This decision underscores the fact that comparability analysis should not be confined to mere matching of FAR profiles and other factors and tests must also be duly considered while identifying comparable companies.
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH “I” NEW DELHI)
BEFORE SHRI RAJPAL YADAV AND SHRI SHAMIM YAHYA
M/s.Yum ! Restaurants (India) Pvt. Ltd. Vs. Additional CIT – ITA No. 3796/Del/2006 – Assessment Year: 2002-03
Income-tax Officer Vs. Yum ! Restaurants (India) Pvt. Ltd. –ITA No. 4154/Del/2006 – Assessment Year: 2002-03
M/s.Yum ! Restaurants (India) Pvt. Ltd. Vs. Income-tax Officer -ITA No. 142/Del/2007- Assessment Year: 2003-04
Income-tax Officer Vs. Yum ! Restaurants (India) Pvt. Ltd. – ITA No. 480/Del/2007 – Assessment Year: 2003-04
M/s.Yum ! Restaurants (India) Pvt. Ltd. Vs. Additional CIT -ITA No. 5122/Del/2010- Assessment Year: 2006-07
ORDER
PER RAJPAL YADAV: JUDICIAL MEMBER
The assessee and revenue are in cross appeals. In order to appreciate various details in more scientific way, we deem it appropriate to take note of the following details in the tabular form:
Sr.No. ITA Nos. Appellant A.Ys Dt. Of CIT(A)’s order Date of A.O.’s order & U/s.
1. 3796/Del/2006 Assessee 2002-03 27.9.2006 2.12.2005
U/s. 143(3)
2. 4154/Del/2006 Department -do- -do- -do-
3. 142/Del/2007 Assessee 2003-04 10.11.2006 30.3.2006
u/s. 143(3)
4. 480/Del/07 Department -do- -do- -do-
5. 5122/Del/2010 Assessee 2006-07 DRP 16.12.2009
23.09.2010 u/s
143(3)/144C
First we take appeal of the revenue in Asstt, year 2002-03 i.e. ITA No. 4154/D/2006
2. In the first ground of appeal, it has been pleaded by the revenue that Ld. CIT(A) has erred in holding the service income receipt of ‘ 12,67,04,206/- as business income.
3. The brief facts of the case are that assessee has filed its return of income on 28.10.2002 declaring total income at NIL. The case of the assessee was selected for scrutiny assessment and a notice u/s 143(2) dated 17/24-10-2005 was sent through registered post. The AO felt that accounts of the assessee are of complex nature after taking necessary approvals he sent for special audit of the accounts. Shri S.C. & Associates was appointed as Special Auditor. This reference was challenged before the Hon’ble High Court but ultimately issue was decided against the assessee. The Special Auditor has handed over the report dated 5th October, 2005. Before adverting to the issue disputed in this ground of appeal, we deem it necessary to note brief background of the assessee and the alleged business module of the assessee company. According to the assessee, it was incorporated under the Indian Companies Act and is engaged into the business of Pizza Hut (“PHILLC”) and Kentucky Fried Chicken (KFCEEC) Restaurant in India. The assessee has entered into a technology license agreement with Kentucky Fried Chicken International holdings Inc. and Pizza Hut international LLC to operate Pizza Hut and KFC Restaurant in India. As per these agreements, the assessee could enter into various franchise agreements with entities in India to operate such restaurants. As per the AO main source of assessee’s income is service income, also called stewardship fees and supply chain management fees hereinafter referred to (SCM). The service income is governed by an agreement entered into by the assessee with M/s. Tricon Restaurant International Inc. ( re named as Yum Restaurant International SWC and referred as YRI hereinafter ). This agreement was entered on 1st April, 2001. As per this agreement, assessee is under an obligation to provide following services :-
i) “Providing assistance to existing and future licensees in India, Mauritius, Pakistan, Sri Lanka and such other areas upon which the parties may agree from time to time;
ii) Providing TRI with such reports concerning the above matters as may be reasonably required by them from time to time.
iii) Collection and onward remittance of license fee, and such other fees as may be payable by the licensees, to KFCIH and PHILLC.
iv) Acting generally on behalf of TRI in a liaison capacity in connection with the existing and the potential licensees and/or such other matters.”
4. For the services stated above, assessee is entitled to service fee equal to 110% of all costs reasonably incurred by it in the performance of such service i.e. refereed above. The next important source of income is Supply Chain Management Fees. This is recognized income as per agreement entered into with supplier of materials to the franchise. The assessee has earned service income aggregating to Rs.12,67,04,206/-. The computation of this income has been noticed by the Ld. CIT(A) on pages 5-6. The AO treated this service income as income from other sources . According to the AO, in earlier assessment years, the service income received was equivalent to the cost incurred. Whereas in this asstt. year, the income received as equivalent to 110% of the expenditure. The AO doubted the agreement itself. According to him, the agreement is not duly signed, witnessed nor executed on stamp paper. He further observed that the very dominant intention of the assessee, right from the beginning was never to enter into any business activity, but to secure and pass on the income earned by the international companies in Indian Sub continent without payment of tax. He also observed that in order to claim the expenditure incurred in excess of its receipts as in earlier years, the assessee through some device alleged during such years claimed such losses as business, contrary to the facts and circumstances. According to the AO, the income alleged to have been received by the assessee i.e. 10% of the total expenditure reimbursed is not on account of exploitation for business or use of commercial assets. He also alleged that in the service agreement countries consisting Pakistan, Sri Lanka and Mauritius, whereas service income has been received in respect of expenses incurred by assessee in India only. In this way, Ld. AO has held that it is income from other source and not the business income.
5. Dissatisfied with the asstt. order, assessee carried the matter before the Ld. CIT(A). Ld. CIT(A) after a detailed discussion accepted the contention of assessee. The findings recorded in paragraph No.3.1 are worth to note which read as under :-
3.9 “On comparing the facts of the appellant’s case in the light of the legal position discussed above I am of the view that Services have been provided to Yum! Restaurants International Inc. (formerly known as Tricon Restaurants International Inc. – TRI) for development of business systems (of the respective brand holders) outside USA, by the appellant. The services provided are of multifarious nature viz. provision of support services to franchisees, collection and remittance of royalty to brand holders in the US, assistance provided for R&D activity, etc. Against such services, service income equivalent to 110% of all costs incurred has been earned by the appellant. The act and course of services provided by the appellant constitute a systematic organized activity conducted with a special purpose as the provision of services is not an isolated transaction but the same has been continuously provided since A.Y. 1998-99 and as informed the appellant continuing even in the present date. Hence, the earning of service income cannot be classified under any other head but business income since all the essential parameters of classifying the said activity as business are fulfilled in the facts and circumstances of present case. Further, it not in dispute that the entire expenditure debited in the P&L account has been accepted by the A.O. as business expenditure. Now, if expenditure is held to be business expenditure, service income computed on the basis of 110% of such expenditure cannot be anything but Business Income. Although, the AO has propositioned that the service income earned by the appellant is not a Business Income but Income from Other Sources, however, in complete contradiction, the expenditure which forms the basis for computation of the service income has been held to be business expenditure.
Also the perusal of assessment order reveals that the A.O. has not given any concrete reasons to support the action of treating service income as `income from other sources’. There is a lack of reasoning to support the A.O.’s conclusion that the appellant was not carrying on any business, or that the service income earned by it was not derived from business. In my view, the existence and operation of the Pizza Hut Restaurants and KFC Restaurants in various cities across India can be seen by any body and needs no proof. These outlets are either operated by the appellant or operated through franchisees. These franchisees have been provided with support services on behalf or the brand holders as discussed earlier. In addition to the provision of these services to the franchisee, the appellant has also provided services to the brand holders in USA by way of collection and remittance of royalty, providing them services by way of research and development etc. All such activities visible and there is evidence to substantiate these activities. There exists a contractual agreement under which the services have been provided, and the service income has been earned, received and accounted for as such, all of which remains uncontroverted. In my view if the assessing officer had any doubt about the genuineness of the services rendered by the appellant company, nothing prevented him from calling upon the franchisees or the principals to confirm the facts. Not only that, he could plan a visit incognito on his own or through the appellant to any of the outlets and see for himself the services being rendered by the appellant under the service agreement. He could not have arrived at a unilateral decision based on his own whims and fancies, when the facts could easily be ascertained by direct inquiry from the parties concerned.
3.10 Finally the appellant has drawn my attention to the fact that the service income earned by the appellant has been continuously assessed under the head `business’ in the past. Although the principle of res-judicata does not apply to income tax proceedings but it has been repeatedly held by various courts that, for the sake of consistency and in order to achieve finality in all litigations, earlier treatment on the same question should not be disturbed unless some fresh facts are found in the subsequent year as held in the following cases:
Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC)
Asstt. CIT v. General Hazarilal and Co. (2003) 263 ITR 679 (MP). CIT v. A.R.J. Security Printers (2003) 264 ITR 276 (Del).
CIT v. Lagan Kala Upvan (2003) 259 ITR 489 (Del).
CIT v. Neo Poly Pack (P) Ltd. (2000) 112 Taxman 363 (Delhi). Sardar Kehar Singh v. CIT (1992) 195 ITR 769 (Raj).
CIT v. Girish Mohan Ganeriwala (2003) 260 ITR 417 (P&H)
Sonepat Hindu Educational and Charitable Society v. CIT (2005) 278 ITR 262 (P&H).
In my view, the inclusion of service fee income as Business income in earlier year’s could not be disturbed without any fresh facts being brought on record.
3.11 Therefore, in view of the reasons discussed above the A.O. it is held that service income receipts aggregating Rs.12,67,04,206/- are to be treated as Business Income only and the appeal is allowed on this ground.”
6. Before us, Ld. DR relied upon the order of AO and pointed out that AO has observed that income was earned by the assessee without exploitation of any business assets.
7. On the other hand, Ld. Counsel for the assessee relied upon the order of Ld. CIT(A). He took us through the submissions reproduced by the Ld. CIT(A) on pages No. 5 to 10 of the impugned order.
8. We have duly considered the rival contention and gone through the record carefully. Ld. First Appellate Authority has reproduced the submissions of the assessee. The assessee in its submissions has pointed out that section 2 (13) provides the definition of expression “business” according to which business includes any trade, commerce, manufacture or any adventure or concern in the nature of trading, commerce or manufacture. In various authoritative pronouncement of the Hon’bel Supreme Course and Hon’ble High Court, meaning and scope of expression “business” has been propounded. It is not necessary to recite and recapitulate of those decisions, but on the strength of them, it would be suffice to say that word “business” is one of wide import and which means an activity carried out continuously and systematically by a person by the application of his labour and skill with a view to earn income. The case of the assessee is that right from asstt. Year 1998-99, it is providing various types of services to the franchise in India and also to its associate enterprises, because it is collecting fees etc. from the franchise and remitting it to YRI in US. The main object of the assessee company, as discernable from Memorandum of Association is to own, purchase, lease, develop, operate, franchise and manage restaurant etc. Similarly, its next object is to provide consultancy and advisory services in connection with the establishment, organization, financing , management and operation of restaurant, café… .etc. This business, assessee has been performing right from 1998-99 and the department has accepted this. Assessee has shown additional receipts which means higher taxes would be payable. The assessee has also pointed out at the time of hearing that a reference to the TPO to determine the arms length price u/s 92 (CA) 3, in respect of the international transaction entered into by the assessee was made and the TPO has also accepted that the transaction are at arms length price. With regard to the objection of the AO, on account of authenticity of the agreement by the assessee that agreement has duly been signed by the both the parties. There is no specific defect referred by the AO. According to the assessee under the Indian Tax Act even on oral agreement or an agreement on plain paper entered into by two or more parties is valid and binding upon the contracting parties. With regard to allegation of AO about payment of dividend by the assessee to the parent company is concerned, it was contended by the assessee that AO has observed that possibility of payments being made in lieu of dividend on contribution toward development / business from time to time made by parent company by the assessee cannot be ruled out. There is no evidence with the AO in this regard. The assessee is receiving the income from parent company i.e. YRI and not making payment to it. Taking into consideration the detailed submission by the assessee, which have duly been reproduced by the Ld. CIT(A) coupled with the finding recorded by the Ld. CIT(A) (extracted supra), we are of the view that AO miserably failed to appreciate the facts and circumstance. The assessee has been offering income from consultancy etc. as a business income. It has duly been accepted by the department since 1998-99. The AO without assigning any valid reason concluded that it is an income from other sources. On the other hand, Ld. First Authority has considered this issue in right perspective. Therefore, we do not find any merit in this ground of appeal it is rejected.
