The Deputy Commissioner of Income Tax, Circle 5(1)(1), Mumbai, Circle 5(1)(1), Mumbai V. GABRIEL INDIA LIMITED, 29TH MILESTONE

ITA 641/MUM/2023

AI Insights

The case revolves around an appeal by the Deputy Commissioner of Income Tax (DCIT) against Gabriel India Ltd concerning the disallowance of management fees for the assessment year 2017-18. The DCIT challenged the CIT(A)'s decision which had allowed the deduction of these fees. The management fees were paid to AAPL, a group company, calculated as a percentage of sales. The primary contention was whether these fees were justifiable and incurred wholly and exclusively for business purposes. The Tribunal examined the facts, including the nature of services provided and the method of charging these fees, and found that the CIT(A) had correctly applied the law as per the judicial precedent.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 301239 (ITAT-MUMBAI)
• Duration Of Justice: 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 08-05-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 02-03-2023
• Other Referred Cases: Spicer India P. Ltd vs. ITA No. 251/Pun/2014
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: DIPIKA DINGREJA
• Keywords: Business expenditure; Commercial expediency
• Section: 143(3); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “G”, MUMBAI BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER AND SHRI OM PRAKASH KANT, ACCOUNTANT MEMBER ITA No. 641/M/2023 Assessment Year: 2017-18 The DCIT, Circle-5(1)(1), Mumbai Vs. Gabriel India Ltd, 29 th Milestone Pune, Nahik Highway, Village- Kuruli, Tal Khed, Pune (Appellant) (Respondent) PAN: AAACG1994N Present for: Assessee by : Ms. Dipika Dingreja Revenue by : Shri Ajay Singh, Sr. AR Date of Hearing : 09.05.2023 Date of Pronouncement : 19.05.2023 O R D E R Per : Kuldip Singh, Judicial Member: The appellant, M/s. Gabriel India Ltd (hereinafter referred to as ‘the assessee’) by filing the present appeal, sought to set aside the impugned order dated 13.12.2022 passed by Ld. CIT(A)-53, Mumbai (hereinafter referred to as CIT(A)] qua the assessment year 2017-18 on the grounds inter-alia that :- “i) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance being 20% of management fees ignoring the fact that management fees could be paid without knowing the cost of services and such management fees could not have been paid in terms of percentage of revenue. ii) On the facts and circumstances of the case and in law, the Ld. CIT(A) failed to appreciating the fact that the assessee has failed to prove the business exigency of excess expenditure incurred on management fees and that ITA No. 641/M/2023 Gabriel India Ltd 2 such expenditure is incurred wholly and exclusively for the purpose of the business.” 2. Briefly stated facts necessary for consideration and adjudication of the issues at hand are: the assessee company is engaged in the manufacturing of Ride Control products, (shock absorbers, struts, front forks) and components thereof. During the scrutiny proceedings the AO noticed that the assessee has debited expenses of Rs. 27,06,17,270/- on account of legal and professional (management fees). The AO also noticed that the assessee has received management services from its group companies namely M/s. Anand Automotive Pvt. Ltd (AAPL). The AO also noticed from the documents relied upon by the assessee qua the services rendered by the AAPL, that AAPL has raised the invoices without cost base charges. It is contention of the assessee that invoices were raised @1.5 % of the sales of the month. Declining the contention raised by the assessee company AO proceeded to disallow an amount of Rs. 4,52,57,100/- being 20% of the management fee paid to the group company i.e. AAPL on the ground that the assessee company has failed to clearly establish the claim of the expenditure and framed the assessment u/s 143(3) of the Act. 3. The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has deleted the addition by partly allowing the appeal. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) revenue has come up before the Tribunal by way filing the present appeal. 4. We have perused the order passed by the ld CIT(A) who has decided the issue in favour of the assessee by relying upon the decision rendered by the coordinate bench of this Tribunal in case of Spicer India P. Ltd a group company of the assessee in ITA No. 251/Pun/2014 by returning the following findings:-“ ITA No. 641/M/2023 Gabriel India Ltd 3 “4.3 I have considered the facts and submissions of the case. The appellant has entered into an agreement with AAPL for provision of various services including usage of "Gabriel" trademark. The fee for the said service has been fixed at 1.5% of, the net sales price. The appellant has relied on the decision in the case of Spicer India P. Ltd. in ITA No. 251/Pun/2014 wherein on similar facts, the ITAT has allowed the charge of management fee (excluding royalty) paid by Spicer @2.85% of sales. The Hon'ble ITAT, in the said decision, has held as under:- "24. In the facts of the present case, the assessee was paying Royalty to Dana Corporation @ 2.85% and was also paying management fees to AIPL for rendering several types of services at remuneration which was equivalent to the amount of Royalty i.e. 2.85% of sales. The perusal of agreement reflects the nature of services to be provided and the fees to be charged for providing the said services. The majority of support services are being rendered by the said concem to