M/s. Murugappa Management Services Ltd., CHENNAI V. DCIT, CHENNAI

ITA 2992/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4463 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 24-04-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 21-10-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR B NISCHAL
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Business expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI . . . , . . , BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER ./ ITA NO. 2992/MDS/2016 / ASSESSMENT YEAR : 2012-13 M/S. MURUGAPPA MANAGEMENT SERVICES LTD., C/O. M/S. SUBBARAYA AIYAR, PADMANABHAN & RAMAMANI, ADVOCATES, NEW NO.75 (OLD NO.105), DR.RADHAKRISHNAN SALAI, MYLAPORE, CHENNAI 4. PAN: AAACT1164F V. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 4(1), CHENNAI 600 034. ( ! /APPELLANT) ( '# ! /RESPONDENT) ! $ /APPELLANT BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE '# ! $ /RESPONDENT BY : DR.B. NISCHAL, JCIT $ /DATE OF HEARING : 24.04.2017 $ /DATE OF PRONOUNCEMENT : 31.05.2017 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER : THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-8, CHENNAI DATED 22.08.2016 AND PERTAINS TO THE ASSESSMENT YEAR 2012 -13. 2 I.T.A. NO. 2992/MDS/2016 2. SHRI R. VIJAYARAGHAVAN, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY ENGAGED IN THE BUSINESS OF PROVIDING CONSULTANCY SERVICES TO MURUGAPPA GROUP OF COMPANIE S. ACCORDING TO THE LD. COUNSEL, THE MURUGAPPA GROUP O F COMPANIES ENGAGED IN DIVERSIFIED BUSINESS INCLUDING ENGINEERI NG, FINANCIAL SERVICES, ETC. THE GROUP OF COMPANIES CONSISTED OF 9 LISTED COMPANIES AND 14 UNLISTED COMPANIES. THE ASSESSEE C OMPANY HAS TO ACT AS BUSINESS ADVISERS TO GROUP COMPANIES AT V ARIOUS INTERVALS. THE ASSESSEE COMPANY HAS ALSO TO ANALYZE DIFFERENT S ERVICES OF PROFITABILITY, REVIEW OF PROJECT EXPENDITURE, PROPO SALS AND ALSO TO GUIDE THE GROUP IN THE RIGHT BUSINESS DIRECTION. THE ASSE SSEE COMPANY HAS ALSO PROVIDED INPUTS IN ECONOMIC POLICY, PUBLIC FIN ANCE ETC. THE ASSESSEE HAS ALSO TAKE CARE OF THE PAY BILLS OF THE EXECUTIVES, IN ORDER TO CARRY OUT THE BUSINESS OF THE ASSESSEE. THE ASSE SSEE COMPANY HAS PAID RS.1,79,76,640/- TO SHRI B.V. MURUGAPPAN, RS.2,27,24,940/- TO SHRI M.V. SUBBAIHA. THE ASSESSEE HAS ALSO PAID A NOTHER SUM OF RS. 2,18,53,860/- TO SHRI M.V. ALAGAPAN. APART FRO M THESE THREE PERSONS, THE ASSESSEE HAS ALSO PAID RS.25,20,000/- TO ONE SHRI P.V. BHIDE. THE AO FOUND THAT THE CONSULTANT FEE PAID BY THE ASSESSEE WAS DISPROPORTIONATE AMONG VARIOUS PERSONS. THEREFO RE, HE CALLED FOR AN EXPLANATION FROM THE ASSESSEE. THE ASSESSEE EXPL AINED BEFORE THE AO THAT SHRI B.V. MURUGAPPAN, SHRI M.V. SUBBAIH AND SHRI M.V. 3 I.T.A. NO. 2992/MDS/2016 ALAGAPPAN ARE HIGHLY QUALIFIED PERSONS AND THEY HAV E ALSO VAST EXPERIENCE IN PROVIDING ENGINEERING CONSULTANCY SER VICES. MOREOVER, THESE 3 PERSONS WERE WORKED EARLIER IN THE SENIOR P OSITION AND RETIRED FROM SERVICES. SO, TO MAKE USE OF