By TIOL News Service

MUMBAI, JUNE 15, 2016: THE issue is - Whether professional fee paid is allowable even if Director of paying company holds 100% shares in recipient company which did not have any other work except the one rendered to paying company. NO is the answer.

Facts of the case

The assessee before is a company engaged in the business of financing and making investments. Assessing Officer noted that the assessee had paid a sum to a Switzerland based company, PAG for 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. Assessing Officer noted that SKP, 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 but that did not constitute any evidence about the services having been rendered. Assessing Officer concluded that assessee company is helping Shri SKP in siphoning off substantial profits to his overseas bank account. Assessing Officer disallowed the fees for consultancy charges paid to PAG. CIT(A) upheld the disallowance.

Having heard the parties, the ITAT held that,

++ one hundred percent of the shares in the PAG were owned by Shri SKP, who is also a director, and majority shareholder, in the assessee. Whatever evidence the assessee has lead, so far as the rendition of service by the PAG is concerned, refers to the involvement of SKP and inputs by him. There is nothing to indicate, consultancy or advisory work done by any person other than SKP.

++ the work done by PAG did not have any independent existence beyond work done by SKP or, as the documentation frequently refers to him as, Sushil. As a matter of fact almost entire work, for which the PAG is paid, is the work done by SKP. There is no evidence for any independent work done by PAG. Here is a director of the company rendering services to the company in which he is a director and a rank outsider commercial entity, owned by the director, is being paid for the work done by the director. It appears that the foreign trips, during which the work is claimed to have been done, were taken up in the capacity as director of the assessee company, and, yet billing for the work done in the course of trips so undertaken at the cost of the assessee company, has been done in the name of PAG. There is nothing on record to show that these foreign trips were undertaken by SKP at the cost of PAG or in the course of his work as director or owner of PAG. When it comes to claiming the travelling expenses, the assessee travels as director in STPL (i.e. the assessee) to attend the business meetings, yet the assessee claims to have actually met the potential business partner in a different capacity, i.e. as a representative of PAG, and seeks a deduction for fees paid to PAG in respect of the same. The same is the position with respect to almost all the invoices. When SKP was representing the assessee in the meeting with the joint venture partners, there cannot be any question for the payment of the same presence, of the same person, to PAG as well. The description of services rendered in the invoices does not, therefore, meet approval.

++ there is no evidence which suggests that the fees for any assignment was agreed to before any assignment commenced. There is hardly any basis for the billing work done. There seems to a charge of USD 10,000 on every billing point. There is no evidence for any work done by a person other than SKP and the SKP has done this work, during his visits abroad, in the capacity of director in the STPL (i.e. the assessee) - as is clearly discernible from the details of foreign travelling expenses on record. The justification for the impugned payment does not exist as there are no independent services rendered by the assessee. Merely because an income has been taxed in the hands of recipient of an income, does not mean that it is a deductible expenditure in the hands of the person making the payment.

(See 2016-TIOL-1054-ITAT-MUM)