TMI Blog2014 (11) TMI 263X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant under the Technology License Agreement with YRAPL – Held that:- The issue has already been decided in assessee’s own case for the earlier assessment year, decided in ITO, Ward 18 (4), New Delhi Versus Yum! Restaurants (India) Private Ltd. [2014 (4) TMI 532 - ITAT DELHI] - The 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 – Decided in favour of assessee. Hypothetical disallowance of the administrative expenses – Held that:- The issue has already been decided in assessee’s own case for the earlier assessment year, decided in ITO, Ward 18 (4), New Delhi Versus Yum! Restaurants (India) Privat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T DELHI] - The AO has highlighted certain discrepancies in the maintenance of WDV of the assets as well as identification of each asset - 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 - 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 - 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 – Decided in favour of assessee. Software expenses disallowed - Capital expenses or Revenue – Held that:- The issue has already been decided in assessee’s own case for the earlier assessment year, decided in ITO, Ward 18 (4), New Delhi Versus Yum! Restaurants (India) Private Ltd. [2014 (4) TMI 532 - ITAT DELHI] – The AO has allowed annual maintenance charges as rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 99,35,274 to ₹ 3,19,27,801 and thereby disallowing royalty amounting to ₹ 3,80,07,473 2.1 That on the facts and circumstances of the case and in law, the Hon'ble DRP/ Ld. AO erred in contending that there is no technology transfer to the appellant under the Technology License Agreement with YRAPL. 3. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in making a hypothetical disallowance of the administrative expenses of ₹ 16,33,46,030 incurred by the appellant as being attributable to its subsidiary company, Yum! Restaurants Marketing Private Limited ( YRMPL ). 4. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in disallowing the lease rent paid by the appellant amounting to ₹ 4,52,000 to M/s Mezbaan Hoteliers Pvt. Ltd. on account of rent free accommodation obtained for its managing director. 5. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has grossly erred in disallowing the tax depreciation claim to the extent of ₹ 28,85,143 made by the appellant under Section 32 of the Act. 5.1 That on the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in respect of neighboring countries of India, but income received is only in respect of costs incurred in India. It was also held that dominant intention of the assessee was not to enter into any business activity but was to pass on the income earned by the group companies in Indian subcontinent without payment of tax and the activity carried out by the assessee is not a systematic or an organized activity so as to be called a business activity. 5. At the outset of the hearing, ld. AR submitted that this issue has been decided by the ITAT in favour of the for the Assessment Years 2002- 03, 2003-04 and 2006-07 vide order dated 31.05.2011 and submitted that the ITAT has held that 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restaurants in India. The assessee has also obtained approval from Secretariat SIA, Government of India (GOI) for payment of royalty for the use of technology and systems for operation of KFC/ Pizza Hut restaurants in India. Later, these royalty payments were covered in the automatic route as per the terms notified in the Press Note 9 (2000 series) and Press Note 2 (2003 series). The assessee has also sought specific clarification in this regard and obtained the same from the GOI, Ministry of Finance. The disallowance was made on the reason that the SIA approval i.e. the Government approval used the term 'license fee' whereas the assessee has used the term 'royalty' in its accounts which is not as per the SIA approval, therefore, it was considered 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 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch costs. Where on one hand assessee is entitled to receive money for such costs incurred by it, on the other hand it is also obliged to contribute to YRMPL for meeting its advertising, marketing and promotion activities budget deficit. The disallowance was made on the reasoning that the administrative expenses incurred by the assessee, proportionately also belong to YRMPL as the business is carried out from common premises and employees and YRMPL has not paid its share of administrative expenses to assessee for the common facilities used by it which belong to the assessee and also that there is no reduction in the AMP contribution to be made by the assessee to YRMPL in lieu of providing 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 ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee by the decision of ITAT in the case of the assessee for assessment years 2002-03, 2003-04 and 2006-07. The relevant para of the said order is reproduced as under :- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he M.D., Shri Sandip Kohli. Disallowance was made under Section 40A(2)(b) of the Act on account of excessive lease rentals paid to related party. Only part rentals up to ₹ 20,000 per month were allowed on the basis of ITAT order for past years. 26. In the case of Director, Mr. Ajay Bansal, lease rentals paid by the assessee were for a property which was already being occupied by the director without payment of any rent. No concession was given in the rentals paid as the property was also being utilized by the mother of the director. 