ACIT RG 9(1), MUMBAI v. M/s. AVENDUS ADVISORS P. LTD, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A MUMBAI BEFORE SHRI R.S.SYAL AM AND SMT.ASHA VIJAYARAGHAVA N JM ITA NOS.5860/MUM/2008 & 2712/MUM/2009 ASST.YEARS 2005-2006 & 2006-2007 THE ADDL.COMMISSIONER OF INCOME-TAX RANGE 9(1) MUMBAI. VS. M/S.AVENDUS ADVISORS PRIVATE LIMITED IL & FS FINANCIAL CENTRE B QUADRANT 5 TH FLOOR BKC BNDRA (EAST) MUMBAI 400 051. PAN : AABCC2404Q. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SRAVAN KUMAR RESPONDENT BY : SHRI F.V.IRANI O R D E R PER R.S.SYAL AM : THESE TWO APPEALS BY THE REVENUE RELATE TO THE ASSE SSMENT YEARS 2005-2006 AND 2006-2007. SINCE SOME OF THE ISSUES RAISED IN THESE APPEALS ARE COMMON WE ARE THEREFORE PROCEEDING TO DISPOSE THEM OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. ASSESSMENT YEAR 2005-2006 2. FIRST GROUND IS AGAINST THE DELETION OF DISALLOW ANCE OF REFERRAL FEE OF RS.43 75 503 BY TREATING THE SAME AS REVENUE EXPEND ITURE. BRIEFLY STATED THE FACTS OF THIS GROUND ARE THAT THE ASSESSEE AT THE MATERI AL TIME WAS ENGAGED IN THE BUSINESS OF MANAGEMENT CONSULTANCY INVESTMENT BANK ER ADVISORY SERVICES FOR MERGER AND AMALGAMATION ETC. IN THE EXPENSES DEBITE D UNDER THE HEAD `LEGAL AND PROFESSIONAL FEES AMOUNTING TO RS.53 00 844 THE A SSESSEE HAD MADE PAYMENT OF RS.41 24 662 AS REFERRAL FEES TO VARIOUS PERSONS AN D RS.2 50 841 AS CONSULTANCY FEES TO MR.TADHG CROWLEY. ON BEING CALLED UPON TO E STABLISH THE JUSTIFICATION OF THIS DEDUCTION THE ASSESSEE STATED THAT IT HAD ENT ERED INTO AGREEMENT WITH CERTAIN PARTIES TO THE EFFECT THAT ON THEIR INTRODUCING A CLIENT THE ASSESSEE WOULD PAY THEM ITA NOS. 5860/M/08 & 2712 /M/09 M/S.AVENDUS ADVISORS PRIVATE LIMITED. 2 FEE AT THE RATE OF 10%. THE ASSESSING OFFICER COND UCTED INQUIRIES U/S.133(6) IN RESPECT OF SOME OF THE PARTIES WHICH REVEALED THA T THEY WERE PROVIDING SERVICES INVOLVING GENERATION OF BUSINESS LEAD INITIAL INTE RACTION WITH THE CLIENTS UNDERSTANDING ITS FUNDING REQUIREMENTS AND FORWARDI NG LEADS TO THE ASSESSEE- COMPANY. THE AO NOTICED THAT THESE PARTIES PROVIDE D INITIAL GROUNDWORK TO THE ASSESSEE-COMPANY FOR TAKING A DECISION. IN THIS BAC KDROP OF FACTS THE ASSESSING OFFICER HELD THAT THE ASSESSEE AVAILED THESE SERVIC ES AND GOT THE BENEFIT OF ENDURING NATURE AND HENCE THE PAYMENT WAS NOT DEDUCTIBLE. AS REGARDS SUM OF RS.2.50 LAKHS THE ASSESSEE STATED THAT IT HAD ENTERED INTO AGREEM ENT WITH MR.TADHG CROWLEY FOR PROVIDING SERVICES IN RESPECT OF SHARED SERVICE CEN TERS IN IRELAND. THE ASSESSING OFFICER TOOK BOTH THE AMOUNTS VIZ. REFERRAL FEES OF RS.41.24 LAKHS AND CONSULTANCY FEES OF RS.2.50 LAKHS AS CAPITAL EXPE NDITURE AND MADE ADDITION FOR THE SAME. THE LEARNED CIT(A) HOWEVER DELETED THE ADDITION. 3. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE RELEVANT MATERIAL ON RECORD IT IS AMPLY BORNE OUT FROM THE ASSESSMENT OR DER THAT THE ASSESSEE PAID COMMISSION AT THE RATE OF 10% CALLED AS REFERRAL F EE TO VARIOUS PARTIES WHO INTRODUCED CLIENTS TO THE ASSESSEE. THIS FACT WAS A LSO CONFIRMED BY THESE PARTIES DIRECTLY TO THE AO IN RESPONSE TO INQUIRY U/S 133. INSOFAR AS PAYMENT OF RS.2.50 LAKHS IS CONCERNED IT WAS IN THE NATURE OF PAYING 50% OF THE FEES RECEIVED BY THE ASSESSEE TO MR.TADHG CROWLEY FOR RENDERING