2023 (12) TMI 1040 - HC - Income Tax

Sham collaboration agreement - addition made after adjustments towards technical expertise and brand value - addition made by the AO is the collaboration agreement as executed between the assessee and an entity named, MGF Development Ltd. - collaboration agreement entered into between the assessee and MGF cast several obligations upon the latter, which included providing and securing funds, bank guarantee and technical expertise for the integrated hotel project and assessee was required to pay 60% of the revenue earned from the transfer/sale of the integrated hotel project to MGF. Tribunal s view that the contention of revenue that the collaboration agreement represented a sham transaction was not established and consideration for sharing the revenue was provided by MGF in the form of funds, technical support/assistance for execution of the project and the benefit of its brand value that had been acquired perhaps over the year - HELD THAT - Tribunal as concluded that the obligation cast on the respondent/assessee to share the revenue from the project represented commercial expediency. In a nutshell, the Tribunal applied the well-established principle that the AO could not have put itself in the armchair of the businessman and decide what amount would pass as a reasonable expenditure, vis- -vis the subject project. In our view, having regard to the findings of facts returned both by the CIT(A) and the Tribunal, no interference is called for. As was correctly concluded by the Tribunal, the amount received by MGF had been offered for tax and quite clearly, addition in that regard could not have been made in the hands of the respondent/assessee, once the remittance had been accepted in the hands of MGF. In a manner of speech, in our view, what is sauce for the goose is also sauce for the gander. No substantial question of law arises for our consideration.

Summary

Issues involved:
The appeal concerns the Assessment Year 2010-11, specifically challenging the deletion of an addition amounting to Rs. 47.07 crores made by the Assessing Officer (AO) in a collaboration agreement related to an integrated hotel project in Jaipur.

Issue 1: Addition made by the AO
The only issue in the appeal was the deletion of an addition amounting to Rs. 47.07 crores made by the AO. The Commissioner of Income Tax (Appeals) (CIT(A)) had deleted this addition, a decision upheld by the Tribunal. The addition stemmed from a collaboration agreement executed between the respondent/assessee and MGF Development Ltd. for an integrated hotel project in Jaipur, involving the construction of a mall and a hotel named Hotel Fortune Select Metropolitan.

Issue 2: Allegation of Sham Transaction
The appellant/revenue contended that the collaboration agreement was a sham transaction, justifying the AO's addition. The agreement required the respondent/assessee to pay 60% of the revenue earned from the project to MGF in exchange for funds, bank guarantee, and technical expertise provided by MGF. The appellant/revenue argued that the AO correctly made the addition, adjusting for technical expertise and brand value.

Tribunal's Decision and Reasoning
The Tribunal ruled in favor of the respondent/assessee, highlighting aspects not contested by the appellant/revenue. It noted deductions allowed by the AO for expenses incurred from funds provided by MGF and brand fee paid to MGF by the respondent/assessee. The Tribunal found that the collaboration agreement was not a sham transaction, as MGF provided funds, technical support, and brand value. It concluded that the revenue-sharing obligation was a matter of commercial expediency, applying the principle that the AO cannot dictate reasonable expenditures for a project.

Judges' Conclusion
Based on the findings of the CIT(A) and the Tribunal, no interference was deemed necessary. The Tribunal's decision was upheld, emphasizing that once the remittance had been accepted in MGF's hands, no addition could be made in the respondent/assessee's hands. The judgment closed the appeal, stating that no substantial question of law arose for consideration.

(Separate Judgment by Judges: None)

This judgment showcases a detailed analysis of the collaboration agreement in question, the revenue-sharing arrangement, and the Tribunal's reasoning in dismissing the appellant/revenue's claims of a sham transaction. The decision underscores the importance of commercial expediency and the limitations on the AO's authority to determine reasonable expenditures in business transactions.