QUANTIUM ADVISORS P. LTD,MUMBAI vs. DCIT CIR 1(3), MUMBAI

2 : 0 Re.: Disallowance of advertising expenditure of Rs. 3,77,14,278/-: 2 : I The Commissioner of Income-tax (Appeals) has erred in confirming the action of the Assessing Officer of disallowing the amount of Rs. 3.77.14.278 - being the advertisement expenditure incurred by the Appellant during the year under consideration.

2:2 The Commissioner of Income-tax (Appeals) has erred in making various erroneous and unsubstantiated observations (which ignore the facts submitted before him and/or are contrary to the facts on record) in the impugned Order to buttress his stand vis-a-vis the disallowance of marketing and development fees.

2:3 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the advertising expenditure incurred by the Appellant was revenue in nature and was incurred wholly and exclusively for the purposes of its business and the Commissioner of Income-tax (Appeals) ought to have held as such.

2:3 The Commissioner of Income-tax (Appeals) erred in making the disallowance without providing an opportunity to the Appellant to show- cause why the said disallowance should not be made. 2:4 The Commissioner of Income-tax (Appeals) erred in rejecting the additional evidence filed by the Appellant.

2:5 The Appellant submits that the Assessing Officer be directed to delete the disallowance so made by him and to re-compute its total income and tax thereon accordingly.”

4. The first issue relates to a disallowance of Rs.3,26,05,689/- representing marketing and distribution fee paid to QIEF Management LLC, Mauritius ( in short ‘QEIF’). On being asked by the Assessing Officer to justify such expenditure, assessee had explained that the payment was made for marketing and distribution services rendered by QIEF and since the payee did not have a Permanent Establishment (PE) in India, such amounts were not taxable in India. The Assessing Officer however, noted that since QIEF was a group concern; its directors are residents in India; and, QIEF operates an administrative back-office in India and, therefore, QIEF has a PE in India, which rendered such payments liable to tax in India. Therefore, according to the Assessing Officer, assessee was required to deduct tax at source (TDS) on the payment of Rs.3,26,05,689/- made to QIEF and assessee not having deducted such TDS, the impugned sum was disallowable under section 40(a)(i) of the Act. Be that as it may, the aforesaid basis of disallowance is not relevant for the present, inasmuch as, the CIT(A) disagreed with the Assessing Officer on the aspect of applicability of section 40(a)(i) of the Act, instead he has retained the disallowance on a different ground. As per the CIT(A), the impugned expenditure does not qualify for deduction under section 37(1) of the Act. The reasons which weighed with the CIT(A) to hold so can be summarized as follows. Firstly, according to CIT(A), assessee had failed to demonstrate that the infrastructure available with QIEF was sufficient to canvass business on behalf of the assessee in Europe or in any other part of the world. As per the CIT(A), the Transfer Pricing documents and the Annual Accounts of QIEF showed that it was a Mauritius-centric concern having no branch office anywhere in the world. On this basis, the CIT(A) concluded that QIEF could not have undertaken marketing activities on behalf of the assessee in Europe or anywhere else. Secondly, as per the CIT(A), the fact that there was an agreement between assessee and QIEF is not determinative of the issue of allowability of expenditure under section 37(1) of the Act . By relying on the ratio of the judgment of the Hon'ble Supreme Court in the case of Lachminarayan Madan Lal Vs. CIT, 86 ITR 439(SC) he observed that it was open for the Revenue to examine the relevant factors and determine allowability of expenditure under section 37(1) of the Act. According to him, the factors in the present case show that the amounts have not been laid out wholly and exclusively for the purpose of business, and he retained the disallowance, albeit on a different ground. In this background, assessee company is in appeal before Tribunal.