OF SERVI CES. IT HAS NOT BEEN FOUND BY THE AO THAT THE ASSESSEE DID NOT PAY THIS MUCH AMOU NT NOR ANY SERVICES WERE PROVIDED BY THIS PARTY. THESE FACTS PROVE THAT THE PAYMENTS WERE MADE BY THE ASSESSEE FOR SOLICITING CLIENTS FROM WHOM BUSINES S INCOME WAS EARNED. IT IS ONLY IN THE NATURE OF COMMISSION PAID TO VARIOUS PARTIES FOR INTRODUCING CLIENTS THOUGH REFERRED TO AS REFERRAL FEES OR CONSULTANCY CHARGES . A CHART HAS BEEN DRAWN ON PAGE 2 OF THE IMPUGNED ORDER GIVING PARTY-WISE DETA IL OF THE AMOUNT REALIZED FROM CLIENTS VIS--VIS REFERRAL FEES OR CONSULTANCY CHA RGES PAID BY THE ASSESSEE TO THE INTERMEDIARIES. WE ARE UNABLE TO APPRECIATE AS TO HOW THIS PAYMENT CAN BE ITA NOS. 5860/M/08 & 2712 /M/09 M/S.AVENDUS ADVISORS PRIVATE LIMITED. 3 CONSIDERED AS CAPITAL EXPENDITURE. THE LEARNED CIT( A) HAS RIGHTLY RELIED ON THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF EMPIRE JUTE LTD. VS. CIT [124 ITR 1 (SC)] IN WHICH IT HAS BEEN LAID DOWN THAT IF THE PAYMENT IS MADE FOR OBTAINING ADVANTAGE WHICH CONSISTS MERELY IN FACILI TATING THE ASSESSEES TRADING OPERATIONS MORE EFFICIENTLY OR MORE PROFITABLY WHIL E LEAVING THE FIXED CAPITAL UNTOUCHED THE EXPENDITURE WOULD BE ON REVENUE ACCO UNT EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUTURE. IN O UR CONSIDERED OPINION THE LEARNED CIT(A) WAS JUSTIFIED IN DELETING THE ADDITI ON FOR THE REASON THAT THE PAYMENT MADE BY THE ASSESSEE SIMPLY FACILITATED IT TO CARRY ON THE BUSINESS MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHE D. THIS GROUND IS NOT ALLOWED. 4. GROUND NO.2 IS AGAINST THE DELETION OF DISALLOWA NCE OF RS.75 257 BY TREATING THE WEBSITE DEVELOPMENT EXPENSES OF RS.1 88 142 AS REVENUE EXPENDITURE. THE FACTS APROPOS THIS GROUND ARE THAT THE ASSESSEE CLA IMED DEDUCTION OF RS.1 88 142 TOWARDS WEBSITE DEVELOPMENT EXPENSES. ON BEING CALL ED UPON TO PROVE THE JUSTIFICATION FOR THE DEDUCTION THE ASSESSEE STATE D THAT THIS SUM WAS PAID IN THE YEAR ON THE MAINTENANCE OF WEBSITE AND THE PAYMENT WAS M ADE TO VENDORS BASICALLY FOR UPGRADATION OF WEBSITE AND THERE WAS NO PERMANENT B ENEFIT ACCRUING TO THE ASSESSEE. THE ASSESSING OFFICER TREATED THIS PAYMEN T AS CAPITAL ASSET IN THE NATURE OF SOFTWARE AND GRANTED DEPRECIATION AT 60% THEREB Y MAKING ADDITION FOR RS.75 257. THE LEARNED CIT(A) HOWEVER DELETED THIS ADDITION. 5. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD IT IS SEEN THAT THE SAID EXPENDITURE WAS INC URRED BY THE ASSESSEE ON THE UPGRADATION OF THE WEBSITE AND HAS NO RELATION WITH COMPUTER SOFTWARE. THE HONBLE DELHI HIGH COURT IN CIT VS. INDIAN VISIT.COM (P) LTD. [(2008) 219 CTR (DEL.) 603] HAS HELD THAT EXPENDITURE ON DEVELOPMENT OF WEBSITE IS A REVENUE EXPENDITURE EVEN THOUGH IT RESULTS INTO ENDURING BE NEFIT. NO CONTRARY JUDGEMENT HAS BEEN BROUGHT TO OUR NOTICE ON BEHALF OF THE REV ENUE. IT IS FURTHER RELEVANT TO ITA NOS. 5860/M/08 & 2712 /M/09 M/S.AVENDUS ADVISORS PRIVATE LIMITED. 