Ground No. 2 :
9. In this ground of appeal, grievance of the revenue is that Ld. CIT(A) has erred in deleting the addition of Rs.12,60,21,989/- . The brief facts of the case are that assessee is in the business of franchising ‘Pizza Hut and Kentucky Fried Chicken Restaurant in India for which it has entered into technology licence agreement with the respective brand owners i.e. KFC and Pizza Hut International LLC. It has entered into a service agreement on 1st April, 2001 with M/s. Tricon Restaurant INC USA ( now known as Yum Restaurant International YRI). The assessee has raised through separate invoices of M/s YRI / TRI amounting to Rs. 9,39,30,265/-, Rs. 3,20,91,724/- and Rs. 6,82,217/- totalling to Rs. 1 2,67,04,206/- the amount which has been treated by the AO as income from other sources. It emerges out that two invoices for a sum of Rs. 9,39,30,265/- and Rs. 3,20,9 1 ,724/- alleged to have beenraised on Pizza Hut International and KFC International were available in the accounts. The first two invoices raised on YRI / TRI i.e. for a consideration of Rs. 9,39,30,265/- and Rs. 3,20,91,724/- were signed by Mr. Rohit Bansal, Manager Finance of the assessee company. The third invoice is under the signature of Mr. Ajay Bansal, Director Finance of the assessee. Whereas the copies of the alleged two invoices have been raised on Pizza Hut LLC and KFC IH were under the signature of Mr. Ajay Bansal. The case of the AO is that assessee has raised two separate invoices on Pizza Hut LLC and KFC IH totalling to Rs. 12,60,21,989/-. It has filed to disclose these receipts. On the other hand, case of the assessee is that service agreement which was entered with YRI and YRIPL for the first time on April 1, 2001. Prior to this agreement, a similar agreement was entered into by YRIPL directly with KFCIH and Pizza Hut LLC for asstt. year 2001 and earlier years. This year no such agreement was available with these two concerns. Inadvertently on the basis of past practice invoices have been prepared for astt. Year 2002-03 also. The invoices were prepared for raising them on KFCIH , PHLLC as well as YRI. The amount could be collected only from YRI. The amounts mentioned in the first two invoices alleged to have been raised of YRI and KFC Pizza Hut are similar. Thus, according to the assessee in fact, no amount was to be received from KFC and Pizza Hut. These invoices were prepared inadvertently and lying in the accounts. The AO did not accept this contention. He observed that invoices alleged to be raised inadvertently, were attached with original voucher, “Advances others” was debited instead of the name of the party in the voucher. Why different invoices were signed on the same day by different persons etc. Ld. CIT(A) has deleted the addition by observing that AO has made the addition only on presumption basis. The said assumption is purely on two pieces of paper, whether they have been acted upon or not? How the money has travelled not discernable.?
10. With the assistance of Ld. Representative, we have gone through the record carefully. Assessee has explained its position that these invoices were prepared inadvertently. It has filed the affidavit of the Director Mr. Ajay Bansal who has explained the mistake. The TPO had also accepted the case of assessee about arm’s length prices. The invoices involved an international transaction. Had they paid by virtue of the alleged invoices then there should be entries in the bank account and there should be trail of the money. AO has unnecessarily treated two documents as sufficient for demonstrating the alleged undisclosed income. The assessee has explained its position properly and no addition deserves to be made. Ld. First Appellate Authority has considered this issue elaborately and has rightly deleted the addition. We do not see any reason to interfere in his finding. This ground of appeal is rejected.
Ground No. 3
11. In this ground of appeal, grievance of the revenue is that Ld. CIT(A) has erred in deleting the addition of Rs. 39,50,000/-. The brief facts of the case are that assessee has a wholly owned subsidiary company by the name of YUM Restaurant Marketing Pvt. Ltd. (Hereinafter referred to as YRMPL). This company was incorporated on 8th June 1999 as a private Ltd. Company after taking prior approval from the competent authorities. This company was formed with a sole objective of undertaking advertising media and promotional activities exclusively for the assessee and its franchise at the regional and national level. According to the assessee, the object of forming this company was to ensure that franchise concentrate on business of running restaurant while marketing and promotional activities are being taken by other entities which is wholly owned subsidiary company. The assessee used to carve out budget for advertisement and promotional activities at the commencement of every year. This was carved out after consultation with the franchise. Each franchise is required to contribute certain fixed percentage of its sales for advertising, media and promotional activities to YRMPL. Any deficit in the budget as compared to the contributory receipt form the franchise is being met by the assessee in the form of its contribution towards advertisement, marketing , promotional activities. Apart from all these Pizza Hut and Kentucky Fried Chicken restaurants, products of Pepsi Food Ltd. are also sold exclusively as per the joint marketing agreement entered into between YRIPL and Pepsi Food Ltd. As the product of Pepsi are also advertised in the promotional material for Pizza Hut and Kentucky Fried Chicken restaurant, Pepsi is also required to contribute towards the advertisement for media and promotional activities. The Pepsi food had paid a sum of Rs. 39,50,000/- to the assessee in F.Y. 2001-02. For this purpose, assessee has raised debit note for pepsi for receiving this contribution. While making the payment to the assessee Pepsi had deducted taxes at source. The assessee had passed on this amount to its subsidiary company i.e. YRIPL to be incurred on advertising media and promotional activities. It had not deducted any tax at source while making this payment. The AO has made the addition on the ground that Pepsi has made the payment to the assessee. The assessee on its own has raised a debit note. Credit for taxes deducted at source by Pepsi was claimed by the assessee in its return of income. The assessee did not claim the amount transferred to its subsidiary concern i.e. YRIPL as its expenditure. It has not deducted taxes at source at the time of transferring the amount. In this way Ld. AO has made the addition.
12. Dissatisfied with the addition, assessee carried the matter in appeal before Ld. CIT(A) . It was contended by the assessee that even if this amount was treated as income of the assessee the corresponding expenditure has been allowed to it. Thus, there will not be any tax implication on the assessee. Ld. CIT(A) accepted the contention of assessee on the ground that as far as transmission of this amount to the subsidiary is concerned there is no dispute. The payment of the amount to the subsidiary is an allowable expense because it was to be incurred towards advertising media and promotional activities. The AO has alleged that assessee has not deducted the TDS on this reasoning Ld. First Appellate Authority is of the opinion that section 40(a)(ia) of the Act were not applicable to the asstt. year under appeal i.e. asstt. year 2002-03. It had come on the statute book subsequently.
13. With the assistance of Ld. Representative, we have gone through the record carefully. There is no dispute with regard to the fact that sum of Rs. 39,50,000/- was paid by Pepsi Food to the assessee. In pursuance of a debit note raised by the assessee. M/s. Pepsi Good has deducted the TDS also and assessee has taken credit of the TDS deducted by Pepsi Food. Thus it suggest that as far as accounting treatment is concerned, it is an income in the hands of the assessee. The assessee further contended that it has paid this amount to its subsidiary i.e. YRIPL for incurring these expenses on advertisement media promotional. According to the finding of Ld. CIT(A), assessee has claimed the expenditure of this amount but the AO has recorded a finding that no such expenditure was claimed by the assessee. The assessee has to reconcile that this amount has been paid to the subsidiary concern and it was incurred for the purpose of the business. At page 8. AO has specifically observed that no such expenditure was claimed by the assessee. During the course of hearing, it was contended by the assessee that amount received by Pepsi was not in the nature of its income. The amount received was pursuance to the joint agreement between the two companies and was received by the assessee under an obligation to be passed on to the subsidiary concern. It emphasised that amount was received by it not on its own account but with an overriding obligation to pass on to YRIPL. The assessee has raised an additional ground also, wherein it pleaded that this receipt can not be treated as income in its hand, became it was received in the capacity of collecting agent. It has relied upon the judgment of Hon’ble Supreme Court in the case of CIT Vs. Bijli Cotton reported in 116 ITR 60 Sheetal Dass Tirth Dass reported in 41 ITR 367 and the judgment of Hon’ble Allahabd High Court in the case of CIT Vs. Upbhokta Sahkari Sangh reported in 288 ITR 106.
14. We have considered all these contentions but we do not find any discussion on these issues in the asstt. order. Somewhat similar is again by the assessee in its ground No. 2 which will be discussing in the later part of the order.The AO has made the observation in one paragraph on page 8. The reasoning assigned by the Ld. CIT(A) is that assessee has debited a similar expenditure of Rs. 51833006/- in the P & L account towards marketing contribution to YRIPL. It has been fully allowed by the AO. From reading of both the orders it is not discernable whether assessee has included this amount in Rs. 5,18,00,000/- or not. The case of the AO is that it has received this amount from Pepsi Food it ought to be accounted an income. How assessee has treated it in the accounts and whether transmitted it to the subsidiary concern is an issue which is to be reconciled. It has taken a credit of tax paid by Pepsi Food. It is a business receipt because it is taking care of all marketing and promotional activities though in this year through its subsidiary concern. Therefore, we set aside the finding of Ld. CIT(A) restore this issue to the AO for verification and readjudication. This ground of appeal is allowed.
Ground No. 4
15. In this ground of appeal, grievance of the revenue is that Ld. CIT(A) has erred in deleting the addition of Rs. 90,000/-. The brief facts of the case are that on perusal of the accounts it revealed to the AO that assessee has drawn certain cheques for withdrawal on a particular dates and entered them on the same date in the cash account in its ledger, whereas actual cash withdrawal from the bank taken place on the subsequent date. A sum of Rs. 30,000/- was alleged to have been withdrawn vide cheque No. 580359. The entry made in the cash book is 10th May, 2001. The actual cash withdrawn from the bank happened on 1 1th May, 2001. There are three transactions of similar nature in different months. AO has made the addition on account of unexplained cash. Ld. CIT(A) deleted the addition on the ground that assessee has explained its position. That on certain occasions, when cheque was signed entries were made in the cash book . But due to certain practical difficulties actual cash could not be taken out from the bank account. On due consideration of the facts and circumstances we are of the opinion that AO has made the addition in a theoretical way, without realising the practical aspect. There is only one difference between actual withdrawal of cash from the bank. The explanation of the assessee before the AO was that for example a person was handed over a cheque for making withdrawals, he reached the bank late and could not withdraw the money, when cheque was signed entry was passed in the ledger account. Thus a small discrepancy has happened. The AO has not brought any material on the record that this much of cash was introduced in the books from an unexplained sources and after withdrawal taking place from the bank the said cash was returned to that source. After taking into consideration the detailed finding recorded by the Ld. CIT(A) we do not find any force in this ground of appeal it is rejected.
Ground No. 5
16. The grievance of the revenue in this ground is Ld. CIT(A) has erred in deleing the disallowance of Rs. 3,23,01 ,939/- which was paid by the assesee on account of royalty expenses.
17. At the cost of repetition, it is observed that primary business activity of the assessee relates to the operation and development Pizza Hut and Kentucky Fried Chicken restaurant, in the Indian sub continent, For this purpose, the assessee company had entered into a technology licence agreement on 1st April, 1995 with Kentucky Fried Chicken HI. Similarly, any technology licence agreement has been executed between the assessee and the Pizza Hut on 15th January, 1996. As per these agreements, the assessee has been granted the rights to use the technology and system in the business of operating service restaurant such as Kentucky Fried Chicken restaurant, outlets and Pizza Hut. In both the agreements, it was settled that for grant of licence as a technology, a licence fee would be payable by the assessee which is equivalent of 5% of sales, net of taxes. According to the assessee, effective rate of technology licence fee, therefore, works out to 6.038%. This has been worked out by the assessee as under :-
1) Licence Fee 5.00%
2) TDS 0.75%
3) R& D cess 0.288%
_________
6.038%
=========
18. The assessee has been granted approval by the Govt. of India, Ministry of Industry Secretariat for Industrial Assistance (SIA) for setting up a wholly owned subsidiary in India for setting up KFC Restaurant. There is no dispute with regard to the facts to this extent. The assessee was authorized to enter into development agreement with other entities for opening up new outlets. During the accounting period relevant to this asstt. year, it has entered into agreements with number of entities namely Devyani International Pvt. Ltd., Speciality Restaurants, Dodsal Corporation these concerns have set up new outlets. As per the agreements between the assessee and the developers / franchise , a continuing fees @ 6.3% on sales is required to be paid by the franchisee to the assessee. It had received a sum of Rs. 3,37,05,801/- during the accounting period relevant to this asstt. year. From the franchise as continuing fees the assessee has remitted royalty aggregating to Rs. 3,23,10,030/- to the principals abroad. The AO has disallowed this payment of royalty to the principal. The AO has observed that Govt. of India has restricted payment of royalty in its initial approval and assessee was permitted to pay technical service fee only. Technical service fee and royalty is distinct and separate. The assessee has termed the payment for technical service fee as royalty to circumvent clause in the SIA approval which restricted the payment of technical service fee to a period of 7 years. The AO further observed that payment has been made to parent companies. It cannot be ruled out that said payments have been made in lieu of dividend.
