M/S. STOCK TRADERS PVT. LTD.,MUMBAI vs. ACIT CIR 2(3), MUMBAI

Appearances by: P J Pardiwala and Nitesh Joshi for the appellant Harshad Vengurlekar for the respondent Date of concluding the hearing: January 8, 2016 Date of pronouncing the order: April 5th, 2016 O R D E R Per Pramod Kumar AM: 1. A common grievance in all these appals is that the “CIT(A) has erred in confirming the disallowance of the payment of professional fess (of Rs.45,09,637 for the assessment year 1995-96, of Rs.1,00,49,742 for the assessment year 1996-97 and Rs.1,21,42,602 for the assessment year 1997-98) to Preroy AG (a Switzerland based company)”. All the three appeals pertain to the same assessee, arise out of a common set of facts and were heard together. As a matter of convenience, therefore, we deem it appropriate to dispose of all the three appeals by way of this consolidated order.

This appeal, filed by the assessee, is directed against the order dated 17th 3. January 2003 passed by the learned CIT(A), in the matter of assessment under , 2803 & 2088/Mum/03 Assessment years: 1995-96 to 97-98 Page 2 of 16 section 143(3) of the Income Tax Act, 1961, for the assessment year 1995-96. Grievances in this appeal, as set out in the memorandum of appeal, are as follows:

“Aggrieved by the order passed by the Commissioner of Income-tax (Appeals) - XXXIII, Mumbai [hereinafter referred to as 'the learned CIT(A)'], under section 250 of the Income-tax Act, 1961 ('Act') and based on the facts and circumstances of the case, Stock Traders Private Limited [hereinafter referred to as 'Appellant'] respectfully submits that the learned CIT(A) erred in disposing the appeal of the Appellant, on the following grounds .

1. The CIT(A) erred in confirming the disallowance of the payment of professional fees of Rs.4,509,637 to Preroy AG ('PAG').

2. The CIT(A) erred in making the following erroneous observations and conclusions in gross violation of the principles of natural justice: (a) In observing that the Appellant has claimed income earned by PAG as exempt from tax in India. (b) In observing that PAG has no other business except that it receives professional fees from the Appellant. (c) In observing that PAG has only one client all over the world ie the Appellant. (d) In observing that evidence brought on record does not show any past history of PAG having any technical expertise. (e In observing that the Appellant and PAG have common directors. (f) In observing that PAG is an agent of the Appellant. (g) In observing that consultancy services rendered by PAG to the Appellant are not supported by an agreement. (h) In observing that the nature of services provided by PAG to the Appellant could not be ascertained from the documentation submitted by the Appellant. (i) In observing that the Appellant's claim that all foreign companies have entered into a joint venture with the Appellant on the advise of PAG is not acceptable as it is not supported by any agreements or documents. (j) In disallowing the professional fees relying on certain judicial precedents not brought to the notice of the Appellant.

, 2803 & 2088/Mum/03 Assessment years: 1995-96 to 97-98 Page 3 of 16 3. The CIT(A) erred in confirming the disallowance of Rs.599,832 in respect of travelling expenses.”

is concerned, the relevant material facts are as follows. The assessee before us is a company engaged in the business of financing and making investments. During the course of the scrutiny assessment proceedings, the Assessing Officer noted that the assessee has paid a sum of Rs.49,09,637 to a Switzerland based company by the name of Preroy AG. As noted by the Assessing Officer, this fees was paid as the PAG was “required to render services to assessee for locating new business opportunities, recommend proposal for new projects and coordinate existing and new joint venture partners for technology transfers, equity participation and secure the support for new business strategies”. It was also noted that the assessee’s stand is that the main source of assessee’s income is interest and dividends, that the assessee uses these incomes to expand its investment base through direct investments in the new projects and that a significant number of such projects, in which investments are made by the assessee, are foreign projects. It was on the basis of these, and other, arguments that the deduction for payment made to PAG was sought to be justified. It was also contended by the assessee that the expenditure incurred by the assesse, by way of making impugned payments to PAG, were to protect and preserve the investments of the assessee, and since the assessee was engaged in the business of making investments, the expenses so incurred by the assessee were deductible under section 37(1) and in the light of Hon’ble Supreme Court’s judgment in the case of CIT Vs Delhi Safe Deposit Co Ltd [(1982) 133 ITR 756 (SC)]. Reliance was also placed on the judgment of Hon’ble Bombay Court, in the case of CIT Vs Rajaram Bondekar [(1994) 208 ITR 503 (Bom)], in support of the proposition that the mere fact that expenditure incurred by the assessee benefits a third party would not lead to disallowance as long as the expenses are incurred wholly and exclusively for the purposes of the business of the assesses. These submissions, however, did not impress the Assessing Officer. He noted that Sushil K Premchand (SKP, in short) who is major shareholder and director in the assessee company, is also one of the two directors of PAG. He noted that the services, on behalf of PAG, were rendered by SKP but then there was no clinching evidence of the actual rendition of service. There were, according to the Assessing Officer, only bills and invoices for services , 2803 & 2088/Mum/03 Assessment years: 1995-96 to 97

