TMI Blog2015 (3) TMI 493X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has also filed the sample bills for the other agencies on which M/s. SBC has not given any discount at all. The assessee has also filed sample bills of M/s. SBC raised on the assessee trust i.e. Bill No. 823 dated 01-09-2007 on which the card rate charges are less than the Newspaper rate as per comparative chart filed by the assessee. The assessee has subsequently demonstrated before us that if the average rate of discount is worked out given to the assessee as compare to card rate which is almost 10%. We also find that M/s. SBC has also done the work for other clients i.e. non-related parties to whom no discount or reduction in the card rates are given. Considering the totality of the evidence before us, we concur with the finding of the Ld. CIT(A) that by giving the advertisement work to M/s. SBC, the assessee trust has not violated the conditions of Sec. 13(1)(c) to deprive to get the benefit of exemption u/s. 11 & 12 of the Act.- Decided against revenue. - ITA No. 1679/PN/2012, ITA No.1204/PN/2013 - - - Dated:- 18-2-2015 - R. S. Padvekar, JM And R. K. Panda, AM,JJ. For the Appellant : Shri P S Naik For the Respondent : Shri S N Doshi ORDER Per: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure amounting to ₹ 3,76,37,138/- was paid to M/s. Sri Balaji Creativities (in short SBC) on account of release of advertisements in various magazines and souvenirs. It was further noticed by the Assessing Officer that M/s. Shi Balaji Creativities through whom major portion of the advertisement expenditure was found to have been made, is a partnership firm constituted by following three partners who happened to be trustees of the assessee society: Sl. No. Name of the Partner Share Ratio 1 Shri B. Paramanandhan 40% 2 Shri B. Parandhaman 50% 3 Smt. Thilangavathy 10% 3.1 The Assessing Officer has observed that the above three trustees of the assessee society are having substantial interest in the firm, M/s. Sri Balaji Creativities (SBC). It was held by the Assessing Officer that the said partners and their firm, M/s. Sri Balaji Creativities have become persons covered u/s. 13(3)(e) of the Income-tax Act vis-a-vis the assessee society. Having hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the quantum of discount granted which was 2% in case of assessee society whereas it stood at 10% in the above case. 3.3 Accordingly, the assessee was called upon by the Assessing Officer to explain as to why the provisions of sec. 13(l)(c) of the Act should not be invoked in its case in the face of the fact that M/s. SBC is a person covered under Sec.13(3) of the Act and the assessee has been awarded less amount of discount than others despite the fact that the assessee society contributed to almost 70% of the total turnover of the SBC. In response, the assessee sought to justify the quantum of discount granted by SBC vis-a-vis its other clients by stating that the discount was granted in its case on the gross advertisement bills in Newspapers as compared to the card rates of the Newspapers. The assessee has furnished a chart where it is shown that it has received a benefit of ₹ 43,17,143/- on the total advertising charges, which if billed according to the card rates of ₹ 4,17,45,910/-, would convert to a discount @ of 10.34%. Thus, it was strongly argued by the assessee there was no undue benefit passed on to SBC by way of higher charges and therefore, provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer that said communication indicated that the said party was directly dealing with the assessee without the help of any intermediary and even if it was that the assessee was receiving reduced rates than as per rate cards, it would follow that such benefits were being given to the assessee directly and M/s. SBC did not have any role to play. Differentiating, the Assessing Officer emphasized that M/s. SBC had granted discounts to other customers on gross billing which include the services rendered by M/s. SBC as an advertising agency. It was further observed by the Assessing Officer that the plea now taken by the assessee was an afterthought. The Assessing Officer, accordingly, came to the conclusion that there was contravention of the provisions of Sec. 13(1)(c) of the Act inasmuch as the assessee had passed out undue benefit to M/s. SBC who was a person as defined in Sec. 13(3), by making payment for services rendered by the said concern in excess of what may reasonably have been paid for such services. The quantum of such excess benefit held to be given to M/s. SBC was worked out by the Assessing Officer at ₹ 30,14,735/-. Citing the violation of Sec. 13(1)(c) as above, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear, which is a person referred to in section 13(3), is in excess of what may be