International Merchandising Corporation- India Branch Office, Gurgaon V. ADIT, New Delhi

ITA 1084/DEL/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66051 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 9 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 18-10-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 01-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JUGDEEP SINGH
• Assessee Lawyers: S K AGARWAL
• Keywords: Depreciation; Transfer pricing; Additional evidence; Assessment record; Commercial expediency; Revised return; Unabsorbed depreciation
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C: NEW DELHI BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER AND SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER ITA NO. 1084/DEL/2011 ASSESSMENT YEAR: 2005-06 INTERNATIONAL MERCHANDISING CORPORATION INDIA BRANCH OFFICE, IMG HOUSE, 5 TH FLOOR, TOWER A, BUILDING 9, DLF PHASE-III, CYBER CITY, GURGAON. PAN NO. AAAC18025Q VS. ADIT, CIRCLE 1(2), INTERNATIONAL TAXATION, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY: SH. S.K. AGARWAL, CA RESPONDENT BY: SH. JUGDEEP SINGH, SR. DR O R D E R PER S.V. MEHROTRA, A.M. THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF LD. CIT(A) DATED 16/12/2010 FOR A.Y. 2005-06. 2. THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME DECLARING NIL INCOME. THE ASSESEE IS INDIAN BRANCH OFFICE OF INTERNATIONA L MERCHANDISING GROUP ENGAGED IN THE MARKETING AND MANAGEMENT OF SPORT LE ISURE AND LIFESTYLE. IT REPRESENTS ATHLETES, PERFORMING ARTISTS, WRITERS, F ASHION MODELS, BROADCASTERS, LEADING CORPORATION WORLD-CLASS EVENT S CULTURAL INSTITUTIONS AND ITA NO. 1084/D/2011 2 RECREATIONAL RESORTS. THE PRODUCTION CENTERS ARE L OCATED IN NEW YORK, LONDON, HONG KONG, SYDNEY AND NEW DELHI. THE ASSES SEE IS THE LARGEST INDEPENDENT PRODUCER PACKAGE AND DISTRIBUTOR OF SPO RTS PROGRAMMING IN THE WORLD. THE ASSESSEE IS ENGAGED IN THE FOLLOWING AC TIVITIES: - 1. ACTIVITIES RELATING TO SPORTS AND ARTS AND TO REPRESENT LOCAL SPORT BODIES ASSOCIATIONS AND INDIVIDUALS FOR EXPLOITATION OF COMMERCIAL RIGHTS; AND 2. SALE OF TELEVISION RIGHT AND PRODUCTION OF TELE VISION PROGRAMMES PROVIDED THAT THE BRANCH OFFICE DOES NOT UNDERTAKE ANY BROADCASTING FROM INDIA SOIL. 3. THE ASSESSING OFFICER NOTICED THAT ASSESSEE HAD PAID AN AMOUNT OF RS. 1,21,54,146/- AS REIMBURSEMENT OF EXPENSES INCU RRED BY AE ON ITS BEHALF. THE AO REQUIRED THE ASSESSEE TO EXPLAIN IN WHAT CONNECTION SUCH EXPENSES WERE INCURRED IN THE RESPECTIVE TERRITORIE S AND DETAILS OF CORRESPONDING INCOME. 4. THE ASSESSEES REPLY HAS BEEN REPRODUCED AT PAGE 3 & 4 OF ASSESSMENT ORDER IN WHICH ASSESSEE POINTED OUT THAT THE EXPENDITURE HAD BEEN INCURRED BY THE AES IN THE FIRST INSTANCE, AND SUBSEQUENTLY REIMBURSED BY THE ASSESSEE ON PURELY COST TO COST BASIS. IT W AS FURTHER SUBMITTED THAT THE EXPENDITURE WAS INCURRED IN THE NORMAL COURSE O F BUSINESS OF THE ASSESSEE AND NO SERVICES WERE PROVIDED BY THE AES I N THIS REGARD. THESE EXPENSES WERE INCURRED IN CONNECTION WITH ITS EVENT S/ OTHER OPERATIONS. THE ITA NO. 1084/D/2011 3 AO OBSERVED THAT ASSESSEE DID NOT SUBMIT THE DETAIL S OF EXPENSES AND THE CORRESPONDING INCOME. HE NOTED FROM FORM NO. 3CEB THAT SUCH EXPENSES WERE INCURRED IN USA,UK, ITALY, SINGAPORE AND HONG KONG. HE, THEREFORE, DISALLOWED THE ASSESSEES CLAIM OBSERVING AS UNDER: - IN ABSENCE OF THE INFORMATION, THE CONTENTION OF THE ASSESSEE THAT THE SAME ARE MERE REIMBURSEMENTS