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GMR Hyderabad Airport Resource Management Ltd. Versus Income-tax Officer, Ward -2 (2) , Hyderabad.

2016 (5) TMI 975 - ITAT HYDERABAD

Accrual of Income - Addition towards service fees received - Held that:- The assessee was able to supply the man power starting from 20 numbers in Nov’07 and managed to increase this level to 112 nos. by Mar’08, not even 50% mark to the agreed level of service. No doubt assessee agreed to supply the manpower and as understand assessee is a new entrant to this field. The assessee was in the process of setting the business. Our understanding is that the assessee will have right to claim the servic .....

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t is earned or accrued i.e. there is a right to receive. In the present case, neither the assessee had achieved the level of service i.e. to supply 300 manpower nor the terms of contract commenced, resulting in no right to receive. We must interpret the situation in the normal course of business i.e. in a situation where the holding company has to deal with outsiders. Just because the assessee is dealing with holding company, it will not get a right to receive. Even in dealing with the outside p .....

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the Assessing Officer in this case needs to be deleted. Hence, the addition made by the Assessing Officer is hereby deleted. - Decided in favour of assessee. - ITA No. 24/Hyd/2016 - Dated:- 20-5-2016 - Smt P. Madhavi Devi, Judicial Member And Shri S. Rifaur Rahman, Accountant Member For the Assessee : Shri Sunil Jain For the Revenue : Shri M. Sitaram ORDER Per S. Rifaur Rahman, A. M. This appeal is preferred by the assessee against the order of the learned Commissioner of Income-tax(Appeals) - .....

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ompany after incorporation was exploring various business opportunities and in the meantime in the month of October 2007, the holding company M/s GMR Hyderabad International Airport Limited (GHIAL) requested it to recruit manpower specialized in various field to work for its hotel division. It was agreed that GHIAL will reimburse the amount of manpower cost incurred by the assessee company for and on its behalf on cost to cost basis. The assessee company accordingly recruited manpower specialize .....

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e of ₹ 1,00,000/- per month towards deputation of upto 300 associates and ₹ 2,00,000/- per month where the no. of associates are more than 300 nos. It was further agreed that the said amount of professional fees shall be payable w.e.f. April 2008 onwards. 2.3 Accordingly, the assessee company had raised an invoice dated March 31; 2008 under the cover of its letter No GHARML/2007-08/001 dated March 31, 2008 for the amount of ₹ 1,45,88,636/- plus service tax of ₹ 18,03,155/ .....

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d March 31, 2008 and further Service fee (i.e. monthly professional fee) was payable from the period commencing from April 1, 2008 onwards. Relevant provisions of the service agreement are reproduced below:- "3. Commercials 3.1 Reimbursements 3.1.1 GHARM alone shall be responsible for paying salary to the Associates for the services rendered by them to the CLIENT (i.e. GHAIL) under this agreement as per the CTC agreed between the CLIENT (i.e GHIAL) and GHARM; 3.1.2 GHARM shall raise an invo .....

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Allowances - Employer's contributions to Provident Fund, ESI contributions, etc - Statutory Bonus payable to the Associates - Premium for Group Insurance Scheme & Mediclaim Policy - Incentives payable to the deputees, wherever applicable. If any. 3.2 . 3.3 Service Fees: In Consideration of the services provided by GHARM to the CLIENT, the CLIENT shall pay to GHARM service fees as detailed below: 3.3. 1 Monthly Fees A. For the first twelve months, commencing from 1st April 2008, a monthl .....

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ees three lakhs). 2.5 The Assessing Officer in the assessment order passed u/s 143(3) has determined a taxable income of ₹ 5,00,000/- under normal provisions of the Act by taking service fee on notional basis. Upon completion of assessment, the AO has determined taxable income of ₹ 5,00,000/- by considering service fee of ₹ 1,00,000/- per month on notional basis for five months from November 2007 to March 2008 by disregarding the terms of arrangement between the parties that th .....

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cases relied upon by the AR also. 5. After considering the submissions of the assessee, the CIT(A) observed that the assessee has rendered services to the holding company i.e. GMR Hyderabad International Airport Limited (GHIAL), by providing manpower during November, 2007 to March,2008. However, the assessee has not shown any income in the form of service fee, for the services rendered. The assessee submitted that for the said period the holding company has reimbursed the expenditure incurred b .....