4 NOTE THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS NOT IN THE NATURE OF INITIAL DEVELOPMENT OF WEBSITE BUT ONLY ITS UPGRADATION. RESPECTFULLY FOLLOWING THE PRECEDENT WE UPHOLD THE IMPUGNED ORDER ON THIS ISSU E. 6. THE LAST EFFECTIVE GROUND IS AGAINST THE DELETIO N OF ADDITION MADE BY THE A.O. ON ACCOUNT OF EXCHANGE FLUCTUATION LOSS OF RS.22 18 4. THE ASSESSEE DEBITED A SUM OF RS.5 53 070 IN THE PROFIT AND LOSS ACCOUNT ON F OREIGN EXCHANGE FLUCTUATION LOSS. ON BEING CALLED UPON TO EXPLAIN AS TO WHY THIS LOSS SHOULD BE ALLOWED THE ASSESSEE SUBMITTED THAT LOSS OF RS.5 30 285 RELATED TO THE T RANSACTIONS SETTLED DURING THE YEAR BY WHICH THE ASSESSEE HAD BILLED TO THE CLIENTS TOW ARDS ADVISORY / CONSULTANCY FEES ON A SPECIFIC DATA AND RECORDED THE TRANSACTION ON THAT SPECIFIC DAY AND AS PER ACTUAL AMOUNT RECEIVED FROM THE CLIENTS THERE WAS DIFFER ENCE BETWEEN THE VALUE RECORDED IN THE BOOKS AND THE AMOUNT REALIZED IN THE BANK W HICH WAS CONSIDERED AS EXCHANGE FLUCTUATION GAIN / LOSS. AS REGARDS THE AM OUNT OF RS.22 784 IT WAS STATED : THE BALANCE LOSS OF RS.22 784 IS WITH REGARD TO RESTATEMENT OF ASSETS / LIABILITIES OTHER THAN CAPITAL ACCOUNTS AT THE YEAR END. THE A SSESSING OFFICER GOT CONVINCED WITH THE DEDUCTION OF LOSS TO THE TUNE OF RS.5.30 L AKHS. HOWEVER ADDITION OF RS.22 784 WAS MADE BY TREATING IT AS CONTINGENT LIA BILITY. THE LEARNED CIT(A) OVERTURNED THE IMPUGNED ORDER ON THIS SCORE AND ORD ERED FOR THE DELETION OF ADDITION. 7. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD IT IS SEEN THAT THE LOSS OF RS.22 784 WAS CL AIMED AS DEDUCTION WITH REGARD TO RESTATEMENT OF ASSETS / LIABILITIES OTHER THAN CAPI TAL ACCOUNTS. THE LEARNED A.R. EXPLAINED THAT THE LOSS FROM THE REALIZATION MADE D URING THE YEAR AMOUNTED TO RS.5.30 LAKHS BUT THE AMOUNT OF RS.22 784 REPRESENT ED THE LOSS IN RESPECT OF RECEIVABLES FROM CLIENTS AT THE END OF THE YEAR. T HIS LOSS WAS BOOKED ON THE BASIS OF DIFFERENCE BETWEEN THE RATE AT WHICH CONSULTANCY SERVICES WERE RECORDED AT THE TIME OF ISSUANCE OF INVOICES AND THE RATE OF FOREIG N CURRENCY AT THE END OF THE YEAR. ITA NOS. 5860/M/08 & 2712 /M/09 M/S.AVENDUS ADVISORS PRIVATE LIMITED. 5 THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA P. LTD. [(2009) 312 ITR 254 (SC)] HAS HELD THAT ADDITIONAL LIABILITY ARISING OUT OF FLUCTUATION IN THE RATE OF EXCHANGE IN RESPECT OF T RANSACTIONS FOR REVENUE PURPOSES IS ALLOWABLE AS DEDUCTION. IN OUR CONSIDERED OPINION THIS GROUND IS SQUARELY COVERED BY THE ABOVE NOTED SUPREME COURT JUDGEMENT. WE THE REFORE APPROVE THE VIEW TAKEN BY THE LEARNED CIT(A). THIS GROUND FAILS. ASSESSMENT YEAR 2006-2007 8. THE ONLY GROUND IN THIS APPEAL IS AGAINST THE DE LETION OF ADDITION OF REFERRAL FEE OF RS.89 25 304 BY TREATING THE SAME AS REVENUE EXPENDITURE. BOTH THE SIDES ARE IN AGREEMENT THAT THE FACTS AND CIRCUMSTANCES OF TH IS GROUND ARE MUTATIS MUTANDIS SIMILAR TO THOSE OF ASSESSMENT YEAR 2005-2006. IN V IEW OF OUR DECISION TAKEN IN THE APPEAL FOR EARLIER YEAR WHICH HAS BEEN DISCUSSED ABOVE DISMISSING SUCH GROUND OF THE REVENUE WE UPHOLD THE IMPUGNED ORDER FOR THIS YEAR AS WELL ON THIS ISSUE. 9. IN THE RESULT BOTH THE APPEALS ARE DISMISSED. ORDER PRONOUNCED ON THIS 9 TH DAY OF FEBRUARY 2011. SD/- SD/- (ASHA VIJAYARAGHAVAN) (R.S.SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI : 9 TH FEBRUARY 2011. DEVDAS* ITA NOS. 5860/M/08 & 2712 /M/09 M/S.AVENDUS ADVISORS PRIVATE LIMITED. 6 COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT CONCERNED 4. THE CIT(A) IX MUMBAI. 5. THE DR/ITAT MUMBAI. 6. GUARD FILE. TRUE COPY. BY ORDER ASSISTANT REGISTRAR ITAT MUMBAI.