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TMI Blog2012 (11) TMI 989X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to AO for fresh adjudication in the light of the decision of the Special Bench of the Tribunal in the case of Amway India Enterprises v DCIT, [2008 (2) TMI 454 - ITAT DELHI], as was done in earler years - issue is restored to the file of AO for fresh adjudication in accordance with the law and the principles governing this issue and after giving due opportunity of being heard to assessee. Unclaimed liabilities - accrual of liability or cessation of liability during the year - diference of opening and closing balance of unclaimed liability account - held that:- As and when the parties seek the amount which cannot be recognized as income, assessee is refunding the amount and once client does not seek any adjustment the same is accepted as income of the year after the end of three years limitation period as per assessee's own accounting method. - No reason for supporting the action of AO in bringing to tax the entire credit in the account as income of the year without examining the principles governing the method of accounting followed by assessee and accrual of income. Addition u/s 92CA(3) - selection of comparable - Payment was made for purchase of software for use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of these expenses. After examination, he came to the conclusion that the expenses of Rs. 33,12,482/- were of capital nature. The details of the expenses treated by AO as capital expenditure have been given at page 3 and 4 of the assessment order. 5. Before the CIT (A), it was submitted that assessee is a leading advertising agency in India. It is a part of the International LOWE Lintas Group. Every year, it has to incur substantial expenditure on the upkeep of its premises since assessee being an advertising agency, has to keep the premises updated regularly. According to assessee these expenses are day to day expenses needed for the upkeep and regular maintenance of the premises. No new asset has come into existence. The expenses incurred relate to paining, plumbing, electrical repairs and carpentry work. These expenses are required to be treated as revenue expenses. It was submitted that similar issue had come up for hearing before the Hon'ble ITAT in the case of assessee for assessment year 1993-94 to 1995-96 and after detailed discussion it was held that such expenses were of revenue in nature. Even the CIT (A) for assessment year 1996-97 to 1999-2000 has decided t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the succeeding sentences. As regards, the expenses incurred on leased property, the Hon'ble Supreme Court in the case of CIT v. Madras Auto Service P Ltd., cited supra has held that by spending money on constructing the new buildings on the leased premises, the assessee did not acquire any capital asset and the only advantage which the assessee derived by spending money was that it got the lease of a new building at low rent and from the business point of view, the assessee got the benefit of reduced rent and the expenditure is to be tread as revenue expenditure. In that case, the assessee was carrying on the business of sale of motor parts. Its head office was at Madras and it had branch at Bangalore. Under an agreement of lease, the assessee obtained certain premises for a period of 39 years under certain terms and conditions of the lease, the lessee (assessee) had the right to demolish existing premises at its own cost and appropriate to itself all the material thereof, without paying to the lessors of any compensation and construct a new building thereof to suit the purpose of their business as per the plan approved by the lessors. The lease agreement further provided that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness premises on low rent, thus saving considerable revenue expenditure for a considerably long period, the Tribunal was perfectly justified in coming to the conclusion that the expenditure should be looked upon as revenue expenditure. In this case also, the assessee had spent Rs. 9,20,436/- for converting go-down premises into office by renovating it by incurring expenses on interior decoration, plastering of walls and construction of bathrooms and WCs etc. Thus, the Hon'ble jurisdictional High Court also had laid down the principle that the sums spent on leased premises for renovation are to be treated as revenue expenditure. Thus, whether expenditure incurred on renovation of building on leased land is revenue or capital is settled by the Apex Court and the Hon'ble Jurisdictional High Court in favour of the assessee by holding that such expenditure is revenue in character. Once it is revenue in character as discussed above and it is purely business expenditure (not personal expenditure), as per section 37 this expenditure is allowable to the assessee, even for argument sake, it is also allowable u/s 32(1) explanation (1). Further, the decision of Hon'ble Bombay High Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 4,67,40,198 AO further found that the 'Rates Sizes account' out of which an amount of Rs. 2,99,14,525/- was written back, appeared in