M/S. MURUGAPPA MANAGEMENT SERVICES LTD.,CHENNAI vs. DCIT, CHENNAI

Shri R. Vijayaraghavan, the Ld. counsel for the assessee submitted that the assessee company engaged in the business of providing consultancy services to Murugappa Group of Companies.

The assessee company having considered the experience and expertise of these 3 persons engaged their services for providing consultancy to other companies. But for these 3 persons, the assessee company could not have provided any services or business to associated concerns. All fees received from the other group companies are not in dispute. The other companies would not have paid the money but for the services rendered by these 3 senior executives to the respective companies. Had the respective company hired them directly, the expenditure would be much more to each company. Therefore, to avoid overall difficulties and to reduce the cost of consultancy charges, the assessee company engaged all the 3 persons and paid consultancy charges in providing consultancy and advice to all the group companies. The Ld. counsel for the assessee had placed his reliance on the judgment of the Apex Court in CIT vs. Dhanrajgirji Raja Narasingirji [1973] 91 ITR 544 and also judgment of Madras High Court in CIT vs. Nagesh Cine Enterprises (1998) 150 CTR 435. The Ld. counsel also placed his reliance in CIT vs. Walchand & Co Ltd, 65 ITR 381.

Referring to the judgments referred by the CIT(Appeals), the LD. counsel submitted that they did not apply to the facts of the case.

Referring to page A8 of the paper book, the Ld. counsel for the assessee submitted that Shri M.V. Murugappan was a qualified Civil Engineer and he was the Managing Director from 1958 to 1978 in CECL. He was also the Chairman and Managing Director in CUMI.

Shri M.A. Alagappan, a management student from UK joined the company in 1961 as management trainee. He became the Executive Chairman in the year 2002. He was also worked as the Chairman of Murugappa Group. Because of the educational qualification, experience, he was engaged by the assessee company for providing services. Shri Subbiah in fact received JRD Tata Business Leadership Award in 2002 and National HRD Award in 1988.

On the contrary, Dr. B. Nischal, the Ld. Departmental Representative submitted that it is not in dispute that all the three consultants namely Shri M.V. Murugappan, Shri M.V. Subbiah and Shri M.A. Alagappan are of highly qualified and they have long exposure to industry and business. Though all the three had working experience for more than a decade in Murugappa Group of Companies, the question is whether the three so called consultants has rendered any service to the assessee company. In the absence of any material to suggest that all the three consultants offered services to the assessee company, the payment made to them cannot be allowed as expenditure in the hands of the assessee company. It is also not known whether these three individuals are capable for any meaningful service after retirement. A mere informal interaction or occasional visit to the factory may not substitute the actual rendering of service by the three individuals. Therefore, the AO has rightly disallowed the payment made to them. The CIT(Appeals) after considering all the issues raised by the assessee, agreed with the Assessing Officer. Therefore the payment made to all the three individuals has been rightly disallowed.

We have considered the rival submissions on either side and perused the material available on record. The assessee company engaged in the business of providing consultancy services to its group companies. It is not in dispute that the group company consists of 9 listed companies and 14 unlisted companies. The business of the assessee company is only providing consultancy services. It is also not in dispute that Shri M.V. Murugappan, Shri M.V. Subbiah and Shri M.A. Alagappan are highly qualified and they have vast experience in engineering, business and human resources. But for these three people, the assessee company would not have earned any income in consultancy services. The AO disallowed the claim of the assessee only on the ground that the assessee could not prove the services rendered by these three individuals to the assessee company. The fact remains is that other than these 3 individuals, no other person is available in the company to provide consultancy services other than Shri P.V. Bhide to whom a sum of Rs.25,20,000/- was paid. The three individuals appears to have provided business advice, review the performance of the various business of group companies at periodical intervals, provided the input in the area of economic policy, public finance etc. They have also provided management consultancy services with regard to general administration, marketing, corporate governance etc. In the field of human resource, they have provided advice and facilitated recruitments of trainee executives apart from that they also look after the pay roll of executives of group companies.

From the material available on record, it appears the group company received IMD Distinguished Family Business Award 2001 from IMD, Switzerland, Cholamandalam MS General Insurance was the recipient of Golden Peacock Award as “Winner of Special Commendation” for “Excellence in Corporate Governance-2014”. This Tribunal is of the considered opinion but for the advice of the three individuals, the group companies could not have earned these awards and developed their business. When compared to the profit of the company, the payment made to the three individuals comes to nearly 6 to 7%. In view of the above factual situation, this Tribunal is of the considered opinion, the AO is not justified in doubting the services rendered by the three individuals to the assessee company. When the recipient group companies received services on behalf of the assessee company through the three individuals and paid the charges as claimed by the assessee, this Tribunal is of the considered opinion that disallowance of the payment made to three individuals towards consultancy fee is not justified. Similarly, the interest paid on the vehicle hired for the use of the three individuals is also for the business purpose. Therefore disallowance of Rs.59,95,415/- is also not justified. In view of the above, this Tribunal is unable to hold the 9 order of the lower authorities. Accordingly, the orders of the lower authorities are set aside and the addition made by the Assessing Officer towards consultancy fee paid to three individuals and the hire charges on the vehicle are deleted.

In the result, the appeal of the assessee stands allowed.