DCIT, Circle-3(1), Hyd, Hyderabad V. Regus Business Centre (Hyderabad) Pvt Ltd., Hyd, Hyderabad

ITA 501/HYD/2015

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6220 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 9 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-02-2017
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 23-11-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 01-05-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Double taxation relief; Commercial expediency
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B (SMC), HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 501/HYD/2015 ASSESSMENT YEAR: 2011-12 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1), HYDERABAD VS M/S. REGUS BUSINESS CENTRE (HYDERABAD) PVT. LTD., HYDERABAD [PAN: AADCR2556C] (APPELLANT) (RESPONDENT) FOR REVENUE : SHRI K.J. RAO, DR FOR ASSESSEE : SHRI K.R. VASUDEVAN, AR DATE OF HEARING : 31-01-2017 DATE OF PRONOUNCEMENT : 10-02-2017 O R D E R THIS IS AN APPEAL BY REVENUE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-3, HYDERABAD, DATED 06-02-2015 FOR THE AY. 2011-12. THE ISSUE IN THIS A PPEAL IS ON THE ALLOWANCE OF MANAGEMENT FEE PAID TO TWO ASSOCIATE CONC ERNS OF RS. 46,09,454/-. 2. BRIEFLY STATED, IN THE SCRUTINY ASSESSMENT COMPLETED , ASSESSING OFFICER (AO) DISALLOWED INTER ALIA THE MANAGEMENT FEE PAID TO TWO ASSOCIATE CONCERNS REGUS ASIA PACIFIC MANAGEMENT LTD., - RS. 22,20,767/- AND REGUS SERVICE CENTRE PHIL LIPINES BV RS. 23,88,687/-, TOTALING TO RS. 46,09,455/-. IT WAS THE I.T.A. NO. 501/HYD/2015 M/S. REGUS BUSINESS CENTRE (HYDERABAD) PVT. LTD., :- 2 - : SUBMISSIONS OF ASSESSEE THAT REGUS WAS A LARGE MULTIN ATIONAL GROUP SPREAD ALL OVER THE WORLD, THAT IN ORDER TO ACHIE VE ITS BUSINESS GOALS, IT HAD BEEN CONSIDERED NECESSARY TO H AVE COMMON RESOURCES TO MANAGE AND CONTROL THE GLOBAL OPERATIONS AND TO DECIDE BUSINESS STRATEGIES FOR THE ENTIRE GROUP, THAT WI TH THIS IN MIND, REGUS GROUP WAS MAINTAINING CERTAIN RESOURCES W HICH PROVIDE COMMON SERVICES TO THE ENTIRE GROUP, THAT THE TOTAL COST FOR THESE RESOURCES WERE FINALLY ALLOCATED TO ALL COMPANIE S IN THE GROUP AND THE MANAGEMENT FEES HAD BEEN PAID TO REGUS ASIA PA CIFIC MANAGEMENT LTD., FOR THIS PURPOSE. 2.1. ASSESSEE ALSO SUBMITS THAT REGUS SERVICE CENTRE, PHILIPPINES B.V.(RSC) WAS ONE OF THE GROUP COMPANIES DULY LICENS ED TO OPERATE THE GROUPS REGIONAL OPERATING HEAD QUARTERS IN THE PHI LIPPINES AND PAYMENT OF MANAGEMENT FEES HAD BEEN MADE FOR SERVICES PROVIDED TO ASSESSEE RELATING TO BILLING SUPPORT, DEBT MANAGEMEN T AND COLLECTION SERVICES, ACCOUNTING SUPPORT, INFORMATION AN D TECHNICAL ASSISTANCE, CONSULTANCY ON DTAA AND OTHER SERVICES. 