19. Dissatisfied with the conclusion of the AO, assessee carried the dispute before Ld. CIT(A). It pointed out that admissibility of expenditure in the nature of licence fee paid is governed by the provisions of 37 (1) of the Income Tax Act 1961. The expenditure under this section can be claimed by the assessee ,If the assessee satisfied the conditions flowing out from the section. The conditions are that expenditure should not be of the nature described u/s 30 to 36. It should not be of a capital nature and it should not be of a personal expenditure. The expenditure should have been laid out or expanded wholly and exclusively for the purpose of the business . It was explained before the Ld. First Appellate Authority that Ld. AO has failed to construe the approval letters in true perspective. It was also pointed out that fee paid in technology transfer case can be said to be both royalty and fee for technical services. The SIA has been using the terms royalty and technical service fee loosely and interchangeably in its various approval letters. The assessee has explained that nomenclature licence fee as royalty are irrelevant consideration so long as the licence fee payment is justified and indispensable to the assesee’s business. According to the assessee, there exist a direct nexus between the payment of licence fee and business of the assessee. Ld. CIT(A) has considered all these aspects elaborately and has deleted the disallowance. The relevant observation recorded by the Ld. CIT(A) in para No. 9.13 read as under :-
“9.13. The contents of the assessment order, material on record and the written submissions and arguments made by the appellant have been considered by me. The impugned payment of Rs. 3,23,01,939/- has been made by the appellant towards licence fee paid pursuant to the technical license agreements with the owners of the technology and systems and claimed as a business expenditure. Against the expenditure of Rs. 3,23,01,939/-, the appellant has directly earned an income of Rs. 3,37,05,801/- as continuing fee from the franchisees, which is an undisputed fact. Thus, there is accrual of direct income against impugned expenditure claimed as business expenditure by the appellant. Therefore, in my view, the expenditure of Rs. 3,23,01,939/- paid as license fee and shown as royalty payment in the Balance Sheet deserves to be allowed as a business expenditure. Further, the main contention of the AO for making the disallowance is that the appellant was permitted to remit technical fees as per Government approvals whereas the appellant remitted Royalty which, according to A.O’s interpretation (of all the relevant documents), the appellant was forbidden to do. However, the AO has not made out a case that the disallowance of the impugned amount is on account infraction of any law. Thus, the whole approach in the assessment order, on this issue, is based on mere technicalities without any importance being attached to the real sum and substance involved. In my view the AO has grossly erred in making such a high pitched disallowance so lightly without any real application of mind to the substance of the matter. As regards the various observations made in the assessment order, the appellant has been able to successfully meet all these observations as discussed in the preceding paragraphs and, therefore, the same need not be repeated again. The assessment order also stresses the omission on the part of the appellant to report the impugned payment of Rs. 3,23,01,939/- under Section 40A(2)(b) in the Tax Audit Report. As clarified by the appellant the impugned payment is not covered u/s 40A(2)(b) irrespective of this clarification the impugned payment cannot be said to be excessive or unreasonable taking into account the fact that the license fee / royalty has been paid @ 5% (net of taxes) as per Government approvals and also the aforesaid transaction being in the nature of an international transaction, the Transfer Pricing Officer vide its order dated 18.2.2005 has held the same to be at arm’s length price. Thus, the disallowance of Rs. 3,23,01,939/- benign without any basis, is deleted.
9.14 In view of the above discussion, the disallowance of Rs. 3,23,01,939/- made by the assessing officer being without any basis is deleted and the appeal is allowed on this ground.”
20. With the assistance of Ld. Representative, we have gone through the record carefully. The main reason for disallowing the royalty payment by the assessee to M/s. KFC international holding Inc and M/s. Pizza Hut with whom it had entered into technology licence agreement is that Govt. of India has permitted the assessee to pay technical fees which is restricted to seven years and assessee is paying it as a royalty. Ld. CIT(A) has deleted the disallowance on the ground that assessee has earned an income of Rs. 3,37,05,801/- as continuing fees from the franchise, because of this technology licence agreement. It has been permitted to collect the fees on behalf of KFC International and Pizza Hut. This permission is in pursuance to the technology licence agreement. The AO failed to bring on record any material that assessee has infringed any law in conducting its business. We have perused the relevant material and also the written submissions of the assessee reproduced by the Ld. CIT(A). In our opinion, AO has misread the approvals granted by the Govt of India while arriving at a conclusion that assessee has not been remitting the payment as per the approvals. In the approval SIA has used expression “royalty as well as fee for technical services” loosely and interchangeably. Apart from all these things, the tax rate for remitting a royalty as well as fee for technical service is 15% plus the research and development cess. The assessee has paid both these amounts while remitting the payment. The expense is directly related to its business. It has been incurred wholly and exclusively for running the franchises within India. Therefore in our opinion Ld. First Appellate Authority has appreciated the facts and circumstances in right perspective and has rightly deleted the disallowance.
Ground No. 6
21. The grievance of revenue in this ground is Ld. CIT(A)has erred in deleting disallowance of Rs. 3,26,01 ,574/-. The brief facts of the case are that assessee has a wholly owned subsidiary namely Yum Restaurant India Pvt. Ltd. The main object of this company was to carry out advertising, marketing and promotion of KFC , Pizza Hut and other brands currently owned or acquired in future by the assessee. This company was incorporated on 8th June 1999. The AO has observed that company has been operating from the premises of the assessee and , therefore, all administrative expenses in connection with advertisement, marketing, promotional activities of YRMPL is to be allocated to that company. In other words, assessee should not bear the overhead expenses at the head office pertaining to YRMPL. The AO has allocated the expenses in equal i.e, 50% for YRMPL and 50% for assessee. In this way, he worked out a disallowance of Rs. 3,26,01 ,574/-.
22. On appeal, Ld. CIT(A) deleted the disallowance. With the assistance of Ld. Representative, we have gone through the record carefully. It emerges out from the record that YRMPL was incorporated on 8th June, 1999. It is a 100% owned subsidiary of the assessee. It has been incorporated to carry out advertisement, marketing and promotion activities of the assessee as well as various franchise. The assessee had entered into a tripartite agreement with its franchise and YRMPL. As per this agreement, the franchise shall pay AMP contribution to YRMPL and assessee may not pay a separate contribution. In a way, YRMPL was to carry out the activities on no profit no loss basis. The AO has disallowed the expenses which are attributable to YRMPL but in fact, he ought to have not disallowed any such amount because ultimately it is the assessee who has to contribute for all these sums. The assessee can bear the cost of administrative expenses alleged to be incurred by YRMPL or it can separately remitted the amount to YRMPL towards such cost. From both the angles, it is the assessee or its franchise who has to contribute this amount. The AO, therefore, has erred in carving out the disallowance. Ld. CIT(A) has rightly deleted this disallowance and we do not find any force in this ground of appeal. It is rejected.
Ground No. 7 – 10
23. These grounds of appeal shall be taken up alongwith ground No. 3 and 4 of the assesee’s appeal.
Ground No. 11
24. In this ground, grievance of the revenue is that Ld. CIT(A) has erred in deleting the disallowance of Rs. 1,35,67,376/-. The AO has observed that assessee failed to produce register maintained for the fixed assets. In Asstt. year 1999-2000, it has transferred its business undertaking at Bangalore and Delhi as a going concern whereas such assets continued to be shown as fixed assets even through in asstt. Year 2002-03 and depreciation has been claimed on such non existent assets. He also observed that assessment in asstt. Year 1999-2000 has already stands reopened u/s 148 of the Income Tax Act. The AO also found that depreciation was claimed in respect of assets purchased for the benefits of employees and utilised by such employees. The AO thereafter made a reference that expenses were found to be incurred, where assets purchases during asstt. Year 2002-03 were not found recorded in the books. On the basis of these discrepancies the AO has allowed the entire depreciation aggregating to Rs. 13567376/-. Dissatisfied with the disallowance assessee carried the dispute before the Ld. CIT(A). The assessee has pointed out that as far as assets used by the employees are concerned prerequisite value has been included as part of the salary of respective employees. The assessee pointed out had these assets were not provided to the employees as per the terms and conditions of employment then assessee would have reimbursed the cost of those assets for personal use upto a limited specified purpose. Ld. CIT(A) has considered these aspects and observed that assessee has produced schedule of assets before the AO. There may be some discrepancy but that does not mean that total depreciation would be disallowed to the assessee. As far as the assets sold out in asstt. year 1999-2000 is concerned, Ld. CIT(A) has already directed the AO to give effect the outcome of assessment proceeding in asstt. year 1999-2000 in this year also.
25. On due consideration of the facts and circumstances, we are of the view that AO has highlighted certain discrepancies in the maintenance of WDV of the assets as well as identification of each assets. There may be some shortcomings but that does not mean that assessee was not having any assets and they were not used for the purpose of business. In our opinion, AO ought to have identified each item and find out how that item is treated in the block of assets, if it is established that those assets were not used for the purpose of the assessee’s business then he should make out a care for disallowance of depreciation. By making general observation, he cannot deny the total claim of the depreciation of the assessee. Taking into consideration these aspects, we do not find any merit in this ground of appeal. Ld. CIT(A) has already directed the AO to give effect outcome of 1999-2000. The depreciation disallowed in asstt. year 1999-2000 would be considered for disallowance in this year also. The effect of outcome in asstt. year 1999-200 would be given after giving an opportunity of hearing to the assessee.
Ground No. 12
26. In this ground of appeal grievance of the revenue is that Ld. CIT(A) has erred in including an income of Rs. 31,01,500/- in asstt. year 2002-03 whereas it pertains to asstt. year 2001-02. The brief facts of the case are that AO has observed that on pages No. 152 – 155 part I of the Special Audit Report, the auditor has pointed out that three receipts accounted by the assessee pertains to earlier asstt. years. These receipts are :-
1) SCM Local fees
2) SCM International fees
3) Reimbursement of general and administrative expenses
1) Rs. 4,97,000/-
2) Rs. 2,46,000/-
3) Rs. 23,62,500/-
27. The AO has observed that these are taxable in asstt. year 2001-02 and he reduced the income of assessee in this asstt. year to this extent. The assessee has contended before the Ld. CIT (A) that AO has selectively considered page No. 155 of the special audit report. It drew the attention of the Ld. CIT(A) towards page No. 253 of the Special Report and pointed out that bill for general and administrative expenses raised on Pizzeria Fast Food Restaurant Madras Ltd. by debit note No. DN/003/12 is on 24.8.2001. This accounting period falls in the asstt. year under appeal and this is the major amount. Ld. CIT(A) has held that tax rate in both the asstt. years are same. It does not make much difference if these receipts are included in the present asstt. years. He directed the AO to tax this income also in this asstt. year.
28. With the assistance of Ld. Representative, we have gone through the record carefully. The major item appears to be taxable in the present asstt. years. The other two items have been considered by the Ld. CIT(A) as taxable in this year on the ground that tax rate are similar. It will create unnecessary complication by excluding these receipts from here and including them in asstt. year 2001-02. Considering the finding of Ld. CIT(A), we do not wish to interfere in it. This ground of appeal is rejected.