5. Before us, the Ld. Representative for the assessee has made detailed submissions assailing the findings of the CIT(A). Firstly, the Ld. Representative for the assessee contested the findings of the CIT(A) on lack of infrastructure with QIEF, which was a Mauritius based company. It was explained that QIEF had a 100% subsidiary, Q India Corp. based in USA. By referring to Page -338 of the Paper Book, it is sought to be canvassed that the US subsidiary of QIEF had on its rolls one Mr. Arvind Rangarajan, based in America, whose profile demonstrates expertise in India-related research and investment efforts. Apart therefrom, it has also been pointed out that Page 339 of the Paper Book contains a list of clients referred by QIEF alongwith the corresponding fees earned by the assessee from such clients, which clearly demonstrates that a substantial portion of assessee’s income is on account of clients referred by QIEF. Furthermore, Ld. Representative for the assessee has referred to Pages 34 to 35 of Paper Book, wherein is placed a copy of the agreement with QIEF dated 01/07/2008 pertaining to rendering of marketing services to non-USA and non-Canada based clients, including Europe, Middle East and Asian clients. Furthermore, our attention has also been drawn to Pages 39 to 42 of the Paper Book, wherein is placed agreement with QIEF relating to marketing services for the clients located in USA. Ld. Representative for the assessee pointed out that the aforesaid material was very much before the lower authorities and there was no justification to disbelieve the same and hold that the requisite services were not provided by QIEF to the assessee. It was also canvassed that the agreement between assessee and QIEF has been duly acted upon and, therefore, it cannot be disbelieved by the Revenue and in this regard reliance was placed on the judgment of the Hon’ble Calcutta High Court in the case of CIT vs Arun Dua, 186 ITR 494(Cal). Emphasizing on the adequacy of infrastructural and other facilities available with QIEF to render services to assessee, Ld. Representative for the assessee also referred to Pages 242 to 298 of Paper Book, wherein is placed copies of the Annual Accounts of QIEF for years ending 31/12/2010 and 31/12/2011. By referring to the relevant portions, it is sought to be emphasized that the said concern is carrying on requisite levels of business, inasmuch as, the gross revenues for 31/12/2010 amounted to USD 56,63,538/-, out of which the impugned marketing fee of USD 22,55,952 has been received from assessee company. By referring to relevant notes on Page 260 of the Paper Book it is sought to be pointed out that QIEF had entered into Fund development agreement with Celerity Venture LLC, a Delaware Limited liability company and the assessee company, under which the interests and obligations of Celerity Venture LLC were assigned to the assessee-company. Thus, QIEF was carrying out various activities, including launch of a Fund in Delaware. It has also been sought to be pointed out that QIEF was also acting as CIS Manager and Investor Manager(unregistered) and was granted certificate of registration as Foreign Institutional Investment (FII) by SEBI in September, 2008. All these aspects have been referred by the Ld. Representative to demonstrate that requisite infrastructural facilities were available with QIEF for rendering marketing services to the assessee.

6. On the other hand, the Ld. Departmental Representative appearing for the Revenue has primarily reiterated the arguments taken by the CIT(A), which we have already adverted to in an earlier para, and are not being repeated for the sake of brevity. According to the Ld. Departmental Representative, the CIT(A) has denied the deduction under section 37(1) of the Act primarily for the reason that assessee could not establish rendering of services by QIEF to the assessee company on the basis of any evidence.

7. We have carefully considered the rival submissions. Pertinently, the dispute before us pertains to the allowability of expenditure incurred by the assessee on fee paid to QIEF for marketing support services. The Assessing Officer as well as the CIT(A) have found it expedient to disallow the expenditure, albeit on different grounds. The Assessing Officer disallowed it on the ground that the requisite tax was not deducted at source and hence such expenditure was to be disallowed under section 40(a)(i) of the Act. This position did not find favour with the CIT(A) as according to him tax was not required to be deducted at source on the impugned amount, as it was not liable to be taxed in India in the hands of QIEF. On this aspect of the matter, there is no appeal preferred by the Revenue and, therefore, such finding of CIT(A) has attained finality. Therefore, we proceed to examine the basis on which the CIT(A) has sustained the disallowance. As per the CIT(A) the expenditure does not qualify for deduction under section 37(1) of the Act. Shorn of other aspects of section 37(1) of the Act, what has been invoked by the CIT(A) in the present case is that the impugned expenditure cannot be considered to have been incurred ‘wholly and exclusively for the purposes of the business’ of the assessee company. The efficacy of such a conclusion is required to be judged having regard to the reasons advanced by the CIT(A), which we do hereinafter.

