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TMI Blog2014 (6) TMI 562X X X X Extracts X X X X X X X X Extracts X X X X ..... ice agreement with Yum! Restaurants International Inc. (YRI) for a period 01.04.2003 to 31.12.2003 and with YRAPL for the period 01.01.2004 to 31.03.2004. Assessee has also established a wholly owned subsidiary under the name of Yum! Restaurants Marketing Private Limited (YRMPL) with the object of undertaking advertising, media and promotional activities (AMP activities). 3. The assessee has taken the following grounds of appeal related to Corporate Tax matters :- "B. Grounds relating to Corporate Tax matter Service income treated as 'income from other sources' 1. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has erred in characterizing the service income earned by the appellant amounting to Rs.10,98,31,254 from M/s Yum! Restaurants Asia Pte Ltd., Singapore ("YRAPL"), as "income from other sources" as against "business income". 1.1 That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO has grossly erred in taking a divergent view from the Ld. TPO on the same sets of facts. Disallowance of royalty expenditure 2. That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d marketing ('AMP') activities contending the same to be excessive under Section 40A(2)(b) of the Act. Disallowance of the research and development expenses 6. That on the facts and circumstances of the case and in law, the Ld. AO has erred in disallowing the research and development expenses amounting to Rs.9,48,831 by holding them to be of capital nature. 6.1 Without prejudice to the above, even assuming (without admitting) that the said research and development expenses are of capital nature, the Ld. AO has erred is not allowing depreciation on the said expenditure. Disallowance of tax depreciation @60% on computer peripherals 7. That on the facts and circumstances of the case and in law, the Ld. AO has erred in allowing depreciation on computer peripherals and accessories @15% as against the depreciation claim of the appellant @60%." 4. In the ground nos.1 & 1.1, the issue involved is regarding service income earned by the assessee amounting to Rs.10,98,31,254/- from M/s. Yum! Restaurants Asia Pte Ltd., Singapore ("YRAPL") as "income from other sources" as against business income. 5. This issue has been decided by the ITAT in the assessee's own case in ITA Nos.26 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f income as business income or income from other sources. He further submitted that when the expenses incurred by the assessee, which form the basis of computation of service income are allowed as business expenditure, the corresponding income should also be treated as business income. It was also submitted that the main objects clause of the memorandum of association of the assessee provides for provision of restaurant support services. He also relied on the case laws, viz., Mazagaon Dock Ltd vs. CIT (SC) (34 ITR 368); Barendra Prasad Ray vs. ITO (SC) (129 lTR 295); and Senairam Doongarmall vs CIT (SC) (42 ITR 392) for the proposition that a regular and continuous activity carried out with the intention to earn profits is to be regarded as business income. 6. We have heard both the sides on the issue. The ITAT in its order dated 31.05.2011 vide para 8 has held as under :- "8. We have duly considered the rival contention and gone through the record carefully. Ld. First Appellate Authority has reproduced the submissions of the assessee. The assessee in its submissions has pointed out that section 2 (13) provides the definition of expression "business" according to which business i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent company by the assessee cannot be ruled out. There is no evidence with the AO in this regard. The assessee is receiving the income from parent company i.e. YRI and not making payment to it. Taking into consideration the detailed submission by the assessee, which have duly been reproduced by the Ld. CIT(A) coupled with the finding recorded by the Ld. CIT(A) (extracted supra), we are of the view that AO miserably failed to appreciate the facts and circumstance. The assessee has been offering income from consultancy etc. as a business income. It has duly been accepted by the department since 1998-99. The AO without assigning any valid reason concluded that it is an income from other sources. On the other hand, Ld. First Authority has considered this issue in right perspective. Therefore, we do not find any merit in this ground of appeal it is rejected." Since facts are same, therefore, respectfully following the decision of ITAT in earlier years, we dismiss ground no.1 of both revenue's appeal." The facts of the issue in this year and pleadings of both the sides remain the same, respectfully following the aforesaid decision of the ITAT, this issue is being taken as covered in fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee in assessment years 2002-03, 2003-04 and 2006-07 and he referred to para 20 of the order. It was also submitted that against this expenditure of royalty, the assessee has also earned royalty of Rs.6,32,44,241 from the franchisee's. There is an accrual of direct income from such expenditure and he referred to the decisions of CIT vs. Ciba of India Ltd. (SC) (69 ITR 692) and Shriram Refrigeration Industries Ltd vs. CIT (Delhi HC) (127 ITR 746). It was also submitted that payment is made for the purposes of carrying out its business and hence allowable as a genuine