee could not establish that Indus Ind Bank provided the above customers. With the above reasons, the Assessing Officer came to following conclusion: i. The payment made to Indus Ind Bank is without any business purposes of the assessee and at the maximum, it helped to get business for Chola MS Insurance, for which the assessee need not pay. ii. The alleged service obtained from the bank like customer database etc. does not match with the magnitude of payments made. iii. There is no business purpose in the payments. iv. There is no conclusive evidence to prove that Indus Ind Bank has actually rendered any service to the assessee. v. The payments were made only to circumvent restriction of IRDA, which is violation of statute. 2.7 In view of the above discussions, the Assessing Officer has disallowed under section 37(1) of the Act the referral fees claimed by the assessee to the tune of ₹.13,14,88,272/- as not proved by the assessee as a genuine business expenditure and added back to the total income of the assessee.
The assessee carried the matter in appeal before the ld. CIT(A) and submitted that the expenses incurred by the assessee was towards business promotion referral charges and it is for the purpose of business only. Therefore, the disallowance made by the assessing Officer under section 37(1) of the Act is not correct. It was further submitted by the assessee before the ld. CIT(A) that the information received by the assessee from Indus Ind Bank has been shared with Chola MS General Insurance Company, for which the assessee has received ₹.16,68,63,629/- and incurred expenses of ₹.13,14,88,272/-, it is the business of the assessee. Therefore, the Assessing Officer was not correct in disallowing the expenses. After considering the explanations of the assessee, the ld. CIT(A) has deleted the addition made by the Assessing Officer.
Aggrieved, the Revenue is in appeal before the Tribunal. The first argument of the ld. DR is that the assessee has not received any customers from the Indus Ind Bank and therefore, the payments made by the assessee to Indus Ind Bank are not for the purpose of the business. Therefore, the expenses incurred by the assessee are not allowable expenses. It was further submitted that the assessee’s sister concern M/s. Chola MS General Insurance Company is directly not able to pay any referral fee/commission to the Indus Ind Bank and therefore, by virtue of IRDA regulations, M/s. Chola MS General Insurance Company paid the amount through the assessee and submitted that the assessee has acted as conduit to make payment on behalf of Chola MS General Insurance Company. The payment made by the assessee not for any business purposes. M/s. Indus Ind Bank has actually not rendered any services to the assessee.
On the other hand, the ld. Counsel for the assessee has submitted that as per agreement with Indus Ind Bank, the assessee is receiving the information from the bank and the same were shared with M/s. Chola MS General Insurance Company for that the assessee received fee/commission. This is the modus operandi business of the assessee and therefore, the expenses incurred by the assessee for the purpose of business of the assessee and it is allowable under section 37(1) of the Act. It is further submitted that the Assessing Officer cannot decide as to how the assessee has to do the business. The assessee is an independent company and decides to do the business in a particular way and accordingly, its activities are carried out. Therefore, the Assessing Officer cannot simply say that the assessee is a conduit of M/s. Chola MS General Insurance Company. It was further submission that the assessee has brought on record the entire revenue generated by the assessee company of ₹.33,83,73,783/- earned during the assessment year 2015-16 and paced its paper book page Nos. 61 & 62. It was further submission that the said referral expenses incurred in the earlier assessment year 2014-15 were duly accepted without any dispute by the Department.
We have heard both the sides, perused the material available on record and gone through the orders of authorities below. The case of the assessee is that the assessee has entered into business agreement with Indus Ind Bank Ltd. and according to the agreement, the assessee company was appointed as a Preferred Partner for the provision of assistance to Indus Ind Bank customers in relation to Risk Advisory and Assessment Services. As per the said agreement, the services included risk assessment services for technical evaluation of projects (in relation to which a loan/facility is made available by the Bank) and referral charges. It is also the case of the assessee that as per the business agreement with Indus Ind Bank, the assessee is receiving the data and full information in respect of the customers as a referral partner and the assessee is sharing the same with M/s. Chola MS General Insurance Company for that the assessee is receiving commission/fee. The assessee has received an amount of ₹.16,68,63,629/- from M/s. Chola MS General Insurance Company for sharing the information/data received from Indus Ind Bank Ltd. In relation to that, the assessee also incurred expenditure of ₹.13,14,88,272/-. The modus operandi business of the assessee is that whenever the data or information collected from Indus Ind Bank, the same has been sharing with M/s. Chola MS General Insurance Company for that the assessee is receiving commission/fee. From the above, it is very clear that there is one to one correlation between the expenditure incurred by the assessee and payment made to Indus Ind Bank and revenue generated by the assessee from M/s. Chola MS General Insurance Company.
