D.C.I.T. CIR - 10,KOL, KOLKATA vs. M/S SINGHA SINGH ROY & ASSOCIATES PVT LTD., KOLKATA

This appeal of the revenue arises out of the order of the Learned CIT(A), XII, Kolkata in Appeal No. 969/XII/Cir-10/09-10 dated 08-08-2012 for the assessment year 2007-08 against the order of assessment framed by the Learned AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

2.1. The brief facts of this issue is that the assessee is engaged in the business of Information Technology Training Business, IT Enabled Services and Contact Centre Business including Health Care BPO activities and software development. The assessee had effected acquisition of Transcription South, Inc. (TSI) as 100% subsidiary company based in United States of America. TSI is also engaged in IT and 1 M/s. Singha Singh Roy & Associates P.Ltd IT Enabled Services including Contact Center, Healthcare BPO activities and software development. The assessee explained that the main objective of this acquisition was to expand and consolidate the client base of the asesssee in USA and to encahs on the advantages of outsourcing through saving of cost and the benefits of synergy. The assessee stated that TSI has gradually been developed as the marketing hub of the assessee. The assessee also statd that the erstwhile GM Operations of assessee at India has been permanently posted at TSI office as its Chief Operating Officer (COO) who also looks after the operations and marketing initiatives of the group. The assesee’s Senior Manager – Marketing is also placed at TSI office on L1 visa as the Country Head – USA to look after business development for the group. This marketing initiative of TSI has helped the assessee to bag many new projects. Incidentally, this apart, the assessee has a co-location in USA and the Contact Center in Navi Mumbai and the co-location is connected through a 2 MBPS IPLC circuit for voice and data transfer required for functioning of the Contact Center. This co-location is also maintained with the help of technical support from TSI. TSI acts as a representative office of the assessee in USA providing marketing, technical and other support as required from time to time. The assessee had invested Rs. 320.58 lacs for acquiring TSI during the year under appeal. In terms of requirement of its subsidiary, the assessee had during the asst year under appeal, advanced interest free loan of Rs. 344.14 lacs to TSI. The assessee had availed bank loans and the same had increased by Rs. 343.64 lacs during the year under appeal while non-interest bearing unsecured loans from its shareholders and directors had increased by Rs. 219.59 lacs. The assessee paid interest to banks amounting to Rs. 1,50,63,000/- and the Learned AO sought to disallow Rs. 99,99,780/- by applying average rate of 10.38% on the investments made in subsidiary company.

2.2. On first appeal, the Learned CITA found that the assessee had earned substantial income from its wholly owned subsidiary companies in the subsequent years and accordingly the assessee justified the commercial expediency of advancing the monies

2 M/s. Singha Singh Roy & Associates P.Ltd to its wholly owned subsidiary company. The Learned CITA placed reliance on the decision of the Hon’ble Apex Court in the case of S.A.Builders Ltd vs CIT reported in 288 ITR 1 (SC) and deleted the disallowance of interest. Aggrieved, the revenue is in appeal before us on the following ground:- “1. Whether ld.CIT(A)-XII, Kolkata was justified in deciding the issue of Commercial expediency of loan given to sister concern without giving reason in his order?”

2.3. The Learned DR argued that the subsidiary company is in foreign location which is accessible to easy loans at cheap cost. While this is so, why should the assessee herein paying huge interest in India to banks should divert its funds to its subsidiary company. The business expediency herein is not understandable. In response to this, the Learned AR argued that the investments and advances to subsidiary company are strategic investments and commercial expediency is proved beyond doubt. He further argued that the memorandum of association allows the assessee to do investment activity and argued that through the subsidiary company, the huge businesses were obtained by the assessee and also relied on the co-ordinate bench decision of this tribunal in the case of EIH Ltd vs CIT in / Kol / 2006 dated 11.9.2015 in support of his contentions.