reasonably paid for such services and thereby the funds of the appellant are diverted to interested person. The AO has drawn this inference on the ground that lower amount of discount at 2% was offered to the appellant on the advertising charges as compared to discount of 10% offered to other customers of SBC, even though the bulk of the business of SBC was on account of advertising from the appellant. On the other hand, the contention of the appellant is that the expenditure incurred is reasonable or commensurate with the services rendered by SBC and therefore the funds of the appellant are not used or applied or diverted for the benefit of the interested persons and the provisions of sec. 13(l)(c) have not been violated by the appellant at all. Therefore, the crucial point for determination in the present case is whether the advertising charges paid by the appellant to SBC are reasonable or commensurate with the services rendered by SBC to the appellant-society during year. To decide the issue, in the first place, it is necessary to refer to the relevant provisions of sec. 13 as applicable to the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing, namely,- (a) the author of (the trust or the founder of the institution; (b) any person who .has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant I previous year exceeds fifty thousand rupees; (c) where such author, founder or person is a Hindu undivided family, a member of the family; (cc) any trustee of the trust or manager (by whatever name called) of the institution; (d) any relative of any such author, founder, person, member, trustee or manager as aforesaid; (e) any concern in which any of the persons referred to in clause (a), (b), (c), (cc ) and (d) has a substantial interest. 5.1 Thus, Section 13(1) (a) provides that any income of a trust for charitable or religious purposes will not get the benefit of exemption under section 11 if such income is used or applied directly or indirectly for the benefit of any person referred to under section 13(3). Section 13(3) specifies such interested persons, Section 13(2) introduces some deeming situations and provides that such income or property is deemed to have been used or applied for the benefit of a person sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment made to SBC for the services is excessive or unreasonable having regard to reasonable payment for such services, A payment for certain services rendered becomes unreasonable if the same is in any way in excess of payment for similar services that can be availed in the open market and in that sense, the payment made to SBC will be unreasonable if some other advertisement agency would have Tendered the same services at rate than what was paid by the appellant to SBC for such services. In the field of advertisement, as a first step, the' advertiser approaches the adverting agency for release of advertisement in selected newspapers and magazines. The advertising agency then issues a 'Release Order' (RO) to the newspaper/magazine concerned indicating the date, page, size, position etc. of the advertisement to be inserted and mentions the card rate or the negotiated rate at which the agency would pay the publishers. After the advertisement is inserted as per the RO, the newspaper raises a formal bill at the card rates or at the rates agreed upon on the agency quoting the relevant RO number. The advertising agency in turn raises its bill on the client and collects the ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tising agencies succeed in getting discount for their advertisements on some days and no discount at all on other days. Similarly, the discounts offered by' advertising agencies to their clients also depend on several factors like nature of services provided to each client and not just the volume of advertisements. Merely because payments made by the appellant constitute 70% of the turnover of SBC, it cannot be said that the appellant should get discount or rebate at the same rate in all the cases of advertisements released through SBC as a matter of right., The discounts offered on publication of advertisements in media depend on various factors and cannot be uniform for all clients and on all the days. In this background, the observation of the Assessing Officer that SBC could have got discount on card rates from the news papers on all the 101 advertisements released during the year as against only 28 instances and subsequently SBC could have passed on the discount to the appellant where rebate on card rates has been received and could have granted discount @ 10% and above in all the cases is only presumption without appreciating the nature and dynamics of advertising busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... calculations of difference between 2% and 10%. If payments made