assessee's books as under: Opening balance (7,83,32,994) Add: Credited during year (additions during the year) (3,24,51,841) Less: Credited to client Credit back to supplier 25,27,487 Written back to income ( 2 yrs. old) 2,99,14,525 Closing balance (7,81,80,823) 13. During the assessment proceedings, AO asked assessee to explain as to why only an amount of Rs. 2,99,14,525/- has been written back out of the amount outstanding in 'rates and sizes' account leaving behind the closing balance of Rs. 7,81,80,823/-. It was submitted by assessee that in some cases, the press over bills wrongly for an advertisement placed with them by assessee. They may bill assessee wrongly for the size of advertisement or for the rate. Assessee asks the press publication for a correction and makes payment only in respect of the correct amount leaving some excess with assessee out of the amount recovered from the advertisers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e liability, the figures appearing in the 'rates and sizes' account for various years are reproduced as under: A.Y 2001-02 A.Y 2002-03 AY 2003-04 A.Y 2004-05 A.Y 2005-06 Opening balance 56,774,935 -78,443,994 -78,180,823 -49,943,146 -32,433,667 Add: Credited during the year 48,377,561 -32,451,841 -17,491,265 -14,942,402 -10,526,883 Less: Credited to client 1,689,369 2,689,487 277,476 175,273 183,342 Written back to income 25,130,133 29,914,425 45,451,466 32,276,608 17,307,923 Closing balance -78,332,994 -78,180,823 -49,943,146 -32,433,667 -25,469,285 The percentage of amounts lying in the rates and sizes account of the appellant as claimed by the clients or the suppliers I various years is as under: Amount lying in rates and sizes account A.Y2001-02 A.Y 2002-03 AY 2003-04 A.Y 2004-05 A.Y 2005-06 Openi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year 2002-03 (Addition confirmed Rs. 7,81,80,823/-). Accordingly the action of AO is upheld. Therefore, the fifth ground is rejected" 16. The learned Counsel objected to the above order on three reasons. The first one is that the opening balance for this assessment year is Rs. 7,83,32,994/- whereas the closing balance is Rs. 7,81,80,823/- which indicates that the entire closing balance which was brought to tax during this year does not pertain to this assessment year at all. The second reason is that assessee is consistently following the same method of accounting for its liabilities and waiting for period of two years after the closure of the financial year and then adding back the amount which was not claimed. He referred to the Table as stated in CIT (A) order to submit that assessee is writing back the income every year as can be seen from the table on a consistent accounting method being followed which was accepted in earlier years. Therefore, on principles of consistency alone the method of accounting being followed by assessee should be accepted. The third reason stated is that there is no difference in tax rates over a period of time and assessee is consistently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see, these disputes arise because of the size of advertisement placed and short or excess charging than what was due. As and when the parties seek the amount which cannot be recognized as income, assessee is refunding the amount and once client does not seek any adjustment the same is accepted as income of the year after the end of three years limitation period as per assessee's own accounting method. In view of this, we do not see any reason for supporting the action of AO in bringing to tax the entire credit in the account as income of the year without examining the principles governing the method of accounting followed by assessee and accrual of income. As explained above, there is no need for bringing to tax any amount. AO is directed to delete the above amount. Since the main addition is deleted, the alternate contention for excluding the amounts which were already offered in this year or in later years does not arise. Assessee's ground is allowed. 19. Ground No.5 is against the action of AO in making addition of Rs. 25,13,808/- under section 92CA(3). The facts of the case are that during the year under consideration, assessee had entered into international transactions with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia buying were rendered by the appellant. It was submitted by assessee that similar services were not rendered to any foreign client. However, it was stated that such services were rendered to Indian clients namely Aptech Ltd., Pantaloon Retail India Ltd, Siemens Telecom Ltd, Ever Ready Industries (India)) Ltd etc. Copies of agreements with these parties were filed by assessee before the TPO. Assessee had adopted the CUP (Comparable Uncontrolled Price) method for determining the arm's length price. The TPO compared the commission of 3% received by assessee from IM Hamburg with controlled transactions entered into by the assessee with Indian clients. He found that assessee had received following commissions from various clients: Client Name % of commission Aptech Ltd 2.25% GM Pens Intl 2.5% Pantaloon (I) Ltd 3.5% Siemens India Ltd 2.5% Simens Telecom Ltd 2.5% Eveready Industries (I) Ltd 7% Average of the