TaxTMI 
TaxTMI 
TaxTMI 
2014 (11) TMI 263
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....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 :- "1. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in concluding that the service income earned by the appellant amounting to Rs. 7,61,32,000 from M/s Yum! Restaurants Asia Pte Ltd., Singapore ("YRAPL"), as "income from other sources" as against "business income". 2. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in restricting the deduction of royalty expenditure paid by the appellant to YRAPL from Rs. 6,99,35,274 to Rs. 3,19,27,801 and thereby disallowing royalty amounting to Rs. 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....
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....treated as 'income from other sources' as held by Assessing Officer. Assessee has entered into service agreements with Yum! Restaurants International Inc., USA (YRI) for the period 1.4.2003 to 31.12.2003 and with M/s Yum Restaurants Asia Pte. Ltd. (YRAPL) for the period 1.1.2004 to 31.3.2004, for providing the franchisee support services in area countries, that is, liaison services for obtaining necessary approvals/ licenses, providing assistance to existing and future licensee's in India, Pakistan, Sri Lanka and Mauritius, provision of reports related to India, Sri Lanka, Mauritius, Bangladesh and new markets and market development in existing and new markets. Assessee was remunerated at a fixed fee for providing various franchisee support/market development services to YRAPL/ its franchisees in area countries. The Assessing Officer disallowed the amount for the service agreement 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 witho....
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....trength of them, it would be suffice to say that word "business" is one of wide import and which means an activity carried out continuously and systematically by a person by the application of his labour and skill with a view to earn income. The case of the assessee is that right from asstt. Year 1998-99, it is providing various types of services to the franchise in India and also to its associate enterprises, because it is collecting fees etc. from the franchise and remitting it to YRI in US. The main object of the assessee company, as discernable from Memorandum of Association is to own, purchase, lease, develop, operate, franchise and manage restaurant etc. Similarly, its next object is to provide consultancy and advisory services in connection with the establishment, organization, financing, management and operation of restaurant, café....etc. This business, assessee has been 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 t....
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....at this issue is also covered in favour of the assessee by the aforesaid order dated 14.02.2014 of ITAT. 8. We have heard both the sides on the issue. The facts of the issue and pleadings of both the sides remain the same in this year as well as in the aforesaid order for Assessment Years 2004-05 and 2005-06. The relevant portion of the order is reproduced as under :- "7. In the ground no.2 & 3 in ITA No.2678/Del/2012 and ground nos.2 & 2.1 in ITA No.2679/Del/2012, the issue involved is disallowing of royalty expenditure. The assessee's primary business operation relates to the operation and development of Pizza Hut and KFC restaurants in India through franchisee. For this purpose, the assessee has entered into a technology license agreement with KFC / Pizza Hut through which assessee has been granted the rights to use the technology and system in operation of 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 P....
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....bed limits. Additionally, Payment of royalty up to 5% of sales has been allowed by Government of India under automatic route in view of Press Note 2 of 2003 and he submitted that therefore, the royalty was paid in accordance with the policies of the Government. It was submitted that payments have been made through authorized dealer and thus cannot be under violation of any law or exchange control regulations. The TPO has also held the same to be an arm's length payment. Therefore, the payment of royalty cannot be treated as unreasonable or excessive as alleged by the AO. 8. We have heard both the sides on the issue. As mentioned by the ld. AR, the issue is covered in favour of the assessee 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 :- "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 pa....
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.... in ITA No.2678/Del/2012 and ground no.3 in ITA No.2679/Del/2012 is against the deletion of addition out of administrative expenses. The YRMPL is a wholly owned subsidiary of the assessee operating as a mutual concern for the common benefit of all the franchisees and the assessee. It carries out advertising, marketing and promotion activities. For this purpose, assessee and YRMPL have entered into a tripartite agreement with each franchisee. Each franchisee is required to contribute a fixed percentage of its sales as its contribution towards advertising and marketing activities. As per the tripartite agreement, for the cost effective functioning of YRMPL, assessee provided YRMPL with any or all administrative support facilities. In case such facilities are extended by assessee to YRMPL, it would be required to reimburse assessee with such 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, proportionate....