Ground No. 13
29. This ground will be taken alognwith the ground No. 6 of assessee’s appeal.
Ground No. 14 +
30. In this ground of appeal grievance of revenue is that Ld. CIT(A) has erred in deleting the disallowance of Rs. 5,56,428/-. The brief facts of the case are that at the end of year, assessee has made certain provisions on the basis of mercantile system of accountancy followed by it. According to the AO, this provision was not utilised by the assessee in the next asstt. year. Therefore, in his opinion, excess provision deserves to be disallowed. Ld. CIT(A) deleted the disallowance on the ground that provision is being made by keeping in view the possibility of certain expenses. If the provision has not been exhausted by the assessee, then it does not mean that there was no possibility of arising such type of expenditure when provision was made. The AO has erred in disallowing the provision.
31. On due consideration of the facts and circumstances, we do not see any reason to interfere in the order of Ld. CIT(A). The assessee has made the provision by keeping in view past experience and the possibility of certain expenses. It has filed the details exhibiting the nature of intending expenses. It is a separate issue that such occasion did not arise to incur those expenses but that does not mean that when provision was made it was not bonafide. If some amount remained unutilised it will be offered for tax in the next asstt. year. Hence, this ground of appeal is rejected.
Ground No. 15
32. In this ground of appeal, grievance of the revenue is that Ld. CIT(A) has erred in deleting the addition of Rs. 2,33,950/-. The assessee has been showing a liability of Rs. 2,33,950/-. The AO has made the addition on the ground that liability to pay has seized. He formed this opinion on the ground that such liability has been shown as outstanding from a number of years. Ld. CIT(A) has deleted the disallowance on the ground that AO cannot classify a particular liability as “ liability no longer required” .it is the assessee who has to proceed after taking into account the requirement of its business for writing of such liability. If assessee is willing to pay the amount, then it would not be construed as liability no longer required. On due consideration of the Ld. CIT(A)’s order, we do find any merit in this ground of appeal. It is rejected.
Ground No. 16
33. In this ground of appeal, revenue has pleaded that Ld. CIT (A) has erred in directing the AO to allow the set off and carry forward of the past unabsorbed losses and depreciation. Ld. Counsel for the assessee at the very outset pointed out that this issue become infructuous because on an application moved by assessee u/s 154 of the Income tax Act, AO himself has rectified the order. In view of the above, this ground of appeal is rejected.
Ground No. 17
34. In this ground of appeal, grievance of the revenue is that Ld. CIT(A) has erred in deleting the interest charged by the AO u/s 234D of the Income Tax Act. Ld. Counsel for the assessee at the very outset submitted that this issue is covered in favour of the assessee by the order of the special bench of the Tribunal in the case of ITO vs. Ekta Promoters reported in 305 ITR (AT) page 1. He also pointed out Hon’ble Delhi High Court has also affirmed the order of Tribunal in ITA No. 491/2008 rendered in the case of Director Income Tax vs. M/s Jacabs . He placed on record copy of the Hon’ble High Court’s decision dated 30th August, 2010. The special bench of the Tribunal has held that interest u/s 234D cannot be leviable prior to the asstt. year 2004-05 because operation of this section would be perspective in nature. In view of the judgment of Hon’ble Delhi High court this ground of appeal is rejected.
35. In view of the above discussion, the appeal of the revenue is partly allowed for statistical purpose.
36. Now we take the appeal of assessee in assessment year 2002-03 i.e. ITA No. 3796/Del/2006. First ground of appeal taken by the assessee is general in nature, it does not require any specific finding to be record, hence it is rejected.
37. In ground No.2, grievance of the assessee is that Learned CIT(Appeals) has erred in upholding the addition of Rs. 11,35,994. The assessee has a wholly owned subsidiary, namely ‘Yum Restaurant Marketing (P) Ltd. ( hereinafter referred to YRMPL). The subsidiary used to undertake advertising, media and promotional activities. The assessee has received a sum of Rs.26,01,700 from one of the franchise M/s. Dodsals Hotels and Resorts (P) Ltd. towards its contribution for advertising, media and promotional activities. This amount, according to the assessee, was paid by Dodsals Hotels for advertising and promotional activities for KFC outlets. Assessee could spent a sum of Rs.14,65,706. The balance of Rs. 11,35,994 was shown as liability under the head of ‘accrued marketing’. Assessing Officer has made the addition of the balance by observing as under:
“Business Income Understated
During the course of assessment proceedings, attention of the assessee was drawn towards page no. 165-166 of the special audit report part II and page 153-154 of the special audit report part I, according to which:
• As far the expense of Rs.14.65,706 on KFC is concerned, the expense relates to the amount received from one of the Franchisee namely M/s. Dodsel Hotels & Resorts Pvt. Ltd. who actually contributed Rs.26,01,700 during the relevant assessment year out of which Rs.14,65,706 was actually incurred as expense by the assessee and the balance amount of Rs. 11,35,994 was shown as Accrued Marketing Liabilities as on 3 1.03.2002. Thus, in view of the above we can say that the moment amount was received by the assessee, it was its income and the expenditure incurred could have been treated separately but the assessee has shown as amount of Rs.14,65,706 only as its income as well as expense, thus the whole exercise has resulted in to under statement of income to the tune of Rs.11,35,994.
• During the year under consideration, the assessee received the advertising contribution from M/s. Dodsals Corporation to the tune of Rs.26,01,700 without deducting the TDS, out of which Rs.14,65,706 was actually spent by the assessee during the year. The amount of Rs.14,65,706 was actually spent by the assessee during the year. The amount of Rs.14,65,706 was booked as income as well as expenditure and also showed the balance amount of Rs. 11,35,994 as liability under the head of Accrued Marketing”.
It is noticed that the assessee disclosed and spent Rs.14,65,706 as advertising contribution out of a total of Rs.26,01,700 received from M/s. Dodsals Hotels & Resorts (P) Ltd. The balance, Rs.11,35,994 was shown as liability under the head of Accrued Marketing. The assessee was thus required to explain as to why a credits of Rs. 11,35,994 be not treated as your income. The assessee failed to place on record any reply. It is thus presumed that the assessee has nothing to say, thus Rs.11,35,994 is treated as income.
(Understated Income Rs.11,35,994/- )
38. Appeal to the learned CIT(Appeals) did not bring any relief to the assessee.
39. The assessee has contended that every receipt is not an income. Assessing Officer has wrongly recorded that assessee failed to file any explanation. The assessee has submitted its reply. The learned counsel for the assessee drew our attention towards page No. 754 of the paper book No.II , wherein letter of the assessee dated 18.1.2005 is available. On the strength of this letter, he pointed out that assessee has contended before the Assessing Officer that advertisement contribution was collected by the assessee with a over riding title that it will be spent on advertisement activities. The assessee had cited decision of the Hon’ble Supreme Court in the case of Sheetal Dass Tirath Dass reported in 41 ITR 367 and appraised the Assessing Officer about the concept of overriding title. The assessee also relied upon the decision in the case of Calcutta Supply Co. Ltd. Vs. CIT reported in 37 ITR 1. The thrust of assessee’ s argument was that it acts only as collecting agent. The amounts received by the assessee is with a pre¬defined obligation. If something has been received with a pre-defined object then assessee was under a compulsory obligation to spend the amount received and the same cannot be regarded as income in its hands. The assessee relied upon the decision of the Hon’ble Supreme Court in the case of CIT vs. Bijli Cotton Mills reported in 116 ITR 60. The learned counsel for the assessee pointed out that contribution which received by the assessee from its franchise are not received by it as an income but as a predefined obligation under the terms of franchise agreement. On the other hand, Learned DR relied upon the order of the Assessing Officer. He pointed out that neither the clauses of franchise agreement was brought to the notice of the Assessing Officer nor it was demonstrated why assessee has acted as a collecting agent. From the business module of the assessee, it was assessee’ s outlook to look after all these aspects. It is immaterial whether assessee is carrying out itself or it has got done by a subsidiary.
40. We have duly considered the rival contentions and gone through the record carefully. In the letter written to the Assessing Officer as well as in the written submissions filed before us, the assessee has taken a plea that amounts were collected with a predefined obligation, therefore, it cannot attain the character of income in the hands of the assessee. While dealing with ground Nos. 1 and 2 of revenue’s appeal in the preceding paragraph, we have considered the nature of business carried out by the assessee. As per its Memorandum of Association, it is required to provide consultancy and advisory services in connection with the establishment, organizations, financing, management and operation of restaurants, cafes and cafeterias etc. In performance of activities, it is also conducting advertisement media and marketing operations. The assessee had made an arrangement that this AMP activity would be carried out by way of its 100% subsidiary i.e. “YRMPL” . It may be true that the subsidiary is actually carrying out advertisement activities but it is the assessee who is collecting the money first and then transmitting to the subsidiary concerned. The business line of the assessee is also similar. Its arrangement with the subsidiary would not make much differences. The decision of the Hon’ble Supreme Court relied upon by the assessee in the case of Bijli Cotton is concerned, in that case, assessee has received certain amounts towards Dharmarth charges. This nominal amount was collected from the customers and it was meant for Dharamsthal. In that background, Hon’ble Supreme Court has observed that it does not contain the character of income in the hands of the assessee. In the case of the assessee, it is collecting as a business receipts but contending that it is meant for YRMPL, therefore, it is not the income in the hands of the assessee. There is no distinguishing feature of these receipts as to why it cannot be a revenue receipts in the hands of the assessee. It may be a different case that the moment amount is transferred to YRMPL, it can attain the character of business expenditure but it cannot be concluded that this amount was not a revenue receipts in the hands of the assessee. Learned CIT(Appeals) has rightly confirmed the addition and we do not find any error in it. This ground of appeal is rejected.
41. Ground Nos. 3 and 4 of the assessee’s appeal are inter connected with grounds 7 to 10 of revenue’s appeal. In ground no.3, grievance of the assessee is that Learned CIT(Appeals) has erred in confirming the disallowance of lease rent at Rs.9 lacs and in ground No.4, it has pleaded that Learned CIT(Appeals) has erred in upholding the disallowance of Rs.7,50,000 out of house maintenance expenditure. The brief facts of the case are that M/s. Mezbaan Hoteliers (P) Ltd. had entered into a lease agreement with Mrs. Surendra Judge on Ist of June 1997 for taking a house property on lease. The annual lease rentals were settled at Rs.2,40,000. M/s. Mezbaan Hoterliers (P) Ltd. is a private limited company in which the relatives of the managing director of the assessee company were directors, namely, the father and wife of Mr. Sandeep Kohli. The assessee took this house property on a sub-lease from M/s. Mezbaan Hotliers for providing a residence to its director Mr. Sandeep Kohli. The annual lease rent has been settled at Rs. 15 lacs per annum. The assessee had also paid a security of Rs.50 lacs to the hotel. It also spent huge amount for renovation. The tax auditor had not reported this transaction for the purpose of section 40A(2)(b) of the Act. Assessing Officer has held that entire transaction was a sham. Assessee has paid excessive security deposit. Assessing Officer further observed that a property which fetch rent of Rs.20,000 in the hands of the original landowner, how can it fetch a rent of Rs. 1,25,000 per month, more so by way of agreement of even date.
42. In ground No.4, assessee has challenged the disallowance of Rs.7,50,000. It emerges out from the record that assessee has incurred a sum of Rs.22,50,000 for repair, renovation and up-gradation of the facilities in the house properties. It has amortized the expenses in three years because lease agreement was for a period of three years and thereafter it was to be renewed. In this way, in the present assessment year, assessee has claimed the deduction of Rs.7,50,000. This deduction was disallowed to the assessee by the Assessing Officer on the ground that lease agreement is a bogus one.
43. On appeal, Learned CIT(Appeals) has observed that rent paid for the residential accommodation of the managing director is an allowable expenditure. He estimated the reasonable rent at Rs.50,000 and disallowed the balance i.e. nine lacs of rupees has been disallowed. With regard to Rs.7,50,000, Learned CIT(Appeals) has observed that this amount could be allowed in the year in which it was incurred.
44. The assessee in its appeal is challenging the disallowance of Rs. 9 lacs. Assessing Officer has made a total disallowance of Rs.25,7 1,600 out of lease rentals. Learned CIT(Appeals) has allowed the lease rent paid by the assessee except a sum of Rs. 9 lacs.