the assessee and the perusal of expenses debited by the assessee reflects that no major expenses have been incurred by the assessee and the benefits flow from AIPL to the assessee. The said benefits were for smooth carrying on of the business by the assessee and were incurred for the purpose of business. The assessee is the best judge to decide the expenditure it needs to incur for smooth carrying on of its business. The Assessing Officer cannot sit in judgment of businessman position in incurring any expenditure. The Hon'ble Supreme Court in Hero Cycles (P) Ltd. Vs. CIT (supra) have applied the ratio laid down by the Apex court in S.A. Builders Ltd. Vs. CIT(A) and another (2007) 288 ITR 1 (SC) and upheld the scope of commercial expediency, wherein it was held that The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. Where there is nexus between the expenditure incurred and the purpose of business, then the revenue cannot put itself in the arm chair of the businessman to decide how much of the expenditure is reasonable. Applying ITA No. 641/M/2023 Gabriel India Ltd 4 the above said proposition laid down by the Hon'ble Supreme Court, we hold that the expenditure incurred by the assessee on management fees in order to facilitate smooth running of its business is an allowable expenditure in the hands of assessee. Similar expenditure has been allowed in the hands of assessee in preceding year. Another aspect of the issue is that the said management fees is to be taxed in the hands of recipient and even the service tax has been paid by the recipient, evidence of which is placed in the Paper Book. Once the commercial expediency of expenditure is established, then the same is to be allowed as business expenditure in the hands of assessee. We hold so. The ground of appeal No.5 raised by the assessee is thus, allowed". 4.4 It has also been brought out by the appellant that AAPL has accounted the entire receipts in its books and offered the same for tax. 4.5 The AO has stated that commensurate benefits are not derived. He has also opined that no tangible and substantial commercial benefit was derived by such payment of management fees. However, no specific instance of excessive charge or non-provision of service has been brought out. The adhoc disallowance of 20% of management fees is not sustainable unless specific discrepancies are brought out which is not the case here. On the other hand, the appellant has stated that various services are being rendered by the payee, in terms of a written agreement. Hence the claim of expenses u/s. 37(1) by the appellant is allowed. This is also in line with the judicial precedent cited above in the case of group company of the appellant.” 5. Bare perusal of the findings returned by the ld CIT(A) goes to prove that the impugned order has been passed by thrashing the facts by relying upon the order passed by the coordinate bench in a group case of the assessee company. The AO has made the addition merely on ad hoc basis without questioning the books of account, who has accounted the entire receipts in its books and offered the same to tax. Moreover all the services have been rendered by AAPL to the assessee company as per ITA No. 641/M/2023 Gabriel India Ltd 5 corporate services agreement that “all services of AAPL have been allowed at 1.5% of sales of the assessee”. 6. The assessee brought on record the fact that AAPL has agreed to provide use of trade mark and various other corporate/ management services which include wide ranging provisions for giving of all marketing, industrial, manufacturing, commercial and scientific knowledge, experience and skill for the efficient working and management of the company in which it has charges a consolidated bundled fees @1.5% of sales for the use of trademark and all other services referred to above. 7. The assessee has brought on record the entire details of management services rendered by AAPL group company, along with copies of invoices raised and also ledger account of management fee in books of account, which has been duly examined. The assessee company has also brought on record detailed quantification of services rendered by group company, but the AO without questioning the same on merit merely proceeded to made the addition on ad hoc basis by way of estimation and guess work which is not sustainable in the eyes of law. 8. The ld DR for the revenue has failed to dispute the legal proposition mooted out by the coordinate bench of Tribunal in case of Spicer India pvt. Ltd (supra) wherein, identical services were also taken from AAPL @2.85% of sales of the assessee. Moreover, expenditure has to be examined with the businessman’s stand point and revenue authority cannot sit in the chair of the businessman to decide as to availing of any services to run its business. 9. The ld CIT(A) has passed the order by following the decision rendered by the coordinate bench of Tribunal in case of ITA No. 641/M/2023 Gabriel India Ltd 6 Spicer India Pvt Ltd (supra) a group company of the appellant wherein identical issue has been decided. 10. So in view of the matter we find no illegality or perversity in the impugned order passed by the ld CIT(A), hence, the appeal filed by the revenue is dismissed. Order pronounced in the open court on 19.05.2023. Sd/- Sd/- ( OM PRAKASH KANT) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 19.05.2023. * Ajay Kumar Keot, Sr. P.S. Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// By Order Dy/Asstt. Registrar, ITAT, Mumbai.