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TMI Blog2016 (5) TMI 975X X X X Extracts X X X X X X X X Extracts X X X X ..... present case, neither the assessee had achieved the level of service i.e. to supply 300 manpower nor the terms of contract commenced, resulting in no right to receive. We must interpret the situation in the normal course of business i.e. in a situation where the holding company has to deal with outsiders. Just because the assessee is dealing with holding company, it will not get a right to receive. Even in dealing with the outside party, the right to receive would not have arisen simply because the assessee had not achieved the expected service level nor the terms of agreement has commenced. The business decisions are done purely on commercial basis. When assessee has not achieved the expected level of services it has no right to claim any service charges. Income has to be realized or there has to be a right to receive the income, in absence of such right, income cannot be recognized. Hence, the addition made by the Assessing Officer in this case needs to be deleted. Hence, the addition made by the Assessing Officer is hereby deleted. - Decided in favour of assessee. - ITA No. 24/Hyd/2016 - - - Dated:- 20-5-2016 - Smt P. Madhavi Devi, Judicial Member And Shri S. Rifaur Rahma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st, 2008. The assessee has not raised any invoice for service fees since the same was payable from April 01, 2008 onwards and no service fee become due or receivable for the period prior to March 2008. 2.4 The said re-imbursement of expenses which was incurred for and on behalf of GHIAL was claimed as per the provision of Article 3 (Commercial) of the Service Agreement dated March 31, 2008 and further Service fee (i.e. monthly professional fee) was payable from the period commencing from April 1, 2008 onwards. Relevant provisions of the service agreement are reproduced below:- 3. Commercials 3.1 Reimbursements 3.1.1 GHARM alone shall be responsible for paying salary to the Associates for the services rendered by them to the CLIENT (i.e. GHAIL) under this agreement as per the CTC agreed between the CLIENT (i.e GHIAL) and GHARM; 3.1.2 GHARM shall raise an invoice on the CLIENT (i.e. GHIAL) detailing the salary payable by it to the Associates, which shall be paid by GHARM to the Associates on receipt of the reimbursement amount from the CLIENT as per Invoice raised by it. The Invoice shall be raised by GHARM on the CLIENT as detailed in this agreement 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has rendered services to the holding company i.e. GMR Hyderabad International Airport Limited (GHIAL), by providing manpower during November, 2007 to March,2008. However, the assessee has not shown any income in the form of service fee, for the services rendered. The assessee submitted that for the said period the holding company has reimbursed the expenditure incurred by the assessee on cost to cost basis. Further, the assessee submitted that there was no contractual obligation during the said period on part of the holding company to pay service fee to the assessee. On the other hand, during scrutiny, the AO, after analyzing the facts, concluded that the assessee has earned income in the form of service fee and the same was computed at ₹ 5,00,000/- (Rs.1,00,000/- per month, for the period November, 2007 to March, 2008.) Aggrieved by the AO's action, the assessee filed the appeal. During the appellate proceedings also, the assessee's AR reiterated the contentions raised before the AO stating that the action of the AO is unjustified, as the AO has brought to tax notional income i.e., the income which was not earned by the assessee. In view of the above observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 1,16,014/- against the income arrived at ₹ 5,00,000/-. 8. Aggrieved by the order of the CIT(A), assessee is in appeal before us raising the following grounds of appeal: Ground 1: Addition of ₹ 5,00,000/- on notional basis: 1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in upholding the action of Assessing Officer in making addition of ₹ 5,00,000/- towards service fees for the period from November 2007 to March 2008 which was never received or paid to the assessee. 2. The CIT(A) erred in not appreciating that for the period prior to March 31, 2008, the assessee company has only received reimbursement of expenses on cost to cost basis which was incurred for and on behalf of GHIAL and in terms of agreement no service was neither accrued/paid or received by the assessee. 3. The Assessee therefore prays that the addition of ₹ 5,00,000/- made in the notional basis in the assessment order passed U/s. 143(3) of the Income-tax Act, 1961 be deleted. 9. Before us, the ld. AR submitted that the assessee had entered into Service Agreement with its holding company GHIAL for supply of manpower t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is eligible to claim professional fees of ₹ 1 lakh only from 01/04/2008. The assessee, no doubt, commenced the recruitment service for holding company from 01/11/2007 but the service agreement entered is for supply of 300 associates or more w.e.f. 01/04/2008. The important thing to consider is that whether the assessee was able to supply the associates at the level agreed between the parties. The assessee was able to supply the man power starting from 20 numbers in Nov 07 and managed to increase this level to 112 nos. by Mar 08, not even 50% mark to the agreed level of service. No doubt assessee agreed to supply the manpower and as understand assessee is a new entrant to this field. The assessee was in the process of setting the business. Our understanding is that the assessee will have right to claim the service charges only when he reaches the level of service agreed and as per the agreement or as per terms of agreement with regard to commencement of the agreement period. In the given case, the assessee neither reached the level of service expected nor the agreement has commenced. Hence, assessee is not in a position to claim any professional fees during the perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e larger. This was not a gift by the assessee firm to the managed companies. The reduction was a part of the agreement entered into by the assessee firm to secure a long-term managing agency arrangement for the two companies which it had floated. 14. In the case of CIT Vs. Shanker Constructions, [2015] 60 Taxmann.com 63 the Hon ble Jurisdicitonal High Court, has held as under: 15. In the instant case, the clause in the contract provided for deduction of 7.5 per cent from each bill. Out of this, 5 per cent would be payable on successful completion of the work and balance 2.5 per cent after the expiry of the defect-free period. For instance, if the value of the contract is ₹ 1 crore and the amounts are paid under the four bills of ₹ 25 lakhs each. From each of the first 3 bills, sums representing 7.5 percent are deducted. On successful completion of the work, the amounts representing 5 per cent deducted from the first three bills, would become payable along with the final bill. However, even from the final bill, 2.5 per cent would be deducted. This amount of 2.5 per cent., which stood deducted from all the four bills, becomes payable, only on expiry of the defe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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