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the assessee filed the appeal. During the appellate proceedings also, the assessee's AR reiterated the contentions raised before the AO stating that the action of the AO is unjustified, as the AO has brought to tax "notional income" i.e., the income which was not earned by the assessee. In view of the above observations, the CIT(A) confirmed the action of the AO by holding as under: 8.1 After having gone through the above, I am of the considered view that the action of the AO is ju .....

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ding company for the period November, 2007 to 2008. However the holding company was not contractually liable to pay towards service fee for the services rendered since the agreement has come into effect from April,2008. On analysis of the above facts, it is clear that the agreement entered into by the assessee and the holding company is clearly favouring the interests of the holding company only. It is strange to say that the assessee is entitled for service fee from April, 2008 and not entitled .....

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ed income of ₹ 5,00,000/- on accrual basis, as the assessee has actually rendered the services to the holding company for the said period November,2007 to April,2008. As a result, the grounds raised are dismissed. 6. During the appellate proceedings, the AR contended that the AO has erred in computing the total income at ₹ 5,00,000/- on notional basis by taking service fee without allowing expenditure of ₹ 1,16,014/- as claimed in the return of income. 7. The CIT(A) observed th .....

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in law, the learned CIT(A) has erred in upholding the action of Assessing Officer in making addition of ₹ 5,00,000/- towards service fees for the period from November 2007 to March 2008 which was never received or paid to the assessee. 2. The CIT(A) erred in not appreciating that for the period prior to March 31, 2008, the assessee company has only received reimbursement of expenses on cost to cost basis which was incurred for and on behalf of GHIAL and in terms of agreement no service wa .....

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/2008. The assessee had started the recruitment of associates from 01/11/2007 so that it will be in a position to supply the manpower to the extent of 300 associates by 01/04/2008. As per agreement, it is eligible to claim the professional fees starting from 01/04/2008 only. There is no right to claim the fees but it was supplying the associates to holding company on cost to cost basis without any fees. Considering the agreement, there is no right to receive the fees, there cannot be any accrual .....

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4] 26 ITR 27 (SC) 5. M/s shoorji Vallabhdas & Co. 46 ITR 14 (SC) 6. CIT Vs. M/s Arihant Avenue & Credit Ltd., 36 Taxmann.com 14 (Guj.) 7. United Nilagiri Tea Estates Co. Vs. DCIT 23 Taxmann.com 423 (Mad.) 8. CIT Vs. M/s Sahara India Mutual Benefit Co. Ltd., ITA No. 184/2005, order dated 09/10/2013 (All. High Court) 9. Highways Construction Co. Pvt. Ltd. Vs. CIT, [1993] 199 ITR 702 10. Voltamp Transformers (P) Ltd. Vs. CIT, [1981] 129 ITR 105 (Guj.); CIT Vs. Walchand & Co., 65 ITR 381 .....

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ible to claim professional fees of ₹ 1 lakh only from 01/04/2008. The assessee, no doubt, commenced the recruitment service for holding company from 01/11/2007 but the service agreement entered is for supply of 300 associates or more w.e.f. 01/04/2008. The important thing to consider is that whether the assessee was able to supply the associates at the level agreed between the parties. The assessee was able to supply the man power starting from 20 numbers in Nov 07 and managed to increase .....

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case, the assessee neither reached the level of service expected nor the agreement has commenced. Hence, assessee is not in a position to claim any professional fees during the period of 01/11/2007 to 31/03/2008. It is clear that the income has not accrued to the assessee. 12. Income can be recognized only when it is earned or accrued i.e. there is a right to receive. In the present case, neither the assessee had achieved the level of service i.e. to supply 300 manpower nor the terms of contrac .....

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are done purely on commercial basis. When assessee has not achieved the expected level of services it has no right to claim any service charges. 13. Considering the above discussion, we refer to the decision of the Hon ble Supreme Court in the case of CIT Vs. Shoorji Vallabhadas & Co., ]1962] 46 ITR 144 (SC), wherein the Apex Court has held as under: Income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, viz., t .....

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d at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. The agreements within the previous year replaced the earlier agreements, and altered the rate in such a way as to make the income different from what had been entered in the books of account. A mere book-keeping entry cannot be income, unless income has actually resulted, and in the present case, by the change of the term .....

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e in the contract provided for deduction of 7.5 per cent from each bill. Out of this, 5 per cent would be payable on successful completion of the work and balance 2.5 per cent after the expiry of the defect-free period. For instance, if the value of the contract is ₹ 1 crore and the amounts are paid under the four bills of ₹ 25 lakhs each. From each of the first 3 bills, sums representing 7.5 percent are deducted. On successful completion of the work, the amounts representing 5 per c .....

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