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Facts
The Revenue appealed against the CIT(A)'s order granting relief to the assessee, who is engaged in media buying and consultancy. The additions/disallowances pertained to management fees paid to Wunderman Pte Ltd and software expenses.
Held
The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal. The management fees were allowed as revenue expenditure after considering TDS and a suo motu disallowance by the assessee. Software expenses were also allowed as revenue expenditure, being license fees for use rather than capital acquisition.
Key Issues
Whether management fees paid to a foreign entity are revenue expenditure and not subject to disallowance for non-deduction of TDS or unexplained expenditure, and whether software expenses are revenue in nature.
Sections Cited
40(a)(i), 69C, 143(3), 37(1), 195
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “D” BENCH,
Before: SHRI SAKTIJIT DEY & SHRI GIRISH AGRAWAL
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the Revenue and Cross Objection by the assessee are against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC) Delhi, vide order no. ITBA/NFAC/S/250/2024- 25/1067351446(1), dated 06.08.2024, passed against the assessment order by ACIT Circle 12(3)(2), Mumbai u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 06.12.2019, for Assessment Year 2017-18.
Grounds of appeal
raised by the Revenue are as under:
1. Whether on the facts and circumstances of the case, the Ld. CIT(A) justified in deleting the addition on the account of Non- deduction of TDS foreign payment u/s 40(a)(i) of Rs. 6,67,05,092/-.
2. Whether on the facts and circumstances of the case, the Ld. CIT(A) is justified in allowing the claim of Unexplained expenditure disallowed u/s 69C.
3. Whether on the facts and circumstances of the case, the Ld. CIT(A) is justified in allowing the unexplained nature of the software expenses of Rs. 61,67,654/- which was treated as capital expenditure in absence of any corroborative evidence.
2.1. Grounds of cross objection raised by the assessee as under: On the facts and in the circumstances of the case, the learned AO has: General Objection to Department’s Appeal 1. erred in objecting the order of Ld. CIT(A) deleting various additions/disallowances made during assessment without appreciating the facts of the case and submissions made, thereby further contesting the various issues before the Hon’ble Tribunal by filing an appeal;
Disallowance of management fees of Rs 6,67,05,092 2. erred in objecting to the order of Ld. CIT(A) that no TDS is deducted on an amount of Rs 6,67,05,092 without considering the fact that taxes are deducted by Appellant while making payment on Rs 5,29,55,091.
3. without prejudice to the above, erred in disallowing entire amount of Rs 6,67,05,092 without appreciating the fact that the Appellant has suo moto disallowed an amount of Rs 1,37,50,001 under Section 40(a)(i) of the Act and thus leading to double taxation of same income and thereby violating principles of natural justice
4. without prejudice to the above, erred in ignoring the fact that the Appellant has submitted/ provided all documents explaining the source of such amount paid by the Appellant and thus does not warrant addition under Section 69C of the Act
Disallowance of software expenses of Rs 61,67,654 5. Erred in objecting the order of Ld. CIT(A) that software expenses of Rs 61,67,654 made by the Appellant are capital expenditure and not revenue in nature.
6. Without prejudice to the above, erred in not granting the depreciation amounting to Rs 37,00,592 (being 60% of Rs 61,67,654) in respect of the expenditure held as capital in nature in relation to the computer software.
The Appellant craves, to consider each of the above grounds of cross-objection without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of cross-objection.
Brief facts of the case are that assessee is engaged in the business of media buying and selling. Additionally, it is also engaged in the business of media consultancy services which includes media planning and buying, brand activation, event management, consumer research, interest marketing (digital direct cash), content creation, social media marketing, out of home advertising and entertainment, sponsorship and sports marketing. The principal business of the company is trading in media spots and rendering marketing consultancy related services. It filed its return of income on 30.11.2017, reporting total income at Rs.65,07,56,460/-. It revised its return of income on 08.06.2018 declaring same total income. Impugned assessment of the assessee was completed u/s 143(3) after making following additions/disallowance to the returned total income for which relief was granted by the ld. CIT(A) and Revenue is in appeal before the Tribunal against the relief so granted. Assessee has filed cross objection to defend the relief it got.
i. Disallowance under Section 40(a)(i) and Section 69C of the Act towards management fees paid to Wunderman Pte Limited (‘Wunderman Pte’) amounting to Rs. 6,67,05,092 ii. Disallowance of software expenses amounting to Rs 61,67,654 under Section 37(1) by treating the same as capital expenditure.