THEIR EXPERIENCE , THE ASSESSEE HAS PAID CONSULTANCY CHARGES AFTER THEIR SUPERANNUATION . AFTER EXAMINING THE EXPLANATIONS OF THE ASSESSEE, THE AO FOUND THAT THE ASSESSEE COMPANY FAILED TO PROVE THAT THEY HAVE AVAILED THE SERVICES FROM THESE 3 PROMOTERS. THEREFORE, THE PAYMENT MADE TO THEM W AS DISALLOWED. THE AO ALSO DISALLOWED RS.59,95,415/- TOWARDS THE HI RE CHARGES ON THE VEHICLES WHICH WAS PROVIDED TO THESE 3 PROMOTER S AND RETIRED FROM SERVICES. REFERRING TO THE PAPER BOOK, THE LD. COU NSEL SUBMITTED THAT THESE 3 PROMOTERS WHO HAVE RETIRED FROM SERVICE HAS PROVIDED SERVICES ON MANAGEMENT CONSULTANCY, BUSINESS, ENGIN EERING SERVICE, SUPPORT SERVICES, ETC. 3. THE ASSESSEE COMPANY HAVING CONSIDERED THE EXPERI ENCE AND EXPERTISE OF THESE 3 PERSONS ENGAGED THEIR SERVICES FOR PROVIDING CONSULTANCY TO OTHER COMPANIES. BUT FOR THESE 3 PER SONS, THE ASSESSEE COMPANY COULD NOT HAVE PROVIDED ANY SERVIC ES OR BUSINESS TO ASSOCIATED CONCERNS. ALL FEES RECEIVED FROM THE OTHER GROUP COMPANIES ARE NOT IN DISPUTE. THE OTHER COMPANIES W OULD NOT HAVE PAID THE MONEY BUT FOR THE SERVICES RENDERED BY THE SE 3 SENIOR EXECUTIVES TO THE RESPECTIVE COMPANIES. HAD THE RE SPECTIVE COMPANY 4 I.T.A. NO. 2992/MDS/2016 HIRED THEM DIRECTLY, THE EXPENDITURE WOULD BE MUCH MORE TO EACH COMPANY. THEREFORE, TO AVOID OVERALL DIFFICULTIES A ND TO REDUCE THE COST OF CONSULTANCY CHARGES, THE ASSESSEE COMPANY E NGAGED ALL THE 3 PERSONS AND PAID CONSULTANCY CHARGES IN PROVIDING C ONSULTANCY AND ADVICE TO ALL THE GROUP COMPANIES. THE LD. COUNSEL FOR THE ASSESSEE HAD PLACED HIS RELIANCE ON THE JUDGMENT OF THE APEX COURT IN CIT VS. DHANRAJGIRJI RAJA NARASINGIRJI [1973] 91 ITR 544 AND ALSO JUDGMENT OF MADRAS HIGH COURT IN CIT VS. NAGESH CINE ENTERPRISES (1998) 150 CTR 435. THE LD. COUNSEL ALSO PLACED HIS RELIANCE I N CIT VS. WALCHAND & CO LTD, 65 ITR 381. 4. REFERRING TO THE JUDGMENTS REFERRED BY THE CIT(A PPEALS), THE LD. COUNSEL SUBMITTED THAT THEY DID NOT APPLY TO TH E FACTS OF THE CASE. 5. REFERRING TO PAGE A8 OF THE PAPER BOOK, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT SHRI M.V. MURUGAPPAN WAS A QUALIFIED CIVIL ENGINEER AND HE WAS THE MANAGING DIRECTOR FROM 1958 TO 1978 IN CECL. HE WAS ALSO THE CHAIRMAN AND MANAGING DIRECT OR IN CUMI. AFTER RETIREMENT FROM SERVICES, THE ASSESSEE COMPAN Y ENGAGED HIM AS SENIOR CONSULTANT. SIMILARLY, SHRI M.V. SUBBIAH JO INED THE COMPANY AS MANAGEMENT TRAINEE IN 1961. HE WAS THE MANAGING DIR ECTOR AND CHAIRMAN OF THE COMPANY FROM 1996 TO OCTOBER 1999. BECAUSE OF HIS 5 I.T.A. NO. 2992/MDS/2016 EXPERTISE AND QUALIFICATION IN INDUSTRIAL ADMINISTR ATION, HE WAS ENGAGED AS CONSULTANT OF THE COMPANY. 