ANIBRAIN DIGITAL TECHNOLOGIES PRIVATE LIMITED,PUNE vs. A/DCIT-4(1)(1), MUMBAI

The grounds of appeal raised by the revenue are as under:

Facts of the case, in brief, are that the assessee filed return of income for the AY 2016-17 on 17.10.2016 declaring total income at Rs.13,10,86,570/-. The case was selected for manual compulsory scrutiny and notice u/s 143(2) was issued on 27.09.2017. Thereafter, various notices were issued to the assessee. The assessee company is engaged in the business of rendering services in the field of animations, visual effects and computer software development. After confronting the assessee on various issues, the AO has added 50% of marketing and sales promotion expenses amounting to Rs.63,22,641/-, royalty for trademark payment of Rs.9,47,000/- and disallowed 20% WIP amounting to Rs.5,69,97,947/-. The total income was determined at Rs.19,53,54,160/-. 5. Aggrieved by the order of AO, the assessee filed appeal before the CIT(A). The CIT(A) has followed the decision of ITAT in ITA No.6640/Mum/2016 dated 02.01.2019 for AY 2012-13 and deleted the addition on account of work-in- progress and royalty payment. However, the CIT(A) has restricted the disallowance on marketing and sales promotion expenses to 40% of the said expenses.

Aggrieved by the order of CIT(A), both assessee and revenue have filed appeal before the Tribunal. The Ld. AR, at the outset, submitted that the issue is squarely covered by the order of ITAT in appellant’s own case for AY 2012-13 cited supra, wherein the disallowance on WIP and royalty has been allowed. The ITAT has restricted the ad hoc disallowance on marketing and sales promotion expenses to 20%. 7. On the other hand, the Ld. Sr. DR supported the order of AO. He, however, admitted that the issues are covered by the decision of the Tribunal in assessee’s own case. 8. We have heard both sides and perused the materials on record. We have also carefully gone through the decision of the co-ordinate Bench in assessee’s own case for AY 2012-13 in ITA No.6640/Mum/2016 (supra). We find that all the grounds raised by both the parties have been decided by the Tribunal in the above order. The relevant part of the decision is reproduced below for ready reference: “4.1 We have carefully perused the rival contentions and perused relevant material on record including documents placed in the paper-book and judicial pronouncements as cited before us. 4.2 Upon due consideration, we find that lower authorities fell in error by not considering the fact that the assessee was engaged in service industry. The material on record suggest that the assessee was providing high end visual effects VFX & Animation services and therefore, salary expenditure was a period cost for the assessee and therefore, there could not no occasion for the assessee to work out the work-in-progress in the financial statements. The assessee was consistently following completed service contract method in terms of Accounting Standard-9 to recognize the revenue in the books of accounts. Nothing on record suggest that there was any change in the consistent method of accounting while drawing up the financial statements. Therefore, the adhoc addition of 20% against total expenses, in our opinion, could not be sustained at all. Regarding advances received from customers, there could be no occasion to bring them to tax in the impugned AY when the same were mere advances and the services against the same remained to be rendered by the assessee. This is further fortified by the fact that that the amount of advances, in subsequent years, have been adjusted in invoices raised by the assessee in those years and the revenue has been recognized in those years. This being the case, the addition of Rs.193.41 Lacs stand deleted. 4.3 So far as the adhoc disallowance of marketing and sales promotion expenses is concerned, we find that the whole basis of the disallowance is that fact that some payments have been made by the assessee through credit cards in the hotels and an amount of Rs.0.41 Lacs has been spent on the gifts. However, we find that most of the payments. have been made through cheques after deduction of TDS. The payments by way of cash vouchers and credit card amounts to Rs.4,21,577/- only, the details of which has already been given on page-11 of the impugned order. This being the case, the disallowance of 50% is on a very higher side. We restrict the same to 20% of Rs.4,21,577/-which comes to Rs. 84,315/-. The balance disallowance stands deleted. 4.4 The sales commission expenses of Rs.8,75,956/- & Rs. 14,11,757/-are stated to be paid to Alan Dinoble, a US citizen & ADLD LLC respectively for providing sales and marketing services to assessee outside India. It has been submitted that initially the payment was made to Mr. Alan Dinoble who subsequently floated a company namely ADLD LLC and both these payments represent minimum payment pursuant to consultancy agreements entered into by the assessee with them. It was further submitted that consultancy agreement was aimed at widening the sales base of the assessee though overseas new clients and orders. In terms of the agreement, the consultant was to be paid @5% of work generated by them subject to a minimum payment of USD 10000 per month irrespective of sales orders procured. The documents on record demonstrate that it is undisputed fact that the payments have been made by the assessee pursuant to consultancy agreement entered into by the assessee with these two entities. The invoices issued by both the entities are placed on record which suggest that the payment has been made for the period from August, 2011 to December, 2011. The remittances are duly supported by Form 15CA / CB. Therefore, the expenditure, in our opinion, fulfilled the conditions envisaged by Section 37(1) and therefore, was an allowable expenditure. The balance payment of Rs.1.89 Lacs represent payment to 24 parties as commission for referrals. Most of these payments are petty payments and made through cheques. The complete details of the same have been placed on record. This being the case, the addition on this account could also not be sustained. We order so. 4.5 The last addition of Rs.2.10 Lacs represent royalty payment to one of assessee's director Krishnamurthy for usage of Trademark and logo Anibrain.