In case of Pipelic Energy Software India Pvt. Ltd.[1] (Taxpayer), the issue before Telangana High Court (HC) was whether expenditure[2] incurred by subsidiary for fulfilling contractual obligation of foreign parent company is deductible as business expenditure.
The Taxpayer, an Indian subsidiary of a foreign company, was formed to carry on business of consultants for supply of industrial computer software systems for use in oil, gas, water, pipelines etc. For tax year 1998-99, the Taxpayer claimed business loss in its return of income due to various expenditure incurred like salaries, travelling expenses, rent, printing and stationery, postage, telegrams and telephone charges and other administrative expenses etc. The tax authority disallowed the expenditure on the ground that expenditure was not incurred for the purpose of Taxpayer’s business but was incurred for the purpose of executing contracts undertaken by Taxpayer’s parent company.
On Taxpayer’s appeal, the first appellate authority (FAA) held that Taxpayer’s business commenced as soon it was ready for rendering consultation to its clients and, consequently, expenditure incurred by the Taxpayer was allowable as business deduction.
On further appeal by the tax authority before Hyderabad Income Tax Appellate Tribunal, the Tribunal reversed the FAA’s ruling and sustained the disallowance made by the tax authority on the ground that the parent and the Taxpayer are two separate entities and expenditure pertaining to one entity cannot be claimed by the other entity.
The Taxpayer appealed further to the Telangana HC. Before the HC, the Taxpayer contended that expenditure incurred out of commercially expediency is allowable even if it benefits a third party. On the other hand, the tax authority contended that an expenditure which does not benefit taxpayer’s business is not allowable.
The Telangana HC ruled in favor of the tax authority by sustaining the disallowance. The HC held that the business can be said to be commenced when a taxpayer is ready to receive clients and for this purpose, the taxpayer has to incur expenses to stay ready. However, in the facts of Taxpayer’s case, the Taxpayer incurred expenditure for overseeing and execution of its holding company’s contracts.
The Taxpayer did not undertake any business on its own and thus, the expenditure incurred were not occasioned in the process or for its own business. The losses incurred by the Taxpayer were for the purposes of giving support services to its holding company and the Taxpayer did not derive any benefit from such expenditure. The holding company and subsidiary company are separate entities and the expenditure pertaining to one entity cannot be claimed or allowed in the hands of another entity.