In respect of ground nos. 1 and 2, it is noted that assessee paid Rs.6,67,05,092/- to a company known as Wunderman Pte. Ltd. towards management fees. Addition has been made for this amount on account oof non deduction of tax at source resulting into a disallowance u/s 40(a)(i) and also as unexplained expenditure u/s 69C since source for the same not explained. Assessee has claimed an expense of Rs. 5,29,55,091/- out of the said total expense while computing income under the head ‘profits and gains from business’. Balance amount of Rs.1,37,50,001/- has been added back in the computation in accordance with section 40(a)(i) owing to non-deduction of tax at source, it being year-end provision. This fact is noted by the ld. Assessing Officer in the impugned assessment order in para 4.4 and is thus undisputed. Copy of computation of total income is placed in the paper book at page 32-33 which has been perused.
4.1. Assessee had entered into an agreement with Wunderman Pte Ltd for procuring various services in the segment of ‘management support service which primarily involves business development and client liaison, finance and other related support services, services in relation to Public Affairs, IT support services etc. These services are centrally provided by Wunderman Pte to all the group entities. The cost of these services is allocated to the respective entities either based on budgeted head count or usage ratio. Copy of the said agreement along with sample invoices were furnished in the appellate proceedings before the ld. CIT(A) and are placed on record in paper book. According to the assessee, “Matrix” as a brand operates under the Wunderman Group. Availing this support services benefit assessee by allowing it to operate coherently within the Wunderman Group, thereby enhancing business growth prospects, service quality and opportunities to maximize profitability from all clients. It was explained that for smooth functioning of its business, assessee requires various support services for new business development, advising on client delivery, introduction to international events, etc. Apart from the business development support, assessee also requires other support in the areas of finance, IT, legal, treasury, etc. Hence, Wunderman Pte provides centralized services to various group entities of its network including the assessee.
4.2. Further, assessee submitted that the said transaction has been undertaken at arm’s length price for which detailed transfer pricing documentation is maintained. Form 3CEB was also filed which is placed on record in the paper book, reporting the impugned transaction. Also, assessee demonstrated that it had duly deducted and deposited appropriate TDS under Section 195 of the Act while making payment to Wunderman Pte. Ltd. for which copy of Form 15CAs and Form 15CBs on a sample basis were filed are also placed on record in the paper book. It is stated that assessee has duly deducted and deposited appropriate taxes on Rs. 5,29,55,091/- (where applicable) during the year and the balance amount of Rs. 1,37,50,001/- is sou moto disallowed u/s 40(a)(i). Hence, adverse view taken by the ld. Assessing Officer is incorrect.
4.3. Attention was also drawn to the fact that the said transaction has been undertaken on a year-on-year basis and the allowability of the said expense has been accepted in the assessment proceedings in the preceding year Assessment Year 2016-17 completed u/s 143(3) vide order dated 29.10.2019, placed on record. attention that Wunderman Pte has been undertaking tax compliances in India and offering the above income to tax in India. Further, it was submitted that Wunderman Pte Ltd has also been subjected to assessment in the preceding years on the income earned by it towards management fees received from the assessee and the said income has been accepted to meet the arms’ length price by the revenue authorities in India. The position adopted by Wunderman Pte Ltd has been accepted by the transfer pricing and corporate tax assessing officers in its completed assessment for AY 2016- 17 i.e. without any adjustment. There has been no change in the facts of the case from AY 2016-17 to AY 2017- 18. A copy of the order passed in the case of Wunderman Pte for AY 2016-17 is placed on record. Assessee also submitted that Wunderman Pte has filed its return for AY 2017-18 offering the management fees earned from assessee, subjecting it to tax in India. Copy of acknowledgement of the said return filed by Wunderman Pte for AY 2017-18 is placed on record.
