TMI Blog2014 (6) TMI 562X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 – Decided in favour of Assessee. Hypothetical disallowance of the administrative expenses – Held that:- Following ITO, Ward 18 (4), New Delhi Versus Yum! Restaurants (India) Private Ltd. [2014 (4) TMI 532 - ITAT DELHI] - 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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the research and development expenses – Held that:- Following ITO, Ward 18 (4), New Delhi Versus Yum! Restaurants (India) Private Ltd. [2014 (4) TMI 532 - ITAT DELHI] - 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 - DRP has erred in treating this amount as a capital expenditure – Decided in favour of Assessee. Disallowance of tax depreciation @60% on computer peripherals – Held that:- Following CIT vs. BSES Yamuna Powers Limited [2010 (8) TMI 58 - DELHI HIGH COURT] - computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system - the computer accessories and peripherals cannot be used without the computer - they are the part of the computer system, they are entitled to depreciation at the higher rate of 60% - Decided in favour of Assessee. Selection of comparables – Support services outside India – Functionally different companies - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hising of Pizza Hut and KFC restaurants in India. The assessee has obtained franchisee rights from KFC International Holdings (KFCIH) and Pizza Hut International LLC (PHILLC) which has been subsequent assigned in favour of Yum! Restaurants Asia Pte Ltd., Singapore (YRAPL) to whom the assessee pays royalty for the use of such rights after taking requisite government approval. Assessee has entered into a service agreement with Yum! Restaurants International Inc. (YRI) for a period 01.04.2003 to 31.12.2003 and with YRAPL for the period 01.01.2004 to 31.03.2004. Assessee has also established a wholly owned subsidiary under the name of Yum! Restaurants Marketing Private Limited (YRMPL) with the object of undertaking advertising, media and promotional activities (AMP activities). 3. The assessee has taken the following grounds of appeal related to Corporate Tax matters :- B. Grounds relating to Corporate Tax matter Service income treated as 'income from other sources' 1. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in characterizing the service income earned by the appellant amounting to Rs.10,98,31,254 from M/s Yu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt, actual physical possession of the fixed assets is not relevant for the claim of depreciation. Disallowance of alleged excessive advertising, marketing and promotion (' AMP') contribution 5. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld, AO has erred in disallowing the contribution made by the appellant to YRMPL, to the tune of Rs.1,91,74,987, for carrying out advertising, promotion and marketing ('AMP') activities contending the same to be excessive under Section 40A(2)(b) of the Act. Disallowance of the research and development expenses 6. That on the facts and circumstances of the case and in law, the Ld. AO has erred in disallowing the research and development expenses amounting to Rs.9,48,831 by holding them to be of capital nature. 6.1 Without prejudice to the above, even assuming (without admitting) that the said research and development expenses are of capital nature, the Ld. AO has erred is not allowing depreciation on the said expenditure. Disallowance of tax depreciation @60% on computer peripherals 7. That on the facts and circumstances of the case and in law, the Ld. AO has erred in allowing d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t providing of services was not an isolated act by assessee but of a continuous nature since Assessment Year 1998-99, with the intentions to earn profits. The assessee has received similar service income in previous and subsequent years which has been consistently held as business income. The different basis for computation of service income is purely a commercial decision between assessee and YRAPL, which ought not to have any impact on characterization of income as business income or income from other sources. He further submitted that when the expenses incurred by the assessee, which form the basis of computation of service income are allowed as business expenditure, the corresponding income should also be treated as business income. It was also submitted that the main objects clause of the memorandum of association of the assessee provides for provision of restaurant support services. He also relied on the case laws, viz., Mazagaon Dock Ltd vs. CIT (SC) (34 ITR 368); Barendra Prasad Ray vs. ITO (SC) (129 lTR 295); and Senairam Doongarmall vs CIT (SC) (42 ITR 392) for the proposition that a regular and continuous activity carried out with the intention to earn profits is to be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as disallowance. The payment of royalty was specifically inapplicable even in the initial agreement by virtue of Conditions 2, 3, 4 of Annexure 1. The payment of license fee was allowed