45. With the assistance of learned representatives, we have gone through the record carefully. It emerges out from the record that assessee has paid Rs. 15 lacs of rent for the residence of Mr. Sandeep Kohli. It has paid a sum of Rs. 50 lacs as security deposits. Assessing Officer has estimated notional rent @ 12% of the interest free deposits which worked out to Rs. 6 lacs. He computed the disallowance of Rs. 21 lacs for the residence for Mr. Sandeep Kohli. The assessee had incurred a sum of Rs.4,20,700 on the residence of Shri Ajay Bansal. In this case also, payment was made to Mrs. Pushpa Bansal and Sheetal Bansal who are the wife and mother of Ajay Bansal. Assessing Officer has also found a security deposit paid by the assessee and he estimated the notional rent on such deposit at Rs.50,900. The disallowance has been worked out to Rs.4,71,600.
46. There is no dispute that the payments have been made to the persons who are covered under sec. 40A(2)(b) of the Act. Under this section, if it is established that assessee has paid an amount in excess, then the one available in open market for availing such services from a person or entity falling within the ambit of this section then such excess amount would be disallowed to the assessee. We fail to understand how a house property giving a rent of Rs.20,000 to the original land owner would immediately fetch a rent at Rs. 1,50,000. This much of rent has been given by the assessee after incurring a huge sum of Rs.22,50,000 on repair which gives an indication that if this sum of Rs.22,50,000 was not incurred then it would not fetch this amount of rent. Apart from this, assessee had paid interest free security deposits of Rs.50 lacs. Assessing Officer has discussed that this payment of rent is associated with the salary of the executive director & house rent allowance is fixed @ 60% of their salary. On the basis of the facts emerging out from the assessment order, we find that assessee has extended extra pecuniar benefit to its managing director. Thus, taking into consideration the over all evidence on record, we set aside the order of the Learned CIT(Appeals). We direct the Assessing Officer to allow payment of rent to the extent of Rs.20,000 per month for the accommodation taken on rent for Shri Sandeep Kohli, the balance has to be disallowed. The estimation of this rent on the basis of the original rent agreement between the landowner and Hotel Mezbaan would take care of all other notional rent computed by the Assessing Officer on the basis of interest free deposits. In brief, against the claim of any rent made by the assessee for the residence provided to Mr. Sandeep Kohli, only a sum of Rs.2,40,000 would be allowed. There will not be any disallowance on account of notional rent worked out on the basis of interest free security. Assessing Officer shall carry out this exercise. As far as the rent claimed in respect of the residence of Shri Ajay Bansal, we remit this issue to the file of the Assessing Officer for readjudication because he has not worked out fair rent this property can fetch, which can be allowed to the assessee. As far as the disallowance of Rs.7,50,000 is concerned, we find that this disallowance has been confirmed by the Learned CIT(Appeals) on the ground it was not incurred in the present year. Since the expense does not pertain to this year, its allowability cannot be judged in the present year. Assessee has raised an alternative plea that in case it is not allowable in this year then a direction be issued to the Assessing Officer to allow in the year of incurrence. In our opinion, assessee will be at liberty to approach the Assessing Officer in accordance with law but in the present year, we do not deem it necessary to give any specific direction. In the result, ground No.3 raised by the assessee is allowed for statistical purposes and ground No.4 raised by the assessee is rejected. Ground Nos. 7 to 10 raised by the revenue are allowed for statistical purposes.
Ground No.5:
47. In this ground of appeal, grievance of assessee is that Learned CIT(Appeals) has erred in confirming the disallowance of Rs.7,10,535. With the assistance of learned representatives, we have gone through the record carefully. Assessing Officer has discussed this issue on page Nos. 24 to 26 of the assessment order. Assessee has claimed expenses of Rs.10,62,991. The nature of these expenses are discernible at page Nos. 275 to 277 of Part-I of Special Audit Report. Assessing Officer has confronted the assessee and the assessee has filed its submissions. According to the Assessing Officer, the submissions are general in nature. He worked out that sum of Rs.7,10,535 does not relate to the present assessment year. Therefore, he made the addition.
48. Appeal to the learned CIT(Appeals) did not bring any relief to the assessee.
49. The assessee has pleaded that liability to pay had been crystallized during the current year and, therefore, expenses should be allowed. To buttress this contention, assessee has relied upon a number of decisions, namely, Non-such Tea Estate Ltd. Vs. CIT reported in 98 ITR 189 and CIT vs. Nagri Mills reported in 33 ITR 681. Alternatively, it contended that the expenses be allowed in assessment year 2001-02 and a direction be issued to the Assessing Officer. Learned DR on the other hand relied upon the order of the Assessing Officer.
50. We have duly considered the rival contentions and gone through the record carefully. Out of the total expenses, a sum of Rs.3,52,456, pertains to gratuity which according to the assessee was allowable as per section 43B read with section 40(A)(7) of the Act. Assessing Officer after verification of this aspect allowed this claim. As far as the proposition of law, contended by the assessee that if the liability to pay has been crystallized during the accounting year relevant to this assessment year then the expenses are allowable is concerned, we do not have any dispute. Our difficulty is that the assessee failed to show crystallization of the liability to pay in the present accounting year. Its accounts are complicated. Special Auditor has been appointed who recommend for disallowance of the expenditure. Assessing Officer has given fair opportunity to the assessee. Before us, it is just merely harping upon the proposition of law instead of buttressing it on facts, therefore, we do not find any force in this ground of appeal, it is rejected.
51. In ground No.6, grievance of the revenue is that Learned CIT(Appeals) has erred in upholding the disallowance of Rs. 1,64,999 out of the total disallowance of Rs.3,36,789. This ground is inter-connected with ground No.13 of the revenue’s appeal. The revenue is challenging deletion of disallowance in ground No.13. The learned counsel for the assessee submitted that details of expenditure have been placed on record at page Nos. 1419 to 1452 of paper book IIIB. The details of these expenses have been compiled in a tabular form and annexed in the written submission also. Assessing Officer while making the disallowance has observed that bills are either in the name of TRIM, on persons, who are neither directors nor employees or also in the name of sister concern. He made a reference towards the payment of Rs.1 lac made to M/s. Arthur & Anderson who have given advise to M/s. Specialty Restaurant (P) Ltd. In his opinion, the expenses are not incurred for the purpose of the assessee’ s business. Learned CIT(Appeals) confirmed the disallowance of Rs. 1 lac and further confirmed the disallowance in respect of expenses incurred for Specialty Restaurant, J. Sagar & Associates etc. The assessee has contended that if the name of the assessee is not in the invoice, it may not be sufficient ground for disallowance of expenditure. It also contended that assessee is a company where no personal expenditure could be there. For buttressing this contention, it relied upon the decision of Hon’ble Gujarat High Court reported in 253 ITR 749. Learned DR on the other hand, relied upon the order of the Assessing Officer.
52. We have duly considered the rival contentions and gone through the record carefully. Assessing Officer has recorded a brief finding in just one paragraph. His conclusions are based on special audit report as well as failure of the assessee to prove a nexus of business expediency with the expenses. They may not be a personal expenditure but these were not incurred for the purpose of the business. The decision of the Hon’ble Gujarat High Court in the case of Saya Ji Iron is not applicable on these expenses. Learned First Appellate Authority reappreciated the expenses and treated some of them as allowable. We have also gone through the chart submitted by the assessee and the details of expenditure available on page Nos. 1420 to 1452 of the paper book. At page Nos. 1420 is a bill in the name of TRICON Restaurant India (P) Ltd. It has some ledger print. This bill is for a sum of Rs.7,194. They are similar type of bills for different requirements. Taking into consideration the findings of Learned CIT(Appeals), we do not see any reason to interfere in it. The ground of appeal raised by assessee as well as revenue is rejected.
Ground No.7:
53. In this ground of appeal, grievance of the assessee is that Learned CIT(Appeals) has erred in confirming the addition of Rs.3,30,474. The brief facts of the case are that the special auditor has quantified certain expenses which are prepaid in nature. According to the special audit report, assessee had incurred certain expenses whose benefit will not be available in the present assessment year rather it will be available in the next assessment year. Assessing Officer has disallowed those expenses on the ground that these are prepaid expenses.
54. Appeal to the learned CIT(Appeals) did not bring any relief to the assessee.
55. The assessee has pleaded that amounts paid were in pursuant to annual maintenance contracts. Once the amounts are paid they are irretrievable and these cannot be claimed back. The assessee also pointed out that certain payments towards annual maintenance contracts were claimed as an expenditure in the present assessment year, they cannot be disallowed by distrusting the method of accounting being irregularly followed. The assessee has cited number of decisions before the Learned CIT(Appeals) as well as in its written submissions. Learned DR on the other hand relied upon the order of Learned CIT(Appeals). The decisions relied upon by the assessee in the submissions are just in order to explain how the quasi-judicial authority ought to have appreciated a controversy. On the strength of Hon’ble Supreme Court’s decision in the case of Indian Molasses Vs. CIT reported in 37 ITR 66. We were appraised how to construe the meaning of expenditure. In our opinion, all these decisions are not of any help to the assessee, because the basic facts for deciding the issue is whether expenses incurred by the assessee are relatable to the assessment year or not. They might be of revenue in nature. They can be allowed in the next assessment year but the expenses which are relatable to the present assessment year can only be allowed. The income against those expenses is assessable in the present assessment year. Assessing Officer has disallowed the claim of assessee on the basis of various defects in its account and the opinion expressed by the special auditor. This is purely a factual issue. There are discrepancies pointed out by the special auditor in the maintenance of accounts and those discrepancies have been affirmed by the learned revenue authorities below. Thus, Learned CIT(Appeals) has rightly disallowed the claim. This ground of appeal is rejected.
56. In the next ground of appeal, grievance of the assessee is that Learned CIT(Appeals) has erred in confirming the addition of Rs.5,53,515 as capital expenditure.
57. With the assistance of learned representatives, we have gone through the record carefully. Assessee has placed on record the details of expenses in the tabular form. It has pointed out the major sum of Rs.4 lacs were incurred towards software expenses. The assessee has got developed a software for Piza Hut Call Centre. According to the assessee, it has paid internet charges and other charges for repair of computers. All these expenses are of revenue in nature. Assessee has referred the decision of the Special Bench of the ITAT in the case of Am Way India reported in 111 ITD 112 and contended that if functional tests are applied to the facts of the present case then these expenses would be allowed to the assessee as revenue expenses. On due consideration of the facts and circumstances, we are of the view that Learned CIT(Appeals) has allowed depreciation to the assessee on these expenses. The assessment year involved herein is 2002-03. The amount involved is not a substantial amount in comparison to the financial status of the assessee. The decision of the Special Bench in the case of Am Way India was not available with Assessing Officer as well as Learned CIT(Appeals). The cost incurred on such repairs or development of software must have been recouped by the assessee in the shape of depreciation. We do not deem it necessary to set aside this issue for readjudication at the level of Assessing Officer in the light of Special Bench decision keeping in view the above factual background. No fruitful purpose will be served. The assessee might have a good case on merit as far as expenses incurred on small repairs on such a trivial issue. But in case of re-verification is not worth to carry out, in terms of monetary benefit to assessee, therefore, we do not wish to interfere in the order of the Learned CIT(Appeals). This ground of appeal is rejected.
58. In the next ground of appeal, grievance of the assessee is that Learned CIT(Appeals) has erred in confirming the disallowance of Rs. 15,21,680. The brief facts of the case are that the assessee had incurred a sum of Rs.28,45,630 on conference and seminars. In earlier years, it has incurred a sum of Rs.8,49,643. Assessing Officer on scrutiny of the accounts found that a sum of Rs.15,2 1,680 was incurred on a conference of Yum’s employees at off site meeting at Goa. Assessing Officer found that certain employees went to Goa along with their wives and children and the expenses pertained to them. He directed the assessee to indicate the nature of conference and necessity of employees to carry their family members but it did not submit any explanation. Assessee has relied upon certain decisions which have been noticed by the Assessing Officer and claimed that involvement of wives of employees of the company were essential for the business as per policy requirement and to understand the culture. Assessing Officer has disallowed the claim of the assessee by making following observations:
“a) the spouse in cases being wife of Chairman/Director/managing director.
b) The spouses contributed towards business of the assessee.
c) The participation of wives of two business entities were essential for building business ties between two business organizations.
d) The courts upon material placed before them had observed that there existed no doubt direct nexus between the visit of wives and business to be contracted.
e) Thus upon the nexus as proved a commercial exigencies existed as such the expenditure was allowed as exceptional circumstances.