98. Page 4 of 16 but that did not constitute any evidence about the services having been rendered. Coming to the invoices raised on the assessee, he noted that these invoices were also rather vague. It was noted that bill no. 1 dated 1/11/94 for US $ 10,000 was for “services rendered in connection with negotiations for development of speciality greases”, the bill no. 2 for US $ 10,000 was for “setting up proposal for joint ventures”, the bill no. 3 was for “services rendered for OKS India-Indonesia projects……..for discussions in Singapore, Jakarta and Munich”. It was also noted that out of 11 bills raised by PAG, 7 bills were OKS India projects in which assessee had 57% shareholding. It was also concluded that “the bills raised by PAG were quite general and vague” which were for “nothing but transfer of funds by the assessee to PAG were S K Premchand is main director in both the companies”. The Assessing Officer also referred to, and relied upon, his orders for the assessment year 1997-98 which was already passed much before the impugned order, as this year, i.e. year before us, was carried in appeal before the CIT(A) and then remitted to the file of the Assessing Officer; what we are dealing with right now is the order passed in the course of the remanded proceedings. Coming to the observations in the assessment year 1997-98, which were specifically relied upon by the Assessing Officer, we find that, after taking note of the ownership pattern of the assessee company and the PAG, the Assessing Officer, inter alia, concluded that “these circumstances also show that so called professional services have been rendered, if I may say, by Shri SKP to Shri SKP for Shri SKP” and added that “ Since PAG is registered in Switzerland, by using this channel of payment for so called professional services, the assessee company is helping Shri SKP in siphoning off substantial profits to his overseas bank account”. As regards the evidence for services rendered by the PAG, the Assessing Officer made specific observations as follows:

“5.8 Let us now evaluate the evidently strength of the evidences submitted by the assessee company. The breakup of all 34 invoices raised by PAG during the previous year relevant to assessment year 1997-98 is as under : Invoice No. Particulars Remark 1 to 7 Related to business of assessee's subsidiary OKS (1) . 8 to 11 Related to Joint Venture concern Cosatec 12 to 15 Related to business of Joint Venture , 2803 & 2088/Mum/03 Assessment years: 1995-96 to 97-98 Page 5 of 16 DME India. 16 to 17 Related to business of Casoni F.L. Spa 18 to 22 Related to business of Johnson & Johnson 23 to 27 Related to Joint Venture ISS India 28 to 29 Related to A. Boss & Co. for export of handmade paper 30 Related to bnsmess of OKS 31 Related to unidentified Co. for Defence services 32 Related to Alfred Carcher Gmbh & Co. Cleaning System project 33. MIS Europe Limited – Data Security system 34. New Opportunity in USA.

5.9 From the details accompanying all 34 invoices following common features are observed : i) The nature of services stated to have been rendered are mentioned in very general and vague terms. All these invoices talk of rendering services in connection with the attending, discussing, negotiating, securing a commitment, presenting the case, establishing credibility, reviewing the need for focused, selling, ensuring the smooth initial ion, participating in various — etc. ii) The supporting evidence consist of mainly xerox copies of fax messages sent, copies of receipts of Hotel booking, copies of boarding passes for Air Travel and some pamphlets relating to certain products, iii) At the end of each set of supporting evidence relating to a particular invoice filed, note/recommendation signed by Shri Sushil K. Premchand, Managing Director bas been appended. iv) All the papers including the invoices the fax message, the itinerary details, Hotel booking, boarding passes etc. have relevant dates appearing on them. But none of the fifed note/recommendation has any date on it. It raises doubt whether they were ever actually sent or not. 5.10 Each file note/recommendation starts with the word “at the request of the Board of STPL ……..”. However, no evidence in any of the set of supporting documents in respect of any of the invoice is accompanied by written request of the Board of STPL asking PAG to make certain inquiries or contacts in respect of any specific matter. No resolution has been passed by STPL to make such a request to PAG. In this regard, it is important to note that item no.1 of clause (E) of agreement between PAG & STPL entitled compensation/payment reads as under:

