ANAND I POWER LTD. (FORMERLY KNOWN AS PERFECT CIRCLE INDIA LTD.),MUMBAI vs. DCIT RANGE 5(2), MUMBAI

Being aggrieved by the order passed by the Commissioner of Income Tax (Appeals) -10 (CIT(A), for short),), Mumbai, your appellant submits the following grounds of appeal for your sympathetic consideration: 1) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance of INR 39,88,000 being 20% of the Professional fees paid to Anand Automotive Systems Ltd of INR 1,99,40,000 by treating it as not incurred wholly and exclusively for business purpose. 2) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance of INR 95,67,000 being 20% of the Advertisement and Publicity expenses of INR 4,78,35,000 by treating as not incurred wholly and exclusively for the purpose of business. 3) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming disallowance of INR 35,86,000 being 20% of the Share of Common Marketing Expenses of INR 1,79,30,000 by treating it as not incurred wholly and exclusively for the purpose of business. 4) On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance of INR 13,47,200 being 20% of the Commission and Discount of INR 57,74,000 and INR 9,62,000 respectively by treating it as not incurred wholly and exclusively for the purpose of business.

Brief facts of the case are that the Assessee-Company is engaged in the business of manufacturing Piston Rings and Semi-finished castings, filed its return of income for Assessment Year 2011-12 on 28.09.2011 declaring total income of Rs. 4,21,15,198/-. The assessment was completed on 27.02.2014 under section 143(3) of the Act. The Assessing Officer while passing the assessment order made the disallowance of 20% of professional fees, advertisement and publishing expenses, common marketing expenses and commission and discount. On appeal before the Ld. CIT(A), all the disallowances @ 20% made by Assessing Officer was confirmed. Thus, further aggrieved by the order of Ld. CIT(A), the assessee has filed the present appeal before us.

We have heard the Ld. Authorized Representative (AR) of the assessee and Ld. Departmental Representative (DR) for the Revenue and perused the material available on record. The Ld. AR of the assessee submits that the Assessing Officer disallowed the professional fees, advertisement expenses, share of common marketing expenses and commission & discount @ 20%. All disallowance was made on adhoc basis and without any specific reasons. The assessee has explained the nature of expenses and their justification. On the other hand, the Ld. DR for the Revenue supported 2 the order of authorities below. The Ld. DR for the Revenue further submits that the assessee failed to provide the nature of services related with all the expenses. The lower authority has reasonably disallowed the expenses which consist of professional fees, advertisement expenses, marketing expenses and commission and brokerage. 4. We have considered the submission of the parties and have perused the material available on record. Ground No.1 relates to disallowance of 20% of Legal & Professional Fees paid to Anand Automotive Systems Ltd. During the assessment, the Assessing Officer noted that the assessee has debited an amount of Rs. 1,99,40,000/- under the head Legal & Professional Fee paid to Anand Automotive Systems Ltd. The assessee was asked to justify if the expenses were incurred wholly and exclusively for the purpose of business. The assessee filed its reply dated 19.02.2014. In the reply the assessee contended that the assessee availed services from Anand Automotive Systems Ltd. in relation to area mainly Human Resources Development as well as marketing matters, training programme and dealers meet for providing assistance to arrange long term sales, capital need from financial institution like Banks, advertising maters of strategic issue, key business decision and corporate relation and communication. The assessee also furnished the agreement with the Anand Automotive Systems Ltd., the assessee further contended that due to special knowledge and guidance of Anand Automotive Systems Ltd., the sale of assessee was increased from Rs. 78.22 Crore to 104.17 Crore which resulted in increased in profit from Rs. 7.36 Crore to 8.56 Crore. The contention of the assessee was not accepted by the Assessing Officer. The Assessing Officer concluded that assessee failed to give exact nature and quantum of services rendered by Anand Automotive Systems Ltd. and disallowed 20% of the expenditure out of total paid amount debited under the head Legal & Professional Fee of Rs. 1,99,40,000/-. The Assessing Officer worked out the disallowance to Rs. 39,88,000/-. During the course of first appellate stage, the Ld. CIT(A) observed that Anand Automotive Systems Ltd. is sister concern of the assessee. The assessee has not justified the expenses incurred wholly and exclusively for the purpose of business. The assessee failed to give exact nature and type of services rendered by its group concern and concur that the discretion applied by Assessing Officer in making disallowance at 20% of expenditure. We have noted that assessee has placed on record the corporate services agreement entered by assessee- company with Anand Automotive Systems Ltd., copies of which available at page No. 56 to 63 of Paper Book. Details of professional fees are provided at page no. 64 to 71 of Paper Book. The perusal of corporate services agreement reveals that the assessee and its sister concern i.e. Anand Automotive Systems Ltd. entered for providing Human Resources Development Services, marketing, finance, legal and taxation, operation review, corporate office facilities, government license, corporate relation and communication support and assistance in corporate areas etc. The lower authority has not disputed the execution corporate services agreement. The Ld. CIT(A) in its order has referred that there is no specific activities, which the assessee-company itself cannot take care of and the need of assistance of sister concern and that the corporate service agreement is vague. We have noted that neither the Assessing Officer nor the Ld. CIT(A) has bring any cogent material on record while making adhoc disallowance @ 20% of expenditure. The Assessing Officer or the Ld. CIT(A) has not referred anywhere that no such services as referred in the corporate service agreement, is undertaken by the Anand Automotive Systems Ltd. No specific reason is identified for making adhoc disallowance only. Further, no specific reason is mentioned as to why the disallowances made @ 20% only. Availing of such services from the group concern is not un-common. The lower authorities have not identified, if the payments made to related party is unreasonable. No comparable on reason cum industry is referred by lower authorities. Moreover, we have seen that Legal & Professional Fees is only 2.02% of the sales. Thus, we do not find any justification in partial disallowance of Legal and Professional Expenses, which we delete. In the result the ground No.1 of the appeal is allowed.

