TaxTMI 
TaxTMI 
2022 (5) TMI 880
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....are, assessee is a company registered under section 25 of the Companies Act, 1956. It conducts market surveys and compiles reports of readership and listenership of various media and provides them to its members and non-members on subscription basis. The reports enable subscribers to plan strategies for advertising in newspapers, periodicals, TV, radio, etc. The assessee is registered under section 12A of the Income-tax Act, 1961 ("the Act") vide certificate dated 7th June 1994 and claims benefit under section 11 of the Act. Ground 1: Denial of benefit of section 11 by invoking section 13 4. During the previous year ended 31st March 2007, the assessee entered into an agreement with Hansa Research Group Pvt. Ltd. ("HRG") (Page 45-58 of PB - IRS 2007) where under HRG agreed to conduct market survey and compile reports styled as Indian Readership Survey ("IRS") to be provided by the assessee to its subscribers. The subscription revenues were agreed to be shared between the assessee and HRG as per clause V of the agreement (page 48) as under: - (i). Upto Rs. 350 lakh of subscription revenues - HRG 90% and assessee 10% (ii). Next Rs. 50 lakh - Hansa 85% and asses....
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.... advances to research agencies - advances were given because research was carried out by Hansa by way of an extensive exercise covering various parts of the country and by involving a large number of people. It was a long-drawn and expensive exercise, which required funds to be disbursed in advance. It was pointed out that the total debit to Income and Expenditure account for payment to research agencies was Rs. 5.15 crore whereas the advance was only Rs. 68.07 lakh (page 11 of the assessment order). • Arrangement for remunerating the research agencies - it was explained that the payment to research agencies was made as a percentage of subscription receipts. It was explained that the apparently lower percentage of payment made to AC Neilson ORG MARG (unrelated entity - ORG MARG stands for Operations Research Group - Marketing and Research Group) as compared to Hansa was on account of the scope of work being different. It was pointed out that the more appropriate comparison would be between work done by Hansa and similar work done by other research agencies in past. The said data was provided. On comparison, it was seen that ORG MARG was paid 87.5% of subscription reven....
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....id as fees Percentage of Subscription received for Reports Upto Rs.350 Lakhs 90% Ac Nielsen - -ORG --MARG: (i) Mumbai and Delhi Subscription Slab paid as fees Percentage of Subscription received for Reports Rs. 20 - Rs. 23 lakhs 80% Rs. 23.1- Rs. 30 lakhs 50% > Rs. 30 lakhs 25% (ii) Other Cities "Rs. 10-Rs.11.5 lakhs 80% Rs. 11.6 Rs. 15 lakhs 50% > Rs. 15 lakhs 25% The apparent lower percentage of payment to A C Nielsen -ORG - MARG is explained hereunder: The IRS Research Fees payable should be seen in the context of past arrangements and not in comparison with another project of a different type, albeit in the same time frame. Please see the following historical data on IRS Research fees with other research agencies as compared to the fees payable in the current year. IRS Year Research Slab Structure Revenue Sharing % IRS 2001 Operations Research India Ltd and Marg Marketing & Research Group Pvt. Ltd., (Referred to as ORG-MRG) Upto 425 Lacs 87.5 Rs.425 - 525 Lacs 75.0 IRS 2002 NFO MBL India Pvt. Ltd.....
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....able or religious institution, any income thereof (i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or (ii) if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied, directly Or indirectly for the benefit of any person referred to in sub-section 3 : The benefit prohibited is both directly or indirectly given to person who is covered ( under section 13(3) of the Act. The -point to be taken note of in the - resent case is that Shri Shekar Swam - who is director of the assessee and also director of Hansa Research Group is also in the Board of Governor of the assessee. He is undoubtedly at the helm of affair. The benefit whether huge or minuscule is prohibited. The assessee itself had argued in earlier years that unless there is Violation of section 11 or 13, benefit of section 11 cannot be denied. Now, when it is established beyond doubt that there is violation of section 13, the assessee is Providing s....
