ACIT, NEW DELHI vs. M/S. SAGE PUBLICATIONS INDIA PVT. LTD., NEW DELHI

The appeal filed by Revenue is against order of CIT(A)-44, New Delhi, dated 19.02.2015 relating to assessment year 2009-10 passed under section 143(3) of the Income-tax Act, 1961 (in short “Act”).

The Revenue has raised following grounds in this appeal:-

Briefly in the facts of the case the assessee had filed return of income of Rs.4,25,97,873/-. The case of the assessee was taken up for scrutiny. The assessee was a group company of Sage Group where 76% equity of the assessee company was held by Sage Publication Ltd. UK and balance 24% was held by Sage Publications Inc., USA. The assessee was engaged in the publication of academic books and journals. The books and periodicals published in India were partly exported to the AEs abroad and the assessee was also purchasing books and journals from its AEs abroad and selling and distributing the same in India. The case of the assessee was picked up for scrutiny. The first addition made by the Assessing Officer was against the disallowance of cash payment made in violation of section 40A(3) at Rs.21,547/-. The next issue raised by the Assessing Officer was the payment of royalty to the authors of the books and journal, on sale of the said books. The assessee had shown royalty payable amounting to Rs.85,34,636/-. The assessee was asked to furnish the details of the same and also justify as to why the amount was outstanding. The assessee furnished the list of the persons to whom the said royalty was payable. The Assessing Officer noted that no addresses of the said persons were given by the assessee. In such circumstances, he observed that it was not possible to verify whether the Page | 3 aforesaid amount was actually payable to the said persons. Hence, the sum of Rs.21,33,659/- equivalent to 25% of the outstanding royalty was treated as not genuine and was disallowed.

The CIT(A) allowed the claim of the assessee against which the Revenue is in appeal. The Revenue is aggrieved on the ground that the CIT(A) had deleted the addition by admitting the additional evidences and where the assessee has failed to furnish the relevant details of payment made to various authors, the said expenditure cannot be allowed.

The Ld. DR for the Revenue placed heavy reliance on the order of the Assessing Officer.

The Ld.AR for the assessee pointed out that the evidences filed by the assessee before the CIT(A), were sent to the Assessing Officer for filing Remand Report, which the Assessing Officer failed to file. Further, the CIT(A) has minutely gone into the details and allowed the claim of the assessee. He also pointed out that the Assessing Officer after receiving the details filed by the assessee, never raised any query regarding the addresses of the authors.

We have heard rival contentions and perused the record. The first issue raised by the Revenue is against the admission of additional evidence by the CIT(A). The grievance of the Revenue in this regard is that the said evidence on which reliance was placed by the CIT(A), was not filed before the Assessing Officer and was also not confronted by the Page | 4 CIT(A) to the Assessing Officer. On the perusal of record, we find that the assessee had furnished the basic details of name of parties to whom the aforesaid payment was made. The Assessing Officer denied the claim of the assessee on the ground that the addresses of the parties to whom the aforesaid payment has been made, was not available. First of all, no such query was raised by the Assessing Officer during the assessment proceedings and hence non-compliance by the assessee. However, details were filed by the assessee before the CIT(A), who in turn forwarded the same to the Assessing Officer for Remand Report, which was never filed by the Assessing Officer. In such scenario, the CIT(A) verified the details filed by the assessee i.e. (i) Schedule of the royalty for books including the name of the author, title of the book, address of the author/royalty payee and amount of royalty payable as on March 31, 2009 and (ii) Schedule of the royalty payable for journals including the name of the journal, address of the royalty payees and amount of royalty payable as on March 31, 2009. The assessee also made detailed submissions with regard to the royalty payable at Rs.85,34,634/- and the royalty expense claimed in the P&L A/c at Rs.78,40,523/- which was also filed before the Assessing Officer and also considered the contention of the assessee that after filing the aforesaid details, no other query was raised by the Assessing Officer. The CIT(A) vide para 5.5 at page 11 of the appellate order observed as under:-

The above said findings of the CIT(A) reflect that though several reminders were issued to the Assessing Officer but he failed to file the Remand Report. Even on merits, the issue has been considered elaborately by the CIT(A) as to the number of books dealt in and has noted that the average royalty expense per book title works out to Rs.3,640/-. The average royalty expense per author works out to Rs.6,240/-. The aforesaid payments were made by cheque and wherever applicable TDS was deducted and deposited. The said expenditure is thus allowed in the hands of assessee. In such circumstances, we find no merit in the Ground No.1 of appeal raised by the Revenue and the same is dismissed.