However, considering the reply of the assessee, it is noticed that assessee has made a general reply without proving how a meeting of employees carried out accompanying wives and relatives be treated as business. The cases relied upon by the assessee since framed upon different circumstances and different facts then that of the assessee, clearly distinguishable thus cannot be relied upon.
Thus from the reply furnished by the assessee following automatically arises:
(b) That no evidence regarding nature of activity carried out at Goa was furnished.
(c) Need and outcome of Goa visit.
(d) Objectives of the programmes so carried out.
(e) Proofs to show that the programmes as alleged and business meetings were carried out.
(f) Extent of and active participation of family members accompanied by employees in such meetings.
Thus in view of the above followings are inferred:
a) the meeting was not held for the business purposes.
b) The cases relied upon since referred in a context where business meetings were held therefore not applicable.
The expenditure thus incurred is the personal expenditure of the employees. The expenditure is thus unconnected and not incurred during the normal course of business, therefore, disallowed”.
59. Appeal to the learned CIT(Appeals) did not bring any relief to the assessee.
60. Before us, assessee has contended that recreational meeting at off-site are organized for the welfare of employees. Such trips are frequently arranged by multi-national companies to keep their employees motivated. It is a very common feature in today’s modern business and environment. The purpose of the off site meeting was to discuss the future growth straightgy for the company along with recreational activities for its employees and their spouses. It was also contended that various talks and lectures and programs were conducted. There is no personal expenditure in the case of the assessee as it is a corporate assessee. The assessee has relied upon the decision of Hon’ble Gujarat High Court in the case of Saya Ji Iron & Engg. Co. Vs. CIT (supra). It has also relied upon the order of the ITAT in the case of Midland International Ltd. Vs. DCIT reported in 109 ITD 198 and DCIT Vs. Haryana Oxygen Ltd. reported in 71 ITD 32. The main thrust of assessee’ s contention is that if expenditure incurred for the welfare of employees and for business purpose then it is an allowable expenditure. The assessee made a reference to the ten decisions in its written submissions, namely, Pounds India Ltd. vs. DCIT reported in 59 TTJ 560 and Delhi Cloth & General Mills Vs. CIT reported in 158 ITR 64 etc. On the other hand, Learned DR relied upon the orders of the Revenue Authorities Below.
61. We have duly considered the rival contentions and gone through the record carefully. The assessee has raised elaborate arguments and made a reference to large number of decisions and in substance it has highlighted the proposition of law available in those decisions and appraised us how expenses for welfare of staff and business nature can be allowed. The main dispute is how the assessee is able to prove that expenses incurred by it were for the purpose of the business. By making a reference to general proposition or the proposition discussed in other authoritative pronouncement would not be suffice to say that expenses are to be allowed to the assessee, such expenses are to be allowed the moment it is proved that they were incurred wholly and exclusively for the purpose of the business. This aspect, the assessee has miserably failed to prove. We have extracted above the findings of the Assessing Officer and how he has demonstrated that these expenses were not for the purposes of the business. The case laws cited by the assessee are of no help unless it proved factually that expenses were incurred for the purpose of the business. Taking into consideration the findings recorded by the Assessing Officer (extracted supra), we do not find any merit in this ground of appeal. It is rejected.
62. In the result, the appeal of the assessee is dismissed.
ITA No. 142/Del/2006:
63. Ground No.1 is general in nature, hence does not require any
adjudication. It is rejected.
64. Ground Nos. 2 and 3 are inter-connected with ground Nos.4 to 7 of the revenue’s appeal in this assessment year. All these grounds read as under:
2. That on the facts and circumstances of the case and in law the Learned CIT(Appeals) was not justified in upholding the disallowance of lease rent to an extent of Rs. 9 lacs, paid on account of rent free accommodation provided to the Managing Director of the assessee company.
3. That the Learned CIT(Appeals) was not justified on the facts and circumstances of the case and in law in upholding the disallowance of an amount of Rs.7,50,000 in respect of house maintenance expenditure pertaining to rent free accommodation provided to the Managing Director of the appellant company”.
ITA No. 480/Del/2006:
“4. On the facts and circumstances of the case, the learned CIT(Appeals) erred in deleting the addition of Rs.6,00,000 on account of lease rent.
5. On the facts and circumstances of the case, the learned CIT(Appeals) erred in deleting the deleting the addition of Rs.6,00,000 on account of notional interest.
6. On the facts and circumstances of the case, the learned CIT(Appeals) erred in deleting the addition of Rs.5,05,500 on account of lease rent paid to Smt. Sheetal Bansal and Smt. Pushpa Bansal relatives of the director.
7. On the facts and circumstances of the case, the learned CIT(Appeals) erred in deleting the addition of Rs.55,527 on account of notional interest”.
65. All these grounds are analogous to ground Nos. 3 and 4 of assessee’s appeal for assessment year 2002-03 and ground nos. 7 to 10 in revenue’s appeal. We have already adjudicated these grounds of appeal while disposing of the cross-appeals of the parties in assessment year 2002-03 in preceding paragraphs. In this assessment year, same effect be given.
66. Ground No.4: In this ground of appeal, grievance of the assessee is that Learned CIT(Appeals) has erred in confirming the disallowance of Rs.30,891. This ground is similar to ground No.5 raised by the assessee in assessment year 2002-03 wherein a disallowance of Rs.7,10,535 has been confirmed by the Learned CIT(Appeals) and we have upheld the order of the Learned CIT(Appeals). Considering the findings of the Learned CIT(Appeals) in this year also, we do not find any merit it is rejected.
67. Ground No.5: In this ground of appeal, grievance of the assessee is that the Learned CIT(Appeals) has erred in confirming the disallowance of Rs.33,460 out of the total disallowance of Rs.63,033 made in the assessment order under the head “personal expenditure”. This ground is inter-connected with ground No.9 of the revenue’s appeal wherein revenue is impugning the partial deletion of the disallowance.
68.With the assistance of learned representatives, we have gone through the record carefully. It revealed that a sum of Rs.33,460 was incurred towards the fee of Mr. Rajiv Kumar who pursued MBA Course. The assessee failed to bring any policy decision arrived at by the management for reimbursing the fee incurred on education. The fee was paid because of the personal influence of the employee and it was not incurred for any business purposes. The assessee failed to bring any material on the record to this effect. Learned CIT(Appeals) has rightly confirmed the disallowance. As far as the other amounts are concerned, we find that these relates to medical expenses of Mr. Sandeep Kohli who is a director and the expenses incurred on the uniforms of his driver. These expenses are to be termed as expenses relating to the day to day business of the assessee. Thus, the ground of appeal raised by the assessee as well as of revenue are rejected.
69. Ground No. 6: In this ground, grievance of the assessee is that the Learned CIT(Appeals) has erred in confirming the addition of Rs. 1498 which has been disallowed on the ground that these expenses were paid for the benefit required to be available for subsequent period. This ground is similar to ground No.7 in assessment year 2002-03. On the basis of our findings, recorded on that ground, this ground is rejected.
70. Ground No.7 : In this ground, grievance of the assessee is that Learned CIT(Appeals) has erred in confirming the disallowance of Rs.33,536 out of the total disallowance of Rs.64,611. This ground is inter¬connected with ground No.10 of revenue’s appeal wherein revenue is impugning the amount partly deleted by the Learned CIT(Appeals). The assessee had incurred a sum of Rs.64,611 on purchase of projector lamp, purchase of room heater, purchase of imported chair and fire extinguishers etc. Learned CIT(Appeals) has allowed the deduction in respect of purchase of projector lamp, room heaters and purchase of ten imported chairs. She disallowed rest of the expenses. As far as the purchase of project lamp is concerned, it required frequent changes after completed number of hours of running, hence it cannot be a capital expenditure and Learned CIT(Appeals) has rightly allowed it. Similar is the position with regard to other two items. These expenses were incurred for replacement of existing assets. As far as the purchase of fire extinguishers and purchase of electronic equipments are concerned, these have rightly been disallowed by the Learned CIT(Appeals) because these are in the capital field. In view of the above discussion, both the grounds are rejected.
71. In the result, appeal of the assessee is dismissed.
ITA No.480/Del/2006:
72. In ground No.1, revenue has pleaded that Learned CIT(Appeals) has erred in holding the service income received of Rs.12,38,00,000 as business income. This ground is similar to ground No.1 raised by the revenue in assessment year 2002-03. We have upheld the treatment of these receipts as a business income. In view of our findings, in assessment year 2002-03, this ground of appeal is rejected.
73. In ground No.2, revenue has pleaded that Learned CIT(Appeals) has erred in deleting the addition of Rs.3,25,87,817 which was computed by the assessee as royalty to KFC International Inc and Piza Hut. This ground is analogous to ground No.5 in assessment year 2002-03. In that assessment year, a similar disallowance of Rs.3,23,01,939 was made by the Assessing Officer. Learned CIT(Appeals) has deleted the disallowance and we have upheld the order of the Learned CIT(Appeals). In view of our findings on ground No.5 in assessment year 2002-03, this ground of appeal is rejected.
74. Ground No.3: In this ground of appeal, grievance of the revenue is that Learned CIT(Appeals) has erred in deleting the disallowance of Rs.3,16,08,889. This ground is similar to ground No.6 raised by the revenue in assessment year 2002-03. In this ground, grievance of the revenue is that Learned CIT(Appeals) has erred in allowing on its subsidiary concern, namely, YRMPL. The disallowance made by the Assessing Officer has been deleted by the Learned CIT(Appeals) for assessment year 2002-03 and we have upheld the deletion. Keeping in view of our findings on ground No.6, this ground of appeal is rejected.
75. Ground No.8: In this ground of appeal, grievance of revenue is that Learned CIT(Appeals) has erred in deleting the disallowance of Rs. 1,26,49,203. A similar issue was taken up by the revenue in assessment year 2002-03 in ground No.11 wherein Assessing Officer has disallowed the claim on depreciation amounting to Rs. 1,35,67,376. Learned CIT(Appeals) deleted the disallowance. We have upheld the order of the Learned CIT(Appeals) subject to certain directions. Similar directions are available in this assessment year. In view of our findings, this ground of appeal is, therefore, rejected.
76. Ground No.11: In this ground of appeal, grievance of the revenue is that Learned CIT(Appeals) has erred in deleting the disallowance of Rs.2,86,478. A similar issue was taken up by the revenue in ground No.14 in assessment year 2002-03. The assessee has made the provision, which was not used in the next year, Assessing Officer on the basis of its non-utilization made the disallowance. Learned CIT(Appeals) has deleted a similar disallowance of Rs.5,56,482 in assessment year 2002-03 and we have upheld the disallowance. In view of our findings recorded on ground No.14, this ground of appeal is rejected.
77. Ground No.12: In this ground of appeal, grievance of the revenue is that Learned CIT(Appeals) has erred in directing the Assessing Officer to allow the set off and carry forward of the past unabsorbed losses and depreciation. We have been informed that similar issue arose in assessment year 2002-03, Assessing Officer by exercising his powers under sec. 154 of the Act has rectified the assessment order and allowed the set off and carry forward of the past unabsorbed losses and depreciation. In view of this fact, this ground of appeal is rejected in the present year also.
78. Ground No.13: In this ground, revenue has challenged the deletion of charging of interest under sec. 234D. A similar issue was taken up by the revenue in ground No.17 in assessment year 2002-03. We have upheld the deletion of charging of interest under sec. 234 on the strength of Hon’ble Delhi High Court’s decision wherein it has been observed that interest under section 234D can be charged from assessment year 2004-05 and not prior to that. Considering our findings in assessment year 2002-03, this ground of appeal is rejected.
79. In view of the above discussion, the appeal of the revenue is partly allowed for statistical purposes.
ITA No. 5122/Del/2010:
80. The present appeal is directed at the instance of the assessee against the order of Learned Dispute Resolution Penal passed under section 144C(5) of the Income-tax Act, 1961 on 23rd September, 2010 in assessment year 2006-07.
81. The grounds of appeals taken by the assessee are not in consonance with Rule 8 of the ITAT’s Rules, they are descriptive and argumentative in nature. In ground no.1, assessee has taken 10 sub-grounds. In all these grounds, it has pleaded that learned revenue authorities have erred in making adjustment in the arm’s length price disclosed by the assessee with regard to its international transaction and thereby erred in making an addition of Rs.2,28,47,737.
