ITA No.91/Coch/2015 , IN INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI B. P. JAIN, AM & GEORGE GEORGE K., JM I.TA No.91/Coch/2015 (Assessment Year :2011-12 ) M/s. Muthoot Exchange Co. Pvt. Ltd. Vs Assistant Commissioner of Muthoot Chambers, Income-tax, Circle-1(2),Kochi. Banerji Road, Kochi-682 018 Assessee Appellant) (Revenue -Respondent) PAN No. AADCM 3244L Assessee By Shri R. Sreenivasan, FCA Revenue By Shri A. Dhanaraj, Sr. DR Date of Hearing 08/09/2016 Date of pronouncement 26/09/2016 ORDER PER B.P. JAIN, AM: This appeal of assessee arises from order of Ld. CIT(A)-II, Kochi dated 15/11/2014 for AY 2011-12. 2. assessee has raised following grounds of appeal:- 1. officers below are not justified in denying and confirming disallowance of Rs.57,51,630/- under head Branding Expenses paid to company established in United Kingdom and having no permanent 1 ITA No.91/Coch/2015 establishment in India, and are in nature of reimbursement of expenses. 2. officers below failed to appreciate fact that these payments have been incurred for services exclusively rendered outside India and they do not have any business partners or non residents in India. 3. Further these expenditure have been paid during previous year. 4. officers below are not justified in invoking provisions of Section 14A r.w. Rule 8D especially when no exempted income has been received nor exemption claimed by assessee during this year. 5. Commissioner of Income Tax (Appeals) observation in para 6.3.4 that cost is inbuilt into even so called passive investment are incidental administrative expenses on collecting information research etc. which helps in arriving at particular investment decision, and these expenses relating to earning of income are embedded in indirect expenses, are devoid of merits. 3. brief facts of case are that assessee is engaged in business of currency exchange and inward money remittance. For AY 2011-12, assessee has filed return of income declaring income of Rs.3,57,83,210. Assessing Officer completed assessment vide order u/s. 143(3) of Income Tax Act dated 28/02/2014 determining total income at Rs.4,21,37,508/-. Following additions were made in assessment. i) Disallowance of Branding Expenses for non-deduction of tax 57,51,630/-. ii) Expenses attributable to exempt income u/s. 14A Rs.6,02,669/- 4. assessment was carried in appeal by assessee before Ld. CIT(A) and both issues disputed were confirmed by Ld. CIT(A) vide order 2 ITA No.91/Coch/2015 dated 15/11/2014. addition of Rs.57,51,613 u/s. 40(a)(ia) was confirmed. Furthermore, addition u/s. 14A was also confirmed. 5. During relevant AY, assessee has debited business promotion expense of Rs.57,51,613/- to Profit and Loss A/c. On enquiry on nature of expense, assessee explained that these are payments to sister concern by name M/s. Muthoot Global Transfers Pvt. Ltd. UK in nature of Branding Expenses incurred outside India. assessee was asked to furnish copy of written agreement. assessee explained that there was no written agreement for these services. So assessee was asked to furnish copy of bill raised by Muthoot Global (photocopy enclosed at page 22 of paper book 1) According to Assessing Officer, it is apparent that for bill of 78000 pounds (i.e., Rs.57,51,603), there is merely single phase cryptic entry (Branding/Business Promotion Expenses). bill does not carry any registration no. of Muthoot Global. It is merely in format of letter in letterhead. Therefore, authenticity of expenditure is under question. 6. Further assessee also furnished basis of billing as follows: Note on branding expenses paid by M/s. Muthoot Global Transfers Pvt. Ltd., U.K. assessee is engaged in business of purchase and sale of foreign currencies and also inward and outward money transfer business. During FY Company has earned income of Rs.3.71 crores from money transfer 3 ITA No.91/Coch/2015 services itself. As large number of Indians are living in United Kingdom, Company has engaged M/s. Muthoot Global Transfers Pvt. Ltd., UK for wide publicity for Muthoot Brand and to create awareness among them forex and money transfer services provided by Muthoot Exchange Company through large network of branches and franchises all over India. Company has reimbursed GBP 78,000 (Rs.57,41,379/-) to M/s. Muthoot Global Transfers Pvt. Ltd., UK towards expenses incurred by them for above mentioned activities, as per invoice issued by them. 7. Details of marketing