TMI Blog2015 (2) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ction (Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT [1996 (10) TMI 2 - SUPREME Court]). The commercial expediency of a businessman’s decision to incur a particular expenditure cannot be tested on the touchstone of strict legal liability to incur such expenditure. Such decisions are to be taken from a business point of view and have to be respected by the authorities, regardless of the fact that it may appear, to the latter, to be expenditure incurred unnecessarily or avoidably. In the present case, the ITAT recorded a finding that the royalty was for business purposes and what is more, payable to the assessee’s foreign principals. Its character as an expense - collected for payment to the said foreign party-has not been disputed. In the circumstances, the assessee’s claim that it was for business purposes alone, and no other reason, could not have been rejected by the AO. - Decided in favour of the assessee. Disallowance out of administrative expenses - Held that:- This Court is of the opinion that the findings of the ITAT cannot be faulted. The ultimate effect on the revenue would be the same, whether the assessee bore administrative expenses and costs of YRMPL or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PPL.14484/2012, 14485/2012 & 14486/2012, ITA 152/2012, C.M. APPL.14478/2012, 14479/2012 & 14480/2012, ITA 158/2012, C.M. APPL.14481/2012, 14482/2012 & 14483/2012 - - - Dated:- 30-1-2015 - MR. S. RAVINDRA BHAT AND MR. R.K. GAUBA, JJ. For the Appellant : Ms. Suruchii Aggarwal, Sr. Standing Counsel with Sh. Aamin Aziz, Advocate, Sh. Kamal Sawhney, Sr. Standing Cousnel with Sh. Sanjay Kumar, Jr. Standing Counsel For the Respondent: Sh. Nageswar Rao, Sh. Shailesh Kumar and Ms. Sayaree Basu Mallik, Advocates JUDGEMENT MR. JUSTICE S. RAVINDRA BHAT 1. In these appeals under Section 260A of the Income Tax Act, 1961, the following substantial questions are framed, after hearing counsel for the parties: (i) Did the Income Tax Appellate Tribunal (ITAT) err in accepting the assessee/respondent s plea that service income declared for the concerned years was business income and not income from other sources as argued by the revenue, in the circumstances of the case; (ii)Was the assessee s claim for royalty payment deduction not sustainable in law, on account of the operation of Explanation to Section 37 (1) of the Income Tax Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o by the assessee with M/s. Tricon Restaurant International Inc. (renamed as Yum Restaurant International SWC and referred as YRI hereinafter). This agreement was entered on 01.04.2001. In terms of the agreement, the assessee was under an obligation to provide assistance:- i) 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) In providing Tricon Restaurant International Inc. with such reports concerning the above matters as may be reasonably required by them from time to time. iii) In collection and onward remittance of license fee, and such other fees as may be payable by the licensees, to KFCIH and PHILLC. iv) In acting generally on behalf of Tricon Restaurant International Inc. in a liaison capacity in connection with the existing and the potential licensees and/or such other matters. The agreement inter alia, stated: 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; Providing TRI with such repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut 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 . 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y or conduct with a set purpose. On the others hand, a single and isolated transaction has been held to be conceivably capable of falling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. The question, therefore, whether a particular source of income is business or not must be decided according to our ordinary notions as to what a business is. This test of some real, substantial and systematic or organised course of activity or conduct with a set purpose to determine whether an activity was business, was affirmed in Commissioner Income Tax v Distributors (Baroda) (P) Ltd. AIR 1972 SC 288. Again, in Barendra Prasad Ray Ors v Income Tax Officer AIR 1981 SC 1047 the Supreme Court held that: the word business is one of wide import and it means an A activity carried on continuously and systematically by a person by the application of his labour or skill with a view to earning an income. In view of this settled position, there is no scope for interference with the findings of the CIT (A) and the ITAT on this aspect. This Court thus holds that the service income declared by the assesse for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,37,05,801 during the accounting period relevant to the assessment year 2002-03 and other amounts for the later years in dispute. Terming as continuing fees, the assessee had, from the franchise, remitted royalty aggregating to ₹ 3,23,10,030/- to the principals abroad. The AO disallowed this payment of royalty to the principal holding that the Central Government had restricted royalty payment in its initial approval, and the assessee was permitted to pay technical service fee only. The AO felt that technical service fee and royalty were distinct and separate. It was held that the assessee termed the technical service fee as royalty to evade the condition in the SIA approval which restricted payment of technical service fee for seven years. Observing that payments were made to the parent companies by the assessee, the AO was of the opinion that their constituting payments in lieu of dividend could not be ruled out. 11. The CIT (A), on being approached by the assessee, went on to consider the documents, and held as follows: 9.13. The contents of the assessment order, material on record and the written submissions and arguments made by the appellant ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction, the Transfer Pricing Officer vide its order dated February 18, 2005 has held the same to be at the arm's length price. Thus, the disallowance of ₹ 3,23,01,939 being without any basis, is deleted. 9.14 In view of the above discussion, the disallowance of ₹ 3,23,01,939 made by the Assessing Officer being without any basis is deleted and the appeal is allowed on this ground. 12. The ITAT went into the documents and materials afresh and concluded, on this point, as follows: 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 the Government of India has permitted the assessee to pay technical fees which is restricted to seven years and the assessee is paying it as a royalty. The learned Commissioner of Incometax (Appeals) has deleted the disallowance on the ground that the 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 Pizz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allow the amount on technicalities. 14. The income and expenditure account of the assessee has been examined, in addition to the contentions made by the parties. The Press Note, which the CIT (A) took into account, issued by SIA unit of the Ministry of Commerce, reads as follows: PRESS NOTE NO.2 (2003 SERIES) Subject Liberalization of Foreign Technology Agreement policy and procedures In pursuance of its commitment to progressively liberalise the FDI regime, the Government has reviewed its policy governing the payment of royalties under Foreign Technology Collaboration. 