82. The brief facts of the case are that the Assessing Officer had made a reference to the learned Transfer Pricing Officer under sec. 92CA(3) of the Act in respect of international transaction entered into by the assessee during the financial year 2005-06. It emerges out from the record that assessee M/s. Yum ! Restaurants (India) Pvt. Ltd. is a subsidiary of Global Restaurants Inc., Mauritius that holds more than 99.99% of shares of YRIPL. The company operates a well known multinational chain of fast food restaurants under the brand names, Pizza Hut, Kentucky Fried Chicken Global BV and Taco Bell. It provides franchise support services to KFC and Pizza Hut franchise in India, Sri Lanka, Pakistan and Mauritius. It advises franchise on restaurant design, business development, human resources management and financial planning. It also collects royalty from the franchisees and remits the same to its associated enterprises. Learned TPO noticed that assessee has reported three international transactions in form No. 3CEB. These transactions have been noticed on page 2 of his order by the learned TPO. They read as under:
S.No. Nature of transaction Method used
by Assessee
Method PLI Value of transaction in Rs.
1. 1. Payment of Royalty for providing schemes, trademarks and system property TNMM OP/OR 11,69,76,923
1. 2. Provision of franchisee support services TNMM OP/OC 20,26,00,000
3. Provision of supply chain management services TNMM OP/OC 35,187
Total 31.96,12,110
83. Learned TPO has observed that assessee has applied transactional net margin method (TNMM) as the most appropriate method for benchmarking the arm’s length price of its international transactions and the profit level indicator i.e. (PLI) has been worked by dividing operating profit by operating cost i.e. OP/OC. The assessee has reported a set of 9 comparable cases and worked out their weighted arithmetic mean of 7.43%. The assessee’s NCP margin is 5.79%. It had used multiple year data. Learned TPO after a detailed analysis of the method applied by the assessee for working out its arm’s length price and other details accepted the method applied by the assessee as TNMM. The assessee has identified 9 comparable cases. Learned TPO rejected 5 comparable. He had done benchmarking by using remaining 4 comparable to arrive at the mean of 11.89% as arm’s length margin. Learned TPO rejected the application of multiyear data. He used current year data. In this way, an adjustment of Rs.2,28,47,737 has been proposed by the TPO which has been incorporated in the draft assessment order by the Assessing Officer. The draft assessment order was forwarded to the assessee on 16.12.2009 which was received by the assessee on the same day. It has filed objection before the dispute resolution penal in time. Learned DRP has considered the objections of the assessee but did not concur with them.
84. Before us, learned counsel for the assessee reiterated the objections of the assessee. His main thrust of arguments was that Learned TPO has excluded the losses making company from the comparables. He pointed out that assessee itself had applied filter of persistent loss making company to eliminate those companies from the comparables but assessee has excluded those companies which are reporting loss continuously three years. Learned TPO has rejected companies having loss in financial year 2005-06. On the strength of order in the case of Sony India (P) Ltd. Vs. ACIT reported in 114 ITD 448, he pointed out that loss and competition are normal incident of business. Merely a company is showing loss, it does not mean that it will loose its status of comparable and would deserve to be excluded. He also relied upon the order of the Special Bench of the ITAT in the case of Qurk System (P) Ltd., Mohali reported in 210 TIOL page 31 (ITAT Chandigarh Bench). He further submitted that assessee is a risk bearing company and it is not remunerated on a cost plus basis as per the past practice. Thus, according to the learned counsel, assessee can suffer loss show lower profit like any other concern depending upon the industry condition. He also pointed out that there is no provision in the IT Act which can indicate that loss making company would be rejected from comparable. He placed on record a chart in a tabular form containing the details of each comparable, this chart reads as under:
STATUS CHART
Comparable
Company Accepted/Rejected
by the TPO Operating
Margins on
Operating Cost Business
Description
Agricultural
Finance
Corporation Ltd. Rejected -8.21% Consulting services w.r.t. agricultural and Rural development
Besant Raj
International Ltd. Reject -14.45% Management consultancy Services
Capital Trust
Ltd. Reject -9.18% Consultancy Services to Foreign Banks
Crisil Limited Accept 10.63% Advisory and information services
Educational Consultants Ltd. Accept 12.56% Technical assistance and
Human resource development
IDC (India) Ltd. Accept 14.05% Market Research and Survey
T S R Darashaw Ltd. Accept 10.32% Payroll and Trust Fund activity
NTPC Electric
supply Co. Ltd. Reject 3.29% Technical consultancy in the area of turnkey execution, project monitoring, quality assurance and inspection, third party quality inspection
India Tourism
Dev. Corpn. Ltd. Reject 3.38% Services in relation to organizing international events. Similar to coordination activities of the assessee.
In House
Productions Limited Reject -5.62% Healthcare Division which provides access to information, relating to healthcare to Healthcare institutions.
85. He also appraised us as to how the comparable shown by the assessee are comparables. On the other hand, Learned DR relied upon the order of the learned DRP. He pointed out that first objection of the assessee before the learned DRP was that learned TPO has recommended adjustment in the arm’s length price of international transaction by using current year data, according to the assessee, multiple year data ought to have been used. He point4ed out that learned DRP has dealt with this proposition. Learned TPO while making a reference Rule 10B(4) has observed that current year data has to be used. Learned TPO has made a reference to the decision of the Special Bench of the ITAT in the case of Aztec Software & Tech. Services reported in 294 ITR 32 as well as the decision of the ITAT, Delhi in the case of Mentorgraphic (P) Ltd. reported in 109 ITD 101 wherein the ITAT has held that comparable analysis is to be conducted on the basis of current year data. With regard to the objection of the assessee regarding exclusion of loss making company from comparable cases, he pointed out that Learned TPO has eliminated those companies on the basis of assessee’ s stand. Assessee in its TP report, has observed that it has applied filter of persisting operating losses. Learned TPO has excluded the other loss making company on the basis of FAR Analysis. Learned DR relied upon the orders of the Learned DRP as well as the TPO on this issue.
86. We have duly considered the rival contentions and gone through the record carefully. On page Nos. 159 to 205 of paper book AI, assessee has placed on record its analysis on transfer pricing. We have gone through this report and other relevant record. Before Learned DRP, the assessee has raised a number of objections but before us it did not dispute with regard to use of current year data for examining its arm’s length price in respect of international transaction. Similarly, before Learned DRP, it has raised an objection that royalty expenses should be netted of with royalty income while calculating operating profit/operating cost as profit level indicator. This issue was also not pressed by the learned counsel for the assessee before us. The method applied for determination of the arm’s length price as TNMM has been accepted by the Learned TPO and no dispute was raised by the assessee either before the Learned DRP or before us. It emerges out from the record that in order to identify companies that could be considered as comparable to Yum! Restaurants (India) Pvt. Ltd., the assessee has used two data base which contain commercial information. These data base are
“PROWESS” & “Capital line plus”. The PROWESS has been up dated up to 9.9.2006 when it was used by the assessee. It is a data base compiled and managed by the centre for monitor Indian economic. Similarly, capital line plus was updated until September 8, 2006. This data base has been compiled and managed by capital market publisher. Both these data base contain financial information of more than ten thousand Indian companies. These data base contains business, profile, annual reports, shareholding pattern and names of subsidiaries/joint ventures of listed and major unlisted public companies. The assessee has used different key words for carving out comparable cases. At Annexure 2 of its analysis, it has identified 342 companies on PROWESS, 617 companies on capital line. There are 90 companies which are common and assessee has identified one additional company. After application of filter, it has rejected 861 companies and carved out 9 comparable as noticed by us in paragraph 84.
87. The main argument of the assessee before us is that Learned TPO has excluded three loss making companies. It has highlighted how these companies are comparable. The first comparable is agricultural finance corporation. The learned counsel for the assessee pointed out that this concern is engaged in providing consulting services in the field of agriculture and rural development. The services includes identification of project for promoting investment, preparation of development of projects and assistance in obtaining approval from external agencies and assistance in project implementation, monitoring and e-valuation. With regard to Basant Raj International, it was submitted by the assessee that this company has earned its income from consultancy services, such as management consultancy, training and recruitment services. With regard to capital trust limited, it was submitted that this company offers consultancy services to foreign banks, not having their branches or representative offices in India. The NTPC is engaged in consultancy and other assignment in the area of turnkey executive, project monitoring, quality assurance and inspection. We find that Learned TPO has considered all these contentions of the assessee. She has not excluded the loss making company simply for the reason that they are making losses. We have no hesitation in observing that merely a company is showing losses would not loose its status of comparable if other criteria depicted status of comparables. Declaration of loss is an incidental of business which is at par with the profit. The assessee has considered these companies on the basis of their FAR Analysis i.e. (function performed, assets employed and risk assumed). Learned TPO is of the opinion that FAR of a company indicates the avowed objective of the company and the tools that it seeks to employ to achieve that objective. It is the financial result which will decide whether that company has been successfully in achieving the objective or not. According to the Learned TPO, if the assessee’s contention based on FAR analysis only is accepted then process of choosing comparable will not proceed beyond the matching of FAR. All types of other tests i.e. data base screening, quality and quantitative screening or use of diagnostic with ratios will be rendered meaningless and unnecessary. Learned DRP concurred with this reasoning of TPO. We find from Annexure 2 of assessee’ s analysis available on page 188 of the paper book IA for assessment year 2006-07 that assessee itself has applied a filter of persistent operative losses. It has excluded three companies out of total 861 on the basis of this filter, then what is the basis for inclusion there loss making company. Learned TPO has examined their financial result by applying other tools, before exclusion from comparable.
88. We have duly considered the other issues also agitated before the Learned DRP though those issues have not specifically been agitated before us, but we do not find any error in the order of the Learned DRP on those issues. Learned TPO has considered all the objections of the assessee in selecting the comparable and thereafter find out four comparables. After going through the order of the Learned TPO as well as of Learned DRP, we do not find any force in the objections of the assessee. The loss making companies have not been excluded simplicitor on the ground that they are declaring loss. Learned TPO has pointed out that their comparablity has been taken into consideration by the assessee on the basis of FAR analysis and other aspects have not been considered. Learned TPO looked into other aspects also. The assessee has placed on record a large number of documents in the paper book as well as judgments, namely, in the case of Philips Software Centre reported in 119 TTJ 721 and Ors. We have considered all those issues which were addressed at the time of arguments. In view of the above discussion, we do not find any merit in this ground of appeal, it is rejected.
Ground No.2:
89. The assessee has taken four sub-grounds along with this ground. In brief, it has pleaded that Learned DRP has erred in affirming the observations of the Assessing Officer that service income earned by the assessee at Rs.20,26,00,000 from M/s. Yum ! Restaurants (India) Ltd., Singapore is to be assessed as “income from other sources” as against “business income”. On due consideration of the facts and circumstances, we are of the view that this issue is analogous to the issue raised by the revenue in ground No.1 for assessment year 2002-03. Assessing Officer in that assessment year has assessed service income receipt as income from other sources. Learned CIT(Appeals) treated such receipts as a business income and we have upheld the order of the Learned CIT(Appeals) in the foregoing paragraph. Taking into consideration our findings, we are of the view that this receipt deserves to be assessed as a business income and not income from other sources.
Ground No.3:
90. The assessee has taken five sub-grounds along with this ground. Grievance of the assessee is that learned DRP has erred in disallowing the royalty paid by the assessee to YRMPL amounting to Rs.12,28,75,765. We find that the facts on this issue are similar to the facts agitated in ground No.5 of revenue’s appeal in assessment year 2002-03. In that assessment year, assessee has claimed deduction of Rs.3,23,01,931 on account of royalty expenses. This was disallowed by the Assessing Officer to the assessee but allowed by the Learned CIT(Appeals). We have upheld the order of the Learned CIT(Appeals). There is no disparity on facts hence Learned DRP ought to have not upheld the draft proposal made by the Assessing Officer on this issue. Learned DRP should have taken into consideration the findings of the Learned CIT(Appeals) in assessment years 2002-03 and 2003-04. Respectfully following our discussion in those assessment years, we allow this ground of appeal and deleted the disallowance.