4.4. With detailed explanation and corroborated by documentary evidence as narrated above, assessee then submitted that management fees paid to Wunderman Pte is revenue expenditure as the same is expended out of commercial expediency, incurred wholly and exclusively for the purpose of smooth functioning of its business operations. Accordingly, the same should be allowed as deduction under Section 37 of the Act.
4.5. Ld. CIT(A) after considering the aforesaid details and explanations along with documentary evidence, held in favour of the assessee by deleting the addition made by the ld. Assessing Officer on account of unexplained expenditure under Section 69C and disallowance under Section 40(a)(i).
We have perused the aforesaid submissions and the material placed on record in the paper book. The factual position remains uncontroverted as nothing is brought on record by the ld. Sr. DR to dislodge the claim of the assessee. Furthermore, reference is made to Form 26AS of Wunderman Pte Ltd for the year under consideration which reflects the TDS done by the assessee on the amount of Rs.5,29,04,162/-. Considering the facts and detailed discussion backed by relevant documentary evidences, we do not find any reason to interfere with the finding arrived by the ld. CIT(A) deleting the addition made by the ld. Assessing Officer. Accordingly, ground nos. 1 and 2 by the revenue are dismissed.
In respect of ground no. 3, assessee incurred certain IT Support charges which were categorized as software expenses for the purpose of carrying out its day-to-day business operations. The details of the same are tabulated below: Sr. Party Name Nature of Expense Amount No. (Rs.) 1 Mobius Solutions Private Limited Outsourced IT Support 10,799/- Charges 2 Team Computers Pvt Ltd Outsourced IT Support 96,701/- Charges 3 WPP Marketing Communications Recharge of IT Support 47,63,921/- India Private Limited Charges 4 Group M Media India Pvt Ltd Recharge of IT Support 7,82,474/- Charges 5 Mediaware Infotech Pvt Ltd Media Database Support 5,13,759/- Charges Total 61,67,654/- 6.1. Addition was made by the ld. Assessing Officer holding that these expenses were not explained to establish their revenue nature and thus treated the same as capital expenditure. No depreciation was allowed while treating the same as capital in nature.
6.2. Contention of the assessee is that these expenses are incurred towards IT support services including software license fee and are not for acquiring any right in the software. These are for use and maintenance of the licenses rather than their acquisition. Thus, the said expense are revenue expenses and therefore, deductible under the provisions of section 37(1) of the Act. According to the assessee, aforementioned expenses are required to carry out day to day business operations and are annual /recurring in nature. These are software in the nature of application software which can be installed on the computers for use of the license holder. No enduring benefit is derived by the assessee from the license purchase of the software and hence, the same cannot be said to be capital in nature. Further, there was no change in the fixed capital base of the business by purchase of license to use the software.
6.3. Ld. CIT(A) after deliberating in detail on the submissions made by the assessee and going through the records held in favour of the assessee to delete the addition made by taking the view that IT support charges paid are not for acquiring any right in the software and but paid as licence fee for use of the software, which is renewable on a yearly basis.
Before us, factual position along with aforesaid submissions were reiterated. The same are considered along with material placed on record and observations of the authorities below. Considering the same, we do not find any reason to interfere with the finding arrived at by the ld. CIT(A) whereby the addition made by the ld. Assessing Officer is deleted. Accordingly, ground no. 3 by the revenue is dismissed.
In the cross objection filed by the assessee, the grounds raised are in support of the relief granted by the ld. CIT(A). No other issue is raised by the assessee in its cross objection. Since, we have upheld the findings of the ld. CIT(A) in the appeal filed by the revenue, the grounds of cross objection stand allowed.
In the result, appeal by the revenue is dismissed and cross objection by the assessee is allowed.
Order pronounced in the open court on 28 May, 2025.