to SBC are more than the card rates of the newspapers/publishers or SBC has not granted rebate at all on the card rates in case of all ads published during the year for the appellant, then possibly one can draw the inference that the payment is in excess of what may be reasonably paid for such services. But, in none of the cases, the amount charged by SBC exceeds the card rates and on the contrary SBC grated overall rebate of more than 15% on card rates to the appellant during the year. 5.3 It is also noticed from the details furnished by the appellant that SBC has not granted discounts uniformly ranging from 10% to 13% to all its clients and there are clients who have been granted discounts at 5% or 8%. For instance, in the case of Trinity Auto Components, discount is granted at 7.50% in some bills and in case of its clients, Sandvik Asia and Delcom Software India Pvt. Ltd, no discount is granted on ad charges (Copies of relevant' {Bill No. 728, 738 883 are attached to the order as Annexure C-1 to C-3). Thus, different percentages of discounts are granted by M/s. SBC to its various clients depending on the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised by publishers on SBC for advertisements released on behalf of the appellant during the year clearly indicate that the appellant was releasing its advertisements through SBC and not dealing with the publishers directly. 5.5 The Assessing Officer also observed that the submissions of the appellant filed during the assessment proceedings are silent on the strictly comparable bills, which are appended to the assessment order, where there was no difference among the gross rates charged to the appellant society and to other customers by SBC and the difference is only in respect of discount allowed by SBC. But, the appellant now explained that the clarifications thereon were missed out in the submissions made on 24.12.2010 through an oversight and in a hurry to meet the deadline of time barring assessment. In the present proceeding, the appellant furnished copy of relevant newspaper clipping, card rates, release orders for ads, bills raised by publishers on SBC and bills in turn raised by SBC on the appellant and the other party. On perusal of these details, it is noticed that in the case of Bill No. 949 dated 2.2.08 raised on the appellant, the gross rate charged was ₹ 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... publication of advertisements in newspapers/magazines. In the initial years, SBC was only conceptualizing, writing the contents and creating the artwork for the advertisements being released by the appellant as is evident from bills of M/s. Sead Advertising Pvt. Ltd, copy of which is enclosed to the order as Annexure 'E', where the agency has clearly mentioned in their invoices that separate bills for certain amount: would be raised by SBC for creative work. It would appear that in 2003, SBC registered itself with the leading newspapers and thus became eligible to release advertisements directly to the publishers and the appellants started releasing their advertisements through SBC, effectively since January 2004. Since then, SBC does not charge the appellant for the other services provided in the form of conceptualization, copy-writing, designing the art work and all that goes into an effective advertisement, media publicity services etc. However, SBC charges others for the artwork and copywriting services ias is evident from representative copies of the bills furnished vide Annexure 'VI' to the written submissions, copy of a few bills is enclosed to the order as A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of condition laid down under sec. 13(l)(c) and sec. 13(2)(c) and withdrawing the exemption claimed under sec. 11. Accordingly, the Assessing Officer is directed to grant the benefit of exemption under sec. 11 to the appellant in respect of its surplus income generated during the year. Now, the Revenue is in appeal before us. 5. We have heard the rival submissions of the parties and perused the record. The main plank of the argument of the Ld. DR is that M/s. Sri Balaji Creativities (SBC) is the child of the trustees of the assessee trust and the advertisement expenditure which is the major part of total expenditure has been diverted to the M/s. SBC and thereby the trustees have diverted the profit of the assessee trust for their personal benefits. He referred to Sec. 13(1)(c) of the Act and submits that it is not necessary that the benefit should be directly diverted but it can be by implication or by in direct way. He referred to assessment order and submits that the Assessing Officer has brought on record the data in respect of card rates of the advertisement and has established that even if the M/s. SBC has given the more discount to other parties but so far