DY. COMMISSIONER OF INCOME TAX - 7(1)(1), MUMBAI vs. MIRAGE CLOTHING COMPANY P RIVATE LIMITED, MUMBAI

The brief facts of the case are that the assessee is incorporated under the Companies Act, 1956 and is engaged in the business of providing “marketing support services” to Indian ready-made clothing exporters and manufacturers. For the year under consideration, the assessee filed its return of income on 26/09/2011 declaring a total income of Rs.4,00,12,760. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. In response to the notices issued during the assessment proceedings, the assessee filed the necessary details. Vide order dated 27/01/2014 passed under section 143(3) of the Act, the Assessing Officer (“AO”) assessed the total income of the assessee at Rs.6,29,88,800, after disallowing sampling/design expenses, foreign travel expenses, website designing expenses, and salary paid to directors and their relatives. During the appellate proceedings before the learned CIT(A), the assessee filed detailed submissions supported by documentary evidence. Accordingly, the learned CIT(A) sought comment/report on the submissions of the assessee from the AO. However, in the absence of any remand report from the AO, the learned CIT(A), vide impugned order deleted the additions made by the AO after considering the submissions and documentary evidence filed by the assessee. Being aggrieved, the Revenue is in appeal before us and has raised the following grounds: –

In the present appeal, the primary grievance of the Revenue is that the learned CIT(A) did not insist on the comments of the AO through the remand report under Rule 46A of the Income Tax Rules, 1962 (“the Rules”), and allowed the appeal filed by the assessee by relying upon the submissions/evidence submitted by the assessee.

In this regard, we have considered the submissions of both sides and perused the material available on record. It is evident from the record that the AO disallowed the sampling/designing expenses and foreign travel expenses primarily on the basis that the assessee did not submit any explanation as to how the same were for the business of the assessee. Further, with respect to website design expenses, the AO raised the same objection and further held that the assessee did not submit any explanation as to why the expenditure

The issue arising in ground no. C, raised in Revenue’s appeal, pertains to the deletion of addition on account of sampling/design expenses.

We have considered the submissions of both sides and perused the material available on record. As per the assessee, it is engaged in the business of agency and ready-made garments and for the same, it procures/develops Page | 4

During the year under consideration, the assessee debited an expenditure amounting to Rs.89,98,290 in the profit and loss account on account of sampling/design expenses. During the assessment proceedings, the assessee vide letter dated 29/11/2013 submitted details of sampling and design expenses. These expenses include expenses on account of Sample Ayushi, Sample Jhalak, Sample Megha Agarwal, and Sample Bikram Oberoi. As per the assessee, it has teams under which design and sampling were done, and therefore the invoices of expenses incurred by such teams were submitted. It is evident from the record that the assessee has furnished the ledger account of these parties. However, the AO on the basis that the Mirage Clothing Company Pvt. Ltd. assessee did not explain how these expenses were for the purpose of the business disallowed the expenditure.

As per the assessee, during the collection of samples the sales team has to visit various places and fabric makers all over India and overseas, wherein out-of-pocket expenses are incurred by the sales team on behalf of the assessee, which are reimbursed based on actual proof furnished by the assessee. It is further the plea of the assessee that the sales team purchased samples directly and had also availed the service of local consultants for gathering information as to the latest trends and styles of the garment. According to the assessee, based on the market research and samples the assessee is able to procure huge orders overseas for its Indian customers on which it earned commission income amounting to Rs.14.58 crores as against the sampling/designing expenditure of Rs.89,98,290, during the year under consideration, which constitutes mere 6.17% of the business income. Thus, it is the submission of the assessee that these expenses were incurred for the purpose of the business of the assessee and form an integral part of its operations as a marketing support service provider. In support of its claim, the assessee has also furnished various evidence of sampling/designing expenditure, such as bank statements, payment vouchers, sample reimbursement statements, purchase bills of fabrics, etc., which forms part of the paper book from pages 32-426.

The Revenue apart from harping that opportunity was not granted to the AO to comment on the evidence produced by the assessee before the learned CIT(A), did not bring any material on record to controvert the detailed Page | 6

The issue arising in ground no. D, raised in Revenue’s appeal, pertains to the deletion of addition on account of foreign travel expenses.

We have considered the submissions of both sides and perused the material available on record. During the year under consideration, the assessee debited foreign travel expenses amounting to Rs.1,91,438 incurred by one of its employees, namely Mr. Lanka Rajkumar. In the absence of any explanation by the assessee regarding the business exigency of the expenditure, the AO disallowed the foreign travel expenses and added the same to the total income of the assessee.

