Supervisory fees paid to parent company in terms of the agreement allowed by ITAT

Recently ITAT in matter of ACIT vs M/s. Dong Woo Surface Tech India Pvt. Ltd, has opined that Supervisory fees paid to parent company in terms of the agreement. Further the court added that Assessing Officer cannot sit in the armchair of businessman and decide whether particular expenditure is required to be incurred or not. It is also an admitted legal position that the Assessing Officer cannot question rational and necessity of incurring any particular expenditure. What is required to be seen is whether particular expenditure is incurred wholly and exclusively for the purpose of business of the assessee and further such expenditure is supported by necessary evidences.

Facts of the Case

• The assessee company is engaged in the business of manufacturing, supply and installation of industrial furnaces and related services. The parent company of the assessee is in possession of vital techniques, processes concerning heat treatment, coating, furnace of metal, sale and services to customers. The said technology was transferred to the assessee company as know-how. The assessee company carried out the process under the supervision of parent company. The parent company renders supervisory services to the assessee by dispatching expatriates to India for carrying out work for which the assessee company has agreed to pay supervisory and managerial fees vide agreement. The scope of supervisory services as per agreement has been defined as per which parent company shall provide necessary manpower support to enable inspection, testing of main and associated equipments in tune with latest approved national and international standards and code of practice. The assessee has paid supervisory fees to its parent company in terms of agreement.
• During the course of assessment proceedings, the Assessing Officer called upon the assessee to justify payment of supervisory fees to its parent company with necessary The assessee in response has filed necessary evidences, including agreement entered and claimed that it has paid supervisory fees to its parent company for rendering various services including dispatching its employees to factory site in rendering technical know-how for manufacture and maintenance of furnaces machine and machine parts.
• The Assessing Officer, however was not convinced with explanation furnished by the assessee and according to him, except copies of invoices and agreement assessee has not able to file any other evidences to justify payment of supervisory fees to its parent company for rendering services.
• The Assessing Officer further noted that scope of work specified in agreement between parties is general in nature and the assessee has not furnished any evidence to prove kind of services received from its parent company to justify payment of supervisory fees.
• The Assessing Officer has discussed the issue at length in light of transactions between two related parties and opined that the assessee has by no means been able to provide any evidence, whatsoever to prove that such services as being mentioned in the agreement was received. Therefore, the Assessing Officer opined that it is only a device adopted by the assessee and its parent company to shift profit from one tax territory to another tax territory without any actual business expediency. Hence, the Assessing Officer disallowed entire payment of supervisory fees paid to its parent company and added back to the total income.
• Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT (A).
• The learned CIT(A), after considering relevant submissions of the assessee and also taken note of various reasons given by the Assessing Officer to disallow supervisory fees has opined that the assessee has provided various details including copies of travel orders, visa and other supporting bills in respect of Korean expatriates who had come and rendered services in India. The assessee had also furnished extracts of e-mail communication with respect to work instructions and draft plans made during the relevant period. The assessee had also furnished copy of agreement entered into with its parent company for supervisory services to be rendered by them.
• The learned CIT(A) further noted that the assessee had also tested its transactions with Associated Enterprises by adopting Transactional Net Margin method, as per which transactions of the assessee with its AEs are at arm’s length price. Therefore, the learned CIT(A) opined that the assessee being in the business of manufacturing and sale of machines and machine parts has carried out process concerning heat treatment, coating furnace of metal and such process had been carried out with assistance and technological support provided by parent company M/s. Dong Woo HST Co. Ltd. Hence, the learned CIT(A) opined that expenditure incurred under the head supervisory charges and paid to its parent company is supported by necessary evidences and accordingly, deleted additions made by the Assessing Officer.
• The learned CIT(A) has also taken note of fact that the assessee has remitted supervisory fees after deducting necessary withholding tax as per law.
• Aggrieved by the order of learned CIT(A), the Revenue is in appeal before us.

Contention of Revenue

• The learned DR submitted that the learned CIT(A) has erred in deleting supervisory fees paid by the assessee to its parent company based on fresh evidences submitted for the first time during appellate proceedings without giving any opportunity to the Assessing Officer in violation of Rule 46A of Income Tax Rules, 1962.
• The learned DR further submitted that the learned CIT(A) has failed to appreciate fact that the Assessing Officer had disallowed supervisory fees u/s.37 of the Income Tax Act, 1961, for lack of genuineness and commercial expediency, whereas the learned CIT(A) has deleted additions made by the Assessing Officer on the ground that necessary TDS has been deducted and thus, same cannot be disallowed u/s.40(a)(i) of the Act, without appreciating fact that once a particular expenditure is considered to be not allowable u/s.37 of the Act, then other formalities of non-deduction of TDS and consequent disallowances is academic in nature.

Judgment

• We have gone through reasons given by the Assessing Officer in light of various evidences filed by the assessee including agreement between parties and we do not ourselves subscribe to reasons given by the Assessing Officer for the simple reason that it is well settled principle of law that the Assessing Officer cannot sit in the armchair of businessman and decide whether particular expenditure is required to be incurred or not.
• It is also an admitted legal position that the Assessing Officer cannot question rational and necessity of incurring any particular expenditure. What is required to be seen is whether particular expenditure is incurred wholly and exclusively for the purpose of business of the assessee and further such expenditure is supported by necessary evidences. In this case, the assessee has filed all possible evidences including agreement between parties to prove genuineness of expenditure incurred for supervisory services. The assessee had also furnished necessary supporting evidences including travel documents of expatriates, who visited India for rendering services. Therefore, we are of the considered view that the Assessing Officer was erred in disallowing expenditure incurred by the assessee for payment made to its parent company for rendering supervisory services.