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.... it cannot be held that it is not allowable. He further submitted that there is no rational basis adopted by the AO for allocating 50% of the expenditure incurred by assessee as being attributable to YRMPL. To clarify the same, he submitted that the assessee has a huge employee base for the purposes of operating its equity stores, huge rental and other operating costs being incurred for the operation of equity stores, which has nothing to do with the AMP activities that YRMPL coordinates on behalf of assessee. Therefore, such expenses should not be allocated to YRMPL at all, as its functioning is basically to make payments to third party advertising firms. Finally, he pleaded to dismiss this ground of revenue's appeal. 10. 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 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 incorporate....
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....Assessee paid rent of Rs. 27,10,000 per annum. MHPL in turn paid a rent of Rs. 20,000 per month for the property. A security deposit of Rs. 50 lacs was also provided by assessee to MHPL, a part of which was advanced to the M.D. by MHPL. In the case of Mr. Ajay Bansal (Director), assessee had been paying rent for a property occupied by him to his wife and mother. Rent of the property was Rs. 5,22,000/- per annum and security deposit for the same was Rs. 4,62,000/-. The Assessing Officer disallowed the claim for the reasons that lease contract was signed by a person on behalf of MHPL (the other contracting party) who at that time was not its director, making the agreement invalid. Excessive security deposits were placed by assessee with MHPL. Security deposits were advanced by MHPL to the 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 Rs. 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....
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....uineness of the transaction, he submitted that rent free accommodation has been provided to the M.D. and the director in accordance with their employment contracts; rent was paid by assessee in accordance with contractually binding lease agreements; TDS was duly deducted on such rental payments along with taxing the same as a perquisite in the hands of M.D. and the director; and rent received has been duly accounted for as income. He submitted that this finding of fact has been recorded by the CIT(A) in his order for Assessment Year 2002-03 and 2003-04. He submitted that onus is on tax authorities to establish excessiveness of expenditure on some material and not on conjectures and in this regard, referred to the decisions of S.K. Engineering vs. JCIT (Bangalore ITA T) (286 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 o....
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....n was very clear that provisions of section 40A(2)(b) shall apply in supersession of other contrary provisions of Act relating to the computation of income under the head 'Profits and gains of business or profession'. The rent paid for the premises occupied by Managing Director is prima facie collusive and excessive. 29A. Some of the issues raises have been considered by ITAT in assessee's own case for assessment years 2002-03, 2003-04 and 2006-07. The relevant paras 45 & 46 of the said order is reproduced as under :- "45. With the assistance of learned representatives, we have gone through the record carefully. It emerges out from the record that assessee has paid Rs. 15 lacs of rent for the residence of Mr. Sandeep Kohli. It has paid a sum of Rs. 50 lacs as security deposits. Assessing Officer has estimated notional rent @ 12% of the interest free deposits which worked out to Rs. 6 lacs. He computed the disallowance of Rs. 21 lacs for the residence for Mr. Sandeep Kohli. The assessee had incurred a sum of Rs. 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. Ass....
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....r rent this property can fetch, which can be allowed to the assessee. As far as the disallowance of Rs. 7,50,000 is concerned, we find that this disallowance has been confirmed by the Learned CIT(Appeals) on the ground it was not incurred in the present year. Since the expense does not pertain to this year, its allowability cannot be judged in the present year. Assessee has raised an alternative plea that in case it is not allowable in this year then a direction be issued to the Assessing Officer to allow in the year of incurrence. In our opinion, assessee will be at liberty to approach the Assessing Officer in accordance with law but in the present year, we do not deem it necessary to give 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 g....
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....facts of these grounds are that as part of its emolument policy for employees, the assessee reimburses amounts incurred by its employees on purchase of hard furnishings. Such reimbursements are made by the assessee to the employees only to the extent of their entitlement (determined on the basis of their grade / level as per their appointment letter). As per the perquisite valuation rules, such assets are considered in the personal income of the employees and taxes are duly deducted on the same. Further, such assets are recorded in the books of accounts by the assessee when the claim for reimbursement is submitted by the respective employees and only to the 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 whic....
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....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. Taking into consideration these aspects, we do not find any merit in this ground of appeal. Ld. 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. The effect of outcome in asstt. year 1999-200 would be given after giving an opportunity of hearing to the assessee." In view of these facts, we find no merits in the ground nos.5 & 6 in ITA No.2678/Del/2012 and ground nos.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 expendit....