9911796707
TMI Blog2012 (11) TMI 989X X X X Extracts X X X X X X X X Extracts X X X X ..... for the earlier years in the appellant's own case. 5. (a) The learned CIT (A) erred in confirming the addition of Rs. 25,13,808/- under section 92CA(3). (b) The learned CIT (A) erred in holding that there was no requirement to bring material on record before forming an opinion and before making a reference to the TPO that the arms length price was not correct". 2. We have heard the learned Counsel and the learned DR in detail and their arguments are considered wherever necessary. 3. Ground No.1 is with reference to treating the expenditure claimed as repairs as capital in nature. 4. The facts of the case are that during the year under consideration assessee had incurred expenditure of Rs. 95,54,601/- on repairs and maintenance of various residential flats and office buildings owned by it. During the assessment proceedings AO examined 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 advertisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets. Balance of the expenditure in our view is revenue in nature as this is for maintenance/repairs of the existing assets. The findings of the ITAT in earlier years on the same issue are equally applicable to the year which are as under: "9.7 We further find identical issue had come up before the Tribunal in assessee's own case in the preceding years. We find the Tribunal vide ITA Nos.2041/Mum /98, 2042/Mum/98 and 3256/Mum/99 for AYs 1993-94 to 1995-96respectively vide order dated 19.1.2005 at Paras 12 & 13 of the order has decided the issue in favour of the assessee by holding as under: "12 We have heard the rival submissions and considered the facts and materials on record including the decisions cited before us by both the parties, even though, we are mentioning only those decisions which are relevant to our finding, which we are giving in 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey, the assessee did not acquire any capital asset as held by the Hon'ble Supreme Court in the case of Madras Auto Services P Ltd (supra) from the business point of view, therefore, the assessee got the benefit of reduced rent and the assessee obtained business advantage. Therefore, the expenditure is to be treated as revenue expenditure by applying the ratio decidendi in the case of Madras Auto Services P Ltd (supra).When the Hon'ble Supreme Court has held so, in our view, the decision of the Tribunal in the case of M/s Vams Fort Motor Pvt. Ltd may not advance any support to the case of the revenue. The Hon'ble Bombay High Court in the case of CIT v. Hede Consultancy P Ltd and another, on similar facts held that since assets created by the said amounts did not belong to the assessee but the assessee got the business advantage of using modern business 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as withdrawn. 11. Ground No.4 pertain to the issue of taxing an amount of Rs. 9,81,80,823/- in respect of unclaimed liability in addition to the amount of Rs. 2,99,14,525/- offered by assessee in the return of income. 12. The facts of the case are that in Schedule 13 to the Profit & Loss A/c assessee had shown income on account of 'unclaimed liabilities no longer required' at Rs. 4,67,40,197/-. The said amount consisted of the following: Rates & sizes written back Rs. 2,99,14,525 Price Water Co Payable written back Rs. 22,98,496 Indian client money written back Rs. 19,00,000 Sundry balances of various job written back Rs. 43,53,000 Out of date cheques written back Rs. 9,90,775 Sundry credit balances of various clients Rs. 72,83,402 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppliers. According to assessee, AO has not given any convincing reason for not accepting the method followed by assessee. 15. The CIT (A) considered the issue and upheld the addition by stating as under:- "6.2 I have carefully considered the submissions made by the appellant. It is the claim of the appellant that the amount of Rs. 7,81,80,823/- represents the amount either excess charged from the clients or less paid to the media in respect of advertisements. It is its claim that the said liability has been kept alive since the clients or the media might make claim of the amount excess charged or lower paid to them. To understand the exact nature of the 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 29,914,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. If the income has accrued in a year, it has to be taxed in that year only. Taxability cannot be postponed on the basis of entries made in the books of accounts. Since the liability amounting to Rs. 7,81,80,823/- outstanding in the books is not the real liability, AO was justified in bringing the same to tax in assessment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to tax. In addition assessee is consistently following the same accounting principles and there is no escapement of income, nor there is any postponement of tax liability. In fact recognizing or not recognizing of a particular amount as income depends on the contract and work done. As rightly pointed out by assessee, 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lease, the agency will earn 2.5% media commission on releases made by it for brands which are handled by other advertising agencies of the advertisers. The other advertising agency will earn 12.5% commission. The TPO asked assessee to submit the details of foreign as well as Indian clients to whom services of media 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% Ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputed at Rs. 9,60,703/- was added by AO to the income of assessee. 22. Before the CIT (A) assessee objected to the action of the TPO and that of AO in making 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstant case, AO obtained the approval of the CIT 3 Mumbai vide letter No.CIT III/Scru/03-04 dated 25.09.2003. Therefore, the objections taken by the appellant at Sr.No.(1) to (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was his submission that the adoption of the commission of 7% is not correct and that should be excluded. If the same is excluded the average of the above commission comes 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o LIBOR rate as is being done for loans and advances given by foreign company. This aspect was not at all considered by the TPO or by the CIT (A). As assessee as an alternative 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. 9,60,70 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
