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TMI Blog2013 (9) TMI 236X X X X Extracts X X X X X X X X Extracts X X X X ..... be set up only when the appellant's customers construct the hotels wherein the appellant has agreed to provide services. 1.2 On the facts and circumstances of the case, the A.O failed to appreciate that the business of the appellant was set up on 1 February, 2006 and the above expenditure being incurred after that date, is allowable as revenue deduction. The appellant craves leave to add, alter, vary omit, substitute or amend the above grounds of appeal and/or the relief claimed, at any time before or at the time of hearing of the appeal, so as to enable the ld. ITAT to decide this appeal according to law." 3.1 The grounds raised in ITA No. 4887/Delhi/2011 in 2008-09 assessment year read as under:- "1. That the Assessing Officer has erred in law and on facts in disallowing the expenditure of Rs.129,324,002/- (16,84,68,109/- for the Assessment Year 2009-10) incurred by the appellant in the course of its business, holding that the business of the appellant had not been set up during the relevant assessment year. 1.1 That the Assessing Officer has erred on facts and in law in holdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovide the management services to hotels in India. It was also submitted that:- (a) After obtaining the permission of the RBI for setting up of Branch Office (BO) in India, the assessee was ready to commence its business. (b) It employed few employees including two expatriates, took a fully furnished office on rent and negotiations started with various parties. (c) The negotiations got converted into final agreements with Classic Citi Investment Pvt. Ltd, Chatel Hotels Ltd, Vatika Hospitality Ltd., etc. (d) Various Courts have held that expenses incurred after commencement of business are allowable expenses. In this regard reliance is placed on the following decisions: 5.2. Accordingly, it was contended that being engaged in the business of providing hotel related services to its clients, it is necessary to have an office and qualified manpower/personnel in order to provide the requisite services. It was stated that both the requirements were met in the year under consideration. It was pointed out that office was taken on rent on 1/2/2006 and two expatriates had also been employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating Agreement (this "Agreement") is entered into as of the Effective Date;. between BRIDGE ENTERPRISES PRIVATE LIMITED, ~ private limited company under the laws of India having its registered office at Penthouse, Brigade Towers, 135. Brigade Road, Bangalore, India ("Owner"), and STARWOOD ASIA PACIFIC HOTELS & RESORTS PTE. ITD., a Singapore company, having its registered office at 6 Temasek Boulevard, #40-01, Suntec Tower 4, Singapore Q38986. and having its registered branch office in India ("Operator"). Owner and Operator are sometimes referred to collectively in this Agreement as the "Parties" and individually as a "Party". A. Owner owns the premises described in Exhibit A (the "Premises"), on which Owner intends to construct a hotel having the facilities described in Exhibit A (the "Hotel"). B. Operator is an Affiliate (as defined below) of Starwood Hotels & Resorts Worldwide, Inc. ("Starwood"), and is knowledgeable and experienced in operating hotels under the Brand (as defined below). - , C. Owner desires to engage Operator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. (v) billing policies (including entering into agreements with credit card organizations). (vi) price and rate schedules, and (vii) rents, fees and charges for all leases, concessions or other rights to use or occupy and public space in the hotel;.................... (q) prepare and submit to Owner the Operating plan for each Operating Year in accordance with Section 5.1;...... ARTICLE 3 FEES AND EXPENSES 3.1 Operating Fees 3.1.1 Payment of Operating Fees. For the services to be provided by Operator under this Agreement, Owner shall pay to Operator the Operating Fees. Owner shall pay the Operating Fees monthly in arrears based on the Operating Fees accrued for the immediately preceding month. All Operating Fees shall be set forth in the Operating Reports required under Section 10.2. The Operating Fees shall be paid net of any applicable withholding taxes or tax deduction at source...................................... ARTICLE 5 OPERATION OF THE HOTEL 5.1 Operating Plan ARTICLE 5 OPERATION OF THE HOTEL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rator's offer. Owner shall not unreasonably withhold or delay its approval of the candidates, and Owner shall be deemed to have approved the candidates, unless Owner delivers notice of its disapproval of such appointment within ten days after Operator's offer to Owner to interview the candidates or Owner's interview of the candidate. whichever is later. Owner acknowledges that it may not reject more than three candidates proposed by Operator for the positions of general manager. Financial controller or chief engineer.................. . 