27. Ld. AR submitted that in the case of property provided to Director, Shri Ajay Bansal, the issue was remitted back to the AO by ITAT to determine fair rent of the property in the AY 2002-03, 2003-04 and 2006- 07. He submitted that the AO has allowed the rent paid by assessee for director's property as fair rent of the property based on valuation certificates produced by assessee for Assessment Years 2002-03, 2003-04 and also for 2007-08. Ld. AR submitted that for the house provided to MD, Shri Sandip Kohli, ITAT had allowed a payment of ₹ 2,40,000 per annum as fair rent of the property and the balance payment of rent was disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 ITR 210) and CIT vs. Indo Saudi Services (Travel) (P) Ltd. (Bombay HC) (219 CTR 562). For commercial expediency, ld. AR relied on the decision of Shahzada Nand Sons vs. CIT (SC) (108 ITR 358) and CIT vs. Panipat Woolen General Mills Co Ltd (SC) (103 ITR 66) where it is held that commercial expediency to be decided from the stand point of assessee and not tax department. He submitted that tax can be imposed only on real income and not on notional income. He submitted that therefore, AO has grossly erred in adding notional interest income and in this regard referred to the decisions of Godhra Electricity Co. Ltd. vs. CIT (SC) (225 ITR 746); CIT vs. Calcutta Discount Company Ltd (SC) (91 ITR 8) and Seth Madan Lal Modi vs. CIT (Delhi HC) (261 ITR 49). The ld. DR relied on the order of the authorities below. 28. We have heard both the sides on the issue. These disallowances have been made by invoking the provisions of section 40A(2)(b) of the Act is on account of excessive rental paid to the related parties. First, we would like to put some facts with regard to this disallowance in summary. In the tax audit report, the assessee has disclosed three parties covered under the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 50 lacs as security deposits. Assessing Officer has estimated notional rent @ 12% of the interest free deposits which worked out to ₹ 6 lacs. He computed the disallowance of ₹ 21 lacs for the residence for Mr. Sandeep Kohli. The assessee had incurred a sum of ₹ 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 ₹ 50,900. The disallowance has been worked out to ₹ 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 ₹ 20,000 to the original land owner would immediately fetch a rent at ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. At this stage, there is no dispute that the payment has been made to the persons who are covered by section 40A(2)(b) of the Act. In the case of M/s. Mezbaan Hoteliers Pvt. Ltd., it is well established that payments had been made in excess for which such goods and services were available. It is apparent from the rentals paid by M/s. Mezbaan Hoteliers Pvt. Ltd. It is very clear that a property which is fetching ₹ 2,40,000/- per annum to the landlord has been further let out for ₹ 15,00,000/- per annum which had been further increased to ₹ 24,70,000/-. This clearly establishes that the assessee company has extended extra peculiar benefits to its Managing Director who is covered by the provisions of section 40A(2)(b) of the Act. We are of the firm opinion that anything in excess to ₹ 2,40,000/- per annum paid to M/s. Mezbaan Hoteliers Pvt. Ltd. by a collusive method is excessive and has to be disallowed. Thus, the rent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he extent of their reimbursement entitlement. Also, the assessee had transferred certain assets belonging to its restaurant outlets in assessment year 1999-00 on itemized basis. However, no sales consideration was received for the same. Accordingly, no deletions were made in the block of assets (owing to Nil consideration) on account of this sale in accordance with the provisions of Section 43(6)(c)(i)(B) of the Act. The disallowance was made on the basis that in the earlier assessment years it was observed that certain assets which were purchased during prior period have been entered in the books of accounts of the financial year. It was held that depreciation claimed on assets purchased exclusively for the employees, are not for the use of business and certain assets which were sold by the assessee as part of its undertakings (outlets) to its franchisees continue to remain in its books and depreciation claimed on the same. The ld. AR submitted that CIT(A) placing reliance on the judicial precedents set forth by the assessee has allowed the issue in favour of the assessee for assessment years 2004-05 and 2005-06. Complete depreciation has been allowed including depreciation of ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 5 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. 18. In the ground nos.6 6.1, the issue is related to disallowance of software expenses by holding them to be of capital in nature. 19. At the outset of the hearing, ld. AR submitted that this issue has been decided by the ITAT in the aforesaid order dated 14.02.2012 in ITA No.2679/Del./2012 and the ITAT, while treating the disallowance of software expenses as capital expenditure, has set aside the issue to the file of the Assessing Officer to decide whether the expenses were for upgradation or it was for acquisition of new software. Ld. AR also pleaded that once it has been taken as a capital expenditure then depreciation should have been allowed for which the DRP has issued the directions. 20. We have heard both the sides on the issue. The DRP has directed the Assessing Officer to verify the details of the software expenses and allow the expenses which are annual nature as revenue and the balance is to be taken as capital expenditure and also directed that such capital expenditure will be eligible for deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X
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