HAPAG-LLOYD INDIA P. LTD, MUMBAI V. DCIT RG 10(1), MUMBAI

ITA 5995/MUM/2010

• Counselvise Citation: 599519914 RSA 2010
• Duration Of Justice: 1 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 04-04-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 02-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJAY
• Assessee Lawyers: SRIRAM SESHADRI

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES H, MUMBAI BEFORE SHRI D.K. AGARWAL, J.M. AND SHRI RAJENDRA S INGH, A.M. ITA NO. : 5995/MUM/2010 ASSESSMENT YEAR : 2007-08 HAPAG-LLOYD INDIA PRIVATE LIMITED 2 ND FLOOR, DIAMOND SQUARE CST ROAD, KALINA SANTACRUZ (E) MUMBAI-400 098. DY. COMMISSIONER OF INCOME TAX RANGE 10(1) ROOM NO.455, 4 TH FLOOR AAYAKAR BHAVAN MUMBAI-400 020. PAN NO: AABCH 7319 B (APPELLANT) VS. (RESPONDENT) APPELLANT BY : SHRI SRIRAM SESHADRI RESPONDENT BY : SHRI AJAY DATE OF HEARING : 4.4.2012 DATE OF PRONOUNCEMENT : 25.4.2012 O R D E R PER RAJENDRA SINGH, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER D ATED 18.5.2010 OF CIT(A) FOR THE ASSESSMENT YEAR 2007-08. THE ONLY DISPUTE RAISED BY THE ASSESSEE IN THIS APPEAL IS REGARDING DISALLOWANCE OF EXPENSES. 2. FACTS IN BRIEF ARE THAT THE ASSESSEE WHO HAD BEEN INCOR PORATED ON 28.8.2006 WAS ENGAGED IN THE BUSINESS OF SHIPPING A GENCY. THE ASSESSEE COMPANY IS A SUBSIDIARY OF HAPAG LLOYD AG, A GERMAN ITA NO. 5995/M/10 A.Y.07-08 2 COMPANY AND WAS FORMED TO RENDER SERVICES TO THE HOLDIN G COMPANY. THE AO NOTED THAT FIRST INVOICE WAS RAISED BY THE ASSESSEE COMPANY ONLY ON 18.1.2007. HE, THEREFORE, OBSERVED THAT THE A CTIVITIES UNDERTAKEN BY THE ASSESSEE PRIOR TO THAT DATE WERE IN T HE NATURE OF SETTING UP OF INFRASTRUCTURE FOR AGENCY BUSINESS. HE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY EXPENSES SHOULD NOT BE CAPITAL IZED. THE ASSESSEE SUBMITTED THAT THE DIRECTORS OF THE ASSESSEE COMPANY HAD BEEN APPOINTED ON THE DATE OF INCORPORATION ITSELF AN D WERE ENGAGED IN VARIOUS ACTIVITIES SUCH AS PURSUING CLIENTS IN THE INDIA N MARKET, RECRUITING EMPLOYEES, SCOUTING FOR OFFICE PREMISES ETC. THE ASSESSEE HAD ENTERED INTO LEASE AGREEMENT FOR THE PREMISES IN T HE MONTH OF OCTOBER 2006. THE VARIOUS EXPENSES INCURRED INCLUDED RENT EXPENSES, TRAVEL EXPENSES, ELECTRICITY EXPENSES ETC. IT WAS ARGUED T HAT EXPENSES WERE ALLOWABLE FROM THE DATE ON WHICH THE COMPANY HA D BEEN SET UP. IN THIS CASE, BUSINESS HAD BEEN SET UP ON THE DATE OF INCOR PORATION AS THE DIRECTORS BEING IN PLACE, THE ASSESSEE WAS IN A POSITION TO COMMENCE ITS BUSINESS ACTIVITIES. THE AO, HOWEVER, DID NOT ACCEPT THE CONTENTIONS RAISED BUT THE BUSINESS WAS SET UP ON THE DAT E OF INCORPORATION ITSELF. IT WAS OBSERVED BY HIM THAT THE ASSESSEE HAD NOT FURNISHED THE DATES OF OTHER STATUTORY REQUIREMEN TS SUCH AS SERVICE TAX REGISTRATION ETC. THE EMPLOYEES PF REGISTRA TION HAD BEEN OBTAINED ONLY ON 21.1.2007 AND ASSESSEE HAD APPOINTED T HE FIRST SUB- AGENT IN THE MONTH OF JANUARY 2007. THE AO ALSO OBSE RVED THAT THE AGENCY AGREEMENT WITH THE