2.2. AO HELD THAT ASSESSEE HAD FAILED TO SUBSTANTIATE T HE EXPENDITURE CLAIMED TOWARDS MANAGEMENT FEES, THAT ASSESS EE HAD NOT ESTABLISHED THE NEXUS BETWEEN THE MANAGEMENT FEES A ND ITS BUSINESS ACTIVITIES, THAT ASSESSEE HAD NOT DEMONSTRATED THA T THE MANAGEMENT FEE CHARGE WAS COMMENSURATE WITH THE RELEVA NT BENEFITS FOR THE SERVICES OBTAINED, THAT THE MERE EXISTENC E OF SERVICE AGREEMENTS OR INVOICE WAS NOT SUFFICIENT TO JUSTIFY THE P AYMENT, THAT NEITHER THE AGREEMENT NOR THE INVOICE DEMONSTRATED TH E SERVICES ACTUALLY RENDERED. THE AO THEREFORE DISALLO WED THE SUM OF RS. 22,20,767/- PAID TO REGUS ASIA PACIFIC MANAGEMEN T LTD., RS. I.T.A. NO. 501/HYD/2015 M/S. REGUS BUSINESS CENTRE (HYDERABAD) PVT. LTD., :- 3 - : 23,88,687/- PAID TO REGUS SERVICE CENTRE PHILIPPINES B.V., AGGREGATING TO RS. 46,09,454/-. 3. BEFORE THE CIT(A) ASSESSEE WHILE SUBMITTING THE SER VICE AGREEMENTS AND BUSINESS MODEL RELIED ON THE ORDER OF ITAT IN THE CASE OF REGUS BUSINESS CENTRE (NAGPUR) PVT. LTD., IN I TA NO. 6424/MUM/2012, DT. 10-09-2014. 4. LD.CIT(A) AFTER ANALYZING THE SERVICE AGREEMENT AN D ORDER OF THE ITAT HAS DELETED THE ADDITION MADE BY THE AO STATING AS UNDER: 7.5 IN THE DECISION CITED ABOVE, THE ASSESSING OFF ICER HAD DISALLOWED EXPENSES OF RS.23,21,589 PAID AS MANAGEMENT FEES ON THE GROUND THAT THE ASSESSEE HAD FAILED TO ADDUCE ANY SUPPORTING EV IDENCE. ON APPEAL, THE CIT(A) NOTED THAT THE ASSESSEE HAD DEBITED THIS AMOUNT IN RESPECT OF COSTS CHARGED BY INTERNATIONAL HEADQUARTERS AND REG IONAL OFFICE AT ASIA PACIFIC LEVEL WHICH WAS BINDING ON THE APPELLANT IN ACCORDANCE WITH AN AGREEMENT DATED 01.01.2008, THAT THE APPELLANT HAD ALSO DEDUCTED TAX ON THE MANAGEMENT FEES. THE CIT(A) HELD THAT THE ASSES SEE HAD INCURRED SUCH COST IN VIEW OF THE AGREEMENT WITH ITS OVERSEA S OFFICES FROM TIME TO TIME AND THEREFORE, ALLOWED THE APPELLANT'S CLAIM H OLDING THAT THE EXPENSES WERE INCURRED FOR THE ASSESSEE'S LIABILITY FOR MEETING ITS BUSINESS ACTIVITY AND COMMERCIAL EXPEDIENCY. IN ITS ORDER, T HE ITAT UPHELD THE ORDER OF THE CIT(A). 