as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agement discount to the extent of 10% of the bills was granted but at same time to many other clients M/s. SBC has not granted the discount at all. He submits that even for the sake of argument if we look into the matter that the assessee trust has diverted its profit for the benefit of the trustees but the fact remains that the assessee trust is enjoying the registration u/s. 12AA of the Act and otherwise also its income is exempt u/s. 11 12 of the Income-tax Act where as the profit earned by M/s. SBC is taxable. He submits that M/s. SBC has actually charged much less than the card rates by obtaining rebates from the Newspapers. He pleaded for confirming the order of the Ld. CIT(A). 7. During the course of hearing the Bench has given the directions to the assessee to file the sample bills of the Newspaper publications raised on M/s. SBC in respect of advertisements of the related parties i.e. the assessee trust and non-related parties to demonstrate that the difference in the card rate of advertisement as claimed in the chart filed in the compilation at Page No. 9 of the P/B. In compliance with the direction of the Bench, the assessee trust has filed sample bills which are pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... miss the grounds taken by the Revenue. 8. Now, we take up the appeal for the A.Y. 2009-10. The Revenue has filed the following revised/concise grounds which are verbatim as taken in the A.Y. 2008-09. 1. The ld. CIT(A) erred on the facts and on circumstances of the case and in law, in holding that the expenditure on advertisement was a legitimate expenditure incurred for the purpose of pursuing the objects of the society. 2. The ld. CIT(A) erred on the facts and on circumstances of the case and in law, in holding that the funds of the society are not applied or used or diverted for the benefit of the person referred to section 13(3) in violation of condition laid down u/s 13(1)(c) 13(2)(c). 3. For this and such other grounds as may be urged at the time of the hearing, the order of the Id. CIT(A), Pune may be vacated and that of the AO be restored. 4. The appellant craves leave to add., amend, alter or delete any of the above grounds of appeal during the course of the appellate proceedings before the Hon'ble Bombay High Court. 9. In this year the issue arising for adjudication is identical as in the A.Y. 2008-09. The impugned order of the Ld. CIT(A) is almost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments by the trust to the said firm M/s Sri Balaji Creativities form more than 80% of the turnover of the said firm. iv. M/s Sri Balaji Creativities has granted discount at the rate of 7.4 to 12% to its other customers and the discount granted to the assessee firm is only at the rate of 2% even though the payments by assessee constitute more than 80% of the turnover of M/s Sri Balaji Creativities. v. The contention of assessee that it has paid advertisement charges to the newspapers lesser than the card rates is misplaced as the facts brought on record indicate otherwise. vi. Thus assessee has paid the amounts out of resources of trust for services rendered by M/s Sri Balaji Creativities in excess of what may reasonably have been paid for such services. The amounts paid in excess in such a way are worked out at ₹ 40, 61,204/-. 10. The Assessing Officer, accordingly, declined to given the benefit of exemption to the assessee u/s. 11 12 of the Income-tax Act and completed the assessment treating the assessee on AOP. The Assessing Officer also referred to Sec. 40A(2) of the Act and observed that the assessee society has made payment to M/s. SBC which are unreasonab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Rates on RO and charged by the paper (Raipur) ₹ 176- psc 1. Rate charged by SBC to the client (Indore) ₹ 347/- psc 2. Rate charged by SBC to the client (Raipur) ₹ 212/-psc The advertising charges are normally fixed as per the card rates provided by the publishers from time to time for insertion of ads in different pages. However, the publishers as well advertising agencies allow rebate on card rates depending on the demand for ads on a particular page, in a particular edition and on a particular day. 6.2 In the course of the present proceedings, the appellant furnished copies of the bills raised by publishers on SBC for insertion of advertisement on behalf of the appellant, relevant card rates, copies of bills raised by M/s SBC on the appellant, discount on gross billing allowed by SBC, which are annexed to the order as Annexure A . As could be seen from the Annexure, as against the total card rates of ₹ 14,85,55,701/- for advertisements inserted on behalf of appellant, M/s SBC charged the appellant ₹ 6,98,48,962/- for the services rendered to the appellant, which effectively works out to 