2019 (9) TMI 662 - AT - Income Tax

Nomination fee - allowable business expenditure - Appointment of assessee as sole hanger supplier by its non-resident client - 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 . - HELD 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. Following the decision in the own case of assessee 2018 (5) TMI 1743 - ITAT CHENNAI appeal of the revenue dismissed.

Issues Involved:
1. Disallowance of nomination fees as business expenditure.
2. Validity of the assessee's business model and related agreements.
3. Relevance of the Supreme Court decision in SA Builders Ltd v CIT(A) & Anr.

Detailed Analysis:

1. Disallowance of Nomination Fees as Business Expenditure:
The primary issue revolves around the disallowance of nomination fees claimed by the assessee as business expenditure for the assessment years 2013-14 and 2014-15. The Assessing Officer (AO) disallowed the expenditure on several grounds, including the lack of historical precedent for such fees, absence of tripartite agreements, and questioning the prudence of the expenditure. The AO argued that there was no direct nexus between the expenditure and the business, and that the cost of specialized tools should be attributed solely to the business of the assessee.

2. Validity of the Assessee's Business Model and Related Agreements:
The assessee, engaged in manufacturing plastic and garment hangers, explained that the nomination fees were paid to secure business from non-resident retailers who nominated the assessee as their "sole hanger supplier" to garment vendors in India. This arrangement purportedly ensured a steady flow of business, avoided competition, and justified the investment in specialized tools. The Commissioner of Income Tax (Appeals) [CIT(A)] found that the facts were similar to previous assessment years where the Tribunal had decided in favor of the assessee, thus directing the AO to delete the disallowance.

3. Relevance of the Supreme Court Decision in SA Builders Ltd v CIT(A) & Anr:
The assessee cited the Supreme Court decision in SA Builders Ltd v CIT(A) & Anr, which established that if there is a nexus between the expenditure and the business purpose, the Revenue cannot question the reasonableness of the expenditure. The Tribunal agreed with this perspective, emphasizing that the Revenue should not interfere with the business decisions of the assessee, and that the nomination fees were a genuine business expenditure.

Tribunal's Findings:
The Tribunal reiterated several uncontested facts:
- The assessee's business involved manufacturing hangers used by global brands.
- The nomination fees were a consideration for securing business and avoiding competition.
- The expenditure on specialized tools was directly related to the business model.
- The business arrangement with non-resident retailers was genuine and beneficial.

The Tribunal dismissed the Revenue's contention that the expenditure was unnecessary, highlighting that business decisions involve complexities that the Revenue should not second-guess. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere, and directed the AO to delete the disallowance of the nomination fees.

Conclusion:
The Tribunal dismissed the Revenue's appeals for both assessment years 2013-14 and 2014-15, and the assessee's cross-objection for assessment year 2013-14 became infructuous. The order emphasized that the nomination fees were a legitimate business expenditure, reaffirming the principles laid out in the Supreme Court decision in SA Builders Ltd v CIT(A) & Anr.

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