2019 (2) TMI 1531 - AT - Income Tax

Addition on account of alleged Closing Work-in-Progress - method of accounting followed - HELD THAT - The material on record suggest that the assessee was providing high end visual effects VFX & Animation services and therefore, salary expenditure was a period cost for the assessee and therefore, there could not no occasion for the assessee to work out the work-in-progress in the financial statements. The assessee was consistently following completed service contract method in terms of Accounting Standard-9 to recognize the revenue in the books of accounts. Nothing on record suggest that there was any change in the consistent method of accounting while drawing up the financial statements. Therefore, the adhoc addition of 20% against total expenses, in our opinion, could not be sustained at all. advances received from customers - HELD THAT - there could be no occasion to bring them to tax in the impugned AY when the same were mere advances and the services against the same remained to be rendered by the assessee. This is further fortified by the fact that that the amount of advances, in subsequent years, have been adjusted in invoices raised by the assessee in those years and the revenue has been recognized in those years. This being the case, the addition stand deleted. Adhoc disallowance of marketing and sales promotion expenses - Disallowed on the basis that some payments have been made by the assessee through credit cards in the hotels and an amount of ₹ 0.41 Lacs has been spent on the gifts - HELD THAT - Most of the payments have been made through cheques after deduction of TDS. The payments by way of cash vouchers and credit card amounts to ₹ 4,21,577/- only, the details of which has already been given on page- 11 of the impugned order. This being the case, the disallowance of 50% is on a very higher side. We restrict the same to 20% of ₹ 4,21,577/- which comes to ₹ 84,315/-. The balance disallowance stands deleted. Sales commission expenses - Form 15CA / CB - HELD THAT - commission mainly paid to Alan Dinoble, a US citizen & ADLD LLC for providing sales and marketing services to assessee outside India. In terms of the agreement, the consultant was to be paid @5% of work generated by them subject to a minimum payment of USD 10000 per month irrespective of sales orders procured. The documents on record demonstrate that it is undisputed fact that the payments have been made by the assessee pursuant to consultancy agreement entered into by the assessee with these two entities. The invoices issued by both the entities are placed on record which suggest that the payment has been made for the period from August, 2011 to December, 2011. The remittances are duly supported by Form 15CA / CB. Therefore, the expenditure, in our opinion, fulfilled the conditions envisaged by Section 37(1) and therefore, was an allowable expenditure. The balance payment of ₹ 1.89 Lacs represent payment to 24 parties as commission for referrals. Most of these payments are petty payments and made through cheques. The complete details of the same have been placed on record. This being the case, the addition on this account could also not be sustained. Addition of royalty payment - use of Trademark and logo Anibrain - allowable business expense - HELD THAT - The payment has been made pursuant to memorandum of understanding dated 22/03/2008 towards use of certain trademarks owned by the director. The copies of the trademarks certificates have been placed on record. We find that this payment is recurring in nature and paid pursuant to contractual understanding. Nothing more was required from assessee, in this regard, to ascertain the admissibility thereof u/s 37(1). Therefore, the same was allowable to the assessee.

Issues involved:
1. Addition on account of alleged closing work-in-progress
2. Disallowance of marketing and sales promotion expenses
3. Disallowance of sales commission
4. Disallowance of royalty fee

Issue 1: Addition on account of alleged closing work-in-progress
The appellant contested the addition made by the Assessing Officer for alleged "Closing Work-in-Progress" and advance received from clients/customers. The appellant argued for the deletion of these additions. The assessment for the relevant year determined the appellant's income after certain additions/disallowances. The appellant, engaged in animations, visual effects, and computer software development, failed to submit timesheets of its employees during assessment proceedings, leading to an ad hoc addition of 20% against total expenses. The disallowance amounted to Rs. 156.28 Lacs. Another addition was made for advances received from customers.

Issue 2: Disallowance of marketing and sales promotion expenses
The appellant challenged the disallowance of marketing and sales promotion expenses made by the Assessing Officer. The disallowance was based on the lack of satisfactory documentary evidence, resulting in an ad hoc disallowance of 50%. The appellant contended for the deletion of this disallowance. The Tribunal found that most payments were made through cheques after TDS deduction, with only a small portion made through cash vouchers and credit cards. The Tribunal reduced the disallowance to 20% of the relevant amount.

Issue 3: Disallowance of sales commission
The appellant disputed the disallowance of sales commission paid for promoting business outside India. The Tribunal noted that the payments were made pursuant to consultancy agreements and fulfilled the conditions under Section 37(1) as allowable expenditure. The Tribunal found the expenditure to be justified and ordered the deletion of the disallowance.

Issue 4: Disallowance of royalty fee
The appellant contested the disallowance of expenditure on royalty fee. The Tribunal observed that the payment was recurring and made pursuant to a contractual understanding for the usage of trademarks owned by the director. The Tribunal found the payment allowable under Section 37(1) and ordered in favor of the appellant.

In conclusion, the Tribunal partly allowed the appeal, deleting certain additions and disallowances while finding the appellant's contentions valid in various instances. The judgment provided detailed reasoning for each issue, considering the facts, legal provisions, and documentary evidence presented before the Tribunal.

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