As per the assessee, Mr. Lanka Rajkumar used to work with the company from October 1996 till August 2013 as a Senior Merchandiser and used to travel on behalf of the assessee to the UK for business trips. It is further the submission of the assessee that the said employee was assigned by the management of the company to do the business marketing and sales activities and overseas cities like Cardiff and Reading in UK to meet the management of the company’s major clientele, namely Peacock. It was submitted that Mr. Lanka Rajkumar finalised the price of the products and Mirage Clothing Company Pvt. Ltd. gathered further orders during the said meeting which helped the assessee in the further advancement of business with the said customer. As per the assessee, the entire expenditure incurred by the said employee on its boarding, lodging, and local travel was authorised by the management of the assessee company and was fully incurred for the advancement/expansion of the assessee’s business. In support of the aforesaid claim, the assessee has placed on record documentary evidence containing ledger account, chart of expenses furnished by the employee, and invoices of boarding, lodging and currency purchase, which form part of the paper book from pages 427 – 445. No material has an brought on record by the Revenue to doubt the genuineness of the claim of the assessee that the said expenditure was incurred for the purpose of the business. Accordingly, we find no infirmity in the impugned order in allowing the foreign travel expenses amounting to Rs.1,91,438 incurred by the assessee. As a result, ground no. D raised in Revenue’s appeal is dismissed.

The issue arising in ground no. E, raised in Revenue’s appeal, pertains to the deletion of addition on account of website design expenses.

We have considered the submissions of both sides and perused the material available on record. During the year under consideration, the assessee debited Rs.5,28,000 towards website designing expenses and claimed the same to be revenue expenditure. During the assessment proceedings, the assessee was asked to explain why the said expenditure be not treated as capital in nature. However, the assessee did not submit any explanation thereto. The AO further held that the assessee also did not Page | 8

As per the assessee it has built a website functioning with the web address, www.miragefg.com. It is the claim of the assessee that the website requires continuous development and upgradation of pages and product catalogue, therefore it has engaged an independent web developer and IT consultant to upkeep and maintain the website. As per the assessee, the nature of expenses in developing the website includes annual fees for a domain name, annual fees for web hosting, monthly fees for web email access to various employees and key persons, content marketing and SEO optimisation, and e-commerce integration or API integrations. Thus, as per the assessee, it has fully outsourced the entire functioning of running and maintaining the said website to an independent consultant. In support of its claim of the expenditure, the assessee has placed on record the invoice issued in respect of charges for designing content material for the official website of the assessee, forming part of the paper book on page 446.

It cannot be disputed that in today’s corporate world having a website and digital presence has become essential for increasing the digital footprint of the company. Considering the business profile of the assessee, wherein it acts as an intermediary between foreign customers and Indian manufacturers, having a fully functional and updated website is a necessity not only for having a digital presence but also for the efficient working of its business. Thus, we Page | 9

The issue arising in ground no. F, raised in Revenue’s appeal, pertains to the deletion of addition on account of excess salary paid to directors and their relatives.

We have considered the submissions of both sides and perused the material available on record. During the year under consideration, the assessee paid remuneration/salaries to the following directors/employees: –

The AO compared the salary of Ms. Manjul Uberoi with the salary of Ms. Kiran Sharan and held that Ms. Kiran Sharan is also the founder and director of the assessee to whom salary of Rs.3,72,000 is paid whereas the salary of Page | 10

As per the assessee, Ms. Manjul Uberoi is one of the promoters and founding directors of the assessee company, who envisioned the entire business framework and roadmap of the assessee company. Further, Ms. Manjul Uberoi has been wholeheartedly running the entire functioning and business of the assessee since its inception. The assessee submitted that Ms. Manjul Uberoi has over 25 years of experience in the garment business and worked in buying agencies and export houses for large corporate houses. In his submission before the learned CIT(A), the assessee provided a detailed profile of Ms. Manjul Uberoi along with her major achievements. Accordingly, the assessee claimed that the work and responsibility of Ms. Manjul Uberoi

As regards Mr. Nishikant Sharan, the assessee submitted that he is handling the overall day-to-day operation of the company and has 10 years of experience as a Manager Human Resource Management with the Tata Group of companies. Further, it is the submission of the assessee that since the year of joining, i.e. 1992, Mr. Nishikant Sharan has been handling various key roles in the assessee company. Accordingly, the assessee justified the payment of a salary of Rs. 64,62,315 to Mr. Nishikant Sharan.

As regards Mr. Vivek Chopra, the assessee submitted that he bought technical expertise in managing logistics and marketing. Therefore, he is managing samples and designs from all over the world and has been vested with the job of efficiently handling the logistics, and supply chain of the samples to and from customers/suppliers. The assessee furnished a detailed resume of Mr. Vivek Chopra before the learned CIT(A), as reproduced from pages 24-28 of the impugned order.

Accordingly, the assessee submitted that the salary paid to the directors is commensurate with their services. It is evident from the record that the AO has merely compared the salary of the directors, without examining the services rendered by them to the assessee company. Therefore, considering the experience and magnitude of operations handled by the aforenoted directors, we are of the considered view that the learned CIT(A) has rightly

In the result, the appeal by the Revenue is dismissed. Order pronounced in the open Court on 22/08/2024