THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 5(1)(1), MUMBAI, CIRCLE 5(1)(1), MUMBAI vs. GABRIEL INDIA LIMITED, 29TH MILESTONE

Per : Kuldip Singh, Judicial Member:

The appellant, M/s. Gabriel India Ltd (hereinafter referred to as ‘the assessee’) by filing the present appeal, sought to set aside the impugned order dated 13.12.2022 passed by Ld. CIT(A)-53, Mumbai (hereinafter referred to as CIT(A)] qua the assessment year 2017-18 on the grounds inter-alia that :- “i) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance being 20% of management fees ignoring the fact that management fees could be paid without knowing the cost of services and such management fees could not have been paid in terms of percentage of revenue. ii) On the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciating the fact that the assessee has failed to prove the business exigency of excess expenditure incurred on management fees and that such expenditure is incurred wholly and exclusively for the purpose of the business.”

“4.3 I have considered the facts and submissions of the case. The appellant has entered into an agreement with AAPL for provision of various services including usage of "Gabriel" trademark. The fee for the said service has been fixed at 1.5% of, the net sales price. The appellant has relied on the decision in the case of Spicer India P. Ltd. in wherein on similar facts, the ITAT has allowed the charge of management fee (excluding royalty) paid by Spicer @2.85% of sales. The Hon'ble ITAT, in the said decision, has held as under:- "24. In the facts of the present case, the assessee was paying Royalty to Dana Corporation @ 2.85% and was also paying management fees to AIPL for rendering several types of services at remuneration which was equivalent to the amount of Royalty i.e. 2.85% of sales. The perusal of agreement reflects the nature of services to be provided and the fees to be charged for providing the said services. The majority of support services are being rendered by the said concem to the assessee and the perusal of expenses debited by the assessee reflects that no major expenses have been incurred by the assessee and the benefits flow from AIPL to the assessee. The said benefits were for smooth carrying on of the business by the assessee and were incurred for the purpose of business. The assessee is the best judge to decide the expenditure it needs to incur for smooth carrying on of its business. The Assessing Officer cannot sit in judgment of businessman position in incurring any expenditure. The Hon'ble Supreme Court in Hero Cycles (P) Ltd. Vs. CIT (supra) have applied the ratio laid down by the Apex court in S.A. Builders Ltd. Vs. CIT(A) and another (2007) 288 ITR 1 (SC) and upheld the scope of commercial expediency, wherein it was held that The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. Where there is nexus between the expenditure incurred and the purpose of business, then the revenue cannot put itself in the arm chair of the businessman to decide how much of the expenditure is reasonable. Applying the above said proposition laid down by the Hon'ble Supreme Court, we hold that the expenditure incurred by the assessee on management fees in order to facilitate smooth running of its business is an allowable expenditure in the hands of assessee. Similar expenditure has been allowed in the hands of assessee in preceding year. Another aspect of the issue is that the said management fees is to be taxed in the hands of recipient and even the service tax has been paid by the recipient, evidence of which is placed in the Paper Book. Once the commercial expediency of expenditure is established, then the same is to be allowed as business expenditure in the hands of assessee. We hold so. The ground of appeal No.5 raised by the assessee is thus, allowed".

4.4 It has also been brought out by the appellant that AAPL has accounted the entire receipts in its books and offered the same for tax. 4.5 The AO has stated that commensurate benefits are not derived. He has also opined that no tangible and substantial commercial benefit was derived by such payment of management fees. However, no specific instance of excessive charge or non-provision of service has been brought out. The adhoc disallowance of 20% of management fees is not sustainable unless specific discrepancies are brought out which is not the case here. On the other hand, the appellant has stated that various services are being rendered by the payee, in terms of a written agreement. Hence the claim of expenses u/s. 37(1) by the appellant is allowed. This is also in line with the judicial precedent cited above in the case of group company of the appellant.”