above commission 3.375% 20. For working out the arm's length price of the transactions with IM Hamburg, the TPO applied the rate of 3.375% to the net payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king addition of Rs. 25,13,808/- under section 92CA(3) on the following grounds: (i) AO has to have material on record on the basis of which he comes to an opinion that the matter has to be referred to the TPO. No such material has been brought on record by AO and accordingly the reference to the TPO was not valid. (ii) A show cause notice is required to be issued by AO to assessee before a matter can be referred to the TPO. No such show cause notice was issued by AO to assessee and hence the order passed by the TPO under section 92CA(3) was not in order. (iii) Before referring the matter to TPO, AO has to obtain approval from the CIT. No material has been brought on record to show that AO had taken the approval of the CIT before making the reference to the TPO. Further, AO can refer any international transaction to the TPO only if the transaction was not bonafide. No opportunity was given by AO to prove that the transaction was bonafide. (iv) Assessee and the TPO have adopted CUP method for computing the arm's length price. The CUP method compares the price charged for services transferred in a comparable uncontrolled transaction in comparable circumstances. The transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) above are rejected. 7.2.1 In this case, the appellant had rendered services of media buying to I M Hamburg, Germany. No such services were rendered to any other foreign enterprise. However, the appellant had rendered similar services to some of the Indian clients. The nature of services provided by the appellant to I M Hamburg and the Indian clients was the same. Therefore, both the transactions were comparable. The transactions entered into by the appellant with I M Hamburg was a controlled transaction and the transactions entered into by it with Indian Enterprises were uncontrolled. The appellant had adopted the CUP method for computing the arm's length price. Under the said method, the arm's length price of a controlled sale is equal to the price paid in comparable uncontrolled sale. Controlled sales are the sales in which the seller and buyer are the members of the same controlled group. In the case of uncontrolled sales, the seller and buyer are not members of the same group. Uncontrolled sales are considered comparable to controlled sales if the physical property and circumstances involved in the controlled sales are comparable to the uncontrolled transactions. Since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to 2.65% whereas assessee has earned the commission at 3%. Therefore, there is no need to adjust any amount as ALP on this issue. 25. The learned DR however, supported the orders of the TPO and the CIT to submit that the average rate of commission is to be fixed at 3.375%. 26. We have considered this issue. As seen from the order of the TPO as well as the orders of the CIT (A), there is no dispute with reference to the fixed monthly fee received from Eveready Industries Ltd. Assessee is not charging any commission as it has entered into fixed fees arrangement with Eveready Industries Ltd. The nature of the service and the fees being charged to the Eveready Industries are entirely different when compared to the other clients which are considered as comparable. Therefore, in our view, the fixed fee received from Eveready Industries cannot be used for comparison in this method as it is not comparable to the transactions of commission undertaken by assessee with the other clients. Not only that the working given by the TPO shows that it is earning 7% commission, whereas as per the industry policy as decided by the AAAI the service on media agency earns commission of 2.5%. On tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernative contention submitted that the interest can be worked out at 7% as per the European standard which would come to Rs. 5,14,357/-. Without discussing this issue at all and without considering the fact that assessee has not charged any interest to any client, in our view both the TPO as well as the CIT (A) wrongly considered the issue of making available credit to the foreign company. We are not in agreement with the action of AO on the facts of this case. We agree with assessee's contentions that assessee is not charging any interest to any client whether Indian or foreign, nor there is any credit extended to the foreign company in the guise of debit notes raised. In view of this, we are of the opinion that no interest can be charged. Accordingly we direct AO to delete the addition made on account of interests at Rs. 13,27,623/-. 28. The third issue under the transfer pricing provisions is with reference to the payments made to Initiative Media Technology, Paris for customized software programme of Rs. 9,60,703/- which is an associate concern. Assessee submitted an invoice dated 6.9.2001 in support of the payments made. On the reason that assessee does not have any evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X
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