The issue raised in Ground No.2 is against the deletion of addition made of Rs.17,82,362/-.

Briefly in the facts of the case relating to the issue, the assessee during the year had declared work in progress relating to journals amounting to Rs.6,49,307/-. The assessee had not shown any stock of journal printed by it. In reply to the query raised by the Assessing Officer, the assessee explained that journals at hand, at the balance sheet date, were not valued. The Assessing Officer noted that the assessee was publishing volumes of journals and the sale of journals published by the assessee was Rs.2.43 crores during the year. The Assessing Officer was of the view that journals could not be published overnight and some related material and other settings had to be kept ready. The Assessing Officer was not satisfied with the explanation given by the assessee and he noted that the work in progress shown was only 2.67 % of the sale value of the journals. The Assessing Officer thus estimated the work in progress @ 10% of the sale value at Rs.24,31,669/- and enhanced the income by Rs.17,82,362/-.

The CIT(A) took note of the explanation of the assessee that the value of any progress had no relationship with the sale of journals, wherein the value was determined on the basis of actual expenditure incurred for the unfinished journals. The CIT(A) vide para 6.3 at page 14 observed that the work in progress related to expenditure incurred during pre-press stage like editing, proof reading, cover printing and other editorial service fees. He thus deleted the estimation of value of work in progress estimated by the Assessing Officer, holding it to be passed on conjectures and surmises.

The Ld. DR for the Revenue placed reliance on the order of the Assessing Officer. The Ld.AR for the assessee pointed out that complete details were filed before the Assessing Officer which are placed at page 131 of the Paper Book, which were not considered by the Assessing Officer, hence the addition.

We have heard rival contentions and perused the record and evidences filed by the assessee and find no merit in the order of the AO in estimating the work in progress of the journals. The assessee claims to have shown the value of work in progress on the basis of actual expense incurred for the unfinished journals. In the absence of any evidence found on the contrary, there is no merit in estimating the value of work in progress. Upholding the order of CIT(A), we dismiss Ground No.2 of the appeal raised by the Revenue.

The Ground No.3 raised by the Revenue is against the deletion of addition of Rs.7,56,935/- made by the Assessing Officer on account of foreign travelling expenses.

Briefly in the facts of the case relating to the issue, the assessee had incurred an expenditure of Rs.30,27,734/- on foreign travelling expenses. The Assessing Officer noted that the assessee was selling the books and journals published by its AEs. However, he was of the view that such huge expenses and frequent visits of foreign travel were not properly explained as what was the business purpose for which such visit was made. In the absence of the same, 25% of the total expenses were disallowed by the Assessing Officer at Rs.7,56,935/-.

The CIT(A) noted the contention of the assessee that the business trips were made to group companies in order to attend global executive committee meets and to discuss critical business issues and the said travels were made by the Managing Director of the assessee company.

On perusal of record and after hearing both authorized representatives and have also perused the details placed at page 136 of the Paper Book, we are of the view that adhoc disallowance out of foreign travel expenses is not warranted in the case of the assessee. The aforesaid expenditure was incurred by the assessee for attending the annual meets and other business conferences and hence, were undertaken for business purposes. Accordingly, we uphold the order of the CIT(A) and dismiss the Ground No.3 of the appeal raised by the Revenue.

The last issue raised in Ground No.4 is against the deletion of transfer pricing adjustment made on account of export of services at Rs.1.17 crores.

Briefly in the facts of the case relating to the issue, the assessee had undertaken various international transactions with its AE. The Assessing Officer during the course of assessment proceedings noted that the assessee had in the TP report applied the Transactional Net Margin Method and had proposed that the international transactions undertaken by it were at arms length. The Assessing Officer after going through the details submitted by the assessee and also the adjustments made to the profits reducing several costs observed that “considering the margins on these available to the Indian entity no adverse inference is being drawn.” The Assessing Officer further observed “however, regarding the cost of services the assessee company has tried to show a Page | 10 margin of 47.11. Out of these the assessee has sold 2,88,35,230/- to the AEs.” The Assessing Officer further observed that the assessee company not been able to support the profitability on cost of services. The assessee had charged cost of services at Rs.62,64,489/-. The Assessing Officer then made cost allocation on account of rent area, administration cost and selling and distributing expenses and reworked the cost of services provided by the assessee to its AE. The Assessing Officer applied cost plus method and in the final analysis made adjustment, observing that adjustment of Rs.1,17,20,448/- is to be made at twice of the above additional costs to the assessee i.e. 58,60,224/- (Rs.7,04,656 + 38,64,200 + 12,91,368/-).

