TaxTMI 
TaxTMI 
2024 (10) TMI 860
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.... The assessee has not disclosed any other source of income during the year. During assessment proceedings, AO observed that the assessee is carrying substantial credit balances as current liabilities under the head 'Advance from customers'. The assessee was asked to explain along with supporting documents. Assessee vide its letter dated 22.11.2011 submitted as under :- "With respect to the above-said proceedings we have submitted all the information required by you from time to time during the course of assessment proceedings. Further we furnish the information relating to Unexecuted Packages (UEP) as follows: 1.1 It must be appreciated that the receipts from the clients for various services are assessable as a part of profit and gains from business and profession and not directly as income. Profits and gains from business and profession are computed as provided in section 29 of the Act. Mere receipts are not taxable as profits. A Note on UEP (Unexecuted Packages) is enclosed. 1.2 Receipt is different than income and the income is different than profits. In mercantile method of accounting, money receipt by itself is not taxable. It is also not material when the right to recei....
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.... business income all inbuilt liabilities against the receipts have to be deducted because incurrence of the said liability is an inevitable precondition to earn the profits. Such a liability of not precisely quantifiable at the particular time then a fair estimate of the same has to be made deducted while computing the said income. Presuming but not admitting, that the amount received in advance is income of the year of receipt then admittedly the assessee has to provide services against the same in the subsequent year and the cost for such series on the particular date has to be estimated and deducted who considering the receipt as taxable income and in absence of the same no correct profits can be determined as per accepted accounting principles. Thus the method of accounting has been accepted by the department and therefore the same should not be disturbed following the principle of Judicial discipline." 4. After considering the submissions of the assessee, AO rejected the submissions made by the assessee that method of accounting adopted by the assessee is accepted by the Revenue over the years and he opined that similar claims made by the assessee were rejected in the earli....
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.... vis-a-vis the amount received from him and the sales corresponding to the services which remains to be rendered are claimed as unexecuted packages i.e. in the nature of liability in the B/S. it has been claimed by the assessee that no package is of a duration of more than one year meaning thereby that the unexecuted package claimed as a liability in one loss account in any particular year is calculated as under : Net sales reflected in P&L A/c= Opening Unexecuted package lie closing unexecuted package of the last year) + Total sales of the year closing UEP of the current year which is shown as liability in the B/S)." 5. Based on the facts and modus operandi, relevant UEP followed by the assessee are as under :- F.Yr. Opening UEP as at start of F.Yr. (A) (in lacs) Total Sales (B) (in lacs) Closing UEP as at end of F.Yr. (C) (in lacs) Closing UEP as a% of total sales Net sales shown in P&L=A+B+C Total income Shown by assessee 1997-98 Nil 519.74 141.52 27 378.22 4,80,440 1998-99 141.52 782.94 176.36 22 748.09 5,92,220 1999-00 176.36 1662.42 255.96 15 1542.82 17,17,240 2000-01 255.96 2774.15 387.02 13 2643.09 29,83,890 2001-02 387.02 3871.44 9....
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....ad 'Share of profit of collaborators'. AO observed that the nature and details of such expenses were not furnished by the assessee and it furnished vide letter dated 12.12.2011 a copy of one agreement and calculation of such share of profit amounting to Rs. 12,14,541/- against the sum of Rs. 2,39,80,342. He further observed that the assessee had not deducted any TDS from the abovesaid sum. On an enquiry of such claim to the assessee, assessee filed its response vide letter dated 22.12.2011. The same is reproduced below :- "The share of profits of Collaborators; please not that under the collaboration agreement, the collaborator carries out the interior work under the guidance, und supervision of the assessee. The collaborator also procures the necessary equipment and hardware under the advice of the assessee from its approved sources/suppliers. After establishing/ developing the centre, its management and control gets fully vested in the assessee. The collaborator gets its share as a percentage of profit for surplus) or loss of the centre which is mutually decided between the parties. In case of loss, the collaborators has to bear the same percentage of loss. It is clear from the....