7.6 IN THE LIGHT OF THE OBSERVATIONS IN THE ITAT OR DER IN THE CASE OF THE SISTER CONCERN OF THE APPELLANT, THE APPELLANT WAS DIRECTED TO FURNISH A COPY OF THE AGREEMENT DATED 01.01.2008 REFERRED TO IN THE ABOVE DECISION, IN ORDER TO ASCERTAIN WHETHER THE NATURE OF SERVICE S FOR WHICH MANAGEMENT FEES HAD BEEN PAID WAS SIMILAR TO THOSE FOR WHICH S UCH FEES HAD BEEN PAID BY THE APPELLANT. ANNEXURE-I TO THE AGREEMENT DATED 01.01.2008 BETWEEN REGUS AUSTRALIA MANAGEMENT PTY LTD AND REGU S BUSINESS CENTRE NAGPUR PVT LTD LISTS THE FOLLOWING SERVICES: 'THIS AGREEMENT COVERS ALL INTERCOMPANY SERVICES AS APPROPRIATE AND MAY INCLUDE, BUT IS NOT LIMITED TO, THE FOLLOWING: I.T.A. NO. 501/HYD/2015 M/S. REGUS BUSINESS CENTRE (HYDERABAD) PVT. LTD., :- 4 - : 1. INFORMATION TECHNOLOGY SERVICES PROVIDING INFORMATION REGARDING NEW INTRANET TECH NOLOGIES. TECHNICAL ASSISTANCE WITH SET-UP AND SOFTWARE INS TALLATIONS. HELPDESK SUPPORT ON TECHNICAL ISSUES. 2. MARKETING AND PUBLIC RELATIONS SERVICES. PUBLICISE/PROVIDE INFORMATION TO THE LOCAL MARKET REGARDING AVAILABLE SERVICES. MONITORING SIGNIFICANT LOCAL PROFESSIONAL EVENTS. CREATING/DEVELOPING NEW PROFESSIONAL SERVICE PROG RAMMES CONSISTENCY OF APPROACH ACROSS THE GROUP ON MARKE TING. 3. PROPERTY SERVICES RESEARCH IN RELATION TO THE LOCAL PROPERTY MARKET ADVICE AND GUIDANCE IN RELATION TO PROPERTY MAINT ENANCE REQUIREMENTS ADVICE AND GUIDANCE IN RELATION TO PROPERTY INVES TMENTS ASSISTANCE AND ADVICE IN RELATION TO FURNISHING N EW CENTRES INVENTORY MAXIMIZATION (WORKSTATIONS & FURNITURE) 4. FINANCE AND LEGAL SERVICES PROVISION OF INTELLIGENCE REGARDING THE LOCAL REA L ESTATE MARKET ADVICE IN RELATION TO MARKET PRICES FOR REAL ESTA TE ADVICE AND GUIDANCE IN RELATION TO THE LOCAL PRIC E POLICY FOR PROFESSIONAL SERVICES FINANCIAL ANALYSIS RELATED TO NEW CENTRE OPENINGS AND EXPANSIONS AS WELL AS CENTRE CLOSURES TAX ADVICE REGARDING STRATEGY AND TAX PLANNING. LEGAL ASSISTANCE ON PROPERTY AND LEGAL STRUCTURE ISSUES AS WELL AS RELATED TO BUSINESS ACQUISITIONS AND DISPOSALS. 5. HUMAN RESOURCES AND TRAINING SERVICES ADVICE AND SUPPORT IN RELATION TO HIRING LOCAL PR OFESSIONAL STAFF. CREATION OF TESTING PROGRAMMES FOR LOCAL RECRUITM ENT CREATION OF PERSONNEL RATING SYSTEM CREATION AND DELIVERY OF LOCAL TRAINING PROGRAMME S. CENTRALIZED TRAINING PROGRAMMES FOR SALES PERSONNE L. (SCHOOL OF EXCELLENCE) ASSISTANCE WITH SUCCESSION PLANNING 6. SALES SUPPORT SERVICES ASSISTANCE WITH THE CREATION OF ANNUAL SALES PLAN S ASSISTANCE AND GUIDANCE IN IMPLEMENTING THE ANNUA L SALES PLANS. ADVISING ON LOCAL SALES STRATEGY AND DEVELOPMENT OF LOCAL SALES TECHNIQUES. PRICING ANALYSIS, ADVICE ON DISCOUNT LEVELS. I.T.A. NO. 501/HYD/2015 M/S. REGUS BUSINESS CENTRE (HYDERABAD) PVT. LTD., :- 5 - : 7. NEW CENTRE OPENING TEAM ASSISTANCE WITH OPENING OF NEW CENTRES-FLOOR PLAN NING, FURNISHINGS. NEGOTIATION WITH BUILDING OWNERS. CO-ORDINATION AND MARKETING OF OPENINGS 8. VARIOUS AD HOC GENERAL SUPPORT SERVICES. 