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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: SHRI R.C. SHARMA, HONBLE & SHRI C.N. PRASAD, HONBLEShri Madhur Agarwal Shri K.C. Selvamani
O R D E R PER C.N. PRASAD (JM) 1. This appeal is filed by the Revenue against the order of the Learned Commissioner of Income Tax (Appeals) – 13, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 03.08.2018 for the A.Y. 2012-13.
The revenue in its appeal has raised following grounds: - “1. "On the facts and circumstances of the case and in law, the Id. CIT(A) erred in allowing the management fees of Rs,21,00,000/- paid to Hakuhodo Inc Japan without considering the fact that expenditure verification is independent for every assessment year”
(A.Y. 2012-13) M/s. Hakuhodo Percept Pvt. Ltd., 2. "On the facts and circumstances of the case, the Id. CIT(A) erred in allowing the addition of Rs. 8,60,00,000/- based on rejection of books of accounts without appreciating the fact that despite giving several opportunities assessee did not submit any evidence before AO during the course of scrutiny assessment nor provide before the Ld. CIT(A).”
Ground No.1 of grounds of appeal is relating to the deletion of disallowance made towards management fees of ₹.21,00,000/- paid to Hakuhodo Inc Japan. AE of the assessee company.
4. Briefly stated the facts are that, the assessee e-filed its return of income on 27.11.2011 declaring income of ₹.95,21,670/- and revised on 28.11.2013 declaring income at ₹.1,04,58,610/-. The assessment was completed u/s. 143(3) of the Act on 24.03.2015 determining the income of the assessee at ₹.16,09,51,440/-. While completing the assessment the Assessing Officer disallowed ₹.21,00,000/- paid by the assessee to its AE towards management fee observing that assessee failed to provide any documentary evidences in support of various services availed by the assessee and the assessee failed to establish the reasonableness of payment to its AE. On appeal the Ld.CIT(A) deleted the disallowance.
5. Ld.DR vehemently supported the orders of the Assessing Officer and submits that the assessee could not prove rendering of services by the AE and the reasonableness of the payment made by the assessee to its AE. Ld.DR submits that the Assessing Officer has rightly made the (A.Y. 2012-13) M/s. Hakuhodo Percept Pvt. Ltd., disallowance in the absence of any proof of rendering of services by the AE to the assessee.
6. On the other hand, the Learned Counsel for the assessee submitted that the management fee paid by the assessee is as per the agreement entered into way back on 29.05.2000 and since then the assessee is paying management fees to its AE as per the agreement and in none of the earlier assessment years payment made by the assessee towards management fee was disallowed. It was further submitted that even in the subsequent Assessment Years payment made by the assessee towards management fee to its AE has been allowed. Ld. Counsel for the assessee submits that in the course of the assessment proceedings the Assessing Officer has not given any show cause notice proposing for disallowance of Management Fee. The Ld. Counsel for the assessee referring to the Ld.CIT(A) order wherein detailed submissions were made before him submits that the management fee had been paid in pursuance of agreement dated 29.05.2000 for providing the following assistances: - a. Provision of information on Japanese Clients b. Support in India and Japan to develop new Japanese clients c. General Support of the media, creative, marketing, research, promotion, etc., in India d. Provision of Hakuhodo advertising expertise. e. Support and instruction and training of staff in India.
(A.Y. 2012-13) M/s. Hakuhodo Percept Pvt. Ltd., 7. Learned Counsel for the assessee submitted that the management fee paid was very reasonable considering the fact that the same was agreed in the F.Y. 2000-01 and has not been revised in the last twelve years. The Learned Counsel for the assessee submitted that the benefit in terms of agreement is evident from the fact that assessee company is allowed to use the word “Hakuhodo” in its name and almost all the clients of the assessee are Japanese companies. It is submitted that the “Hakuhodo Inc” is one of the leading advertising agency in Japan. Learned Counsel for the assessee submitted that the management fee paid have been incurred wholly and exclusively for the purpose of business. Therefore, it is submitted that the Ld.CIT(A) has rightly allowed the claim of the assessee.