business expenditure. The term classification (nomenclature) of license fees as royalty or technical fees is not relevant. The terms "royalty" and "license fee" were interchangeably used by the Government of India in its correspondence with assessee. He submitted that AO has misinterpreted the SIA approval since the clause made inapplicable to the assessee was not relevant to its nature of business. It was further submitted that the Government of India, in its letters dated September 29/30, 2003 and June 16/17, 2004, which is placed at Page 280 and 282 of Paper book 2 for AY 2005-06, has used the term 'r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical services" loosely and interchangeably. Apart from all these things, the tax rate for remitting a royalty as well as fee for technical service is 15% plus the research and development cess. The assessee has paid both these amounts while remitting the payment. The expense is directly related to its business. It has been incurred wholly and exclusively for running the franchises within India. Therefore in our opinion Ld. First Appellate Authority has appreciated the facts and circumstances in right perspective and has rightly deleted the disallowance." Facts are same, therefore, we find no merits in the ground nos.2 & 3 in ITA No.2678/Del/2012 and ground nos.2 & 2.1 in ITA No.2679/Del/2012 and the same are dismissed." Facts of the issue and pleadings of both sides remain the same, therefore, respectfully following the aforesaid decision of the ITAT, we allow this ground of assessee's appeal. 9. In the ground nos.3, 3.1 & 3.2, the issue involved is hypothetical disallowance of the administrative expenses of Rs.23,87,46,837/- incurred by the assessee as being attributable to its subsidiary company, YRMPL. 10. At the outset of the hearing, ld. AR submitted that this issue i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al of SIA with the objective of conducting AMP activities for the assessee and its franchisees. YRMPL is completely funded by the assessee and its franchisees by way of fixed contributions and any additional fund requirements being met by the assessee. He further submitted that the ITAT has duly examined the business model of the assessee and YRMPL and held that the assessee was entitled to contribute to the activities of YRMPL as per its business needs and the facts and circumstances of the case remain identical to those before the ITAT in previous years. Ld. AR submitted that the assessee, instead of recovering charges for sharing administrative facilities, reduced its AMP contribution to YRMPL to avoid unnecessary cash flows. He explained that by way of a simple example - if assessee has to fund Rs.100 and recover Rs.20 from YRMPL; it funds only Rs.80 after reducing the amount of recovery. However, the AO has grossly misinterpreted the same as non-reduction of AMP contribution. He submitted that direct contributions paid by the assessee to YRMPL have been allowed by the AO as an expense thereby duly recognizing the commercial interest of assessee in the functioning of YRMPL. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PL towards such cost. From both the angles, it is the assessee or its franchise who has to contribute this amount. The AO, therefore, has erred in carving out the disallowance. Ld. CIT(A) has rightly deleted this disallowance and we do not find any force in this ground of appeal. It is rejected." In view of these facts, we find no merits in the Ground No.4 in ITA No.2678/Del/2012 and ground no.3 in ITA No.2679/Del/2012 and the same are dismissed." Respectfully following the aforesaid decision of the ITAT, we allow this ground of assessee's appeal. 12. In the ground nos.4 & 4.1, the issue involved is not allowing the income tax depreciation claim to the extent of Rs.25,59,253/- made by the assessee under Section 32 of the Act. 13. At the outset of the hearing, ld. AR submitted that this issue is also covered in favour of the assessee by the aforesaid order dated 14.02.2014 in ITA Nos.2678 & 2679/Del/2012 of ITAT. 14. We have heard both the sides on the issue. The facts of the issue and pleadings of both the sides remain the same in this year as well as in the aforesaid order for Assessment Years 2004-05 and 2005-06. The relevant portion of the order is reproduced as under :- " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock of asset concept, individual assets lose their identity when merged in the block and accordingly, actual physical possession and use of assets are not essential. He also relied on the decisions of CIT vs. Yamaha Motor India Pvt Ltd (Delhi HC) (ITA No 203/ 2009 and 601 2009): CIT vs Bharat Aluminium Co Ltd (Delhi HC) (ITA No 659/ 2007 and 1484/2006); Xerox India Ltd.. (Delhi ITAT) (ITA No. 680/Del/2006); CIT vs G.R. Shipping Ltd. (Bombay HC) (ITA No. 598 of 2009) and Swati Synthetics (ITA No. 1165/M/2006). 