7.1 On the issue of availability of infrastructure with QIEF, in our view, the CIT(A) has merely brushed aside the material and evidence which the assessee sought to put-forth before him. In Para 1.13(a) of the order, the CIT(A) observes that assessee had failed to show the infrastructure available with QIEF to render services to assessee- company. Such an observation by the CIT(A) is a bland assertion because the material which was before him, and which has also been placed in the Paper Book filed before us, clearly shows that it is not a case where QIEF could be said to be a concern without adequate infrastructure and ability to render services to assessee. The Annual Accounts of the said concern, copies of which have been placed in the Paper Book, clearly show that QIEF is a concern which is carrying on regular activities in the field of management of investors, etc. and it was having a subsidiary in USA. Notably, assessee is engaged in providing investment management services to International Institutional clients such as sovereign funds, pension fund, etc. in relation to their investment exposures in India-listed securities. Ostensibly, such institutional clients would require appropriate and diligent evaluation of their Investment Manager and for that purpose assessee had undertaken marketing efforts through QIEF. In terms of the agreement with QIEF, the said concern was tasked to look for potential opportunities and to market the capabilities and experience of the assessee-company on India-focused investment options. In fact, at Page-339 of the Paper Book, a list of clients have been placed, who were referred to the assessee by QIEF and at the time of hearing it was explained that more than 90% of assessee’s revenues have been earned from the clients referred by QIEF. From the submissions of the asessee made to the lower authorities, it is seen that assessee has consistently explained that QIEF was marketing assessee’s services to prospective institutional investors such as sovereign funds, pension funds, etc. in Europe, Middle East and Asia and also to private sector institutional clients in USA. In our considered opinion, the assertions which have been made by the assessee before the lower authorities as well as before us are borne out of record inasmuch as assessee has earned income through clients referred by QIEF, which is not disputed. Much has been made out by the CIT(A) that mere existence of an agreement between asessee and QIEP would not ipso-facto lead to the allowability of the impugned expenditure. In absolute terms, we have no quarrel with the said proposition advanced by the CIT(A) but the onus in the present case was on him to establish on the basis of evidence and material that the actual state of affairs was contrary to the agreement. In fact, the agreement between assessee and QIEF has been acted upon inasmuch as assessee has earned business thereupon and in return assessee made payments for the services rendered by the payee. In our considered opinion, having regard to the material and evidence on record, the CIT(A) has sought to disregard the agreement on a mere hypothetical basis, without any factual support.

7.2 Before parting, we may mention two more aspects which were before the CIT(A) . In the course of the assessment proceedings, the only objection of the Assessing Officer was based on non-deduction of tax at source and in so far as the issue of section 37(1) of the Act was concerned, the Assessing Officer had no objection. It was only during the appellate proceedings that the CIT(A) show caused the assessee- company on the aspect of section 37(1) of the Act. It is seen from the record that during the appellate proceedings, CIT(A) called for a remand report from the Assessing Officer on the issue of allowability of the expenditure under section 37(1), which was not a point raised in the assessment order. In such remand report, the Assessing Officer observed that the impugned expenditure was incurred during the course of normal business activity by the assessee and hence deductible under section 37(1) of the Act. Thus, impliedly the Assessing Officer reiterated the stand taken in the assessment order on the issue of section 37(1) of the Act. Second aspect which needs mentions is the assessment made by the Assessing Officer under section 143(3) of the Act for the assessment year 2012-13, wherein a portion of the marketing support fee paid to QIEF was disallowed by invoking section 40A (2)(b) of the Act. As per the CIT(A), the aforesaid two aspects reflected that the Assessing Officer was contradicting his own position taken in the assessment for assessment year 2012-13 by accepting that the expenditure was deductible under section 37(1) of the Act in the remand report. It appears that for the aforesaid reason, the CIT(A) disregarded the stand of the Assessing Officer in the remand report and proceeded to examine afresh the issue of allowability under section 37(1) of the Act.

7.3 In our considered opinion, the stand of the CIT(A) is misdirected and is based on a wrong perspective. In fact, the invoking of section 40A(2)(b) of the Act to disallow a portion of the expenditure in assessment year 2012-13 does not lend any support to the inference of the CIT(A) that the expenditure has not been made wholly and exclusively for the purpose of assessee’s business because what is envisaged by section 40A(2)(b) is to disallow an expenditure which is found to be unreasonable or excessive in relation to it’s market value. Invoking of section 40A(2)(b) of the Act to disallow a portion of the expenditure is an altogether different dimension than invoking section 37(1) of the Act to say that the expenditure is not laid out wholly and exclusively for the purposes of business. In fact, under such a situation, it was all the more onerous on the part of the CIT(A) to demonstrate as to why the entire expenditure was disallowable under section 37(1) of the Act, having regard to the stand of the Assessing Officer in the remand report as well as in the assessment for assessment year 2012- 13. The said burden, in our view, has not been discharged by the CIT(A) in the present case and, therefore, we are unable to acquiesce to the same. As a consequence, we hereby set-aside the order of the CIT(A) on this aspect and direct the Assessing Officer to delete the addition of Rs.3,26,05,268/- representing payment made to QIEF for marketing support services. Thus, on this aspect assessee succeeds.