activities performed by Muthoot Global Transfers, UK are:- About products and services of Muthoot exchange company Pvt. Ltd., India. Money transfer services available to India through Muthoot Exchange Branches both inward and outward remittances. Foreign exchange services. Payment of educational expenses/fee from India to UK Targeted customers. NRIs residing in United Kingdom Immigrant Indian workers in UK. Foreigners and Indians travelling to India and UK 4 ITA No.91/Coch/2015 Different modes of marketing done during F.Y. 2010-11 Direct marketing to customers of Muthoot Global Transfers Distributed brochures explaining products and services of Muthoot Exchange India. Sponsored various association programs organized by Indian Committees in UK and gave wide publicity about money transfer and Forex Services provided by Muthoot Exchange. Muthoot Global Staff attended events and explained products and services of Muthoot Exchange India. 8. According to Assessing officer, basis of billing is reimbursement of expense incurred. least minimum expected is that assessee should have insisted split up of expenditure incurred, proof for having spent it etc. Therefore assessee was asked to furnish proof of expenditure incurred by Muthoot Global on behalf of assessee,. Despite calling for information, assessee has not been able to furnish any such proof from sister concern. It is apparent that billing party being sister concern, assessee has not insisted on proof. transaction appears to have occurred way short of arm s length for reasons other than commercial expediency. 9. assessee was also asked to mention as to how it was able to monitor activities of Muthoot Global which in itself was fledgling company and by no means established player in UK. brand promotion, services rendered by it could not be accepted at face value. assessee mentioned that it had no 5 ITA No.91/Coch/2015 employee/agent/independent monitoring agency to monitor performance of Muthoot Global before paying rebranding expenses. 10. assessee was asked to furnish country wise remittance of income and currency exchange income figures for F.Y. 2009-10, FY. 2010-11 and FY 2011-12. intention being if there is definitive positive revenue impact attributable to these brand promotion expenses, authenticity of expenditure may be considered. But assessee expressed inability stating that its remittance business in India is primarily as agent for major remitters like Western Union etc. and no such data is available in its custody. assessee had identified that UK is prospective market for its inward remittance business and apparently spent 78000 pounds for brand promotion expenses. It is but natural for any business to attempt at correlating its revenue from region vis-avis money spent on business promotion activities. assessee appears to have not undertaken such exercise. Besides it has not been able to furnish necessary information despite repeated requests and granting sufficient time period. 11. Accordingly, Assessing Officer concluded that expenses were not paid out or expended for purpose of business and therefore this is not permissible for deduction under section 37(1) of Income tax Act. That apart according to Assessing Officer since tax was not deducted at source Branding 6 ITA No.91/Coch/2015 Expenses paid to non-resident company amounting to Rs.57.52 lakhs is to be disallowed u/s. 40(a)(ia) also. 12. learned CIT(A) held that recipient company, registered in UK is group Company of assessee and is mainly working for Building Brand name Muthoot, company whose business operations are located in India. There is business connection to company in India. According to her, assessee has not produced any detailed break up of any kind of business promotion expenses and it is consolidated payment of 78,000 UK pounds that were paid. assessee company has claimed to have paid this amount for Brand Building, but in remittance form submitted to bank for making this payment, this amount has been shown as only some other remittance to company in UK and not any payment of professional fee for brand building or any kind of reimbursement of business promotion expenses. She concluded that in view of detailed reasoning brought out by Assessing Officer, she agreed with analysis that explanation (i) of section 9(1) r.w.s 5(2)(b) is applicable to assessee and hence business income is deemed to accrue or arise in India as it can be attributable to business connections and operations carried out in India and hence tax should have been deducted at source while making payment to such company. Accordingly, she has confirmed addition of Rs.57.51 lakhs. 