12. We have heard both the sides on the issue. We find that this issue is covered in favour of the assessee by the decision of ITAT in the case of the assessee for assessment years 2002-03, 2003-04 and 2006-07. The relevant para of the said order is reproduced as under :- "25. On due consideration of the facts and circumstances, we are of the view that AO has highlighted certain discrepancies in the maintenance of WDV of the assets as well as identification of each assets. There may be some shortcomings but that does not mean that assessee was not having any assets and they were not used for the purpose of business. In our opinion, AO ought to have identified each item and f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contributed by the assessee. During the year under consideration, the assessee has made additional payments of Rs 2,27,53,357/- over and above the 5% of the net sales of its equity stores, as being contributed by other franchisees. It is noticed that the actual beneficiaries of the AM.P activities undertaken by YRMPL are the foreign brand holders or the parent company whose income is directly proportional to the turnover of the franchisees and whose brand value/goodwill would increase. The beneficiaries are the new stores because they get straight away huge turnovers without any AMP activities initially. The other marginal beneficiaries would be the franchisees whose total turnover would increase by such AMP activities. But major beneficiaries of such AMP activities i.e. the foreign entity as well as the new stores are not contributing anything for activities of YRMPL and are also not making any additional contribution. Logically, the excess funding to YRMPL should have been proportionately distributed among all the franchisees, the assessee and the foreign company which has not been done. Thus the excess payment made by the assessee cannot be treated as being incurred wholly and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been held to be allowable expenditure :- (i) Sassoon J. David and Co. (P.) Ltd vs. CIT - 118 ITR 261 (SC); (ii) Cit VS. Chandulal Keshavlal & Co. - 38 ITR 601 (SC); (iii) Nestle India Ltd. vs. DCIT - 111 TTJ 498 (Delhi ITAT) (iv) Star India (P) Ltd. vs. ACIT - 311 ITR 235; (v) Sony India Pvt. Ltd. vs. DCIT - 114 ITD 448. It was also pleaded before us that the commercial expediency and quantum of expenditure needs to be examined from the stand point of the assessee and not from the point of view of tax authorities. The tax authorities should not superimpose an imaginary limit for determining the allowability of an expenditure based on surmises and conjectures and reference was drawn to CIT vs. Microsoft Corporation of India (P) Ltd. - 176 Taxman 396 (Delhi High Court). It was also pleaded that by making such expenditure, assessee gets benefit through increase in sales of the franchisees and any benefit to the foreign brand holders is only incidental and not the driving factor. It was also claimed that YRIPL is an independent third party and no prudent businessman shall contribute to the AMP activities without getting any benefit out of it. There was no clause that assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s expenditure. Logically, such expenditure should be proportionately distributed among the franchisees, assessee and foreign company which is not done by the assessee, therefore, this expenditure cannot be held wholly and exclusively for the purpose of business of the assessee. 18. We have heard both the sides on the issue. The DRP has given a finding that the major beneficiary of the AMP expenditure was foreign associate concerns who are the owner of the brand and the franchisees are only marginal beneficiaries. The calculation returned in the Assessing Officer's order give a different picture with regard to the ratio of benefits. Further, we find that no finding has been recorded with regard to the relevant provisions with regard to advertisements etc. in the franchisees agreement between the assessee and the franchisees. Considering all these aspects, we hold that this issue requires a fresh look to determine the relevancy of the expenditure u/s 37 of the Act and also u/s 40A(2) of the Act. Since we are restoring the issue to the file of the Assessing Officer we find no necessity to adjudicate on other issues raised during the proceedings on this issue. Accordingly, this issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no.7, the issue involved is against allowing depreciation on computer peripherals and accessories @ 15% as against the depreciation claim of the assessee @ 60%. 23. The ld. AR submitted that this issue is covered in favour of the assessee by the decisions of various High Courts including the Hon'ble jurisdictional High Court in the cases of Commissioner of Income Tax vs. BSES Yamuna Powers Ltd. (in ITA No.1267 decided on 31.08.2010) and CIT vs. Oriental Ceramics & Inds. Limited in ITA No.66/2011. 24. We have heard both the sides on the issue and also perused the records. After hearing both the sides, we hold that this issue has been decided by the Hon'ble jurisdictional High Court in the case of CIT vs. BSES Yamuna Powers Limited reported in 358 ITR 47 in favour of the assessee and Hon'ble High Court has held as under "4. We are in agreement with the view of the Tribunal that computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow the appellant the benefit of variation of 5 percent in determining the Arm's Length Price." 26. Ground No.1.1 is general in nature and the same does not require any adjudication as the issue raised therein is covered by other specific grounds raised in the grounds of appeal. Hence, the same is dismissed. 27. In the ground no.1.2, the assessee has raised the issue that DRP/TPO has erred in considering an inappropriate set of companies which has been taken as comparable to the support services outside India segment of the assessee. 