Ground No.2 relates to 20% of disallowance of advertisement and publicity expenses. The Assessing Officer during the assessment proceeding disallowed the 20% of advertisement expenses out of Rs. 4,78,35,000/- debit in the Profit & Loss Account. The Assessing Officer disallowed holding that no proper justification and supporting documentary evidence is produced by the assessee. Therefore, an amount of 20% of Rs. 4,78,35,000/- i.e. Rs. 95,67,000/- was disallowed. The Ld. CIT(A) confirmed the action of Assessing Officer by observing that the assessee failed to furnish require details that in substantiating that expenditure was wholly and exclusively incurred of the purpose of running the business. Before the Tribunal, the assessee has placed on record the ledger account on account of advertisement and publicity expenses (page no. 72 to 83 of Paper Book). The assessee has certified/verified that these documents were furnished to the lower authority. We have noted that the lower authority has not given any finding on the documentary evidences furnished before them.

Ground No.3 relates to disallowance of 20% of share of common marketing expenses. The Assessing Officer disallowed 20% of marketing expenses out of Rs. 1,79,30,000/- holding that no proper justification and supporting documentary evidence was produced. The second reason for disallowance by Assessing Officer was that earlier year’s addition was pending before the Ld. CIT(A). Before the Ld. CIT(A), the assessee- company urged that the assessee entered in agreement with Victor Gasket India Ltd to share certain common resources for marketing and that amount were paid as per agreement. The Ld. CIT(A) concurred with the decision of Assessing Officer holding that the perusal of agreement with Victor Gasket India Ltd dated 23.06.2009 relates to Assessment Year 2010-11 and that there is no such agreement for Assessment Year 2011-12, nor there is reference in the agreement regarding validity of agreement for the Assessment Year under consideration. Before us, the assessee has placed on record the copies of four agreements with Victor Gasket India Ltd. with regard to share of common marketing expenses, copy of which are available at page no. 84 to 94 of Paper Book (four agreements). The perusal of the agreements reveals that initial agreement was made between the assessee and Victor Gasket India Ltd. on 06.02.2002 for providing marketing services to assessee all over India to handle mechanical service, sales promotion, Van campaign and to share the expenses in 60:40 ratio. No period of validity of agreement is mentioned. Further, the agreement was revised by agreement dated 05.08.2004, which was further revised vide agreement dated 27.05.2007. The agreement dated 27.05.2007 was again revised vide agreement dated 05.06.2009. In agreement dated 05.06.2009, the assessee and Victor Gasket India Ltd. agreed to share 67% and 33% of the marketing expenses. Interestingly, no period of validity of agreement is mentioned in this agreement as well. We have noted that the lower authority has not disputed the expenses incurred in relation to the agreement, only the validity of agreement was disputed. The lower authority has not brought any material on record that payment incurred on common marketing expenses is in-genuine or unreasonable. Considering the fact that neither any adverse material was brought on record nor any specific reason was mentioned before disallowing 20% only of the common marketing expenses. We have seen that share of common marketing expenses is only 1.61% of the sales. Hence, we do not find any justification in making adhoc disallowance @ 20% of the common marketing expenses. In the result this ground of appeal