Income Tax Deduction on Consultancy Fee cannot be Disallowed Merely because Payee is Related Party: ITAT notes Trademark Use Proves Services Rendered [Read Order]
The Tribunal restored the issue back to the file of the AO to examine additional evidence submitted, and the issue of the allowability of the consultancy expenditures.
The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) recently held that a consultancy fee paid to a related party cannot be disallowed merely on account of the relationship between the payer and the payee, particularly where there is material to demonstrate that services were actually rendered.
The ITAT arrived at its conclusion after noting that the service provider's ownership of a trademark actively used by the assessee in its own business forms material evidence of actual rendering of services.
M/s. Fyers Securities Private Limited (Fyers Securities), a company providing stock brokering services filed its return for Assessment Year 2022-23 declaring total income of ₹30.86 Crore. The company paid consultancy fees of ₹5,50,80,000 (including GST) to M/s. Fyers Investment Advisors Private Limited (Fyers Investment), a related party as part of a consultancy agreement.
The consultancy agreement covered intellectual property consultancy, real estate advisory and end-to-end documentation services including purchase and stamp papers, payment of stamp duty and ancillary services.
The income tax deduction availed on the consultancy fees under Section 37 was disallowed by the Assessing Officer (AO) on the grounds that the agreement was between related parties without a specific basis for payment, and that the service provider's response to notice under Section 133(6) lacked the specific details that had been called for.
Fyers Securities reiterated the facts and stated that they had replied to the notice u/s. 133(6), filed income tax return, audited annual accounts, GST (Goods and Services Tax) returns, TDS details and more. It was further stated that the detailed services provided by the Fyers Investment were also mentioned.
Consequently, an Assessment Order determining the assessee’s total income at ₹36,37,11,000 was issued on March 18, 2024.
The CIT(A) confirmed the disallowance by the AO, noting that the assessee had not produced a single piece of correspondence between the parties to demonstrate that any activity mentioned in the agreement had actually been performed.
In the appeal to ITAT, Fyers Securities filed an application for additional evidence under Rule 29 of the ITAT Rules alongside a paper book of 305 pages. The additional evidence included trademark registration certificates under the Trademarks Act establishing that the trade name 'Fyers' was owned by the Fyers Investment and actively licensed to Fyers Securities for use in rendering brokerage services to clients.
The Bench of Vice-President Prashant Maharishi and Judicial Member Soundararajan K. observed that even if the service provider had no clients other than the assessee, that fact alone could not justify the disallowance; the relevant test was whether the expenditure had been incurred wholly and exclusively for the purposes of business only.
The Tribunal further noted that the Fyers Investment’s annual accounts reflected expenditure attributable to the services rendered to Fyers Securities.
Perhaps the most important observation came through the trademark certificates for the ‘Fyers’ mark that the Assessee produced. The ‘Fyers’ mark owned by Fyers Investment was licensed exclusively to Fyers Securities for use in its brokerage business, forming tangible evidence that services had in fact been rendered between both parties.
Noting that the newly produced additional evidence had not been available before the lower authorities, ITAT restored the matter to the AO for fresh examination in light of its observations.
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