only for a period of initial seven years, so payment was termed as royalty to avoid the said clause. Then the payments have been made to parent companies, it cannot be ruled out that the same is in lieu of dividend. Ld. AR submitted that ITAT has allowed the issue in favour of the assessee in assessment years 2002-03, 2003-04 and 2006-07 and he referred to para 20 of the order. It was also submitted that against this expenditure of royalty, the assessee has also earned royalty of Rs.6,32,44,241 from the franchisee's. There is an accrual of direct income from such expenditure and he referred to the decisions of CIT vs. Ciba of India Ltd. (SC) (69 ITR 692) and Shriram Refrigeration Industries Ltd vs. CIT (Delhi HC) (127 ITR 746). It was also submitted that payment is made for the purposes of carrying out its business and hence allowable as a genuine business expenditure. The term classification (nomenclature) of license fees as royalty or technical fees is not relevant. The terms royalty and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Facts are same, therefore, we find no merits in the ground nos.2 3 in ITA No.2678/Del/2012 and ground nos.2 2.1 in ITA No.2679/Del/2012 and the same are dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g administrative support. Ld. AR submitted that the this issue is cove red in favour of the assessee by the decision of ITAT in assessee s own case for assessment years 2002-03, 2003-04 and 2006-07 and referred to Para 22 of the said He submitted that the CIT(A) also for assessment years 2004-05 and 2005- 06 has relied upon the said decision of the ITAT and decided. this issue in favor of the assessee. He submitted that YRMPL is a not for profit entity set up with the due approval of SIA with the objective of conducting AMP activities for the assessee and its franchisees. YRMPL is completely funded by the assessee and its franchisees by way of fixed contributions and any additional fund requirements being met by the assessee. He further submitted that the ITAT has duly examined the business model of the assessee and YRMPL and held that the assessee was entitled to contribute to the activities of YRMPL as per its business needs and the facts and circumstances of the case remain identical to those before the ITAT in previous years. Ld. AR submitted that the assessee, instead of recovering charges for sharing administrative facilities, reduced its AMP contribution to YRMPL to avoid un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bution 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. In view of these facts, we find no merits in the Ground No.4 in ITA No.2678/Del/2012 and ground no.3 in ITA No.2679/Del/2012 and the same are dismissed. Respectfully following the aforesaid decision of the ITAT, we allow this ground of assessee s appeal. 12. In the ground nos.4 4.1, the issue involved is not allowing the income tax depreciation claim to the extent of Rs.25,59,253/- made by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee for assessment years 2004-05 and 2005-06. Complete depreciation has been allowed including depreciation of assets sold. He submitted that assets used by the employees would also be regarded as used for the purposes of business and hence eligible for claim of depreciation. He submitted that these were also taxed in the hands of the employees as perquisites and relied on the decision of Sayaji Iron and Engg Co vs. CIT (Gujarat HC) (253 ITR 749). He further submitted that under the block of asset concept, individual assets lose their identity when merged in the block and accordingly, actual physical possession and use of assets are not essential. He also relied on the decisions of CIT vs. Yamaha Motor India Pvt Ltd (Delhi HC) (ITA No 203/ 2009 and 601 2009): CIT vs Bharat Aluminium Co Ltd (Delhi HC) (ITA No 659/ 2007 and 1484/2006); Xerox India Ltd.. (Delhi ITAT) (ITA No. 680/Del/2006); CIT vs G.R. Shipping Ltd. (Bombay HC) (ITA No. 598 of 2009) and Swati Synthetics (ITA No. 1165/M/2006). 12. We have heard both the sides on the issue. We find that this issue is covered in favour of the assessee by the decision of ITAT in the case of the assessee for assessment years 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the assessee and have perused the material on record. It is seen that YRMPL undertakes AMP activities at the national level of brand names owned by the foreign entity for which every franchisee contributes 5% of its turnover as per the tripartite agreement. Apart from this contribution, as per the agreement, every franchisee including the assessee is required to utilise 1 % of its sales for AMP activities. Further, if there is a need to spend additional amount for the AMP activities, the same is to be contributed by the assessee. During the year under consideration, the assessee has made additional payments of Rs 2,27,53,357/- over and above the 5% of the net sales of its equity stores, as being contributed by other franchisees. It is noticed that the actual beneficiaries of the AM.P activities undertaken by YRMPL are the foreign brand holders