TaxTMI 
TaxTMI 
2015 (2) TMI 17
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....d 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, 1961 since the said amounts could not have been collected on account of lack of approval of the Secretariat for Industrial Assistance (SIA); (iii) Whether, on the facts of the case, the ITAT could have deleted the addition made from out of administrative expenses since they related to another company YRMPL, which had apparently no office and had not incurred any expenses; (iv) Whether ITAT was correct in law and on facts in failing to give direction in respect of disallowance on account of non-business use of some specific assets; (v) Did the ITAT commit an error in law in not appreciating that the expenses for food tasting and trials were incurred to develop food items/flavors that would be used b....
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....ime. 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 reports concerning the above matters as may be reasonably required by them from time to time. Collection and onward remittance of license fee, and such other fees as may be payable by the licensees, to KFCIH and PHILLC. Acting generally on behalf of TRI in a liaison capacity in connection with the existing and the potential licensees and/or such other matters." For these services the assessee was entitled to a fee equal to 110% of all costs reasonably incurred by it in the per....
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....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 franchisees. These franchisees have been provided with support services on behalf or the brand holders as discussed earlier. In addition to the provision of these services to the franchisee, the appellant has also provided services to the brand holders in USA by way of collection and remittance of royalty, providing them services by way of research and development etc. All such activities visible and there is evidence to substan....
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....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 the relevant years is business income (Rs.12,67,04,206/-, for 2002-03 in ITA 151/2012, Rs. 12,38,00,000/- for 2003-04 in ITA 152/2012; Rs. 20,26,00,000/- for AY 2006-07 in ITA 158/2012; Rs. 12,77,00,000/-for AY 2004-05 in ITA 614/2014; Rs. 15,71,00,0001- for AY 2005-06 in ITA 619/2012; Rs. 7,61,32,0001- for AY 2007-08 in ITA 661....
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....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 have been considered by me. The impugned payment of Rs. 3,23,01,939 has been made by the appellant towards licence fee paid pursuant to the technical licence agreements with the owners of the technolo....
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.... 9.14 In view of the above discussion, the disallowance of Rs. 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 Rs. 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 Assessing Officer failed to bring o....
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....ion 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 policy dispensati....
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....09-2003, which confirms these facts. In fact, in the said letter, the Central Government of India too used the term 'royalty' and not 'technical license fee', while clarifying that, 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 ....
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....ce [1914] 6 T. C. 399 ; Smith v. Incorporated Council of Law Reporting for England and Wales [1914] 6 T. C. 477; Sree Meenakshi Mills Ltd. v. CIT [1967] 63 ITR 207 (SC)). 19. In examining a claim for deduction on the ground 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....
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....s. The assessee can bear the cost of administrative expenses alleged to be incurred by YRMPL or it can separately remit the amount to YRMPL towards such cost. From both angles, it is the assessee or its franchise who has to contribute this amount. The Assessing Officer, therefore, has erred in 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 continue....
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....arned Commissioner of Income-tax (Appeals) has already directed the Assessing Officer to give effect to the outcome of 1999-2000. The depreciation disallowed in the assessment year 1999-2000 would be considered for disallowance in this year also. The effect of outcome in the assessment year 1999-2000 would be given after giving an opportunity 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 coul....
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....inue to attract clientele, it was essential to develop new flavours and adapt to new markets. Thus, counsel stated, such expenditure properly falls in the revenue field. 28. One of the earliest decisions to indicate a test for distinguishing between capital expenditure and revenue expenditure was in Assam Bengal Cement Co. Ltd. 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 necessar....
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....nd effect, considered in a common sense way having regard to the business realities. In a given case, the test of 'enduring benefit' might break down. In CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 (SC) at p. 262, this court said: "As observed by the Supreme Court in the decision in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. 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....
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....p; "The law is settled: If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in present though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be dis charged is not certain . . . A few principles were laid down by this court, the relevant of 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....