Income Tax Deduction on Consultancy Fee Valid Despite Related Party Concerns

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) recently held that consultancy fees paid to a related party cannot be disallowed merely because of the relationship between the payer and the payee. This decision was made after the ITAT noted that the service provider's ownership of a trademark actively used by the assessee in its own business forms material evidence of actual service rendering.

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 agreement covered intellectual property consultancy, real estate advisory, and end-to-end documentation services, including the purchase and stamping of documents 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, stating that they had replied to the notice under Section 133(6), filed income tax returns, audited annual accounts, GST returns, TDS details, and more. It was further stated that the detailed services provided by 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 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 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.