6. SHRI M.A. ALAGAPPAN, A MANAGEMENT STUDENT FROM U K JOINED THE COMPANY IN 1961 AS MANAGEMENT TRAINEE. HE BECA ME THE EXECUTIVE CHAIRMAN IN THE YEAR 2002. HE WAS ALSO W ORKED AS THE CHAIRMAN OF MURUGAPPA GROUP. BECAUSE OF THE EDUCATI ONAL QUALIFICATION, EXPERIENCE, HE WAS ENGAGED BY THE AS SESSEE COMPANY FOR PROVIDING SERVICES. SHRI SUBBIAH IN FACT RECEI VED JRD TATA BUSINESS LEADERSHIP AWARD IN 2002 AND NATIONAL HRD AWARD IN 1988. THEREFORE THE AO IS NOT JUSTIFIED IN SAYING THAT THE ASSESSEE HAS NOT PROVED THAT THE 3 INDIVIDUALS HAS OFFERED SERVICE T O THE ASSESSEE. REFERRING TO PAGE A13, A14, THE LD. COUNSEL SUBMITT ED THAT ALL THE 3 PERSONS HAS OFFERED THEIR SERVICES BY PROVIDING ADV ICE IN BUSINESS, CORPORATE AFFAIRS AND ENGINEERING SERVICES. THEREF ORE THE AO IS NOT JUSTIFIED IN DISALLOWING THE CLAIM OF THE ASSESSEE. HIRE CHARGES ARE PAID TO THE VEHICLE WHICH WAS USED BY THE 3 PERSONNEL. THEREFORE THE SAME HAS TO BE ALLOWED AS BUSINESS EXPENDITURE. 7. ON THE CONTRARY, DR. B. NISCHAL, THE LD. DEPARTM ENTAL REPRESENTATIVE SUBMITTED THAT IT IS NOT IN DISPUTE THAT ALL THE THREE CONSULTANTS NAMELY SHRI M.V. MURUGAPPAN, SHRI M.V. SUBBIAH AND SHRI M.A. ALAGAPPAN ARE OF HIGHLY QUALIFIED AND THE Y HAVE LONG 6 I.T.A. NO. 2992/MDS/2016 EXPOSURE TO INDUSTRY AND BUSINESS. THOUGH ALL THE T HREE HAD WORKING EXPERIENCE FOR MORE THAN A DECADE IN MURUGAPPA GROU P OF COMPANIES, THE QUESTION IS WHETHER THE THREE SO CAL LED CONSULTANTS HAS RENDERED ANY SERVICE TO THE ASSESSEE COMPANY. IN THE ABSENCE OF ANY MATERIAL TO SUGGEST THAT ALL THE THREE CONSU LTANTS OFFERED SERVICES TO THE ASSESSEE COMPANY, THE PAYMENT MADE TO THEM CANNOT BE ALLOWED AS EXPENDITURE IN THE HANDS OF THE ASSES SEE COMPANY. IT IS ALSO NOT KNOWN WHETHER THESE THREE INDIVIDUALS A RE CAPABLE FOR ANY MEANINGFUL SERVICE AFTER RETIREMENT. A MERE INFORM AL INTERACTION OR OCCASIONAL VISIT TO THE FACTORY MAY NOT SUBSTITUTE THE ACTUAL RENDERING OF SERVICE BY THE THREE INDIVIDUALS. THEREFORE, THE AO HAS RIGHTLY DISALLOWED THE PAYMENT MADE TO THEM. THE CIT(APPEALS ) AFTER CONSIDERING ALL THE ISSUES RAISED BY THE ASSESSEE, AGREED WITH THE ASSESSING OFFICER. THEREFORE THE PAYMENT MADE TO ALL THE THREE INDIVIDUALS HAS BEEN RIGHTLY DISALLOWED. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSESS EE COMPANY ENGAGED IN THE BUSINESS OF PROVIDING CONSULTANCY SE RVICES TO ITS GROUP COMPANIES. IT IS NOT IN DISPUTE THAT THE GROUP COMP ANY CONSISTS OF 9 LISTED COMPANIES AND 14 UNLISTED COMPANIES. THE BUS INESS OF THE ASSESSEE COMPANY IS ONLY PROVIDING CONSULTANCY SERV ICES. IT IS ALSO NOT IN DISPUTE THAT SHRI M.V. MURUGAPPAN, SHRI M.V. SUBBIAH AND SHRI 7 I.T.A. NO. 2992/MDS/2016 M.A. ALAGAPPAN ARE HIGHLY QUALIFIED AND THEY HAVE V AST EXPERIENCE IN ENGINEERING, BUSINESS AND HUMAN RESOURCES. BUT FOR THESE THREE PEOPLE, THE ASSESSEE COMPANY WOULD NOT HAVE EARNED ANY INCOME IN CONSULTANCY SERVICES. THE AO DISALLOWED THE CLAIM O F THE ASSESSEE ONLY ON THE GROUND THAT THE ASSESSEE COULD NOT PROV E THE SERVICES RENDERED BY THESE THREE INDIVIDUALS TO THE ASSESSEE COMPANY. THE FACT REMAINS IS THAT OTHER THAN THESE 3 INDIVIDUALS , NO OTHER PERSON IS AVAILABLE IN THE COMPANY TO PROVIDE CONSULTANCY SER VICES OTHER THAN SHRI P.V. BHIDE TO WHOM A SUM OF RS.25,20,000/- WAS PAID. THE THREE INDIVIDUALS APPEARS TO HAVE