52.98% discount on the card rates. These deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9th January, 2009, all on page 5. i. Card rates: Rs.8,940/- basic for 2-5 insertions Rs.1,020/- Premium for page 5 Total ₹ 9,960/- ii. Thus, cost of each advertisement (insertion) ₹ 19,50,000/- Cost of four insertions ₹ 6,88,03,680/- Gross amount charged by TOI on SBC ₹ 1,62,77,682/- iii. Gross billings by SBC on the society (Rs.41,25,803/- X 4) ₹ 1,65,03,212/- iv. Total Rebate passed on by SBC ₹ 5,23,00,468/- (Copies of relevant Bill No. 1144, 1145, 1146 1147 are enclosed to the appellate order as Annexure - B-1 B-4) Similarly, reference may also be drawn to the other instances (as detailed in Annexure A appended to the order), where substantial benefit has been passed on to the appellant by SBC on card rates:- S. No. Bill No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin a gap of a month:- i. NICMAR: Bill No. 1081 Advertisement on 28.9.2008, Size 272 sq. cm. Card rate Rs.8,435/- per sq. cm. Hence, for 272 sq. cm. Rs.22,94,320/- Actual charged by TOI on SBC Rs.20,64,888/- Actual charged by SBC to client Rs.22,94,320/- Rebate passed on to the client Rs. NIL Discount allowed at 10% on the card rate of ₹ 22,94,320/- ii. Balaji Institute of Modern Management: Bill No. 1100 Advertisement on 28.10.2008, Size 480 sq. cm. Card rate: Basic Rs.8,435/- per sq. cm. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Actual charged by DC on SBC Rs.19,99,718/- Actual charged by SBC to client Rs.21,68,989/- Rebate passed on to the client Rs.34,60,901/- Discount allowed at 2% on the rebated card rate of ₹ 21,68,989/- (Copies of relevant Bill No. 1081, 1100, 1168 1148 are attached to the order as Annexure C-1 to C-4). Similarly, the observation of the Assessing Officer that SBC gave discount uniformly ranging from 7.4% to 12% to all its clients is contrary to facts as could be seen from the material placed on record, as there are also clients to whom no discount was passed on at all by SBC. For instance, in the case of Sandvik Asia Ltd. (Bill No. 1125, 1176), no discount is given on the gross billing amount. Similarly in the case of Dina Institute of Hotel Management, while at some instances discount of 10% was granted, at other instances no discount was granted (Bill No. 1127, 1166). (Copies of relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in Hindustan Times (All) on page 3 (premium page) for which the applicable card rates are ₹ 5,600/- (Rs. 3500+ premium @ 60%). The billing done by SBC is at the basic rate of ₹ 3,500/-. The A.O. has however mentioned the card rates applicable in the analysis and not the actual amounts charged by SBC. Sadhana Center for Management and leadership development has been charged the total of card rates applicable for 'any' page in different editions and released on different dates, which is ₹ 4,725/- (Attachment-II to the assessment order). The same has been charged by SBC in the bill. Similarly, for advertisements released in Dainik Bhaskar (MP Rajasthan), the applicable card rates are ₹ 3,098/- as seen and accepted by the A.O. However, the billing done by SBC is ₹ 2,729/- (gross). The A.O. has again mentioned the card rate in the analysis and not the actual amount charged by SBC. On the other hand, Sadhana Center for Management and leadership development is found to have released advertisement in Indore (not whole of M.P.), Raipur (Chhattisgarh) and Rajasthan. And, they have been charged the actual card rate of ₹ 2,275/- for 'any' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant are diverted to interested person, the Assessing Officer has not taken into consideration the rebate of ₹ 7,72,81,250/- that was passed on to the appellant by SBC against card rates of advertisement, which works out to discount of 52.02% on the card rates. The AO considered only the discount of 2% against the reduced amount of ₹ 7,12,74,451/- and observed that the funds of the appellant society are used or applied for the benefit of interested person or diverted to the interested person. - There is no evidence brought on record by the Assessing Officer to show that the payments made by the appellant are in excess of payments for similar services that can be availed in the open market or some other advertisement agency would have rendered the same services at lower rate than what was paid by the appellant for such services or at a discount of 10% on the reduced card rates. - The payments made by the appellant to SBC by way of advertisement charges did not exceed the card rates of different newspapers/magazines. The payments viewed from the overall perspective cannot be said to be unreasonable or excessive having regard to the overall discount of 52.98% allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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