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....ts have held that there can be no sympathy or equities could be extended, particularly for an organization, which received exemption purely for the welfare of the under-privileged and needy class of the society. Reliance is placed on the judgment in the following case: "enabling one of members of the assessee, to avail loan without adequate security and consideration, and certain transaction of purchase of lands was routed through an AOP in which all members were directors and employees of assessee, the misutilization was glaring and it could not escape the clutches of law, nor any sympathy or equities could be extended, particularly for an organization, which received donations purely for the welfare of the under-privileged and needy class of the society. In view of the fact that entire transaction was within personal knowledge of trustees, it could be said that the funds of assessee were diverted and misutilised. On fact, the assessee had violated provisions of section 13(1)(c)(ii) read with section 13(2)(b) and, thus, was not entitled for exemption - Action for Welfare & Awakening in Rural Environment (AWARE) v. Dy. CIT[2003] 130 Taxman 82/263 ITR 13 (AP)." In ....
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....sons. It was submitted by the assessee vide letter dated 27" November, 2009 that IRS subscription is received both from members and non members. It was further stated that Subscription of Rs. 21,00,749/was received for 140 non members. Thus it is seen that sizeable amount of subscription is made by non-members. Assessee has also NOT claimed to be a mutual association and Department has also NOT held the assessee has mutual association in earlier years. Reliance is placed on the judgment in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321(SC) wherein it was held rule of consistency must be followed. This judgment has been relied upon in the case of the assessee by the Hon'ble Tribunal. Further, in the case of Mafatlal Industries Ltd. v. Wealth-tax Officer, 95 ITD 66 (Mum.) it was held that "General presumption is that a taxpayer should not take inconsistent view and expected to be consistent with the view already taken. It is also expected that taxpayer should not change its stand as Suits to its requirement and advantageous in different proceedings. Therefore, respectfully following the above referred judicial decisions, the claim of the asses....
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....hares in BBDO. Mr. Swamy holds 100% in TIPL and TIPL holds 49.90% in BBDO. Therefore, these dues cannot be a reason for invoking section 13 of the Act. 12. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and Ld.CIT(A) concurred with the view of the Assessing Officer that section 13(3)(e) applied to HRG. In para 5.4 at page 13, the Ld.CIT(A) held that the advance of Rs.68,07,442 was covered by section 13(2)(a). In para 6.16 at page 21, he held that the payments to HRG were excessive and, therefore, section 13(3)(c) was attracted. 13. Before the Ld.CIT(A), assessee reiterated its submissions made before the Assessing Officer, the assessee further pointed out that HRG was not dependent on the assessee and that it worked with over 100 companies for research and did over 500 research reports in a year and that it had a 100% subsidiary in the US which did over 50 projects a year for US companies [page 10, para (e)]. 14. Ld.CIT(A) rejected the above submissions and observed as under: - "6.16 I have carefully considered the arguments of the Assessing officer and have also gone through the written submissions, oral submissions as also letter dated 18th December....
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....nd in Law, the said amounts are not loans and hence not covered by the disabling provisions of section 13 (2) (a). IV. Without prejudice to Ground Il and assuming, without admitting, that Mr. Shekar Swamy and / or his relatives have a substantial interest in HRG, the learned CIT (A) has erred in holding that payments to HRG are in excess of what may be reasonably paid for the services rendered by them, or are otherwise violative of any provisions of section 13. 2. He failed to appreciate and ought to have held that payments made to HRG were not in excess of what may be reasonably paid for such services or are violative of any other provisions of Section 13. V. 1. Without prejudice to the above Grounds, the appellant submits that if, in the opinion of the CIT (A), the appellant was not entitled to exemption u/s 11, he erred in not granting exemption on grounds of mutuality to the entire Income other than income attributable to non members. 2. He failed to appreciate and ought to have held that if exemption is to be denied under section 11, the appellant is fully entitled to claim and be allowed exemption on grounds of mutuality in respect of incom....