PROVIDED BUSINESS ADVIC E, REVIEW THE PERFORMANCE OF THE VARIOUS BUSINESS OF GROUP COMPAN IES AT PERIODICAL INTERVALS, PROVIDED THE INPUT IN THE AREA OF ECONOM IC POLICY, PUBLIC FINANCE ETC. THEY HAVE ALSO PROVIDED MANAGEMENT CON SULTANCY SERVICES WITH REGARD TO GENERAL ADMINISTRATION, MAR KETING, CORPORATE GOVERNANCE ETC. IN THE FIELD OF HUMAN RESOURCE, TH EY HAVE PROVIDED ADVICE AND FACILITATED RECRUITMENTS OF TRAINEE EXEC UTIVES APART FROM THAT THEY ALSO LOOK AFTER THE PAY ROLL OF EXECUTIVE S OF GROUP COMPANIES. THE ASSESSEE CLAIMS THAT THEY HAVE PROVIDED CONSULTA NCY SERVICES IN THE ENGINEERING FIELD ALSO. IN THE FIELD OF FINANC E, IT APPEARS THEY HAVE PROVIDED ADVICE ON THE ACCOUNTING POLICIES, CORPORA TE FINANCE, BUDGET, RESOURCE MOBILIZATION ETC. THE THREE INDIVIDUALS HA S ALSO PROVIDED PUBLICATION AND MARKETING ADVICE THROUGH MEDIA COVE RAGE. THEY HAVE 8 I.T.A. NO. 2992/MDS/2016 ALSO ADVISED THE GROUP COMPANIES TO ADOPT LATEST ST ATE OF ART TECHNOLOGY IN THE INDUSTRY. 9. FROM THE MATERIAL AVAILABLE ON RECORD, IT APPEARS THE GROUP COMPANY RECEIVED IMD DISTINGUISHED FAMILY BUSINESS A WARD 2001 FROM IMD, SWITZERLAND, CHOLAMANDALAM MS GENERAL INS URANCE WAS THE RECIPIENT OF GOLDEN PEACOCK AWARD AS WINNER OF SPECIAL COMMENDATION FOR EXCELLENCE IN CORPORATE GOVERNAN CE-2014. THIS TRIBUNAL IS OF THE CONSIDERED OPINION BUT FOR THE AD VICE OF THE THREE INDIVIDUALS, THE GROUP COMPANIES COULD NOT HAVE EAR NED THESE AWARDS AND DEVELOPED THEIR BUSINESS. WHEN COMPARED TO THE PROFIT OF THE COMPANY, THE PAYMENT MADE TO THE THREE INDIVIDUALS COMES TO NEARLY 6 TO 7%. IN VIEW OF THE ABOVE FACTUAL SITUATION, T HIS TRIBUNAL IS OF THE CONSIDERED OPINION, THE AO IS NOT JUSTIFIED IN DOUB TING THE SERVICES RENDERED BY THE THREE INDIVIDUALS TO THE ASSESSEE C OMPANY. WHEN THE RECIPIENT GROUP COMPANIES RECEIVED SERVICES ON BEHA LF OF THE ASSESSEE COMPANY THROUGH THE THREE INDIVIDUALS AND PAID THE CHARGES AS CLAIMED BY THE ASSESSEE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT DISALLOWANCE OF THE PAYMENT MADE TO THREE INDI VIDUALS TOWARDS CONSULTANCY FEE IS NOT JUSTIFIED. SIMILARLY, THE I NTEREST PAID ON THE VEHICLE HIRED FOR THE USE OF THE THREE INDIVIDUALS IS ALSO FOR THE BUSINESS PURPOSE. THEREFORE DISALLOWANCE OF RS.59,9 5,415/- IS ALSO NOT JUSTIFIED. IN VIEW OF THE ABOVE, THIS TRIBUNAL IS UNABLE TO HOLD THE 9 I.T.A. NO. 2992/MDS/2016 ORDER OF THE LOWER AUTHORITIES. ACCORDINGLY, THE O RDERS OF THE LOWER AUTHORITIES ARE SET ASIDE AND THE ADDITION MADE BY THE ASSESSING OFFICER TOWARDS CONSULTANCY FEE PAID TO THREE INDIV IDUALS AND THE HIRE CHARGES ON THE VEHICLE ARE DELETED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE STAND S ALLOWED. ORDER PRONOUNCED ON 31 ST MAY, 2017 AT CHENNAI. SD/- SD/- ( . . ) ( . . . ) (D.S. SUNDER SINGH) (N.R.S. GANESA N) /ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, /DATED, THE 31 ST MAY, 2017. JR. /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. ( )/CIT(A) 4. /CIT 5. !' /DR 6. #$ /GF