2.4. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. The facts stated hereinabove remain undisputed are not reiterated for the sake of brevity. We find that the Learned AO had disallowed the interest payments to banks only on the sole ground that interest free funds were advanced to subsidiary company by the assessee. He had not brought on record the nexus between the borrowed funds and the amounts advanced to subsidiary company which is one of the main pre-requisite before resorting to disallowance of interest. We also find from the facts that the assessee is having both interest bearing and interest free funds at its disposal and had advanced the monies to subsidiary company from the bank account where own and borrowed funds are 3 M/s. Singha Singh Roy & Associates P.Ltd inextricably mixed. We also find that the advances made to wholly owned subsidiary company through which huge businesses were obtained by the assessee in subsequent years cannot be swept under the carpet as they remain undisputed. We also find that the assessee had deputed its employees in TSI who are working as Chief Operating Officer and Senior Manager Marketing to take care of the new business opportunities and develop the business. These efforts have yielded fruits to the assessee in the form of new businesses and expanded global presence in USA. This itself goes to prove that the business interests of the assessee beyond doubt. With regard to the arguments of the Learned DR that the subsidiary company is accessible to cheap cost of funding in USA is of no relevance as it is well settled that once it is established that there is nexus between expenditure and purpose of business, revenue cannot justifiably claim to put itself in arm-chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case.

2.4.1. We also find that the issue before us is squarely covered by the recent decision of the Hon’ble Apex Court in the case of Hero Cycles (P) Ltd vs CIT reported in (2015) 63 taxmann.com 308 (SC) vide order dated 5.11.2015, it was held :

4 M/s. Singha Singh Roy & Associates P.Ltd sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(1)(iii) of the Act. In Madhav Prasad's case [1979 (118) ITR 200 (SC)], the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named, it was held by this court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency.

5 M/s. Singha Singh Roy & Associates P.Ltd additional margin to M/s. Hero Fibres Limited to meet the working capital for meeting any cash losses.

In view of the aforesaid facts and circumstances and the judicial precedents on the impugned issue, we hold that the advances were made by the assessee to its wholly owned subsidiary company during the course of its business and is a strategic investment and as a measure of commercial expediency to protect its business interests. Accordingly we don’t find any infirmity in the order of the Learned CIT(A). Accordingly, the ground no. 1 raised by the revenue is dismissed.

3.1. The brief facts of this issue is that the assessee had written off in its books a sum of Rs. 76,000/- towards expenses relating to TIRM and in this regard had stated in its notes on accounts to financial statements as under:-

6 M/s. Singha Singh Roy & Associates P.Ltd

Deferred Revenue Expenditure

TIRM – Expense relating to Technical Information Reference Material has been consistently treated as Deferred Revenue Expenditure on the basis of the tenure of the Licensed Agreement with NIIT. The “License Agreement” with NIIT having expired during the year with no further renewal, the balance amount of Rs 76,000/- on account of TIRM lying as Deferred Revenue Expenditure has fully been charged to revenue.

The said sum was also claimed as deduction in the return by the assessee. The Learned AO treated the same as capital in nature and disallowed the same which was deleted by the Learned CIT(A). Aggrieved, the revenue is in appeal before us on the following ground:- “2. Whether the decision ld. CIT(A)-XII, Kolkata w.r.t Ground 10 was not inconsistent with the decision of CIT(A) in Appeal No. 291/XII/Cir-10/08-09 dated 03-02-2012 (AY 2006-07)? “ 3.2. The Learned DR vehemently supported the order of the Learned AO. In response to this, the Learned AR stated that the said expenditure has been allowed by the revenue in the first two years and the license is for a period of three years with NIIT and hence prayed for non-interference in the order of the Learned CIT(A).

3.3. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. The facts stated hereinabove remain undisputed are not reiterated herein for the sake of brevity. We find that this issue has been allowed by the revenue in the earlier two assessment years with regard to the deferred revenue expenditure incurred towards TIRM based on license agreement entered into by the assessee with NIIT and in the asst year under appeal, the said agreement having expired, the assessee chose to write off the unabsorbed deferred revenue expenditure in its books. Hence we find that there is no mistake in the claim of the assessee. Accordingly, the ground no.2 raised by the revenue is dismissed.

7 M/s. Singha Singh Roy & Associates P.Ltd

THIS ORDER IS PRONOUNCED IN OPEN COURT ON 20 -01-2016