28. While pleading on behalf of the assessee, ld. AR submitted that M/s. Saket Projects Limited is a company engaged in hosting of events, exhibitions in the area of energy, textile industry, etc. which is a different business activity vis-à-vis services provided by the assessee. M/s. Saket Projects Limited was having a negative net worth in financial year 2007-08. The segmental results of M/s. Saket Projects Limited are not reliable. The segmental results of M/s. Saket Projects Limited are significantly varying if one looks in comparison to past three years. The segmental margin of 159.37% computed by the TPO was abnormal and is an outlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded by the Sixth Pay Commission. Accordingly, the profit of the company did not give the correct picture. Similarly, in the case of Rites Limited, ld. AR submitted that it is engaged in the engineering services and providing consultancy for infrastructure. Services rendered by Rites Limited are similar to M/s. Wapcos (India) Ltd. There is a change in the accounting practice in Rites Ltd. in the Assessment Year 2007- 08. As a result of this change, profits of the year were higher by INR 2388.60 lakhs. This constituted 25% of the company's overall profit of the company. Given these abnormalities, Rites Ltd. cannot be considered as comparables. Reliance was placed on the decision of ITAT, Delhi in the case of M/s. MCI Com India P. Ltd. (now known as Verizon India P. Ltd.) - (TS-643-ITAT-2012 (Del.)- TP) wherein Rites Ltd. and Wapcos (India) Ltd. are held to be engineering companies and these companies provided end-to-end solutions, therefore, these are not functionally comparables to the assessee. Ld. AR submitted that this order of ITAT has been confirmed by Hon'ble Delhi High Court in the case of CIT VI vs. Verizon India Pvt. Ltd. in ITA Nos.271/2013 & 277/2013 dated 29.05.2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of factors given in Rule 10B(2)read with sub-rule (3), that such case shall merit omission then only it can be considered. Higher profits achieved due to factors not mentioned in the rule then such case shall be continued to find place in the list of comparables. Similar view has been approved by various coordinate ITAT benches in the cases like Exxon Mobil Company India (P.) Ltd.- (2011-TTJ-68-ITAT-MUMTP) and DCIT vs. M/s. B.P. India Services (P.) Ltd. - ITA No.4425/Mum/ 2010. 11.3. On issue of comparability of Saket Projects Limited, we are in agreement with the ld DR that no comparable can be rejected merely on the basis of high margins if it is functionally comparable to the assessee or there is miner variation in functional similarity. The case of Saket Projects Ltd. has functional dissimilarity as it is organizing events with various kinds of sponsorships. The company in this division is earning revenue from selling event fees and offering space for rent which cannot be comparable with provision of marketing and sales support services. Besides segmental allocation of expenses were not reliable. In view of these facts, we hold that Saket Projects Ltd. has been rightly held as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and these were held to be functionally non-comparable. Wapcos (India) Ltd. provides services requiring technical expertise. In the Assessment Year 2007-08 and 2009- 10, TPO itself has rejected as comparable to assessee. Wapcos has recorded grants in aid for carrying out specific schemes of the Government. It has also not provided for pay revision in view of 6th Pay Commission. In view of this, the results are not comparable. In the case of Rites Limited, we find that it is engaged in engineering services and providing consultancy pertaining to infrastructure services. The services rendered by Rites Ltd. are similar to Wapcos. Due to change in accounting practice, the profit for the year has been overstated. In view of this fact, we hold it as non-comparable. 33. In the case of M/s. Choksi Laboratories Ltd., we hold that it was engaged in chemical testing services which are highly technical and not comparable to assessee. It has been held to be not comparable on the functional basis. In view of these facts, we also hold that Choksi, Rites and Wapcos are functionally different from the assessee company and cannot be held to be proper comparables, therefore, we direct to exclude th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO for transfer pricing analysis on the basis that such data was not available in public domain at the time of finalization of transfer pricing study and the use of multiple year data would result in better capturing of market/business cycles reflected in the industry in comparison to single year data. This plea of the assessee was not accepted in view of the provisions of Rule 10B(4) of the Income-tax Act, 1961 wherein it is provided that data of the comparable transactions shall be for the same financial year in which the assessee has entered into international transactions unless data related to earlier years (not more than 2 years) reveals certain facts which could have an influence on the determination of transfer pricing in relation to the transactions being compared. Since assessee has failed to make out any case relating to the use of earlier years data, this plea of the assessee was dismissed. This issue has been taken by the assessee under grounds no.16.1 to 16.4. 4. After hearing both the sides on this issue, we find that assessee has failed to establish that earlier two years data reveal certain facts which have influence on the determination of transfer pricing in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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