“Consultancy Fee Deductions: ITAT Says Related Party Payments Valid if Services Proven”
Trademark Licensing Emerges as Crucial Evidence in Tax Disputes
Section 37 and Rule 29: How Courts Assess Business Expenditure
By Our Legal Correspondent
New Delhi: June 03, 2026:
The Bangalore Income Tax Appellate Tribunal (ITAT) recently ruled that consultancy fees paid to a related party cannot be disallowed merely because of the relationship, provided there is evidence of actual services rendered. The case highlights the importance of Section 37 of the Income Tax Act, Rule 29 of ITAT Rules, and the evidentiary value of trademark licensing in proving business expenditure.
Background of the Case
- Assessee: Fyers Securities Pvt. Ltd., a stock brokering company.
- Assessment Year: 2022–23.
- Consultancy Fee Paid: ₹5.50 crore (including GST) to Fyers Investment Advisors Pvt. Ltd., a related party.
- Nature of Services: Intellectual property consultancy, real estate advisory, documentation, and ancillary services.
- AO’s Disallowance: Under Section 37, citing lack of evidence and related-party nature of transaction.
- CIT(A) Confirmation: Upheld disallowance, noting absence of correspondence proving services.
- ITAT Appeal: Additional evidence filed under Rule 29, including trademark certificates showing “Fyers” mark owned by Fyers Investment and licensed to Fyers Securities.
Key Legal Provisions Discussed
1. Section 37 of the Income Tax Act, 1961
- Allows deduction of business expenditure incurred “wholly and exclusively” for business purposes.
- Disallowance occurs if expenditure is not substantiated or is deemed personal in nature.
- ITAT’s View: Relationship alone is not a ground for disallowance; test is whether expenditure is genuine and for business.
2. Section 133(6)
- Empowers AO to call for information from parties.
- In this case, AO claimed inadequate response from Fyers Investment.
- ITAT noted that audited accounts, GST returns, and trademark certificates were sufficient evidence.
3. Rule 29 of ITAT Rules
- Permits filing of additional evidence at appellate stage if earlier unavailable.
- ITAT accepted trademark certificates as fresh evidence, restoring matter to AO for reconsideration.
4. Trademark Act, 1999
- Ownership and licensing of trademarks can establish business relationships.
- Here, trademark “Fyers” owned by Fyers Investment and licensed to Fyers Securities proved consultancy services were rendered.
Analytical Insights
- Related Party Transactions: Courts emphasize substance over form. Payments to related parties are valid if backed by evidence.
- Evidentiary Standards: Trademark licensing, audited accounts, and GST filings can serve as strong proof of services.
- Judicial Approach: ITAT balanced scepticism of related-party dealings with recognition of legitimate business arrangements.
- Implication for Businesses: Documentation and demonstrable evidence are critical in defending consultancy fee deductions.
FAQs on Consultancy Fee Deductions
Q1. Can consultancy fees paid to related parties be disallowed automatically?
No. Disallowance cannot be based solely on relationship. Evidence of services rendered is crucial.
Q2. What kind of evidence is acceptable to prove services?
Trademark licensing agreements, audited accounts, GST returns, correspondence, and invoices.
Q3. What does Section 37 require for deduction?
Expenditure must be incurred wholly and exclusively for business purposes, not personal or capital in nature.
Q4. What role does Rule 29 of ITAT Rules play?
It allows submission of additional evidence at appellate stage if earlier unavailable, ensuring fair adjudication.
Q5. How does trademark ownership prove consultancy services?
If a related party owns a trademark actively used by the assessee, it demonstrates intellectual property consultancy and licensing services.
Q6. What happens if AO disallows expenditure despite evidence?
Assessee can appeal to CIT(A) and ITAT, providing additional evidence if necessary.
Q7. Are GST returns relevant in proving consultancy services?
Yes. GST filings corroborate that services were rendered and payments were made.
Q8. What is the broader implication of this ruling?
Businesses must maintain robust documentation to defend deductions, especially in related-party transactions.
Conclusion
The ITAT’s ruling underscores that business expenditure deductions hinge on evidence, not relationships. Section 37 requires proof of genuine business purpose, and Rule 29 ensures fairness by allowing additional evidence. Trademark licensing emerged as decisive proof in this case, setting a precedent for how intellectual property can substantiate consultancy services.
This judgment is a reminder for companies to maintain comprehensive documentation—agreements, invoices, GST returns, and trademark licenses—to withstand scrutiny in tax assessments.