2. Presently, wholly owned subsidiaries are permitted to make payment of royalty up to 8% on exports and 5% on domestic sales to their offshore parent companies on the automatic route without any restriction on the duration of the royalty payments. However, royalty payments by other companies are allowed for a period not exceeding seven years from the date of commencement of commercial production or ten years from the date of agreement, whichever is earlier. 3. With a view to further liberalising the foreign technology collaboration agreement policy and extending a uniform polic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in terms of the liberalized policy, YRIPL may remit royalty under the automatic route within the prescribed limits. It is also not in dispute that royalty payments were made under the normal banking channels. In fact, the SIA - in this case - had used the terms technical license fee and royalty loosely and interchangeably. The ITAT further concluded that, The AO failed to bring on record any material that assessee has infringed any law in conducting its business and that 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. 16. Section 37(1) of the Act- and its explanation, read as follows: 37. (1) Any expenditure not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . Explanation.-For the removal of doubts, it is hereby declared that any expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of commercial expediency, what is to be seen is not whether it was compulsory for the assessee to make the payment, but whether it was of commercial expediency. As long as the payment is made for the purposes of the business, and not by way of penalty for infraction of any law, the same would be allowable as a deduction (Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101 (SC)). The commercial expediency of a businessman s decision to incur a particular expenditure cannot be tested on the touchstone of strict legal liability to incur such expenditure. Such decisions are to be taken from a business point of view and have to be respected by the authorities, regardless of the fact that it may appear, to the latter, to be expenditure incurred unnecessarily or avoidably. In the present case, the ITAT recorded a finding that the royalty was for business purposes and what is more, payable to the assessee s foreign principals. Its character as an expense - collected for payment to the said foreign party-has not been disputed. In the circumstances, the assessee s claim that it was for business purposes alone, and no other reason, could not have been rejected by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carving out the disallowance. The learned Commissioner of Income-tax (Appeals) has rightly deleted this disallowance and we do not find any force in this ground of appeal. It is rejected. 22. This Court is of the opinion that the findings of the ITAT cannot be faulted. The ultimate effect on the revenue would be the same, whether the assessee bore administrative expenses and costs of YRMPL or it remitted such amount to YRMPL, its wholly owned subsidiary, towards such costs. The final effect is revenue-neutral. Having regard to these circumstances, this court holds that the question of law framed in this regard is to be answered in favour of the assessee. Question No. 4 23. The AO noticed that the assessee failed to produce registers maintained for the fixed assets. In the AY 1999-2000, it transferred its business undertaking at Bangalore and Delhi as a going concern. Such assets continued to be shown as fixed assets even through in the AY 2002-03, depreciation was claimed on such non-existent assets. The AO observed that re-assessment for year 1999-2000 was ordered under Section 148 of the Income-tax Act and also that depreciation was claimed in respect of assets, pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of hearing to the assessee. It is, therefore, evident that the revenue s argument is only in respect of a remand directed by the ITAT. That remand directed the AO to give effect to the outcome of AY 1999-2000 after providing opportunity of hearing to the assessee, for the subsequent period. For the later years, the ITAT held the amounts were also taxed in the hands of the employees as perquisites and relied on the decision of Sayaji Iron and Engg Co vs. CIT (253) ITR 749 (Guj.) The ITAT accepted the contention 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 asset is inessential. 24. Learned counsel for the revenue contended that the ITAT s findings are not justified. Once the assets were purchased by the assessee s employees, it could not claim depreciation. The assessee, on the other hand, contended that though the assets were purchased by its employees, this was in accordance with the prevailing policies. The assessee was, in terms of the employment of each of its personnel, entitled to such concessions, as it was bound to reimburse the cost of the assets. In these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. v Commissioner of Income Tax, West Bengal [1955] 27 ITR 34(SC). The Supreme Court, in that judgment stated as follows: If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset (or) advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. Re-visiting the entire issue, nearly three and a half decades later, the Court in Alembic Chemical Works Ltd. v Commissioner of Income Tax 1989 (177) ITR 377, traced the developments in the law: The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the case on hand also. Judicial metaphors, it is truly said, are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it. The nondeterminative quality, by itself, of any particular test is highlighted in B. P. Australia Ltd. v. Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test ...... 29. In the present case, it is not disputed that the assessee is engaged in the restaurant business. As part of its commercial activity, it strives to develop new recipes to develop its clientele, or expand it. The amounts expended towards such development are part of its business. Possibly, some recipes may be viable; equally possibly, all of them may be unviable. The mere possibility of the result of such exercise being a popular or long lasting recipe would not make the expenditure capital in nature. As such, it cannot be held that the food tasting development charges would result in a capital advantage of an enduring nature. Re Question No. 6 30. In respect of this issue, the facts are that the assessee made certain provisions on the basis of the mercantile system of accounting followed by it, at the end of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f which for our purpose are extracted and reproduced as under: (i) for an assessee maintaining his accounts on the mercantile system, liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in the case of amounts actually expended or paid; (ii) just as receipts, though not actual receipts but accrued due are brought in for Income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business ; (iii) a condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability ; (iv) a trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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