6.1 It is further noted that the quantum of expenditure incurred by the assessee towards referral fee to Indus Ind Bank is a strategic expense by virtue of which Indus Ind Bank is strategically tied with the assessee company for referral, which in other words would not be available to the competitors. Hence, there would be both tangible and intangible benefits from the transaction with Indus Ind Bank and this cannot be questioned through a narrow minded approach as these decisions have to be looked into from macro business strategies in the given scheme of things, and the Assessing Officer cannot question the legality of the payment in as much as IRDA has never questioned the payment by the assessee company and the Assessing Officer cannot assume the role of IRDA. We find that the assessee received referrals from Indus Ind Bank and provided service to M/s. Chola MS General Insurance Company (in addition to third parties) since M/s. Chola MS General Insurance Company gets insurance business and the risk advisory income is coming from M/s. Chola MS General Insurance Company for the customers referred by the Indus Ind Bank and thereby the assessee’s payments were not prohibited by law. The payment made by the assessee was only for the purpose of carrying its business as per the commercial expediency along with Indus Ind Bank. The relevant findings of the ld. CIT(A) in the appellate order are reproduced as under:
“Further the AO appears to have not appreciated the business model of the appellant and the fact that it receives revenue from IBL and Chola MS Gen. Insu. Co., Ltd., (in addition to third parties) since Chola MS Gen. gets insurance business, and the risk advisory income is coming from Chola MS Gen. for the customers referred by IBL and further as stated earlier, revenue and expenses is not required to be commensurate each year from the point of view of commercial expediency and further that appellant's payments were not prohibited by law.
Now, whether expenditure is expedient for the purpose of promotion of sales or business and the amount and the manner in which it is to be expended, is to be looked at by the authorities under the Income-tax Act or the court from the view point of the assessee, not from its armchair as held in a catena of cases. Since, the assessee knows his business, it is his success or failure in the business which is material to him and it is not for the court or the income-tax authority to suggest or advise, to presume or surmise as to the expedience even as they examine the genuineness of the expenditure and the purpose for which it was expended but once it is established that the amount was genuinely expended and it was expended for a particular purpose, as it undisputedly was in the instant case the only discretion that it left to the authority under this Act is to apply the law on the basis of such established fact or finding and if the purpose for which it is expended is eligible for deduction under a particular head no discretion is left to the Authority either to surmise that the quantum that ought to have been spent or presume the purpose differently and convert the same under some other head.
Again the quantum of expenditure incurred by appellant towards referral fee to IBL is a strategic expense by virtue of which Indus Ind Bank is strategically tied with the appellant company for referral, which in other words would not be available to the competitors. Hence there would be both tangible and intangible benefits from the transaction with Indus Ind Bank and this cannot be questioned through a narrow minded approach as these decisions have to be looked into from macro business strategies in the given scheme of things, and the AO can not question the legality of the payment inasmuch IRDA has never questioned the payment by the appellant company and the AO cannot assume the role of IRDA in coloring a perfectly legitimate transaction as a transaction prohibited by law as appears to have been done by the AO in the instant case. In view of the above discussion, more particularly the ratio of the judgements quoted by the AR and as applied to the factual matrix of the instant case the AO's action in disallowing the expenses claimed appears to be on the basis of wrongful and hypothetical assumption, surmises and conjectures and therefore being untenable is directed to be deleted.” Under the above facts and circumstances, we sustain the well reasoned appellate order passed by the ld. CIT(A) and dismiss the ground raised by the Revenue.
In the result, the appeal filed by the Revenue is dismissed.
Order pronounced on 16th September, 2022 at Chennai.