, 2803 & 2088/Mum/03 Assessment years: 1995-96 to 97-98 Page 6 of 16 “' For the services rendered by PAG under this agreement, STPL was paid fees to PAG at rates to be agreed by the parties on a case to case basis. The fees in respect of assignment will be agreed upon by the parties before FAG commenced work on the said assignment" It was stated by the assessee company that the requests were made by STPL orally. This fact was confirmed in assessment year 1995-96. Once again, it is interesting here to note that all the requests on behalf of STPL are made orally and the recommendations have also been communicated orally (as already mentioned none of the recommendations has mentioned date on it). This implies that Shri SKP(STPL) is requesting to SKP (PAG). Similarly Shri SKP (PAG) makes a recommendations to Shri SKP (STPL) who may or may not act on such recommendation, 5.11 While submitting its bill vide invoice no. 31 (running invoice no.1996- 24) dated 3.10.1996, the narration of the services rendered is as under : “DEFENCE SERVICES OPPORTUNITY Billing for services rendered in connection with discussions with a member of the Board of Directors of Swiss company that has developed a new product that permits ammunition free target practice (using laser technology), which is available for licensing to India, for consideration by STPL as a new project opportunity, amounting to US Dollars Ten Thousand only.” 5.12 It is strange that the invoice talks of services rendered in connection with the discussion with a member of Board of Directors of Swiss Company. The company has not been mentioned. The members of the Board of the Directors has also not been named. However, literature of laser shot is enclosed along with the invoice. It is normal practice that whenever a new product is introduced in the market, the manufacturer, publishes brochures and pamphlets giving the new features and utility of the product. These brochures and pamphlets are freely available in the market. Anybody can have access to them. Since PAG has not mentioned any reference to the name of the company or to the member of the board of directors, it cannot be said that the discussion were actually held with that ember of that company for exploring the possibilities of STPL's entering into transaction with that company. 5.10 Similarly, invoice no.34 (running invoice no.1996-13) dated 23fd May 1996 reads as under : “EXAMINATION OF NEW OPPORTUNBITIES FOR AINDIA DURING RECENT VISIT TO THE USA: Billing for services rendered in connection with meeting members of the senior management of two European companies at an international conference in Chicago in May 1996, to review the rote that STPL could play in both these opportunities for specific project in India, resulting in , 2803 & 2088/Mum/03 Assessment years: 1995-96 to 97-98 Page 7 of 16 invitations for further discussions in Europe, in the near future, amounting to US Dollar Ten Thousand only." From a perusal of invoices and accompanying documents, it is seen that documents show only the travel schedule of Shri SKP, slay at hotel etc. It appears that Shri SKP just happened to go to Chicago in May 1996 and be found it proper to utilise this visit for billing to STPL. As already mentioned that STPL had never requested SKP to go to Chicago. 5.13 All above facts considered together give a definite indication that actually no services have been rendered by PAQ to STPL. Moreover, credentials of PAG having expertise in relation to providing various consultancy services have also not been established. Another important fact seen from the details furnished by the assessee during this year as well as in earlier year is that the running invoice ( PAG appears to be following Calendar year) have been issued to STPL only and to no other party. This is clear from the fact that 24 invoices of 1996 (i.e. invoice no. 9 of 1996 to invoice no. 32 of 1996) and 10 invoices of 1997 ( i.e. invoice no.1 of 1997 to invoice 10 of 1997) have all been issued to STPL If PAG was actually engaged in providing consultancy services in general, some of the invoices would definitely have been issued to other parties.