We have heard the rival submissions, perused the orders of the authorities below. On a perusal of the order of the Ld.CIT(A) and the submissions of the assessee, we observe that the management fee has been paid by the assessee right from the year 2000-2001 and it is as per the agreement entered into between assessee and its A.E. In none of the earlier assessment years except the year under consideration the department did not doubt the rendering of services by the assessee. The claim of the assessee has been allowed year after year and even in the subsequent assessment years. The Ld.CIT(A) also considered the (A.Y. 2012-13) M/s. Hakuhodo Percept Pvt. Ltd., submissions of the assessee and deleted the disallowance by making the following observations: - “I have considered the submission made by the appellant, the reasons recorded by the AO, the remand report of the AO and rejoinder of the appellant in respect of the remand report. The additional evidence provided by the appellant is necessary for arriving at a proper conclusion in respect of the issue under consideration. Therefore, the additional evidence filed by the appellant is admitted in this appeal. It is seen from the submission of the appellant and material on record that the payment in respect of management fees has been allowed to the appellant in earlier years as well as subsequent two assessment years. The payment has pursuant to an agreement which is in force since A.Y 2001-02. Therefore, in the opinion of the undersigned, even if the appellant is not able to establish the services rendered by the parent company during the year, the payment of management fees as per the agreement is to be allowed because 1) It has been allowed in the case of the appellant for all other years including succeeding two assessment years. 2) a client given by the parent in any earlier year continues to be the client of the appellant for a long time. Similarly, other support provided by the parent continues to benefit the appellant in future years. 3) The nature of services is such that it may be difficult to have documentation for each and every service. Accordingly, the disallowance of Rs 21,00,000/- made by the AO is directed to be deleted.”
On a perusal of the Ld.CIT(A) observations we do not find any valid reason to interfere with the same. In the circumstances, we uphold the order of the Ld.CIT(A) and dismiss the ground raised by the revenue.
(A.Y. 2012-13) M/s. Hakuhodo Percept Pvt. Ltd., 10. Coming to Ground No.2 of grounds of appeal of the revenue, it relates to deleting the addition of ₹.8,60,00,000/- made by the Assessing Officer towards estimation of Gross Profit margin at 10% as against 5.3% reported by the assessee.
In the course of the assessment proceedings the Assessing Officer noticed that there is variation in profitability and profit ratios of the current assessment year when compared to the preceding assessment years. The Assessing Officer noticed that the Gross Profit ratio for the year under consideration was shown at 5.37% as against 18.80% declared for the immediately preceding assessment year. Therefore, the Assessing Officer was of the view that the assessee did not charge proper margin on the transactions with its group companies.
The Assessing Officer required the assessee to furnish certain details in respect of fall in Gross Profit and since there was no submission of specific details and also in the absence of any explanation for fall in Gross Profit ratio, the Assessing Officer rejected the book results of the assessee and applied the Gross Profit margin @10% as against 5.37%. Accordingly, an addition of ₹.8,60,00,000/- was made. On appeal the Ld.CIT(A) deleted the addition against which the revenue is in appeal before us.
(A.Y. 2012-13) M/s. Hakuhodo Percept Pvt. Ltd., 13. Ld. DR vehemently supported the orders of the Assessing Officer. Referring to the Assessment Order the Ld.DR submits that it is the finding of the Assessing Officer that the requisite details called for by the assessee were not furnished and there was no justification for fall in Gross Profit margin as compared to the earlier assessment year and therefore the Assessing Officer was rightly rejected the Books of Accounts and estimated the Gross Profit margin for this year @10% and consequently addition was rightly made.