i) CIT v/s Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC) ii) CIT v/s Royal Calcutta Turf Club [1961] 41 ITR 414 (SC) iii) Eastern Investment Limited v/s CIT [1951] 20 ITR 1 iv) Campa Beverages (P) Ltd. v/s IAC [1990] 34 ITD 241 (Del.) v) CIT v/s Alfa Laval (I) Pvt. Ltd. [2005] 149 Taxman 29 vi) S.A. Builders v/s CIT [2007] 158 Taxman 74 to say that an expenditure incurred for the purposes of business is allowable even if some benefit arises to a third party. Apart from relying on the aforesaid decisions, assessee also relied on the following decisions for the proposition that the nature of the impugned advertisement expenditure could not be construed as having been incurred for ‘brand building’:- i) ACIT v/s Global Healthline (P) Ltd. [2012] 19 ITR(T) 298 ii) ITO v/s Spice Communications Ltd. [2010] 35 SOT 78 iii) JCIT v/s ITC Ltd. [2008] 112 ITD 57 Further, reliance was also placed on the judgment of the Hon'ble Gujarat High Court in the case of Core Healthcare Ltd., 308 ITR 263 and that of Hon'ble Delhi High Court in the case of Modi Revlon Pvt. Ltd., 26 taxmann.com 133 for the proposition that even advertisement expenses incurred to create a brand image was allowable as revenue expenditure. The CIT(A) considered the exhaustive submissions made by the assessee and called for a Remand report from the Assessing Officer on various issues, including the application of the assessee seeking admission of additional evidences under Rule 46A of the Rules. In response, the Assessing Officer submitted that M/s. Hansa Vision Pvt. Ltd. had raised all the invoices in the months of February and March, 2011 and even the agreement was dated 15.2.2011, which was towards the fag end of the year, which appeared to be doubtful. Secondly, the Assessing Officer submitted that the assessee was allowed opportunity during the assessment proceedings to furnish the complete evidence and, therefore, no additional evidence ought to be admitted by the CIT(A). Thirdly, the Assessing Officer canvassed that assessee had paid to a single entity , i.e. M/s. Hansa Vision Pvt. Ltd. for advertisement and promotion of Quantum Mutual Fund, which was a trust and a separate taxable entity exempt from tax and hence the advertisement expenditure ought to have been incurred by the Mutual Fund itself and not by the assessee-company acting as a sponsor. In sum and substance, the Assessing Officer reiterated his earlier position and also opposed the plea of the assessee for admission of additional evidence.

It is noticed from the order of CIT(A) that assessee also furnished its say on the Remand report submitted by the Assessing Officer, which has been reproduced by the CIT(A) in para 2.5 of his order. The CIT(A) considered the rival stands and concluded as follows. Firstly, on the issue of admission of additional evidence under Rule 46A of the Rules, the CIT(A) declined the plea of the assessee. At this stage, we may notice that apart from other additional evidences, assessee produced before the CIT(A) an agreement dated 1.6.2011 entered with Quantum Asset Management Co. Pvt. Ltd., who managed the assets of Quantum Mutual Fund. The aforesaid agreement was produced by the assessee to show that it was also earning Management fees from Quantum Asset Management Co. Pvt. Ltd. and thus, the action of incurring expenditure on promotion of various schemes of Quantum Mutual Fund was on relevant considerations. The CIT(A) declined to admit such an evidence as, according to him, the agreement did not pertain to the impugned assessment year as it was dated 1.6.2011. With regard to the merits, CIT(A) concluded that the expenditure did not qualify for deduction u/s 37(1) of the Act as it was not laid out wholly and exclusively for the purposes of assessee’s business.

“…………. once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their view point but that of a prudent businessman.”

In view of the aforesaid, we therefore do not find any merit in the stand of the income-tax authorities that the expenditure in question is not laid out for the purposes of assessee’s business, merely because it could benefit another entity also.