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.... ITR 372 (Delhi) Meaning and intention of a statute must be gathered from the plain and unambiguous expression used therein rather than to find out what is just or expedient. CIT Vs National Agriculture Co-operative Marketing Federation of India Ltd. (1999) 105 Taxman 586/236 ITR 766 (Delhi) The law is well settled that where the language is plain, it can neither be stretched wider nor squeezed narrowly with an eye of assumed or implied intention of the Legislature. In a fiscal law much scope for interpretative process is not available if the language of an enactment permits of no ambiguity. CIT Vs IIT Limited HC Delhi The Delhi High Court in case of N Limited has clearly held that sharing of the profits is not liable to TDS A copy of the judgment is also attached herewith for your reference. Thus, in view of the said legal proposition and decided case laws by High Courts sum payable to the collaborator as a fixed percentage of profit (or surplus) under the said joint venture collaborator arrangements is undoubtedly his share in profit of the centre only payment for which is not covered under any type of the payment prescribed under Chapter XVIIB of the Income tax Act, 19....
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....the assessee and assessee did not furnish any explanation on the same. Based on the above discussion, he rejected the submissions wherein assessee merely submitted calculation of Rs. 12,14,541/- against the claim of Rs. 2,39,80,342/-. Accordingly, he disallowed the claim of abovesaid expenditure. 10. Aggrieved with the above order, assessee preferred an appeal before the ld. CIT (A). During appellate proceedings, assessee furnished detailed submissions. For the sake of clarity, the same is reproduced below :- "In this regard, it is submitted that the assessee is engaged in the business of running beauty and slimming centres through out the country. The assessee carried out its business under the following two business models during the year under consideration: a) Joint Venture Partners / Collaborators (JVP) - The first model is Joint Venture Partnership wherein an agreement 'Infrastructure and Facility Management Agreement' is entered into with the joint venture partner / Collaborator. A copy of the agreement entered with Kasganj Ispat Udyog (P) Ltd. for running Bhopal centre as submitted before the assessing officer as sample is enclosed. In this business model, the ....
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....essee. In the JVP model, the management lies with the assessee but in case of franchisee, the management lies with the franchisee and not with the assessee. Such centres have their independent status. In JVP model, the fees generated from operating the healthcare center is collected by the assessee and is recorded in its books of account. The share of the collaborator is disbursed thereafter. The profits I loss arising from operating the centre under JVP model are to be shared between the assessee and the collaborator in an agreed ratio. In the case of loss arising from operation of healthcare centre, the collaborator has to bear the loss in the same agreed ratio. It is not a case, where the collaborator is rendering certain services to the assessee but it is a case of sharing of profits of business undertaken together by the assessee and its collaborator. If the collaborator would have rendering services to the assessee as alleged by the assessing officer, then it would not have shared the loss incurred by the centre at all. This distinction clearly spells out the fact that the collaborator was not rendering any services to the assessee but sharing the profits of the business wi....
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....itted that the share of profit of the collaborator is computed for each centre in the similar manner on the basis of terms and conditions of the agreement. If the assessing officer wished to verify the computation of share of profit for all JVPs, then he could have asked for the same to the assessee during the course of assessment proceedings. However, the assessing officer did not raise any further query in this regard and therefore no further documents were submitted on this issue. Photocopies of the computation of the share of profit of Collaborator of the centres along with copies of agreement with them for the five centres are produced for your verification on sample basis and copies of the same can be submitted, if desired. As regards the non-deduction of tax at source on the said payment, it is submitted that the said amount is not liable to deduction of tax at source at all. The said amount is neither interest, royalty, fees for professional and technical services nor rent or commission which is liable to tax deduction. The said amount is sharing of profit of the joint venture and therefore is not covered under the provisions of tax deduction at source. The assessee place....
