ACIT,, CHENNAI vs. M/S. MAINETTI INDIA PVT.LTD.,, CHENNAI

आदेश/ O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

:-3-: & 253/Chny/2019 & CO No.49/Chny/2019 /global presence accredit "Mainetti India" as a preferred vendor- consequent to which the garment manufacturer places his orders with us.

In this connection, it is most humbly submitted that the four non-resident companies viz., ASDA Stores Ltd (ASDA), C&A Buying GMBH (C&A) and Gap lnc (Old Navy) & Arcadia Ltd (BHS) are assessee’s customers. The assessee has entered into an agreement with these retailers by which they have nominated the assessee as their “sole hanger supplier” to heir garment vendors located in India. By this arrangement, whenever the garment suppliers in India get orders from these non-resident retailers, they have to necessarily procure hangers from the assessee company as we are the preferred accredited vendor.

By virtue of this arrangement, the assessee has secured business, avoided competition and better cash flow scenario. This benefit/treatment is extended to us as we are part of “Mainetti Group" who is a preferred Global vendor. As a consideration, the assessee has to pay a "nomination fees" as a percentage on the sale value of hangers to ASDA, C&A, Old Navy & Arcadia for this referral/accredition as a preferred vendor. During the year under review company has paid Rs. 2,76,99,239/- break up for the same & nomination agreement copies is given in Annexure-I This arrangement for nomination fees was insisted upon on the assessee by the retailers since 4-5 years ago, The assessee had made huge investments in tools that can be used exclusively for the manufacture of hangers catering to the said retailers' specifications in the past years, These tools cannot be used to manufacture hangers for other vendors From the said facts it is clear that the said agreement, has secured confirmed business for the assessee, The business from these nominations are in addition to the regular business which the assessee was getting earlier.

Further, the said arrangement secures business for the assessee, by way of Indian garment manufacturers procuring hangers only from the assessee upon receiving purchase orders from the non-resident retailers, which was not available prior to the agreement.

Further being an accredited vendor to global brands gives us an edge in our business and also to procure fresh businesses/leads.

:-4-: & 253/Chny/2019 & CO No.49/Chny/2019 The global competition/spurious products make the business very competitive. At this stage this nomination agreement was a new leg to the business entered into by the assessee with non-resident its retail customers, As mentioned above, by virtue of this agreement not only is business secured bill a continuous return on investment in tools made by the assessee company is ensured.

In this connection, attention is drown to the decision of the Hon'ble Supreme Court in the case of SA, Builders Ltd v CIT(A) & Anr [2007] 288 ITR I (SC), wherein it has been held as follows:

"once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case, No businessman can he compelled to maximize its profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman.”

By the ratio of the said decision, it is clear from the above cited facts that there is a nexus between the nomination fees paid and the business of the assessee company, and is determinative of the fact that expenditure has been incurred wholly and exclusively for the business of the assessee.”

3.1 However the Ld.AO rejected the submission of the assessee for the following reasons:- (i) The assessee has been supplying hangers to the garment manufacturers in the earlier years without incurring such expenditure.

:-5-: & 253/Chny/2019 & CO No.49/Chny/2019 (ii) Capital cost incurred for purchasing specialized tools if any is only attributable to the business of the assessee. (iii) There was no agreement between the assessee and the clients of the assessee towards such business plan at the time of incurring expenditure for purchase of specialized tools. (iv) There was no tripartite agreement between the assessee, garment manufacturers and the assessee’s clients such as the owners of the brand Old Navy, Asda George, C&A, Arcadia etc., with respect to payment of nomination fees. Thus there is no nexus between the expenditure incurred by the assessee and the business of the assessee. (v) It was not prudent on the part of the assessee to incur such expenditure. and disallowed the expenditure claimed by the asseessee towards the nomination fee for both the assessment years.

4. Aggrieved, the assessee filed appeals before the ld.CIT(A) and the ld.CIT(A) by his common order & 296/16-17 dated 20.11.2018 found that on similar issue this Tribunal in its order ITA Nos.3432 & 3433/Chny/2016 for the assessment years 2011-12

:-6-: & 253/Chny/2019 & CO No.49/Chny/2019 & 2012-13 dated 18.05.2018 decided the issue in favour of the assessee for both the assessment years. Since, the facts are similar for both the assessment years, in accordance with judicial discipline, he directed the AO to delete the disallowance made in this regard for the assessment years 2013-14 & 2014-15 respectively.