5.14 Another important fact is that all the invoices are of US $ 10,000/- irrespective, whether the so called services were only in connection with the Telephonic discussion or whether they were in connection preparation and conduct of presentation giving demonstration of some product. It is highly unlikely that all such services have same cost. It may be mentioned that as per the agreement between PAG & STPL all out of pocket expenses incurred by PAG to provide these services shall be reimbursed by STPL on a actual basis. However, no such reimbursement has ever been asked for by PAG in relation to any of the invoices. This also is highly unbelievable that in any of 34 invoices no out of pocket expenses were actually incurred. Generally some incidental expenses are always incurred in any kind of activity. The incidental expenses can be nil only if there is actually no activity at all. The said agreement, of course, has an overriding clause in respect of out of pocket expenses that is to say either these expenses are to be reimbursed on actual basis or as credit before hand. However, once again, there is no evidence on record to show that PAG had agreed before hand - that is to say before the commencement of the assignment - not to claim out of pocket expenses in respect of that project This creates serious doubt regarding genuineness of the services because as per the agreement dated 2.1.1995, each invoice has to be prepared and approved on case to case basis before the invoiced activity commences. Obviously, neither the assessee nor PAG bothered to do so because both of them knew for sure that there was no services to be actually rendered and hence, there was no out of pocket expenses to be incurred at all. Both of them were clear that PAG has to only raise an invoice and STPL has only to make payment thereof and that would be the end of the matter.

, 2803 & 2088/Mum/03 Assessment years: 1995-96 to 97-98 Page 8 of 16

5.15 In view of above discussion I am convince that no services whatsoever were actually rendered by PAG and thus, the payment made by the assessee company cannot be said to have been incurred wholly and exclusively for the business of the assessee company. Accordingly expenses of Rs.1,21,42,602/- are not allowable expenditure u/s.37(1).”

“3.9 I have carefully considered the above facts of the case. The main contention of the appellant is that the professional fees have been brought to tax in completing PAG's assessment on the basis that the technical and strategic services have been rendered. I have also gone through the assessment order passed by the A.O. in the case of PAG for the A.Y. 97-98. The observation of the A.O. in the case of PAG is very relevant here. It was observed that "the assessee company (PAG) having only one client in the whole world i.e. M/s. STPL from whom it has received fee for management consultancy. The assessee company (PAG) is a show of single individual Shri Premchand who holds 100% shares in the assessee company. This one man company has received from one group concern which is engaged in the same business in India. The assessee has no other business. This facts clearly leads to conclusion that the Indian Co. (STPL) is dependant agent of the foreign company. Since the foreign company has a dependent agent, it has permanent establishment in India. Even if the assessee's income is treated as business income it will be taxable under article 7 of the Treaty." In the case of PAG the appellant had claimed that its income are exempt in India as the fees receipt by the assessee company (PAG) are business profit under article 7 of the Treaty. No fees have been included services and the assessee has no P.E. in India, from the above findings of the A.O in the case of PAG clearly show that both PAG and STPL are basically controlled by only one person Shri S.K. Premchand who holds 100% shares in PAG and also one of the directors in STPL. It is also interesting to note that PAG has no other business except it receives professional fees from STPL. It has only one client all over the world i.e. its associate company STPL only. Evidence brought on record by the assessee does not show any past history of Swiss Company (PAG) having any technical expertise as STPL is the only company to which PAG claims to have rendered technical services. Both the companies have common directors and Indian Company has given no basis on which the alleged commission has been paid. There is no evidence to show that services have been rendered by the agent PAG nor any evidence to show that any work has been done by the PAG. No evidence has been brought on record by the appellant to show that business was procured due to the active involvement of the agent. Any agent who has to earn commission/professional , 2803 & 2088/Mum/03 Assessment years: 1995-96 to 97-98 Page 9 of 16 fee has to put in some efforts to get the business but the appellant has brought nothing on record to show whether any effort was put in by the said agent. I have gone through the documents/papers furnished by the appellant. The appellant has furnished a statement indicating the list of projects undertaken by the appellant wherein it claims that PAG had rendered consultancy services during the F.Y. under consideration. The names of some foreign companies with whom the appellant has entered into joint venture have been furnished by the appellant like OKS India, D & E India, Johnson & Johnson, ISS India Project etc. But the details furnished by the appellant wherein the appellant claims that PAG had rendered consultancy services are not supported by any agreement or any other documentary evidence. It is only a summary of so called services prepared by the appellant itself. All these papers are general in nature and given by the appellant itself. No doubt a few correspondence have also been filed but all these papers does not prove the nature of services rendered by PAG. These letters/correspondence are personal in nature. Thus, it could not be ascertained as to what was the nature of services rendered by PAG to STPL. The only relevant document is invoices which have been raised by PAG to STPL. It is interesting to note that for every kind of services PAG claims to have charged 10,000 $ only irrespective of the fact whether the so called services were only in connection with the telephonic discussion or whether they were in connection of preparation of the report or presentation giving demonstration of some product. It is highly unlikely that all such services have same cost. It is also pertinent to mention here that as per the agreement between PAG & STPL all out of pocket expenses incurred by PAG to provide these services shall be reimbursed by STPL on actual basis. However, no such reimbursement has ever been asked by PAG in relation to any of the invoices. All supporting evidence consisting of mainly zerox copies of FAX messages sent, copies of receipt of hotel booking, copies of boarding passes of Air Travel and some pamphlets relating to certain products do not prove the nature of technical services rendered by PAG. The claim of the assessee that all the foreign companies have entered into joint venture with STPL on the advice given by PAG is not acceptable as it is not supported by any agreement or documents. Only invoices raised by PAG and the summary given for nature of so called services claimed to have rendered by PAG are not sufficient to prove that PAG was actually engaged in providing consultancy services to STPL. In the case of Laxminarayan Madanlal vs. CIT 86 ITR 439 the Apex Court has held that mere existence of an agreement to pay commission does not bind A.O to allow the deduction. The mere existence of an agreement between the assessee and its selling agent or payment of certain amounts as commission does not bind the ITO to hold that the payments were made exclusively and wholly for the purpose of the assessee's business despite the existence of such agreement/payment, it is open to the ITO to consider the relevant facts and determined for himself whether the commission said to have been paid is properly deductible u/s. 37(1). In the case of Assam Pesticides and Agro Chemicals Vs. CIT (Guwahati) 227 ITR 846 the Hon'ble Court has held that mere payment by itself would not entitle an assessee for deduction of the said expenditure unless the same was proved to be paid for commercial considerations. The onus of proof at all relevant times rest upon the assessee. In the case of Swadeshi Cotton Mills 63 ITR 57 (SC) the Apex , 2803 & 2088/Mum/03 Assessment years: 1995-96 to 97-98 Page 10 of 16 Court has held that additional commission to Directors in addition to monthly remuneration for extra commercial reason is not allowable as deduction. Under the circumstances and facts of the case I hold that no services have been rendered by the PAG as the evidence brought on record by the appellant does not show any past history of the Swiss Company having any technical expertise as STPL is the only associate company to which PAG claims to have rendered technical services where both the companies have common directors and the Indian Company has given no basis on which the alleged commission/professional fee has been paid. In the result the findings of the A.O is upheld and this ground of appeal is dismissed."