7 ITA No.91/Coch/2015 13. We have heard rival submissions and perused facts of case. Ld. Counsel for assessee reiterated that company has been registered under laws of UK. Merely because it is group company it cannot be stated that there is business connection in India. He further submitted before us copies of Balance sheet as on 31/03/2011 of company and drew our attention to Profit and Loss Schedule 5 which deals with investment in overseas company. It has been clearly mentioned thereon that investment are in 2 companies One at London in UK in share capital by name Muthoot Global Transfers Pvt. Ltd. and other overseas company at USA by name Royal Exchange Inc (USA) total investment in shares at Rs.6,81,00,672/-. According to him, M/s. Muthoot Global money transfer located at UK is assessee company s service provider through Exchange Branch for both inward and outward remittance, foreign exchange services, payment of educational expenses/fee from India to UK. targeted customers are NRIs residing in United Kingdom Immigrant Indian workers in UK Foreigners and Indians travelling to India and UK. 14. He further submitted that entire service of M/s. Muthoot Global Transfers is centred in UK and it is only for these services, actual expenses are reimbursed. 8 ITA No.91/Coch/2015 assessment of company is in UK and they have no Permanent establishment in India. According to representation, amount paid to overseas company is not taxable under laws of Indian Income Tax, so much so there is no liability to deduct tax on that principle. He further submitted that Ld. CIT(A) misconstructed that there are shareholders of overseas company in India. 15. He also drew our attention to para 23 to 30 of paper book No. 1 filed which contains application of declaration form under FEMA Act, seeking permission to remit payment to overseas. At P27 of said paper book attention was also drawn to col 14 (a) & (c) wherein fact that TDS was not liable to be deducted on account of amount not chargeable to tax in India has been stated. It was only after that department has issued permission in Form 15C. Now they have taken different stand when it comes to assessment. Reference was also drawn to decision of Hon ble Delhi High Court in case of CIT vs. DLF Commercial Project wherein it has been held that there is no obligation to deduct tax at source on reimbursement of expenses since it does not have character of income. Accordingly. he submitted that there was no case of Assessing Officer or Ld. CIT(A) to disallow such expenditure and also confirm same. 9 ITA No.91/Coch/2015 16. As regards second disallowance pertaining to invocation of section 14A r.w.r. 8D being expenditure attributed to exempted income, Ld. AR submitted that during year under issue assessee did not have any exempted income and further no expenditure have been incurred towards investment for earning exempted income. So much so, no disallowance is called for u/s. 14A. 17. According to Assessing Officer expenditure incurred have to be divided into 2 categories which are related to exempted stream of Income and other related to taxable stream of income. Assessing Officer is of view that it is not necessary that there would be exempted income earned during year. According to him exempted income appearing in sec. 14A includes positive income, nil income and negative income (loss). Therefore, provisions of section 14(2) and (3) read with Rule 8D are applicable and he has proceeded to disallow Rs.6,02,559/- on this issue. 18. According to Ld. CIT(A) as per section 14A, if expenditure has relation or connection with or pertains to exempt income, it cannot be allowed as deduction even if it otherwise, qualifies under other provisions of said Act. She is of view that assessee had not been able to establish and show that investments were made from own interest free fund. assessee also could not establish himself that there is no nexus between expenditure 10 ITA No.91/Coch/2015 and investment made with relation to any sequential cash flow along with any identifiable banking transaction. Accordingly, she concluded that provisions of Sec. 14A are attracted. 