7.7 THESE SERVICES ARE LARGELY SIMILAR TO THE SERVI CES AS PER THE AGREEMENT DATED 22.04.2009 BETWEEN THE APPELLANT AND REGUS AS IA PACIFIC MANAGEMENT LTD. AND THE AGREEMENT DATED 01.01.2010 WITH REGUS SERVICE CENTRE PHILLIPINES B.V. THE AGREEMENT WITH REGUS SERVICE CENTRE PHILLIPINES B.V. ALSO LISTS CERTAIN ADDITIONAL SERV ICES. THE PAYMENT OF MANAGEMENT FEES OF RS.46,09,454 IS, THEREFORE, DIRE CTED TO BE ALLOWED. THE FOURTH GROUND OF APPEAL IS ALLOWED. 5. LD. DR REITERATED THE STAND OF AO WHEREAS LD. COUN SEL EXPLAINED THE BUSINESS MODEL, SHARING OF COMMON EXPE NDITURE AND THE TERMS OF SERVICE AGREEMENTS IN SUPPORT OF THE ORDE R OF LD.CIT(A). 6. AFTER CONSIDERING THE RIVAL CONTENTIONS AND PERUSING THE SERVICE AGREEMENT, I AM OF THE OPINION THAT THE REVEN UE HAS NOT MADE OUT ANY CASE FOR DISALLOWANCE OF THE EXPENDITUR E UNDER THE HEAD MANAGEMENT FEE. ASSESSEE GROUP BUSINESS MODEL INCORPORATES A SEPARATE COMPANY FOR EACH OF THE BUSIN ESS CENTRES AND THE COMMON EXPENDITURE IS SHARED BY THE GROUP COMP ANIES AS PER THE AGREEMENT. THE COST OF PROVIDING SERVICES GROUP AND REGIONAL HEADQUARTER CHARGES AND SHARED SERVICES FE ES ARE ALLOCATED, BASICALLY ON TURNOVER BASIS AND THERE IS M ARK UP OF 5.5% ON ACTUAL COST IN SERVICES SHARED. THE AGREEMENTS AR E SIMILAR IN THE GROUP CASES. THE FINDINGS OF THE CIT(A) THAT THE SERVICES ARE LARGELY SIMILAR IS NOT COUNTERED BY REVENUE. AS SEEN FROM THE AGREEMENTS ALSO, THE SERVICES SPECIFIED IN GROUNDS THA T THEY ARE NOT BEING PROVIDED, IS NOT CORRECT. THE GROUND ITSELF IS WRONGLY TAKEN. I.T.A. NO. 501/HYD/2015 M/S. REGUS BUSINESS CENTRE (HYDERABAD) PVT. LTD., :- 6 - : I DO NOT FIND ANY REASON EITHER TO DIFFER FROM THE ORDE R OF THE CIT(A) OR TO DIFFER FROM THE DECISION OF THE CO-ORDINATE BENCH (SUPRA) GIVEN IN THE GROUP CASES ON SIMILAR FACTS. THERE IS NO MERIT IN GROUNDS RAISED. 7. IN THE RESULT, APPEAL OF REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH FEBRUARY, 2017 SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER HYDERABAD, DATED 10 TH FEBRUARY, 2017 TNMM COPY TO : 1. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3( 1), HYDERABAD. 2. M/S. REGUS BUSINESS CENTRE (HYDERABAD) PVT. LTD. , LEVEL 1, MID TOWN PLAZA, ROAD NO. 1, BANJARA HILLS, HYDERABAD. 3. COMMISSIONER OF INCOME TAX(APPEALS)-3, HYDERABAD . 4. THE COMMISSIONER OF INCOME TAX-3, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.