or the parent company whose income is directly proportional to the turnover of the franchisees and whose brand value/goodwill would increase. The beneficiaries are the new stores because they get straight away huge turnovers without any AMP activities initially. The other marginal beneficiaries would be the franchisees whose total tur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of royalty when the sales of franchisees increase, thus, the assessee gets double benefit by making such expenditure and it was claimed that all conditions laid down u/s 37 of the Act is satisfied and expenditure is a genuine business expenditure. It was also canvassed that foreign company which is holding the brand name is getting benefit only incidentally in the form of a part of the increased royalty as compared to major benefit to the assessee. He relied on the following decisions where such expenditure has been held to be allowable expenditure :- (i) Sassoon J. David and Co. (P.) Ltd vs. CIT 118 ITR 261 (SC); (ii) Cit VS. Chandulal Keshavlal Co. 38 ITR 601 (SC); (iii) Nestle India Ltd. vs. DCIT 111 TTJ 498 (Delhi ITAT) (iv) Star India (P) Ltd. vs. ACIT 311 ITR 235; (v) Sony India Pvt. Ltd. vs. DCIT 114 ITD 448. It was also pleaded before us that the commercial expediency and quantum of expenditure needs to be examined from the stand point of the assessee and not from the point of view of tax authorities. The tax authorities should not superimpose an imaginary limit for determining the allowability of an expenditure based on surmises and conject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be required to be made by these franchisees then additional amount paid by the assessee cannot be for genuine need of the business of the assessee. It is for the brand holding which is owned by the foreign associate concern of the assessee. Therefore, such expenditure cannot be treated as wholly and exclusively for the purpose of business u/s 37 of the Act. The DRP has also held that actual beneficiary of the AMP activities are foreign brand holders or the parent company and the franchisees are marginal beneficiaries from this expenditure. Logically, such expenditure should be proportionately distributed among the franchisees, assessee and foreign company which is not done by the assessee, therefore, this expenditure cannot be held wholly and exclusively for the purpose of business of the assessee. 18. We have heard both the sides on the issue. The DRP has given a finding that the major beneficiary of the AMP expenditure was foreign associate concerns who are the owner of the brand and the franchisees are only marginal beneficiaries. The calculation returned in the Assessing Officer s order give a different picture with regard to the ratio of benefits. Further, we find that no f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P has erred in treating this amount as a capital expenditure. We allow this ground of appeal and delete the addition. In view of these facts, we find no merits in the ground no.7 and the same are dismissed. 21. We have heard both the sides on the issue. The facts of the issue in this year and pleadings of both the sides remain the same, respectfully following the aforesaid decision of the ITAT, this issue is being taken as covered in favour of the assessee. Therefore, we allow this ground of assessee s appeal. 22. In the ground no.7, the issue involved is against allowing depreciation on computer peripherals and accessories @ 15% as against the depreciation claim of the assessee @ 60%. 23. The ld. AR submitted that this issue is covered in favour of the assessee by the decisions of various High Courts including the Hon'ble jurisdictional High Court in the cases of Commissioner of Income Tax vs. BSES Yamuna Powers Ltd. (in ITA No.1267 decided on 31.08.2010) and CIT vs. Oriental Ceramics Inds. Limited in ITA No.66/2011. 24. We have heard both the sides on the issue and also perused the records. After hearing both the sides, we hold that this issue has been deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Multiple Year Data 1.6 On the facts and in the circumstances of the case and in law, the Hon'ble DRP/Ld. TPO erred in using single year data as against the multiple year data used by the Appellant, to compute the arm's length price of the international transaction of the Appellant using Transactional Net Margin Method ( TNMM ) method. Application of Proviso to Section 92C of the Act 1.7 On the facts and in the circumstances of the case and in law, the Hon'ble DRP/Ld. TPO erred by not applying the Proviso to section 92C of the Act and have failed to allow the appellant the benefit of variation of 5 percent in determining the Arm's Length Price. 26. Ground No.1.1 is general in nature and the same does not require any adjudication as the issue raised therein is covered by other specific grounds raised in the grounds of appeal. Hence, the same is dismissed. 27. In the ground no.1.2, the assessee has raised the issue that DRP/TPO has erred in considering an inappropriate set of companies which has been taken as comparable to the support services outside India segment of the assessee. 