Ltd., 226 ITR 188 (SC). According to the CIT(A), the ratio of the above decision justifies the inference that the impugned expenditure was not incurred for the purposes of assessee’s business. We have perused the judgment of Hon'ble Supreme Court in the case of Amalgamations (P) Ltd. (supra) and find that the same has been unjustly applied in the present case inasmuch as the facts and circumstances in the case before the Hon'ble Supreme Court stood on an entirely different footing. The assessee before the Hon'ble Supreme Court was a bulk shareholder in several companies and it was rendering services to its subsidiaries in various areas of finance, liaisoning, export promotion etc. The Directors of the subsidiary companies were earning remuneration from the respective companies in terms of the limits fixed under the Companies Act, 1956. The assessee-company paid remuneration to Directors of the subsidiary companies in excess of the ceiling prescribed in the Companies Act, 1956. Such excess remuneration paid by the assessee-company to the Directors of the subsidiary companies was claimed as a deduction on the ground that it was incurred wholly and exclusively for the business of the assessee- company. The Hon'ble Supreme Court noted that there was no nexus between the expenditure and the business of the assessee. The business of the assessee was noted to be of holding its investments and it was noticed that such income could be earned by the assessee without incurring the disputed expenditure. It is for the said reason the claim of the assessee was negated by the Hon'ble Supreme Court. So however, in the present case, the complexion of the factual matrix is quite different. Herein, it is the assessee-company which has set-up the Mutual Fund as a sponsor and is also the holding company for the Asset Management Company, which in turn is managing the assets of the Mutual Fund. The income-earning apparatus of the assessee includes a stream of income from such an activity in which assessee has a deep interest, may it be the affairs of the Asset Management Company or the Mutual Fund. No doubt, the advertisements are intended to secure investors for investing in the schemes of the Mutual Fund, which is a separate entity, so however, the incurrence of such expenditure vis-à- vis assessee’s business cannot be discounted even if its incurrence would result in a benefit to a third party. On this aspect of the matter, the learned representative for the assessee relied upon the judgment of the Hon'ble Bombay High Court in the case of Tata Sons (P) Ltd., 18 ITR 460 which has also been referred to by the Hon'ble Supreme Court in the case of Amalgamations (P) Ltd. (supra). In the case of Tata Sons (P) Ltd. (supra) assessee was managing agent of an another company and it was earning agency commission computed with reference to the net profits of the managed company. Assessee-company voluntarily paid certain sums to some of the officers of managed company as bonus, and such expenditure was claimed as deduction while computing its taxable business income. Such claim was upheld on the ground of commercial principles as according to the Hon'ble High Court, what the assessee had done was something, which had an objective of increasing the profits of the managed company, which in turn would increase its own share of commission income. The Hon'ble Supreme Court in the case of Amalgamations (P) Ltd. (supra) considered the judgment of Hon'ble Bombay High Court and observed that there was a direct nexus between the increased profits of the managed company and the managerial commission payable to the assessee since such agency commission was calculated as a prescribed percentage of the net profits of the managed company. In our considered opinion, the parity of reasoning in the case of Tata Sons (P) Ltd. (supra) is clearly attracted in the present case too. There can be no gain saying that-better the performance of the Mutual Fund and the Asset Management Company, better would be the returns of the assessee-company. Therefore, in our view, the CIT(A) has erred in holding that the advertisement expenditure is not laid out wholly and exclusively for the purposes of the appellant’s business. Having regard to the aforesaid discussion, we reverse the stand of the lower authorities on this aspect.

18. Insofar as the other grounds of disallowance discussed by the Assessing Officer in the assessment order, namely the expenditure being of capital nature having been incurred for ‘ brand building’; or that the complete newspaper cuttings of advertisements not having been filed is concerned, we find no specific determination by CIT(A) on this aspect. In any case, we find that before the CIT(A), assessee had assailed the aforesaid position in a detailed manner and in the absence of any rebuttal of the same by the CIT(A), it can only be inferred that the CIT(A) acquiesced to the same. Nevertheless, we find that factually there is nothing on record to show that the expenditure has been incurred with the objective of brand building inasmuch as the advertisements are intended to canvas investors to invest in the schemes of the Quantum Mutual Fund. Therefore, on facts also, we find no support for the plea of the Assessing Officer. Insofar as the non- furnishing of some of the newspaper cuttings is concerned, before the CIT(A) assessee had explained it properly and we find that there are no credible reasons to disbelieve the assessee on this aspect, as the sample newspaper cuttings clearly support the invoices raised by M/s. Hansa Vision Pvt. Ltd.

Order pronounced in the open court on 15/07/2016