BLACK & VEATCH INDIA P. LTD,MUMBAI vs. DCIT 8(1), MUMBAI

These are set of six appeals filed by assessee & revenue arising out of separate orders of First Appellate Authority for Assessment Years [AY] 2003-04 & 2004-05 in the following manner:- No. Appeal No. Particulars 1. Assessee’s Appeal for AY 2003-2004 2. ITA No. 3369/Mum/2009 Assessee’s Appeal for AY 2004-2005 3. C.O.No. 3/Mum/2009 Revenue’s Cross Appeal for AY 2003-2004 4. C.O.No.4/Mum/2009 Revenue’s Cross Appeal for AY 2004-2005 5. Assessee’s Appeal Against penalty order for AY 2003-2004 6. ITA No. 1866/Mum/2012 Assessee’s Appeal Against penalty order for AY 2004-2005 Since common and inter-related issues are involved, we dispose-off all the appeals by this common order for the sake of convenience and brevity. First, we take up Assessee’s Appeal ITA No. 3253/Mum/2009 as the lead case which is against the order of Ld. Commissioner of Income Tax (Appeals)-VIII [CIT(A)], Mumbai dated 17/03/2009 qua solitary issue of confirmation of disallowance of certain professional fees of Rs.2,78,33,048/-.

Briefly stated, the assessee was resident corporate assessee engaged in the business of execution of infrastructure projects and providing technical support at the project site. It filed its return of income for impugned AY on 20/10/2003 declaring loss of Rs.4,59,78,700/- which was subjected to scrutiny assessment u/s 143(3) vide Assessing Officer [AO] order dated 30/09/2005 wherein the total income was determined at Rs.1,82,220/-after making certain disallowances and adjustments. The assessee had paid certain professional fees of Rs.2,88,33,048/- to one entity namely ‘M/s P.A.Shah & Associates’ [PASA/Payee] and ITA NO. 3253&3369/Mum/2009 C.O.NO. 3-4/Mum/2009 M/s Black & Veatch India Private Limited Assessment Years 2003-04 & 2004-05 claimed the same as business expenditure u/s 37(1). AO noted that these expenses were very huge in comparison to the turnover of the assessee and moreover, the entity PASA or any of its partners was neither qualified / registered Chartered Accountant nor lawyers. It was newly constituted firm on 01/11/2001 and the agreed fees to be paid was ‘success based fees’, being 18% of actual abatement of the Tax Assessment and Relief. The payee was engaged to render various services in connection with Income Tax proceedings at various levels but its representatives never attended the assessment proceedings before various authorities for which they were engaged. Further, the assessee could neither substantiate the expenditure by producing any person / representative of the payee nor filed any confirmation letter regarding impugned payment. AO also noted various discrepancies in the agreement entered into between the assessee and payee and finally concluded that the impugned payment were excessive, unreasonable, unsubstantiated and not incurred for business purposes of the assessee. Thereafter, after finding only Rs.10.00 Lacs being spent by payee to engage the legal attorney who actually attended the proceedings, AO disallowed the balance sum of Rs.2,78,33,048/- and added the same to the income of the assessee.

Aggrieved, the assessee carried the matter before first Appellate authority and raised similar contentions. The assessee brought to the notice of Ld. CIT(A) that similar payments were made by assessee in immediately preceding year and all these payments were made as per the terms of one single common agreement. The Tribunal in the immediately preceding year allowed the appeal of the assessee qua this expenditure and hence following the same, the expenses of the current year, being paid pursuant to same agreement, should also be allowed. But not convinced, CIT(A) dismissed this ground of assessee’s appeal by distinguishing the facts of the impugned AY and after placing reliance on various judicial ITA NO. 3253&3369/Mum/2009 C.O.NO. 3-4/Mum/2009 M/s Black & Veatch India Private Limited Assessment Years 2003-04 & 2004-05 pronouncements and considering the statutory provisions of Section 37(1). Aggrieved, the assessee is in appeal before us.