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....urce on the payments made to Collaborators I Joint Venture Partners under the Infrastructure Facility Management Agreement wherein the Professionals opined on the facts of the case that no tax is to be deducted at source on such payments. While framing such opinion, the professionals relied upon the decision of ACIT Vs NIIT Ltd. 112 TTJ 800 which has been approved by the jurisdictional High Court as explained above. A copy of the said opinion is enclosed. The assessee has been making such payments since its inception and the said payments have been scrutinized by the department in a number of years whenever the assessee was assessed u/s 143(3). However the assessing officer after properly understanding the facts of the case and the business models of the assessee, never drew an adverse opinion about the same. No such disallowance has been ever made in any of the preceding years. There is no Change in the facts and circumstances of the case and therefore, following the principle of consistency, no such disallowance should be made. In view of the above facts of the case and judgments, it is clear that the share of profit to JVP is not covered under any of the specified payments m....
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....ction 40(a)(ia) is not attracted. As regards A.O.s view that profits cannot be distributed without a partnership firm etc., the existence of Joint Venture Agreement is sufficient for distribution of profits as per mutual agreements." 12. Aggrieved with the above order, Revenue is in appeal before us by taking the following grounds of appeal:- "1. That the Ld.CIT(A) has erred on facts and circumstances of the case and in law in ignoring the fact that the assessee has paid to the collaborators for expenses on services/ premises which are clearly covered under the ambit of TDS provisions. 2. That the Ld. CIT(A) has erred on facts and circumstances of the case and in law in not appreciating the fact that the assessee did not form any partnership firm with any of the collaborators and accordingly payments made to them/ revenue shared with them cannot be treated as share of profits in the absence of partnership firm." 13. At the time of hearing, ld. DR for the Revenue brought to our notice detailed findings of the AO at page 6 of the assessment order. He submitted that from the facts on record, it is clear that assessee has shared the profit with the collaborators. Further, he brou....
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.... between the Parties in the following ratio: Year 1: 10% to Franchisor and 90% to Franchisee Year 2: 12% to Franchisor and 88% to Franchisee Year 3: J 5% to Franchisor and 85% to Franchisee Year 4: 15% to Franchisor and 85% to Franchisee Year 5: 15% to Franchisor and 85% (0 Franchisee The Sales Collections means amount collected by the Franchisee from the clients either by way of cash, cheque, credit card or such other mode convertible in cash. The Sales Collections for this Agreement shall be inclusive of Service tax collected from the clients. This is to cover service tax amount payable to the Franchisor." 16. The same is computed as per the model share placed by the assessee at pages 24 & 25 of the paper book. For the sake of clarity, the same is reproduced below :- 17. From the above, we observed that the assessee is sharing the revenue based on the franchise agreement and as far as claiming the expenditure or sharing of surplus depends upon the method adopted by the assessee. It follows two method i.e. (a) franchise method; and (b) JV method. In franchise model, the revenue and expenses are under control of collaborator. The assessee only shares the income/loss. ....
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....he assessee and the Franchisee was to share the revenue and certainly it was not hire the premises provided by the assessee. Therefore, the assessee is not liable to deduct the taxes under section 194-I of the act in respect of the amount shared by the assessee and remitted to the Franchisee for infrastructure claims." 19. From the above decision, we observed that the Hon'ble High Court allowed the claim of the assessee where the assessee shared the revenue with the franchise partner on account of composite services provided by the franchisee. Based on the above observation, Hon'ble High Court held that it was not the hire of the premises provided by the assessee. Accordingly, Hon'ble High Court held that the provisions of section 194-I is not applicable. In that case, the franchise agreement was entered by the assessee with education centres at various metro cities. The issue involved in this case is only sharing of revenue. In the present case, we observed that the issue involved no doubt relating to sharing of revenue only and the assessee has shared the surplus with the collaborator and it is not fall under any expenditure covered u/s 30 to 37 or section 40(a)(ia) of the Act. ....