On the other hand, Learned Counsel for the assessee submitted that the assessee has filed all the details before the Ld.CIT(A) in the form of additional evidences and the Ld.CIT(A) called for the remand report from the Assessing Officer and after verification of the details, submissions of the assessee and the remand report of the Assessing Officer, Ld.CIT(A) deleted the addition made by the Assessing Officer. Ld. Counsel for the assessee further submits that the Assessing Officer has not pointed out any mistake in the Books of Accounts and no fault was found with regard to the additional evidences furnished by the assessee. It is submitted that no adverse remarks regarding the Books of Accounts was made and the books were not rejected in the remand report called for. It is further submitted that the profits were taxed on the same rate in assessee’s case and also in subsidiaries case and further in subsidiaries
(A.Y. 2012-13) M/s. Hakuhodo Percept Pvt. Ltd., case the Assessing Officer accepted as genuine and therefore there cannot be any estimation of Gross Profit in assessee’s case. Ld. Counsel for the assessee further submits that the assessee has provided the financials of the subsidiary in the remand proceedings. It is also submitted that no addition has been made in any of the earlier assessment years and also in the subsequent assessment years towards fall in Gross Profit.
Ld. Counsel for the assessee also placed reliance on the decision of the Hon'ble Jurisdictional High Court in the case of CIT v. Indo Saudi Services (Travel)(P) Ltd., 310 ITR 306]
We have heard the rival submissions, perused the orders of the authorities below. On a perusal of the order of the Ld.CIT(A) we find that assessee made elaborate submissions including the additional evidences before the Ld.CIT(A) and a remand report was also called for from the Assessing Officer. In the remand report no adverse findings have been given by the Assessing Officer on the additional evidences furnished by the assessee. The Assessing Officer only stated that the assessee company has not provided any basis or reasons as to why the sales could not have been made by the assessee company directly to the outside customers and why the same was required to be routed through its (A.Y. 2012-13) M/s. Hakuhodo Percept Pvt. Ltd., subsidiary. The Ld.CIT(A) considering the submissions and also the remand report deleted the additions observing as under: - “I have considered the submission made by the appellant, the reasons recorded by the AO, the remand report of the AO and rejoinder of the appellant in respect of the remand report. The additional evidence provided by the appellant is necessary for arriving at a proper conclusion in respect of the issue under consideration. Therefore, the additional evidence filed by the appellant is admitted in this appeal. The appellant has given proper explanation for decline in the gross profit which has been primarily due to increase in the sales to subsidiary. The profit margin on these sales are low because the appellant is not rendering any services to its subsidiary except for buying media for its whereas tin respect other clients, the appellant is doing creative work as well as media planning and therefore, the margins are higher. The appellant has also given explanation as to why it had to service M/s Toshiba through its subsidiary. Even otherwise, it is prerogative of the appellant to decide which client it wants to service and which clients are attended by subsidiary. The AO can only examine whether the appellant is getting adequate compensation for services rendered to the subsidiary. Considering the fact that the similar transactions of the appellant with its subsidiary in A.Y 2013-14 has been held to be at arm's length by the TPO and the AO has not brought anything on record to show that the appellant has not been adequately compensated for services rendered, I am of the opinion that the gross profit addition of Rs 8,60,00,000/- made by the AO was not proper and the same is directed to be deleted.”
On a careful perusal of the observations of the Ld.CIT(A), we do not find any valid reason to disturb the findings of the Ld.CIT(A). In our view the assessee has properly explained the fall in Gross Profit and no defects have been pointed by the Assessing Officer for rejecting the Books of Accounts. The apprehensions of the Assessing Officer that why the sales have been routed through subsidiary company has been satisfactorily
(A.Y. 2012-13) M/s. Hakuhodo Percept Pvt. Ltd., explained by the assessee before the Ld.CIT(A). In the circumstances, we do not find any reason to disturb the findings of the Ld.CIT(A). Hence the same is sustained. Ground raised by the revenue on this issue is rejected.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on the 26th February, 2020