2009 (10) TMI 651 - AT - Income Tax

Business disallowance - Interest etc. payable outside India Transfer pricing - Computation of income from international transaction having regard to arm s length price

Summary

Issues Involved:
1. Addition of Rs. 1,02,41,723 under Section 92 of the Income-tax Act, 1961.
2. Disallowance of Rs. 46,900 royalty under Section 40(a)(i) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition of Rs. 1,02,41,723 under Section 92 of the Income-tax Act, 1961:

The assessee, a wholly-owned subsidiary of McDonald's Corporation, USA (MC), was established to set up and operate McDonald's restaurants in India. The assessee entered into a Master License Agreement with MC, which required the assessee to pay MC a royalty of 5% of gross sales and an initial franchise fee of US $45,000 for each new restaurant. The assessee also formed two joint venture companies in India and entered into Franchise Agreements with them, which required these companies to pay a royalty of 5.04% of gross sales and the same franchise fee. The assessee did not have the necessary RBI approval to remit the franchise fee, so it was not charged to the P&L account.

The Assessing Officer (AO) noted that the assessee had shown a service fee of Rs. 2,03,63,270 against total expenditure of Rs. 2,78,22,721. The AO invoked Section 92 of the Act, concluding that the entire expenditure was incurred for the benefit of MC and should have resulted in an income of Rs. 2,78,22,721. The AO added Rs. 1,02,41,723 to the income of the assessee, applying Rule 10(iii) of the Income-tax Rules, 1962.

The CIT(A) upheld the AO's addition, but the assessee argued that the reimbursement of advertisement expenditure to the franchises was a business transaction between the assessee and its Indian franchises, and Section 92 was not applicable. The Tribunal agreed with the assessee, noting that the advertisement expenditure was not part of the authorized expenditure under the service agreement with MC. The Tribunal found that the benefit of advertisement primarily accrued to the franchises and the assessee, not to MC. Therefore, Section 92 was not applicable, and the addition was deleted.

2. Disallowance of Rs. 46,900 royalty under Section 40(a)(i) of the Income-tax Act, 1961:

The assessee made royalty payments to MC during the financial year 1999-2000 and deducted TDS, but a portion of the TDS amounting to Rs. 7,035 was deposited late. The corresponding royalty payment of Rs. 46,900 was not claimed as an expense in the return for the assessment year 2000-01 or 2001-02. The assessee claimed this deduction during the assessment proceedings for the assessment year 2001-02.

The CIT(A) rejected the claim, stating that the deduction was not allowable since the TDS was deducted in the preceding year. The Tribunal, however, noted that as per the proviso to Section 40(a)(i), deduction is allowable in the year in which TDS is paid. Since the TDS was paid in the assessment year 2001-02, the Tribunal allowed the deduction of Rs. 46,900 in the present year.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, deleting the addition of Rs. 1,02,41,723 made under Section 92 and allowing the deduction of Rs. 46,900 royalty under Section 40(a)(i).