HOLDING COMPANY WAS EFFECTIVE FROM 1.1.1997 AND, THEREFORE, THE BUSINESS COULD NOT BE SAID TO BE READY BEFORE THAT DATE. THE AO ALSO NOTED THAT PRE-OPERATI VE EXPENSES WERE CLAIMED TO HAVE BEEN REIMBURSED BY HOLDING COMPANY. TH E ASSESSEE HAD, HOWEVER, CLAIMED RENT AND TRAVELING EXPENSES, ET C. IN THE P&L ACCOUNT. THE ASSESSEE HAD NOT CLAIMED ANY EMPLOYEE COST PRIO R TO ITA NO. 5995/M/10 A.Y.07-08 3 JANUARY 2007 WHICH ALSO SUPPORTS THE FACT THAT BUSINESS HA D NOT COMMENCED OR SET UP BUSINESS PRIOR TO THAT DATE. THE AO, THEREFORE, TREATED THE EXPENSES INCURRED UP TO 31.12.2006 AS PRE-O PERATIVE EXPENSES AND DISALLOWED THE SAME AMOUNTING TO RS .59,83,066/- AS PER DETAILS GIVEN BELOW :- RENT PAID UP TO DECEMBER 2006 RS.45,95,083/- TRAVELLING EXPENSES UP TO DEC.2006 RS. 7,80,256/- ELECTRICITY EXPENSES (1/2) RS. 3,85,226/- MAINTENANCE EXPENSES (1/2) RS. 1,00,682/- SECURITY EXPENSES (1/2) RS. 1,21,819/- TOTAL RS.59,83,066/- 2.1 THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT(A) THAT THE ASSESSEE WAS ENGAGED IN PROVIDING VARIO US BUSINESS SUPPORT SERVICES TO THE HOLDING COMPANY . IT PROVIDED C O-ORDINATION AND MARKET SUPPORT IN RESPECT OF VESSELS OWNED, OPERATED , CHARTERED OR MANAGED BY HOLDING COMPANY. DURING THE RELEVANT Y EAR THE ASSESSEE WAS ENGAGED IN RENDERING MARKETING SUPPORT SERVICE S, SUPERVISION, CO- ORDINATION, CUSTOMER SERVICES AND OTHER LO GISTIC SUPPORT. THE DIRECTOR HAD BEEN APPOINTED ON ITS INCOR PORATION ITSELF AND HAD BEEN PLAYING A KEY ROLE IN PROVIDING SUPPOR T SERVICES. THE SERVICES RENDERED BY THE DIRECTORS INCLUDED VARIOUS ACTIV ITIES SUCH AS PURSUING CLIENTS IN THE INDIAN MARKET, RECRUITING EMPLO YEES ETC. ASSESSEE WAS, THUS, READY TO START BUSINESS OPERATION IN AUG UST 2006 AND EXPENSES WERE ALLOWABLE. CIT(A) HOWEVER DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT THE ASSES SEE WAS NOT HAVING ANY EMPLOYEES TILL 31.12.2006 AND AGENCY WAS E FFECTIVE FROM 1.1.2007 ONLY. THE FIRST SUB-AGENT APPOINTED BY THE CO MPANY WAS ONLY IN JANUARY 2007 AND, THEREFORE, IN THE ABSENCE OF ANY EMPLOYEE, THE ASSESSEE COULD NOT BE SAID TO COMMENCE ANY BUSINESS ACTIVITIES. HE ITA NO. 5995/M/10 A.Y.07-08 4 DID NOT ACCEPT THE CLAIM OF THE ASSESSEE THAT THE DIRECTORS WERE DOING BUSINESS ACTIVITY. CIT(A) THEREFORE, CONFIRMED THE DISAL LOWANCE, AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 3. BEFORE US THE LD. AR FOR THE ASSESSEE SUBMITTED THAT A SSESSEE COMPANY HAD BEEN FORMED TO PROVIDE VARIOUS SERVICES TO T HE HOLDING COMPANY. THE DIRECTORS HAD BEEN APPOINTED ON THE DATE OF INCORPORATION ITSELF, WHO WERE ENGAGED IN VARIOUS ACTI VITIES ON BEHALF OF THE HOLDING COMPANY. THE ASSESSEE COMPANY WAS THUS, REA DY TO DO BUSINESS ON THE DATE OF INCORPORATION ITSELF AND THEREFO RE, BUSINESS HAD BEEN SET UP AND EXPENSES WERE ALLOWABLE. HE PLACED REL IANCE ON THE JUDGMENT OF HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF WESTERN INDIA VEGETABLE PRODUCTS LTD. VS CIT (26 ITR 151). THE LD. AR ALSO SUBMITTED