Preroy AG, Switzerland 100% shareholdings and director SKP Rendition of Services rendered service for PAG Majority shareholdings and director Stock Traders Pvt Ltd India

OKS India- Carl Bechem GmbH, Hagen Negotiation on behalf of STPL in March 1994, in respect of development of a proposal for the manufacture of speciality grease at OKS plant in Mysore Supporting documents a) Preroy’s file note setting out a summary of services rendered and the recommendations made to STPL b) Sushil’s fiile note on the meeting at OKS Munich on March 7,1994 discussing several issues such as 1993-94 sales of OKS ‘grease plant’ issue, financing situation of STPL, Bechem Product pricing etc c) Corporate Brouchers of OKS and Carl Bechem

C1. PAG shall render any or all the services under this agreement at any place outside the territory of the Republic of India, depending on the requirements of STPL. C2. PAG shall make endeavour to locate new business opportunities and partners of STPL and recommend proposals for new projects, and negotiate, coordinate with existing and new joint venture partners or technology transfers, equity participation etc, and secure their support for, and approval of, new business strategies and policies, provided however that the payment for fees for the services rendered by PAG shall be determined in accordance with the compensation clause of this , 2803 & 2088/Mum/03 Assessment years: 1995-96 to 97-98 Page 14 of 16 agreement and shall not, in any manner, be affected either by the success or the failure of a project, strategy or business approach recommended by PAG.

16. Having heard the rival contentions and having perused the material on record, we find that as no evidence has been lead before us to demonstrate and establish that the travel by director’s wife was “wholly and exclusively for the purposes of business of the assessee”, and in the light of Hon’ble Kerala High Court’s full bench decision in the case of Ram Bahadur Thakur Ltd Vs CIT [(2003) 261 ITR 390 (Ker FB)], the action of the authorities below deserves to be confirmed. We, therefore, confirm the stand of the authorities below and decline to interfere in the matter.

17. Ground no. 2 is thus also dismissed.