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.... Ltd. Therefore, the Revenue contended that the requirement of having more than 20% of the voting power was established when the holding of 16.39% was clubbed with the holding of 6.25% through the 100% subsidiary. Negativing the said contention, the Hon'ble Bombay High Court held: (paras 27-31)" "27. On a plain reading of the aforesaid provisions, we are unable to agree with the submissions of the Revenue. What Explanation (a) to section 40A(2)(b) clearly stipulates is that a person shall be deemed to have a substantial interest in a business or profession in a case where the business or profession is carried on by a company. such person is, at any time during the previous Veal. the beneficial owner of shares carrying not less than 20% of the voting pow. In other words, Explanation (a) when broken down, requires two conditions that need to be fulfilled. The first condition is that, that the person should be the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits); and second that these shares (of which the person is the beneficial owner) are carrying not less than 20% of the voting powe....
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....n the assets of the company. The use of the word 'assets' in the passage quoted above cannot be exploited to warrant the inference that a shareholder, on investing money in the purchase of shares, becomes entitled to the assets of the company and has any share in the property of the company. A shareholder has got no interest in the property of the company though he has undoubtedly a right to participate in the profits if and when the company decides to divide them. The interest of a shareholder vis-a-vis the company was explained in the Sholapur Mills Case [(1950) SCR 869, 9041. That judgment negatives the position taken up on behalf of the appellant that a shareholder has got a right in the property of the company. It is true that the shareholders of the company have the, sole determining voice in administering the affairs of the company and are entitled, as provided by the Articles of Association to declare that dividends should be distributed out of the profits of the company to the shareholders but the interest of the shareholder either individually or collectively does not amount to more than a right to participate in the profits of the company. The company is a jurist....
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.... national and international level for better returns for the investors and for the growth of the company. When a holding company owns all of the voting stock of another company, the company is said to be -a WOS of the parent company. Holding companies and their subsidiaries can create pyramids, whereby a subsidiary owns a controlling interest in another company, thus becoming its parent company. 257. The legal relationship between a holding company and WOS is that they are two distinct legal persons and the holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in its Board of Directors. In Bacha F. Guzdar v. CIT [AIR 1955 SC 74], this Court held that shareholders' only right is to get dividend if and when the company declares it, to participate in the liquidation proceeds and to vote at the shareholders' meeting. Refer also to Carew and Co. Ltd. v. Union of India [(1975)2 SCC 791] and Carrasco Investments Ltd. v. Directorate of Enforcement [(1994) 79 Comp Cas 631 (Del)]. 258. Holding company, of course, if the subsidiary is a WOS, may appoint or remove any Director if it so desire....
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.... beneficial owner of the shares that HDFC Investments Ltd. holds in the Petitioner. This is simply because the shares that HDFC Investments Ltd. holds in the Petitioner is its asset, and HDFC Ltd., though being a 100% shareholder of HDFC Investments Ltd., cannot be termed as the owner (beneficial or otherwise) of the assets and properties of HDFC Investments Ltd. In these circumstances, therefore, the shareholding of HDFC Ltd. and HDFC Investments Ltd. cannot be clubbed together to cross the threshold of 20% as required under explanation (a). This being the position, we have no hesitation in holding that the HDFC Ltd. does not have a substantial interest in the Petitioner, and therefore, is not a person as contemplated under section 40A(2)(b)(iv) for the present transaction to fall within the meaning of a SDT as set out in section 92BA (i) of the I. T. Act. 31. There is another reason for coming to this conclusion. If we were to interpret this provision as is sought to be contended by the Revenue, it would lead to an absurd situation, as correctly contended by Mr. Mistri. It is undisputed that there cannot be more than one beneficial owner of the same shares. If we were to....
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....ssible in the present case. Corporate veil can be lifted only in cases where an attempt is made to defraud revenue by putting up facades which have no commercial substance, which is not so in the present case. In the present case, TIPL is assessed in its own right in respect of its income. It is not open to the Revenue to disregard the existence of TIPL for the limited purpose of applicability of Explanation 3. 18. Learned Counsel for the assessee submitted that if the above submissions are accepted, other issues raised in the present appeal as to whether or not the advance given to HRG is a loan and whether or not the amounts paid to HRG are excessive will not have to be decided as being of an academic nature. 19. Ld. Counsel for the assessee, however, for sake of completeness, submitted the submissions on these issues which are reproduced below:- "General - Applicability of Section 13(1)(c) Since section 13(2)(a) and 13(2)(c) deal more specifically with payments for services and monies lent, section 13(1)(c) ought not to be invoked for such payments. In any event, the amounts are not used or applied. Payment made for services cannot be regarded as use or a....