THAT THE ASSESSEE HAD RAISED THE FIRST INVOICE ON THE PARENT COMPANY ON 18.1.2007 FOR RS.1,78,01,264/-. THE INVOI CE WAS BASED ON COST INCURRED BY THE ASSESSEE UPTO 17.1.2007 AND MARK-U P OF 1.5% AND TAX PAYABLE. THE DETAILS OF VARIOUS ITEMS OF COST IN CURRED WERE GIVEN AT PAGE-39 OF THE PAPER BOOK . THESE EXPENSES RE LATED TO OFFICE RENT, TRAVELING, MAINTENANCE, DIRECTORS, ACCOMMODATION E TC. SINCE THE INCOME EARNED BY THE ASSESSEE INCLUDED VARIOUS EXPENSES AND WAS BASED ON SUCH EXPENSES THESE COULD NOT BE DISALLOWED. IT WA S ALSO SUBMITTED THAT PRIOR TO RAISING INVOICE ON THE PARENT COMPANY ASSESSEE HAD ALSO RAISED 3 RD PARTY INVOICES DATED 5.1.2007 FOR RS.47,088.31 A COPY OF WHICH WAS PLACED AT PAGE-40 OF THE PAPER BOOK. IT WAS ARGUED THAT THE EXPENSES HAD BEEN INCURRED AFTER SETTING UP O F THE BUSINESS WHICH HAD ALSO BEEN RECOGNIZED BY THE HOLDING COMPANY A S PAYMENTS HAD BEEN RECEIVED BASED ON THE EXPENSES INCURRED. THERE FORE, IT WAS URGED THAT THE CLAIM OF THE ASSESSEE SHOULD BE ALLOWED. THE LD. DR ON ITA NO. 5995/M/10 A.Y.07-08 5 THE OTHER HAND STRONGLY SUPPORTED THE ORDERS OF AUTH ORITIES BELOW AND PLACED RELIANCE ON THE FINDINGS GIVEN IN THE RESPECTIV E ORDERS. 4. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALLOW ABILITY OF THE EXPENSES TO THE TUNE OF RS.59,83,066/- INCURRED BY THE ASSESSEE TILL 31.12.2006. THE ASSESSEE COMPANY IS A SUBSIDIARY OF A GERM AN COMPANY AND WAS INCORPORATED ON 28.8.2006 TO RENDER S ERVICES TO THE HOLDING COMPANY AS A SHIPPING AGENT. THE AO HELD THA T BUSINESS OF THE ASSESSEE HAD NOT BEEN SET UP TILL 31.12.2006 AS THE A SSESSEE WAS NOT HAVING ANY EMPLOYEES TILL THEN AND THE AGENCY WIT H THE HOLDING COMPANY WAS EFFECTIVE ONLY FROM 1.1.2007 AND THE FIRST SUB-AGENT HAD ALSO BEEN APPOINTED BY THE ASSESSEE COMPANY ONLY IN JANUA RY 2007. THE CLAIM OF THE ASSESSEE IS THAT IT WAS ENGAGED IN PROV IDING VARIOUS BUSINESS SUPPORT SERVICES INCLUDING MARKETING SUPPORT SERV ICES TO THE HOLDING COMPANY. THE ASSESSEE WAS PROVIDING CO-ORDINATION AND MARKETING SUPPORT IN RESPECT OF VESSELS OWNED, OPERATED, CHARTERED OR MANAGED BY THE HOLDING COMPANY. THE DIRECTORS HAD BEEN APPOINTED ON THE DATE OF INCORPORATION ITSELF AND HAD BEEN PLAY ING A KEY ROLE IN PROVIDING SUPPORT SERVICES. THEREFORE, BUSINESS OF THE ASSE SSEE HAD BEEN SET UP ON THE DATE OF INCORPORATION ITSELF. THIS CLAIM HAS NOT BEEN ACCEPTED BY AUTHORITIES BELOW ON THE GROUND THAT THERE WERE NO EMPLOYEES IN PLACE TILL 31.12.2006 AND THE AGENCY WAS E FFECTIVE FROM 1.1.2007. 4.1 IN OUR VIEW THE STAND OF THE AUTHORITIES BELOW CAN NOT BE UPHELD. IT IS A SETTLED LEGAL POSITION THAT ANY REVENUE EXPEND ITURE INCURRED BY THE ASSESSEE AFTER SETTING UP OF THE BUSINESS HAS TO BE ALLO WED AS DEDUCTION WHILE COMPUTING INCOME. IT IS ALSO A SETTLED L EGAL POSITION THAT BUSINESS HAS TO BE CONSIDERED AS SET UP WHEN ASSESSEE I S IN A ITA NO. 5995/M/10 A.Y.07-08 6 POSITION AND IS READY TO COMMENCE ITS ACTIVITIES. IN T HIS CASE, BUSINESS OF THE ASSESSEE