Ground No.4:
91. In this ground of appeal, grievance of the assessee is that Learned DRP has erred in making a hypothetical disallowance of the administrative expenses of Rs.8,97,22,346. The facts and circumstances of this ground are similar to the issue agitated by the revenue in ground No.6 of its appeal for assessment year 2002-03. The assessee had a 100% subsidiary, namely, YRMPL who was taking care of advertisement marketing and promotional activities. It is also functioning from the same premises. Assessing Officer allocated the head office expenses in the ratio of 50-50% between the assessee and its subsidiaries. He made a disallowance of the 50% expenses on the ground that this much of expenses are attributable for the activities of the subsidiaries. We have considered this issue in ground no.6 of revenue’s appeal for assessment year 2002-03 and delete the disallowance. Considering our findings in the foregoing paragraphs, we allow this ground of appeal and delete the addition.
Ground Nos. 5 to 8:
92. These grounds of appeal read as under:
“5. That On the facts and circumstances of the case and in law, the Hon’ble DRP/Learned A.O. has erred in deleting the lease rent paid by the appellant amounting to Rs.27,12,000 to M/s. Mezban Hoteliers Pvt. Ltd. on account of rent free accommodation obtained for its managing director.
6. That On the facts and circumstances of the case and in law, the Hon’ble DRP/Learned A.O. has erred in deleting the lease rent paid by the appellant amounting to Rs.4,44,750 to M/s.Sheetal and Mrs. Pushpa Bansal on account of rent free accommodation obtained for its director.
7. That On the facts and circumstances of the case and in law, the Learned A.O. has erred in adding a notional interest income of Rs.6,00,000 to the returned income of the appellant, on account of security deposits placed with M/s. Mezbaan Hoteliers Pvt. Ltd. for obtaining rent free accommodation for its managing director, without considering the directions of the Hon’ble DRP.
8. That On the facts and circumstances of the case and in law, the Learned A.O. has erred in adding a notional interest income of Rs.55,557 to the returned income of the assessee, on account of security deposits placed with M/s. Sheetal and Pushpa Bansal for obtaining rent free accommodation for its director, without considering the directions of the Honble DRP”.
93. Ground Nos. 5 & 7 are inter-connected to each other. We had discussed these issues in assessment year 2002-03. M/s. Mezbaan Hotlier Pvt. Ltd. has taken a premises on lease from Mrs. Surendra Judge for an annual rent of Rs.2,40,000. It gave a security deposit of Rs.50,000 to Mrs. Surendra Judge. The directors in M/s. Mezbaan Hoteliers are relatives to Mr. Sandeep Kohli who is the executive director in the assessee’ s company. In this year, assessee company has paid a rent of R.27,12,000 to M/s. Mezbaan Hotelier. In assessment years 2002-03 and 2003-04, we have upheld the grant of deduction to the extent of Rs.2,40,000 which is equivalent to the rent paid by M/s. Mezbaan Hotel. This is the assessment year 2006-07. The facts, how much rent was paid by M/s. Mezbaan Hotelier to its landlord is not available on the record. It is not ascertainable whether any enhancement of rent was made by the landlord against M/s. Mezbaan Hotelier. Learned DRP has allowed the deduction of rent paid by the assessee in the capacity of a sub-tenant at Rs.2,40,000 only. We have observed in assessment year 2002-03 that tenancy agreement as well as sub-tenancy agreement were executed on the same day and there cannot be any difference in rent value at this magnitude. Keeping in view our discussion, in assessment year 2002-30, we modify the order of Learned DRP and direct the Assessing Officer to grant a deduction of rent payment to the assessee equivalent to the amount paid by M/s. Mezbaan Hotelier to the original land owner in this assessment year.
94. In assessment year 2002-03, Assessing Officer has added the notional interest in the value of the rent. We have deleted that part because in our understanding that disallowance of rent payment over and above Rs.2,40,000 can take care of all aspects in hiring of the premises. In the present assessment year, Learned DRP has not associated this issue with the rent free accommodation, Learned DRP construed this payment of tax free security as a utilization of fund for non-business purposes. When the tenant can had the accommodation by making a deposit of Rs.50,000 only from the original landowner, we do not see any justification for the payment of Rs.50 lacs by the assessee to the tenant. The assessee has been paying this amount in the capacity of a sub-tenant, in other words, it is just an extension of benefit to the relatives of the directors, Learned DRP has rightly held that it is user of business fund for non-business purposes. Learned DRP has rightly directed the Assessing Officer to verify if any interest expense has been debited to the P & L account and if used, disallow the proportionate interest expense as not having been incurred for the purpose of the business. In view of the above discussion, we do not find any merit in both these grounds of appeal. They are rejected.
95. As far as other two grounds are concerned, i.e. ground Nos. 6 & 8, we have remitted this issue to the file of the Assessing Officer in assessment year 2002-03 for determination of fare rent payable by the assessee for the purposes of making disallowance under sec. 40A(2)(b) of the Act. In view of our findings in assessment year 2002-03, these grounds are allowed for statistical purposes.
Ground NO.9.
96. In this ground of appeal, grievance of the assessee relates to denial of depreciation. We find that Assessing Officer has proposed the order on the basis of his findings in assessment year 2002-03. The depreciation has been allowed to the assessee by the Learned CIT(Appeals) and we have upheld the order of the Learned CIT(Appeals). Considering our findings on ground No.11 of the revenue’s appeal, we allow this ground of appeal of the assessee and delete the disallowance.
Ground No.10:
97. The grievance of the assessee is that Learned DRP has erred in in disallowing the software expenses amounting to Rs. 1,33,000 by holding them to be of capital nature. The assessee has pleaded that these expenses have not resulted in the creation of any capital assets. These expenses pertain to purchase software of the self consultancy charges and maintenance charges. According to it, the Learned DRP ought to have examined the case of the assessee within the right of the special bench’s decision of the ITAT rendered in the case of AM Way India Enterprises Vs. DCIT reported in 111 ITD 112. It has also relied upon a number of other decisions.
98. On the other hand, Learned DR has relied upon the order of the Learned DRP. Similar expenses were incurred by the assessee in assessment year 2002-03. We would have remitted the issue to the file of the learned revenue authorities below for readjudication in the light of Special Bench’s decision, because of the involvement of very small amount we desist. This year also, the amount claimed by the assessee is Rs. 1,33,000, depreciation @ 60% has already been allowed to the assessee, now assessee might have recouped its cost. In our opinion, one more round of litigation is not worth, keeping in view the amount involved and the rate of depreciation. The assessee might have a very good case on the merit of its details are required to be looked into in the light of Special Bench’s decision at the level of Assessing Officer. That exercise would be a futile exercise. We put it to the learned representative also and they have conceded the proposal on the ground that it may not be treated as a precedent in the subsequent year. In view of the above discussion, this ground is rejected.
Ground No.11:
99. In this ground of appeal, grievance of the assessee is that Learned DRP has erred in directing the Assessing Officer to treat a sum of Rs.6,40,046 as capital in nature. The brief facts of the case are that assessee is in the business of running restaurants and managing the franchise. It is required to continuously development new food items/flavors etc. for this purpose. It has incurred expenses for food tasting and trials. It has also incurred certain expenses for studying demographic trends. The assessee has claimed these expenses as revenue in nature. Assessing Officer has treated these expenses as capital in nature. The learned counsel for the assessee while impugning the order of Learned DRP contended that expenses incurred by the assessee only enable the assessee to carry on its business in more efficient manner, practically it will not give any enduring assets. On the other hand, Learned DR relied upon the order of the Learned DRP.
100. We have duly considered the rival contentions and gone through the record carefully. In its day to day operations, assessee is experimenting new dishes, where it incurred expenses on food items and spices etc. On many of occasions, the flavor may not come to the expectation for commercialized use. Thus, these are the routine research work carried out by the assessee and no capital assets came into existence. Learned DRP has erred in treating this amount as a capital expenditure. We allow this ground of appeal and delete the addition.
Ground No.12:
102. In this ground of appeal, grievance of the assessee is that the Learned DRP has erred in confirming the treatment of interest income as income from other sources. It emerges out from the record that assessee has a surplus fund which was invested by it. Learned DRP on the strength of Hon’ble Supreme Court’s decision rendered in the case of Tuticorn Alakalies & Chemicals reported in 227 ITR 172 had held that such interest income is to be assessed under sec. 56 of the Act. The income is not a part of assessee’ s business activities. The learned counsel for the assessee submitted that interest income has to be assessed as a business income because in the past, Assessing Officer has assessed such income as a business income except in assessment year 2005-06. He relied upon the decision of Hon’ble Mumbai High Court in the case of CIT vs. Punnet Commercial reported in 245 ITR 550 and CIT Vs. Paramount Premises reported in 190 ITR 259. Learned DR on the other hand relied upon the order of the Assessing Officer.
103. We have duly considered the rival contentions and gone through the record carefully. The decisions relied upon by the assessee are not applicable on the facts of the present case. The decision of Hon’ble Mumbai High Court in the case of Puneet Commercial was in respect of treatment of interest income while computing the deduction under sec. 80-HHC of the Act and it talks about operational profit. The view of Hon’ble Delhi High Court in the case of Sri Ram Honda Equip reported in 289 ITR 475 is contrary to this decision, wherein Hon’ble Delhi High Court has held that interest income for the purpose of sec. 80HHC has to be treated as income from other sources. The assessee has nowhere indicated as to how this interest income is linked with its business activity. It has simply surplus fund which has been deposited in the bank giving rise to interest income. Learned DRP has rightly treated this income as income from other sources. This ground of appeal is rejected.
Ground No.13:
104. In this ground, the grievance of the assessee is that Learned DRP has erred in upholding the disallowance of expenses incurred on foreign travel. The brief facts of the case are that the assessee had incurred a sum of Rs.2,72,57,457 on travel and conveyance. Out of this amount, a sum of Rs.95,22,664 is in respect of foreign travel. The assessee has pointed out that Rs.8,33,038 was incurred by the assessee on travel of its directors/employees to the area where its franchise are working. The balance of Rs.86,89,626 was incurred on other countries. Assessing Officer had disallowed the claim of assessee on the ground that in clause No.4 of service agreement, it has been stipulated that the assessee would be entitled to receive a fix service fee along with reimbursement of travel expenses incurred in performance of its duties. The case of the assessee is that this clause has been put inadvertently the expenses were incurred by it on its day to day business and it is allowable in nature.
105. Before us, learned counsel for the assessee raised an alternative contention, wherein he contended that if it is a genuine business expenses incurred during the course of performance of the services. If at all, it was liable to be reimbursement but not done then it should be treated as a commercial loss and should be allowed to the assessee. He relied upon the decision of Hon’ble Supreme Court in the case of Badridass Dogra Vs CIT reported in 34 ITR 10. He also submitted that expenses of Rs.86,89,626 is not covered by the service agreement. This was incurred as a part of routine business operation, hence it could have not been disallowed by the Assessing Officer. He relied upon the decision of Hon’ble Supreme Court in the case of CIT vs. Panipat Woolen & Gen. Mills reported in 103 ITR 66. Learned DR on the other hand relied upon the order of the Learned DRP as well as of Assessing Officer.
106. We have duly considered the rival contentions and gone through the record carefully. Assessing Officer has made a reference to clause 4 of the service agreement and observed that assessee would receive a fixed service fee along with reimbursement of travel expenses incurred in performance of its duties. The assessee is earning its income from service agreement which provide fixed fee plus reimbursement of travel expenses incurred in performance of its duties. In such situation, how the assessee can say that it has incurred expenses on its own. As far as the arguments of the assessee that it should be allowed as loss is concerned, it has not raised any such plea before the Assessing Officer and has not demonstrated how that loss has been crystallized this year. It is remitting royalty payment under the technical license fee and it is getting service receipt under the service agreement. It is highly improbable that such type of loss would be suffered by the assessee in this situation. As far as the agreement that Rs.86,89,626 was incurred by the assessee at its own is concerned, we find that no material was brought to notice therefore, this ground of appeal is without any merit and accordingly rejected. How these expenses are not related to its duties carried out under the service agreement. The assessee has only raised this argument before the Learned DRP also but failed to produce supporting evidence. There should be the material indicating the fact that these expenses were incurred by the assessee for its business and these are not to be reimbursed. No such facts were brought to our notice. In this respect, we have gone through page 115 of the paper book-I where assessee has placed written objections before the Learned DRP.
107. In the result, all the appeals are partly allowed.
Decision pronounced in the open court on 31.05.2011
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