28. While pleading on behalf of the assessee, ld. AR submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered as comparables also. Wapcos (India) Ltd. is engaged in providing engineering and technical consultancy services in the transportation industry. In the assessee s own case, the TPO has rejected M/s. Wapcos (India) Ltd. as comparable by holding that it is functionally different as compared to YRIPL in the Assessment Years 2007-08 and 2009-10. Ld. AR also submitted that as per notes of accounts of M/s. Wapcos (India) Ltd., it has received grants in aids for carrying out specific schemes of the Government. The company has also not provided pay revision as recommended by the Sixth Pay Commission. Accordingly, the profit of the company did not give the correct picture. Similarly, in the case of Rites Limited, ld. AR submitted that it is engaged in the engineering services and providing consultancy for infrastructure. Services rendered by Rites Limited are similar to M/s. Wapcos (India) Ltd. There is a change in the accounting practice in Rites Ltd. in the Assessment Year 2007- 08. As a result of this change, profits of the year were higher by INR 2388.60 lakhs. This constituted 25% of the company s overall profit of the company. Given these abnormalities, Rites Ltd. cannot be cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Nortel Networks India P. Ltd. vs. Addl. CIT in ITA Nos.4765/Del/2011 427/Del/2013 order dated 25.02.2014, the ITAT, Delhi Bench I , New Delhi has held as under :- 11.2. On issue of exclusion of Saket Projects Ltd, we are of the view that specific characteristics of services provided, assets employed, risk assumed i.e. the FAR of the comparable is decisive and inclusion or exclusion of comparables. The higher or lower rate of profit is nowhere prescribed as the determinative factor in this behalf. Only if the higher or lower profit rate results on account of effect of factors given in Rule 10B(2)read with sub-rule (3), that such case shall merit omission then only it can be considered. Higher profits achieved due to factors not mentioned in the rule then such case shall be continued to find place in the list of comparables. Similar view has been approved by various coordinate ITAT benches in the cases like Exxon Mobil Company India (P.) Ltd.- (2011-TTJ-68-ITAT-MUMTP) and DCIT vs. M/s. B.P. India Services (P.) Ltd. ITA No.4425/Mum/ 2010. 11.3. On issue of comparability of Saket Projects Limited, we are in agreement with the ld DR that no comparable can be rejected mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hold that Choksi, Rites and WAPCOS being functionally different cannot be applied as appropriate comparable to the assessee. Therefore, they are to be excluded from TP adjustment while determining the ALP. As far as Wapcos (India) Ltd. and Rites Limited are concerned, we find that both these companies are providing engineering consultancy and undertake turnkey contracts as held in the case of M/s. Nortel Networks India P. Ltd., cited supra. These companies were found to be not comparable on the basis that these companies are providing marketing support services to the parent company and these were held to be functionally non-comparable. Wapcos (India) Ltd. provides services requiring technical expertise. In the Assessment Year 2007-08 and 2009- 10, TPO itself has rejected as comparable to assessee. Wapcos has recorded grants in aid for carrying out specific schemes of the Government. It has also not provided for pay revision in view of 6th Pay Commission. In view of this, the results are not comparable. In the case of Rites Limited, we find that it is engaged in engineering services and providing consultancy pertaining to infrastructure services. The services rendered by Rite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest of justice and equity, we restore this issue to the file of the DRP to be decided afresh. 36. The other issue involved in Ground Nos.1.5 1.6 is use of data not existing at the time of preparation of TP documentation and single year versus multi year data respectively. Similar issues have been considered by the ITAT. 37. The ITAT in the case of M/s. Premier Exploration Services Pvt. Ltd. vs. ITO in ITA No.5293/Del/2012 order dated 22.11.2013 has decided the issue against the assessee. The relevant para 3 is reproduced as under :- 3. The assessee objected the use of current year data by the TPO for transfer pricing analysis on the basis that such data was not available in public domain at the time of finalization of transfer pricing study and the use of multiple year data would result in better capturing of market/business cycles reflected in the industry in comparison to single year data. This plea of the assessee was not accepted in view of the provisions of Rule 10B(4) of the Income-tax Act, 1961 wherein it is provided that data of the comparable transactions shall be for the same financial year in which the assessee has entered into international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