WAS TO PROVIDE CO-ORDINATION AND MARKET SU PPORT IN RESPECT OF VESSELS OWNED, CHARTERED AND MANAGED BY THE H OLDING COMPANY. ONCE THE ASSESSEE IS IN A POSITION TO START ANY O F THE ACTIVITIES OF THE BUSINESS, THE BUSINESS HAS TO BE CONSIDERE D AS HAVING BEEN SET UP AND READY TO COMMENCE THE ACTIVITIES. IN TH IS CASE, THE DIRECTORS HAD BEEN APPOINTED ON THE DATE OF INCORPORAT ION ON 28.8.2006 AND THEREFORE, THEY WERE READY TO PROVIDE SUPPORT SERVICES SUCH AS CO-ORDINATION, PURSUING MATTER WITH CLIENTS ETC. IT IS NOT A CASE OF A MANUFACTURING CONCERN THAT THE BUSINESS CAN BE TAKEN AS SET UP ONLY WHEN THE PLANT AND MACHINERY HAD BEEN INSTALLED AND WERE READY TO PRODUCE GOODS. IN OUR VIEW, EVEN IF NO OTHER EMPL OYEES HAD BEEN APPOINTED, THE BUSINESS OF THE ASSESSEE ON THE FACTS OF TH E CASE HAS TO BE TAKEN AS SET UP ON 28.8.2006. 4.2 MOREOVER, WE ALSO NOTE THAT THE BILLING AS PER A GREEMENT WITH THE HOLDING COMPANY HAS BEEN MADE BASED ON THE EXPENSE S INCURRED BY THE ASSESSEE AFTER ALLOWING MARK UP OF 1.5% OF SUCH E XPENSES AND AFTER MAKING PROVISION FOR TAXES. THEREFORE, EVEN I F THE AGENCY WAS EFFECTIVE FROM 1.1.2007 IF THE HOLDING COMPANY ALLOWE D BILLING BY ASSESSEE BASED ON CERTAIN EXPENSES INCURRED PRIOR TO 1.1.200 7 AND BILLING AMOUNT HAS BEEN OFFERED BY THE ASSESSEE IN THE P &L ACCOUNT, THE CORRESPONDING EXPENSES WHICH ARE EMBEDDED INTO THE B ILLING HAVE TO BE ALLOWED. IN CASE THESE EXPENSES ARE NOT ALLOWED O N THE GROUND THAT BUSINESS COMMENCED ONLY FROM 1.1.2007, THE GROSS RECEI PTS OFFERED BY THE ASSESSEE BASED ON THE EXPENSES INCURRED PR IOR TO 31.12.2006, COULD ALSO HAVE TO BE EXCLUDED FROM THE P& L ACCOUNT. BUT SINCE THE RECEIPTS HAVE BEEN TAKEN INTO ACCOUNT IN TH E COMPUTATION OF INCOME AS PER UNDERSTANDING WITH THE HOLDING COMPAN Y, THE ITA NO. 5995/M/10 A.Y.07-08 7 CORRESPONDING EXPENSES HAVE TO BE ALLOWED. THE DETAILS OF EXPENSES GIVEN IN PARA-2 CLEARLY SHOW THAT THESE ARE OF THE N ATURE OF REVENUE EXPENSES. THE LD. DR HAS MADE A POINT THAT THESE EXPEN SES COULD ALSO INCLUDE THE PERSONAL EXPENSES OF THE DIRECTORS WHICH HAS NO T BEEN EXAMINED. WE AGREE WITH THE PLEA OF THE LD. DR THAT THESE EXPENSES HAVE NOT BEEN FURTHER EXAMINED BY THE AO AS HE TREAT ED THE SAME AS PRE-OPERATIVE EXPENSES AND HELD NOT ALLOWABLE. ANY P ERSONAL EXPENSES IF INCLUDED IN THOSE EXPENSES HAVE TO BE DISALL OWED. WE, THEREFORE, RESTORE THE MATTER TO THE FILE OF AO FOR THE LIMITED PURPOSE OF EXAMINING IF THE EXPENSES CLAIMED ALSO INCLUDED PERSON AL EXPENSES OF THE DIRECTORS. THE AO WILL PASS A FRESH ORDER AFTER N ECESSARY EXAMINATION OF EXPENSES AND AFTER ALLOWING NECESSARY OPP ORTUNITY OF HEARING TO THE ASSESSEE . 5. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR ST ATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 25.4.2012. SD/- SD/- ( D.K. AGARWAL ) JUDICIAL MEMBER (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 25.4.2012. JV. ITA NO. 5995/M/10 A.Y.07-08 8 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.