2. The Ld.CIT(A) erred in deleting the disallowance of nomination fee made by the Assessing Officer to the extent of Rs.4,07,88,503/- for the A.Y.2013-14.

2.1 The Ld.CIT(A) erred in allowing the assessee to claim nomination fees paid as allowable business expenditure to the tune of Rs.4,07,88,503/- for the A.Y.2013-14.

2.2 The Ld.CIT(A) erred in allowing the nomination fees paid expenses claimed by the assessee despite the fact that the assessee failed to furnish any evidence in the form of tripartite agreement before the Assessing Officer in support of the claim that they are the Sole or Preferred Vendor for the foreign retailer.

2.3 The Ld.CIT(A) had failed to observe that the Assessing Officer had rightly pointed out that the cost of tools would be accounted for at the time of fixing the sale price of the hangers and it makes no business sense for the foreign retailer to accept that there be a moratorium on the payment of Nomination fee on the part of the assessee.

:-7-: & 253/Chny/2019 & CO No.49/Chny/2019 3. The Ld.CIT(A) has allowed assessee's appeal based on the decision of the Hon'ble ITAT, Chennai in ITA Nos. 3432 & 3433/Chny/2016 dtd. 18.05.2018 which has not yet reached finality. Revenue has filed further appeal u/s.260A before Hon'ble High Court which is pending for disposal.

Now the contention of the Revenue were, it was unnecessary for the assessee to have incurred expenditure towards nomination fee, the assessee was not incurring such expenditure during the past, there is no direct nexus with respect to the expenditure incurred by the assessee and the business of the assessee and the huge investment on specialized tools made by the assessee has no relevance to the business model of the assessee. These findings of the Revenue are not appreciable. The Revenue cannot sit on judgment with respect to the business policies and decisions made by the assessee during the course of the business of the assessee. Any business carried out by any entity has various dimensions and complexities which have to be prudently tackled by the entity in order to survive in that business. Further the general practice in any business is that when an entity obtains certain benefits from another entity, a portion of the benefit is passed on to that entity in some manner or the other in order to nourish healthy business environment. In the case of the assessee, the proximity of the assessee’s clients and the garment suppliers who are purchasing the hangers from the assessee are not in dispute and is also genuine. More over the clients of the assessee are in a position to influence the purchase price of the hangers purchased by the garment suppliers from the assessee. In :-9-: & 253/Chny/2019 & CO No.49/Chny/2019 these circumstances when the clients of the assessee have insisted the garment suppliers to purchase the hanger from the assessee, it is quite natural that they would expect some benefit out of the transaction. Further the clients of the assessee are in a position to control certain business policies of the garment suppliers because they buy bulk garments from them. Therefore when they charge a nomination fee from the assessee on turnover basis, it is genuine business expenditure incurred by the assessee and cannot be brushed aside by stating that such expenditure is unnecessary. Needless to mention that, in the case of the assessee, all the entities are aliens to each other but for their business connections. Further it is not for the Ld.Revenue Authorities to decide as to what expenditure is to be incurred by the assessee and what not. In these situations, we fully agree with the submission of the Ld.AR that the decision rendered by the Hon’ble Supreme Court in the case of SA Builders supra is relevant to the case of the assessee. For the above stated reasons we are of the view that the disallowance made by the Ld.AO towards nomination fee which was further confirmed by the Ld.CIT(A) is not justifiable. Hence, we hereby direct the Ld.AO to delete the disallowance made on account of nomination fee which is debited to the P&L account of the assessee for both the assessment years. Thus this ground raised by the assessee is decided in its favour for both the assessment years. Since, there is no change in the facts of law, we do not find any reason to interfere with the order of the ld.CIT(A) and hence, the Revenue’s appeals are dismissed.

:-10-: & 253/Chny/2019 & CO No.49/Chny/2019 9. In the result, the Revenue’s appeals for the assessment years 2013-14 & 2014-15 and the assessee’s cross objection for the assessment year 2013-14 are dismissed.

Order pronounced in the court on 13thof September, 2019 at Chennai.