The CIT(A) noted that the Assessing Officer had held that allocation of the cost was not correctly made by the assessee and had applied cost plus method. Further, as the assessee had agreed that it had understanding of charging 100% of the cost of services from the AEs, the Assessing Officer had taken 100% profit on the additional cost of rendering the services and making an adjustment of Rs.1.17 crores. The CIT(A) noted that the assessee had allocated 22% of the total rent as against 10% rent area taken by the Assessing Officer; as regards the administration of journal expenses, the allocation of cost was on the basis of turnover figures and selling and distribution cost did not relate to the services exported to AE and hence no cost to be allocated. The CIT(A) also took note of the contents of the affidavit filed by the assessee Page | 11 company that the observations of the Assessing Officer made in the assessment order as stated above para and his understanding of 100% margin over cost was not correct and was contrary to the submissions made by the assessee company and its authorized representatives during the course of assessment proceedings and the company denied from having made any such representation. The copy of the affidavit was forwarded to the AO who did not make any submission in response to the same. The CIT(A) deleted the addition observing as under:-

The Ld. DR for the Revenue after taking us through the facts of the case pointed out that the Assessing Officer had separated the transaction of provision of services to the AE and made an adjustment by estimating the cost. She also pointed out that the Assessing Officer had applied Page | 12 cost plus method and doubled the cost allocated. Referring to the order of CIT(A), she stressed that u/s 92C of the Act, arms length price of each transaction have to be determined, but the CIT(A) has not benchmarked the margins of the assessee and the margins of the comparables in this regard.

The Ld.AR for the assessee took us through the transfer pricing report of the assessee placed at pages 41 to 75 of the Paper Book. Our attention was drawn to page 49 which gave over view of the activities of the assessee and page 51 wherein international transactions undertaken by the assessee were specified. He then referred to the reply filed before the Assessing Officer dated 02.12.2011 placed at pages 1 to 6 and the Annexure at page 7 of the Paper Book. He stressed that at the behest of the Assessing Officer, segmental P&L A/c of provisions of services to the AE was filed. Our attention was drawn to the said segmental details and it was pointed out that the margin of the transaction of provision of services “was at 47.11 %”. He also drew our attention to allocation of cost which was majorly on actual basis and on some expenditure, turnover ratio was applied. The Ld.AR for the assessee stressed that allocation was partly accepted by the Assessing Officer and in the garb of cost plus method, the Assessing Officer re-allocated the cost on account of rented space area occupied, selling and distribution expenses and administration and journal expenses. The said allocation was made without any show cause notice to the assessee was also based on Page | 13 margins whereas the assessee had allocated this cost either on actual or on the basis of turnover.

We have heard the rival contentions and perused the record. The assessee had entered into multiple international transactions with its AEs and had benchmarked the arms length price of the said international transaction on aggregate basis. The assessee had applied Transactional Net Margin Method and compared its margins with the mean margins of the comparables selected by it. It may be pointed out that the Assessing Officer had accepted the margins of various international transactions undertaken by the assessee, except the transactions of provisions of services to AE. In this segment, the Assessing Officer observed the allocation of cost was not correctly made by the assessee and he re-worked cost and doubled the cost, in the garb applying cost plus method and made an addition of Rs.1.17 crores. First of all, there is no basis in the exercise carried out by the Assessing Officer as the Cost Plus method has not been correctly applied. Even otherwise, where the assessee had provided the segmentals at the behest of the Assessing Officer, which in turn were worked out after allocating the cost either on actual or on turn over basis, then the same cannot be rejected. First of all, there is no merit in segregating one transaction of provisions of services to AE and separately benchmarking the same.

In the result, appeal filed by the Revenue is dismissed.