5.11.3 Pre-Operating Period- Owner acknowledges that, notwithstanding anything to the contrary in this Agreement, except for the opening Services and the services to be provided by Consultant pursuant to the Technical Services Agreement, exhibit I;) and E of this Agreement an~ the Operating Support Agreement, Operator and its Affiliates shall have no obligations to provide any services for the Operation of the, hotel prior to the commencement of the Operating Term on the Opening Date ARTICLE 6 CONSTRUCTION OF HOTEL 6.1 Construction of the Hotel. Owner shall provide or obtain all financial and oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; If Owner, after authorization within six months after the Effective Date, then Operator shall have the right to terminate this Agreement by providing notice to Owner, with no liability whatsoever to Owner for such termination. IN WITNESS WHEREOF, the Parties hereto have duly executed this Operating Agreement as of the Effective Date. Effective Date shall mean the date on which this Agreement is executed by the Parties. Operator countersigns the Agreement, as set forth next to its signature line at the end of the Agreement.................... EXHIBIT TO OPERATING AGREEMENT PRE-OPENING SERVICES Subject to Owner's performance of its obligations during the Pre-Opening Period, Operator shall perform the following services during the Pre-Opening Period in order to facilitate a proper and orderly opening Of the Hotel (collectively, the "Pre-Opening Services"): 1.1 Pre-Opening Budgets. 1.1.1 Proposal of Pre-Opening Budgets. Operator shall prepare the following budgets for pre-opening activities (each a "Pre-Opening Budget" and collectivel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocated at [ADDRESS], and opening as the Sheraton Bangalore Hotel-Brigade Gateway.' 6.2 The Assessing Officer in the above background was of the view that the crucial points which emerged on the analysis of the above terms and conditions can be summarized in the following manner:- 5.4 From the above clauses the crucial points that emerge are: The owner has not started the construction of the hotel in respect of which the assessee is required to render services. The owner intends to construct the hotel. (b) Once the Hotel comes into existence, then the assessee is required to operate all the aspects of the hotel. (c) The assessee is required to prepare and deliver to the assessee a proposed budget for the first operating year, 60 days prior to the Anticipate opening date. Needless to say that the agreement is silent as to when precisely is the opening date. This is because the hotel has not been constructed and the owner is not aware as to when the construction can be completed. (d) Operator shall recruit, screen, appoint, hire, pay, train, Supervise, instruct and direct the Hotel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's business services can be rendered only when the hotel is built. The A.O relying upon Sarabhai Management Corpn. Ltd. v. CIT [1976] 102 ITR 25 (Guj.) held that the assessee may have commenced the first category of business activity by entering into a contract with the owner of the hotel property but the second category of business activity had not started as the hotel had not been constructed. 6.4. Support was derived from Western India Vegetables Products Ltd. v. CIT [1954] 26 ITR 151 (Bom) wherein it had been held that the certificate of commencement of business issued by the Registrar of Joint Stock Companies is not relevant for deciding the date of setting up of the business . Thus the AO was of the view that simply because few staff including two expatriates had been appointed and a completely furnished office was taken on rent and the fact that commencement certificate is issued it cannot be said that the business had commenced as it was to commence only when the hotel is constructed. 6.5 Accordingly he was of the view that since the draft assessment order was confirmed by the Dispute Resolution Panel vide its order dated 30th September, 2010 income as proposed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces remained identical. As such for identical reasons the claim was disallowed by the A.O in the draft assessment order and the action was confirmed by the DRP consequent to which the final assessment order was passed. 9. Aggrieved by this in each of the years the assessee is in appeal before the Tribunal. 10. Ld. A.R inviting attention to DRP's order dated 30/9/2010 in 2007-08 assessment order submitted that the Dispute Resolution Panel has dismissed the claim of the assessee by way of non-speaking order as such it was his humble prayer that the issue may be restored back to the DRP with the direction that the issues are disposed by way of a speaking order so that the objections of the assessee are considered. It was the stand of the ld. A.R that elaborate arguments on facts and position of law on the issues were addressed before the DRP against the action proposed by the Assessing Officer in the draft assessment order. Attention was invited to Form No-35 A filed before the DRP. 11. We have heard the rival submissions and perused the material available on record .It is seen that in 2007-08 arguments advanced before the DRP were disposed in the following manner:- & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it. 6. The Dispute Resolution Panel may, before issuing any directions referred to in sub-section (5), (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income tax authority and report the result of the same to it. 7. The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any propose variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order. 8. If the members of the Dispute Resolution Panel differ in opinion on any point, the point shall be decided according to the opinion of the majority of the members. 9. Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer, ..... 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