2024 (10) TMI 860 - AT - Income Tax

Expenditure for sharing the surplus - assessee has paid to the collaborators for expenses on services/ premises - assessee has shared the surplus with the collaborator - whether it not fall under any expenditure covered u/s 30 to 37 or section 40(a)(ia)? - HELD THAT - 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. Whereas in JV model, all the revenues are recorded by the assessee and shares the surplus/loss which are recorded by the assessee and shares the surplus/loss with the collaborator. We observed that the assessee has claimed the sharing of surplus, which is under dispute. In our view, the Assessing Officer has mixed up with the methods adopted by the assessee. Whatever expenses claimed as share of surplus with the collaborator, it is only sharing of revenue and not the claim of expenditure, as per the terms of agreement, the collaborator does not render any service to the assessee. As sharing of revenue and its impact of taxability vis- -vis application of TDS provision depends upon the method of accounting adopted by the respective assessee s. In this case, the franchise agreement and method of sharing the revenue based on computation sheet clearly shows that assessee records all the revenue and share the surplus with the franchisee/ collaborator after adjusting the expenditure. In this case, the assessee follows the JV model and incurs all the expenditure and shares only the surplus with the franchisee that means it is clearly shares the surplus and all the facilities are operated and controlled by the assessee. The issue is whether the provisions of TDS will apply in this case. In our considered view, as per the facts on record, merely shares the revenue and the collaborator does not render any service to the assessee, hence the provisions of TDS has no application. In the given case, the assessee is claiming expenditure for sharing the surplus which is nothing but sharing of revenue as per the agreement with the parties. Therefore, we do not see any reason to disturb the findings of ld. CIT (A). Decided against revenue.

Summary

Issues Involved:

1. Treatment of Unexecuted Packages (UEP) as income.
2. Disallowance of expenses under the head 'Share of Profit of Collaborators' due to non-deduction of TDS.

Issue-wise Detailed Analysis:

1. Treatment of Unexecuted Packages (UEP) as Income:

The primary issue was whether the advance payments received by the assessee for services to be rendered in the future should be treated as income in the year of receipt. The assessee argued that these advances were not income until the corresponding services were provided, citing the mercantile method of accounting and relevant case law, including the Delhi High Court's decision in Uttam Singh Duggal & Co. (P) Ltd Vs CIT, which held that advance receipts become income only when the related work is completed. The assessee maintained that these advances were liabilities to be carried forward as "Unexecuted Packages" (UEP) and should not be taxed until the services were rendered. The AO, however, disagreed, noting that similar claims had been rejected in previous assessments and treated the difference between the opening and closing UEP balances as taxable income. The AO's stance was that the amounts were non-refundable and thus should be recognized as income.

2. Disallowance of Expenses under 'Share of Profit of Collaborators' Due to Non-Deduction of TDS:

The second issue involved the disallowance of expenses claimed under 'Share of Profit of Collaborators' due to non-deduction of TDS. The AO contended that the payments made to collaborators were for services or premises, which should have been subject to TDS under the Income Tax Act. The assessee argued that these payments were not for services rendered but were a share of profits from a joint venture, and hence not liable for TDS. The assessee further clarified that these arrangements were based on joint venture agreements, where profits and losses were shared, and no services were rendered by one party to another. The CIT(A) accepted the assessee's argument, noting that the payments were indeed a share of profit and not rent or service fees, thus not attracting TDS provisions. The CIT(A) also recognized that the assessee had deducted TDS on certain payments classified as rent, further supporting the claim that the disputed payments were profit shares.

Conclusion:

The appellate tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal. It was concluded that the advances classified as UEP were not taxable in the year of receipt as they were contingent upon future service delivery. Regarding the TDS issue, the tribunal agreed with the CIT(A) that the payments to collaborators were a share of profits, not service fees or rent, and thus did not require TDS deduction. The tribunal emphasized the distinction between revenue sharing and service provision, supporting the assessee's accounting treatment and the CIT(A)'s findings. Consequently, the tribunal found no merit in the Revenue's grounds of appeal, leading to the dismissal of the appeal.