The Ld. Counsel for assessee [AR] has raised multiple contentions in support of the assessee’s claim, first and foremost being, that similar payment has been allowed by the Tribunal in assessee’s favor in immediately preceding years. All these payments spring out of one single agreement and there is no reason to deviate from the earlier stand taken by the Tribunal, there being no change in facts or circumstances. Further, the assessee was associated with a foreign entity and was created in India for limited purpose of facilitating various projects on behalf of foreign entity. After fulfillment of its objectives, it was in the process of winding up its business operations and stopped all business activities. There was no one to look after the various legal /statutory compliances including tax proceedings /assessments etc. in India which were pending at various stages and hence, the assessee engaged the services of the consultant payee. The payee was engaged to perform multi faceted services and was also responsible to hire professional attorneys to carry out the task assigned to the payee. Therefore, the payee, in fact, acted as solicitor on behalf of assessee to carry out statutory obligations and wind up Income Tax proceedings at various levels. The engagement terms clearly spelt out the responsibilities of the payee and the payee assumed risk to carry out these activities and in fact, attended various proceedings from time to time pursuant to this agreement as against contrary observations made by lower authorities. Moreover, the payments were made pursuant to the terms of agreement and duly supported with respective vouchers / bills raised by the payee from time to time and due Tax at source [TDS] as required by law was deducted from the impugned payments and the payee has duly confirmed / certified the receipt of these payments. The revenue failed to corroborate the same by making independent inquiries and never issued any confirmatory letter to the payee ITA NO. 3253&3369/Mum/2009 C.O.NO. 3-4/Mum/2009 M/s Black & Veatch India Private Limited Assessment Years 2003-04 & 2004-05 despite being specifically requested by the assessee to do so. Hence, the assessee has discharged its onus of proving the genuineness of expenses from all angles and impugned additions, therefore, could not be sustained. The Ld. AR further contended that the additions have been made by revenue on mere suspicious basis without any cogent material in hand and there was no illegality, whatsoever, in impugned payment or the basis of calculations of ‘success based’ fees. The payments were perfectly legal and there was no legal bar in making these payments. Reliance was placed on the following judicial pronouncements for the contention that there was no illegality in the ‘success based’ mode of payment, the assessee being non-professional entity:- i) Mr. G [Action under Order IV, Rule 30 of the Supreme Court Rules] [Supreme Court AIR 1954 SC 557] ii) K.L.Gauba Vs. Unknown [Bombay High Court 1954 AIR 1954 Bom. 478] iii) Damodar Kilikar & Others Vs Oosman Abdul Gani & Others [Kerala High Court 1961 Kerala Law Journal 356]

Per Contra, the Ld. DR drew out attention to the fact that the order of Tribunal in immediately preceding year has been challenged by the revenue before Hon’ble High Court and the same is pending and hence the Tribunal’s decision of earlier years is not conclusive. Further, the agreement entered into between the assessee and the payee was only a colorable device and mere after thought of the assessee to evade the taxes and give legal shape to the illegal payments made by the assessee. The payee was entrusted with heavy legal responsibilities whereas they had no professional expertise, background or qualification to handle those proceedings. The agreement itself was full of discrepancies and also the bills raised by payee were mere piece of self serving documents. The payments were exchanged without rendering of services and the payee never actively participated in the stated Income ITA NO. 3253&3369/Mum/2009 C.O.NO. 3-4/Mum/2009 M/s Black & Veatch India Private Limited Assessment Years 2003-04 & 2004-05 Tax proceedings. The quantum of payment was exorbitant vis-à-vis payment made to other professional. Further, the impugned payments were opposed to public policy as per Section 23 of the Indian Contracts Act and hence hit by explanation to Section 37(1). The assessee failed to produce any partner of the firm to confirm the impugned payment despite being provided with several opportunities and further, deduction of TDS, by itself, do not validate the impugned payment unless they pass the test of ‘incurred wholly and exclusively for the purpose of business’ as provided in Section 37(1). All these factors cast serious doubts on the genuineness of the whole arrangement and therefore, the additions have rightly been made by the lower authorities. Further, each year was unique unit of assessment and the principles of res-judicata do not apply to Income tax proceedings and the matter of earlier years is already sub-judice before Hon’ble Bombay High Court and also CIT(A) distinguished the facts of the impugned year and therefore, the action of the lower authorities should be confirmed. Moreover, the assessee has already been allowed heavy deduction of Rs.10.00 Lacs incurred by him to engage legal attorney who actually attended the proceedings and hence, no further relief could be granted to him.