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....t the average effective rate of payment to Hansa was lower than the rate at which payments were made to unrelated parties. Therefore, the amounts paid to Hansa were not excessive. It may be noted that the payments made to AC Neilson during the year cannot be taken into account for comparison in view of the large difference in the scope, extent and nature of the work done by AC Neilson and by Hansa, as explained at page 7-8 of the statement of facts before the CIT(A). In any event, if a mechanical comparison is to be made of the initial slab (as was sought to be done by the AO), then, the highest slab of payment to AC Neilson was 100% since upto Rs.20 lakh, the amount was fully payable to Neilson and, therefore, even on that count, payment to Hansa is not excessive! Submissions The several differences between the work done by unrelated entities under IRS 2001 and the work done by Hansa under IRS 2007 must be kept in mind while determining the reasonableness of the payments made to Hansa. Mutuality The Assessing Officer rejected the assessee's plea that the assessee was a mutual concern. He noted that the assessee received Rs.21,00,749 from non....
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.... These issues are consequential in nature and if the benefit of section 11 is conferred, any increase in the income will also qualify for the said benefit. Ground VII - Add back of Rs. 12,00,000 In Para 13.4 of the Order, Assessing Officer has added amount of Rs. 12,00,000. This amount represents the option exercised by the assessee in the assessment year 2006-07 under clause (2) of the Explanation to Section 11(1) of the Act. The addition of Rs.12 lakhs are not justified irrespective of whether exemption under section 11 is allowed or denied. The explanation for not adding the above amount under either of the two alternatives is given below: I If exemption under Section 11 is not allowed (as has been done in the impugned Assessment Order) While assessing the total income of Assessment year 2006-07 at Rs.24,21,920, the amount of Rs. 12 Lakh was not allowed as an expenditure. Therefore, the same cannot be added to the taxable income in Assessment year 2007-08 as that would result in taxing the same amount twice. II If exemption under section 11 is allowed (as requested by the assessee) If exemption under section 11....
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.... of the business was undertaken with the HRG and only small portion was undertaken with other unrelated party. The Assessing Officer observed that HRG falls under the related person category within the meaning of section 13(3) of the Act, by lifting the corporate veil, considering the fact that the key director (Shri Shekar Swamy) of the assessee company, who held indirect substantial interest in the HRG through TIPL. The assessee objected to the above view and it argued before the tax authorities and before us that Assessing Officer has not given clear finding how TIPL and Shekar Swamy violated the provisions of Section 13, when the definition does not attract directly to both the parties i.e., Shri Shekar and TIPL. We consider the submissions carefully and observed that the assessee shares the majority of the revenue with the other entity, whether related or unrelated, in that case the assessee has to conduct its affairs without violating any of the restrictions specified in section 13. On careful evaluation, we observe that the section 13 restrictions are very specific that the assessee cannot share the revenue or benefits with any of the persons specified in the section 13(3) o....
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....e related persons who are availing benefit u/s 11 of the Act (unless it is established that there is no benefit passed on to them directly or indirectly). We cannot equate the two sections, which are in two different chapters of the ACT as well as for different purposes. In this case, the Assessing Officer has established that by removing the corporate veil, one of the director falls within the meaning of section 13(3) and 13(2)(e) of the Act. Whether the revenue sharing with the other concern are within the arm's length is subjective, considering the fact that it is sharing 90% of the revenue and transaction with the unrelated party is not substantial and assignments in both the cases are totally different. Therefore, we reject the submissions of the assessee and grounds raised in this regard before us. 24. Coming to the other issue, whether the advances given against the pending research assignments, we do not agree with the Assessing Officer that it falls within the meaning of loan given to the related parties. The Assessing Officer has acknowledged that there exists the transaction between the assessee and HRG, the advances given during the year can be considered as the adva....