TMI Blog2009 (10) TMI 651X X X X Extracts X X X X X X X X Extracts X X X X ..... ances of the case, inter alia : ( a )profits made by the appellant are not less than the ordinary profits which it was expected to make in the business in view of the specific arrangement between the appellant, McDonald s Corporation and the Joint Venture Companies. ( b )The profits that the appellant had made were reasonable and neither the Assessing Officer nor the CIT(A) had demonstrated by giving comparable instances to allege that the appellant had not earned reasonable profits." 3. The facts are narrated by ld. CIT(A) in para Nos. 5, 6 7 of his order which are reproduced below : "5. The facts of the case are that the appellant is a wholly owned subsidiary of McDonald s Corporation, USA (MC). MC is engaged in McDonald restaurant business and the appellant was established for setting up and operating McDonald s restaurant in India. For this purpose, the appellant entered into a Master License Agreement with MC under which it acquired a non exclusive right, license and privilege to adopt and use the McDonald s system in restaurants in India. The appellant could sub-licence the operation of Mc Donald s business with the approval of MC. In terms of the Master Lic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred for furtherance of objectives of MC and income should have been 100 per cent of this sum of Rs. 2,78,22,721. He invoked the provisions of section 92 of the Act. The Assessing Officer held that all the activities of the appellant were for the benefit of MC and since the policies of the appellant were decided by MC and the appellant could not undertake any other work and could not be a franchise of other products of different companies, it existed only for MC. The Assessing Officer took note of the fact that in regard to initial amount of 45,000 US $ realized for opening new restaurants, the appellant was merely a conduit as the amount collected had to be transmitted to MC and even in respect of royalty, out of 5.04 per cent collected, 5 per cent was paid to MC. The Assessing Officer found that expenses on account of advertisement, professional charges and travels considered for reimbursement were less by Rs. 1,01,27,072 when compared to the expenses debited by the assessee. The Assessing Officer held that these expenses were also for promoting the business of MC as it led to royalty income etc. and non reimbursement of these expenses, resulted into a lesser profit to the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which were to be reimbursed by McDonald s Corporation, USA along with 10 per cent income which mean that against the expense of Rs. 100, the assessee was to receive Rs. 110 but the same is not for all expenses but only for authorized expenditure. It was also submitted that advertisement is not a part of authorized expenditure and advertisement is neither a part of budgeted services as per this service agreement. Our attention was also drawn to marketing, support agreement entered by the assessee with its franchises, copy of which is available on paper book 45-50. It is also submitted that one agreement is furnished in the paper book which is entered into by the assessee with Hardcastle Restaurant Pvt. Ltd. and similar agreement has been entered into by the assessee with other franchises also, i.e., Connaught Plaza Restaurant Pvt. Ltd. Both agreements are available in the paper book. It is submitted that on such advertisement expenditures, section 92 is not applicable because the same has been incurred by the assessee as per this market support agreement entered into by the assessee with two Indian franchises. It is also submitted that on advertisement expenditure, section 92 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is running two types of businesses although both are connected with McDonald s Corporation, USA. As per this agreement dated 1-1-1996, i.e., Master Licence Agreement, the assessee can operate restaurant system under McDonald s System and the assessee can run it of its own or through franchises. In both these situations, the assessee has to pay royalty to McDonald s Corporation, USA at the rate of 5 per cent of gross turnover. Regarding advertisement, clause ( vi ) of this Master Licence Agreement is relevant as per which, licensee has to spend during each calendar year for advertisement or promotion of restaurant business for the general public and amount which is not less than 5 per cent of its gross sales. In view of this, we find that as per Master License Agreement dated 1-1-1996, the assessee has to pay 5 per cent of gross turnover to McDonald s Corporation, USA as Royalty and at the same time, the assessee has to spend minimum 5 per cent of gross turnover for advertisement. As per franchises agreement of the assessee with Connaught Plaza Restaurant Pvt. Ltd. also, we find that the franchises has to incur minimum of 5 per cent of gross sales towards advertisement a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to advertisement expenditure which has been borne by the assessee as a result of this agreement with Indian franchises and the same has resulted into lesser profit/loss of the assessee and more profit to the franchises and it has no impact on the income of the McDonald s Corporation, USA because whether the advertisement expenditure is borne by the assessee or by the franchises, the benefit of McDonald s Corporation, USA will remain the same. The benefit of McDonald s, USA remains unchanged. McDonald s Corporation, USA will get the same amount of royalty whether advertisement expenditure is borne by the assessee or by its franchises and, hence, it cannot be said that by agreeing to beare a part of the advertisement expenditure which was to be borne by the franchises, there is any arrangement between the assessee and a non-resident to the effect that there is no profit to the assessee or lesser profit to the assessee. 9. In fact, the Assessing Officer and Ld. CIT(A) has applied terms and conditions of service agreement dated 1-4-1999 to this advertisement expenditure also. In this regard, we find that as per this service agreement dated 1-4-1999, the assessee was appoint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present assessment year." 11. The facts are noted by the ld. CIT(A) in para No. 12 of his order which is reproduced below : "The facts in regard to this ground are that during the financial year 1999-2000, the appellant made royalty payment of Rs. 2,61,33,567 to MC. The appellant deducted TDS regarding this payment and deposited it on time except the amounting to Rs. 7,035 which was deposited in November 24, 2000. Royalty, payment of Rs. 46,900 to which this tax pertained was not claimed as an expense in the return of income for assessment year 2000-01 and it was also not claimed in the return for assessment year 2001-02. However, during the assessment proceedings for the assessment year 2001-02 the claim was made through written submissions dated November 18, 2003 and December 6, 2003. The appellant s contention is that this claim made during the course of assessment proceedings should have been allowed." 12. Before ld. CIT(A) it was contended that TDS in question was paid in the present year and hence deduction should be allowed under section 40( a )( i ) of the Income-tax Act, 1961 but ld. CIT(A) was not satisfied and he rejected the claim of the assessee and now th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee and no disallowance was to be made if TDS was deducted although not paid. Ld. CIT(A) says that since the assessee has duly deducted the tax in the preceding year, but not claimed deduction in that year, deduction is not allowable in the present year. We feel that this objection of the ld. CIT(A) is not valid because as per the old provision of section 40( a )( i ) also, there was a confusion as to whether deduction is allowable if TDS has been deducted but not paid. Under this situation, if the assessee was of the view that section 40( a )( i ) will be applicable if TDS has been deducted but not paid and did not claim deduction in the preceding year, this claim for deduction in the present year cannot be rejected. This is admitted position that TDS was paid by the assessee in the present year, i.e., on 14-11-2000, i.e., financial year 2000-01 relevant to assessment year 2001-02 . As per the proviso, under section 40( a )( i ), deduction is allowable to the assessee in the subsequent year in which TDS has been paid or deducted under Chapter XVIIB. In the present case also, TDS has been paid by the assessee in the present year although deducted in the preceding ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