19. On behalf of assessee , reliance was placed on judgment of Hon ble High Court of Punjab and Haryana in CIT vs. Lakhani Marketing Company to effect that disallowance u/s. 14A cannot be made if there is no exempted income earned during year. Reference was also made to decision of same Court in CIT vs. Winsome Textiles Ltd. reported in 319 ITR 204 (copy filed P5 to P14 of paper book No. 1). Reliance was also made on decision of Hon ble ITAT Cochin Bench dated 20.11. 2015 in case of Kairali Steels and Alloys vs. JCIT(OSD) Cir.1(2) Kochi in I.T.A. No. 254/Coch/2015 copy of decision was also filed. Specific reference was made to P20 wherein conclusion of Hon ble Bench is given. 20. We have heard rival submissions and perused records. first issue is with regard to allowabiltiy of Branding Expense incurred outside India. learned representative finally concluded to draw our attention to article issued by IT department on tax treatment of dividend from foreign company which has been annexed on P1 and P2 of paper book No. 2; dividend received from Indian company which has suffered dividend distribution tax is exempt from tax u/s. 10(34). Exemption under section 10(34) is granted to 11 ITA No.91/Coch/2015 dividend received from Indian Company and not to dividend received from foreign company. Thus dividend from foreign company received by Indian resident is taxable. In this part you can gain knowledge about tax treatment of dividend received from foreign company. Dividend received from foreign company is charged to tax in India as well as in country to which foreign company belongs. If foreign dividend has suffered double taxation, then tax payer can claim double taxation relief either as per provisions of Double Taxation Avoidance Agreement (if any) entered into with that country (if any) by Government of India or can claim relief as per section 91 (if no such agreement exists). 21. It was pointed out that assessee has investment of Rs.6.81 crores in shares of foreign company as shown in schedule 5 of Balance Sheet. Since dividends if any received from these investments will be taxable in hands of assessee there is also no question of exemption and therefore disallowance u/s. 14A r.w. Rule 8D is not applicable. 22. No doubt branding expense has been incurred outside India and as is evident from various records available and also application made under FEMA regulation in Form 15CA. It is also not case of Assessing Officer that this has been incurred in India. recipient Muthoot Global Transfers Pvt. Ltd. being foreign company registered under UK laws, cannot be held to 12 ITA No.91/Coch/2015 have any business connections in India, though they are carrying out service for some of group concerns. it is also not case of Department that they are having any permanent establishment in India. As stated by Ld. Counsel if at all they are taxable it will be under UK laws. 23. Therefore, in our considered view, assessee company is not liable to deduct tax on payment made. assessee company has also been earning income and incurring expense which would establish that expenses have been laid out and expended in course of carrying on of business. Accordingly, we hereby delete disallowance of Rs.57.51 lakhs. 24. Coming to second issue of invoking sec. 14A r.w.r. 8D, it is fact that assessee has not earned any exempt income during year. These investments have been exclusively in shares of foreign companies as evidenced by Schedule 5 of audited Balance Sheet produced. Respectfully following decisions cited of Hon ble Punjab and Haryana High Court and also our own decision in case of Kariali Steels and Alloys (P) Ltd. vs. JCIT and also for reason that investments are made in foreign companies, we hold that section 14A r.w.r. 8D has no applicability to facts of this case. Accordingly, addition of Rs.6,02,559/- is hereby deleted. 13 ITA No.91/Coch/2015 25. In result, appeal of assessee is allowed. Pronounced in open court on 26-09-2016. sd/- sd/- (GEORGE GEORGE K.) (B. P. JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER Place: Cochin Dated: 26th 09/2016 GJ copy to: 1. M/s. Muthoot Exchange Co. Pvt. Ltd., Muthoot Chambers,Banerji Road, Kochi-682 018 2. Assistant Commissioner of Income-tax, Circle-1(2),Kochi. 3. Commissioner of Income-tax(Appeals)-II, Kochi. 4. Commissioner of Income-tax, 5.The DR/ITAT, Cochin Bench. 6 Guard File. By Order Assistant Registrar I.T.A.T., COCHIN 14 ITA No.91/Coch/2015 15 M/s. Muthoot Exchange Co. Pvt. Ltd. v. Assistant Commissioner of Income-tax, Circle-1(2),Kochi