We have heard the rival contentions and perused relevant material on record including cited case laws. At the outset we note that the assessee engaged the consultant payee who was non-professional entity to render services in relation to Income Tax Proceedings before various authorities. For this purpose, an agreement dated 01/11/2001 has been entered into between the parties. We have perused the relevant agreement placed in the paper-book. We note that as per clause-2, the payee was required to render the professional business and tax advisory services including handling of appellate matters, refunds, returns etc. for AY 1998- 99 and subsequent years. The fees, as per clause-3 was fixed as 18% of the actual abatement of Tax Assessments and Relief. The schedule of payment was linked with various stages of ITA NO. 3253&3369/Mum/2009 C.O.NO. 3-4/Mum/2009 M/s Black & Veatch India Private Limited Assessment Years 2003-04 & 2004-05 rendering of services. As per clause-4, the consultant was required to assume risk, cost and expenses to fulfill the obligations under the agreement and was also authorized to hire attorney upon separate payment. As per clause-6, the consultant was to remain independent contractor retaining sole control of the manner and means of performing this agreement. Clause-10 restricted payment by consultant to undesirable set of persons. With this background, we find that it is an admitted position that the payee was non-professional entity to which the ‘success based’ fees has been paid. So far as the legality of the payment is concerned, a perusal of the case laws cited by the Ld. AR, give rise to conclusion that there was no illegality in such mode of payment to non-professional entities. In particular, the following observation of the Hon’ble Apex court in Mr. G [supra] deserves attention:-

Moving further, we have perused the various documents viz. copies of invoices raised by the payee, certificate of attorney dated 10/11/2005 regarding assistance provided by the payee during the specified period and factum of various meetings / conferences / consultation / legal drafting and other support services provided by consultant payee, Bank statements from where impugned payments have been made by the assessee, TDS certificates issued by the assessee to the payee etc. The firm, M/s P.A.Shah & Associates, was duly registered with the registrar of Firms, Maharashtra vide Regn. No. BA-82791 entry dated 17/05/2002 with two partner namely Shri Pravin Amritlal Shah and Ms. Suman Dilip Kumar. Per directions from the bench, the revenue has produced the assessment summary of the consultant payee which reveals that the payee has been assessed under Income Tax PAN -AAEFP8606K and the date of creation of firm as per PAN database is 09/10/2001 and PAN generation date is 01/02/2002. The payee has reflected income of Rs.57,17,880/- for AY 2003-2004 and Rs.16,40,140/- for AY 2004-2005 and both returns has been duly processed u/s 143(1). It is also an admitted position that there was no violation of applicable TDS provisions and due TDS has been deducted from these payments by the assessee. Few TDS certificates have been placed on pages 23-26 of the assessee’s paper-book. We have also perused Tribunal’s order for AY 2002-2003 ITA No.3747/Mum/05 order dated 26/11/2008 where we find that the assessee suffered similar disallowance of Rs.70,19,102/- qua professional payment made to the payee. This payment also arose from the terms of same agreement dated 01/11/2001.Similar allegations were also made by the revenue against the assessee. The coordinate bench of the Tribunal after examining the conduct of the assessee and payee concluded that the payee had rendered the services by attending various Income ITA NO. 3253&3369/Mum/2009 C.O.NO. 3-4/Mum/2009 M/s Black & Veatch India Private Limited Assessment Years 2003-04 & 2004-05 Tax proceedings and there was no violation of any provisions of law and hence, these expenses were allowable. We have also perused the various Income Tax Assessment orders passed by various authorities, which are placed in the paper-book wherein we find that that representative of the payee namely Sh.D.Kumar appeared from time to time and the perusal of invoices reflects that services of varied natures have been provided by the payee. Therefore, following judicial discipline and in the light of facts and circumstances of the cases and in view of our various discussion / observations in the preceding paragraphs, we are of the considered opinion that the impugned payments were incurred by the assessee against services rendered and for the purposes of the assessee’s business and hence, allowable. The appeal of the assessee stands allowed.

In nutshell, all the four appeals filed by assessee succeeds whereas both the appeals of the revenue stands dismissed. Order pronounced in the open court on 06th February, 2017.