IS NOT ACCEPTABLE AND ALSO THE ASSESSEE HAS NOT SUBMITTED THE REASONS FOR NOT DEDUCTING THE TAX. BUSINESS PURPOSE IS ALSO NOT EXPLAINED. THEREFORE, THE WHOLE EXPENSES ARE DISALLOWED FOR BEING NON-BUSINESS IN NATURE AND ALSO UNDER THE PROVISIONS OF SECTION 40(A)(I) OF TH E ACT. 5. BEFORE LD. CIT(A) THE ASSESSEE SUBMITTED FOLLOWI NG DOCUMENTS: - (A) BRIEF DESCRIPTION OF EXPENSES AND THEIR CO-RE LATION WITH THE RESPECTIVE EVENTS FOR WHICH THESE EXPENSES ; AND (B) COPIES OF THIRD PARTY INVOICES ON THE BASIS OF WHICH THE AES IN THEIR RESPECTIVE TERRITORIES INITI ALLY PAID THE EXPENSES AND LATER ON REIMBURSED BY THE APPELLA NT ON COST TO COST BASIS. 6. LD. CIT(A) CALLED FOR THE REMAND REPORT FROM AO. HE HAS EXTRACTED THE RELEVANT PORTIONS OF REMAND REPORT DATED 08/04/2009 IN PARA 7 OF HIS ORDER. IN THE REMAND REPORT, THE AO AFTER EXAMINING THE AS SESSEES CLAIM IN RESPECT OF VARIOUS PAYMENTS TO ITS AES, OBSERVED AS UNDER: - ITA NO. 1084/D/2011 4 IN VIEW OF THE ABOVE, IT IS STATED THAT, FIRSTLY ASSESSEE HAS NOT SUBMITTED THE SUPPORTING DOCUMENTS FOR THE EXPENSES INCURRED BY THE AES, SECONDLY NO DOCUMENTS ARE SUBMITTED TO PROVE THAT SUCH EXPENSES WERE INCURRED IN NORMAL COURSE OF BUSINESS ACTIVITY OF THE ASSESSEE, THIRDLY, THE TAXABILITY OF THE PAYMENT REQUIRED TO BE EXAMINED I N THE CASE OF THE ULTIMATE PAYERS AND FOURTHLY, AS ASSESSEE HAS NEITHER DEDUCTED THE TAX NOR OBTAINED ORDER U/S 195(2) NOR SUBMITTED THE UNDERTAKING AND CHARTERED ACCOUNTANT CERTIFICATE, THEREFORE, THE EXPENSES HAVE RIGHTLY BEEN DISALLOWED U/S 40(A)(I) OF THE ACT. 7. LD. CIT(A) GAVE A COPY OF THE REMAND REPORT TO A SSESSEES COUNSEL WHO IN REJOINDER, INTER-ALIA, SUBMITTED THAT NONE O F THE REIMBURSEMENTS MADE BY THE ASSESSEE QUALIFIED AS ROYALTY OR FEE FOR TEC HNICAL SERVICES. ACCORDINGLY, NO TAX WITH HOLDING WAS REQUIRED TO BE DONE ON ANY OF THE REIMBURSEMENTS. THE ASSESSEE SPECIFICALLY POINTED OUT THAT AO, WITHOUT GOING THROUGH THE COMPLETE DOCUMENTS SUBMITTED BY A SSESSEE, COMMENTED THAT THE ASSESSEE HAD SUBMITTED ONLY A SUMMARY OF EXPENSES ON PAGE 80 OF PAPER BOOK, BUT NO SUPPORTING DOCUMENTS AND THIR D PARTY INVOICES ARE ATTACHED. IT WAS FURTHER POINTED OUT THAT AT PAGE 80 TO 122 OF THE PAPER BOOK, THE ASSESSEE HAD SUBMITTED DOCUMENTARY EVIDEN CE IN THE FORM OF THIRD PARTY BILLS/INVOICES ON SAMPLE BASIS. LD. CIT(A) A FTER CONSIDERING THE REMAND ITA NO. 1084/D/2011 5 REPORT OF AO AND REJOINDER OF ASSESSEE, ADMITTED TH E ADDITIONAL EVIDENCE AND DISMISSED THE ASSESSEES APPEAL OBSERVING AS UNDER: - 7.4 I HAVE CONSIDERED THE WRITTEN SUBMISSION ON BEHALF OF THE APPELLANT, THE FINDINGS OF THE AO IN THE ASSESSMENT ORDER AS WELL AS IN THE REMAND REPORT AN D THE FACTS ON RECORD. FOR ANY EXPENDITURE TO BE PERMITTED AS DEDUCTION U/S 37(1) OF THE ACT THE TWI N CONDITIONS WHICH ARE REQUIRED TO BE FULFILLED ARE T HAT THE EXPENDITURE IN ISSUE SHOULD NOT BE OF A CAPITAL NATURE, AND THAT, IT SHOULD HAVE BEEN EXPENDED WHOL LY FOR THE PURPOSES OF BUSINESS. IT IS WELL SETTLED T HAT THE EXPRESSION FOR THE PURPOSES OF BUSINESS IN SECTIO N 37 OF THE ACT HAS BEEN HELD TO MEAN AND EXPENDITURE WH ICH IS VOLUNTARY IN NATURE AND COMMERCIALLY EXPEDIENT. IN THE PRESENT CASE THE ASSESSING OFFICER HAS GIVEN A FINDING OF THAT THE ASSESSEE COMPANY HAS NOT BEEN ABLE TO PROVE THAT THE REIMBURSEMENT OF EXPENSES TO THE ASSOCIATED ENTERPRISES WERE MADE IN THE COURSE OF BUSINESS OR ON ACCOUNT OF COMMERCIAL EXPEDIENCY. I ALSO FEEL THAT IF AT ALL THE APPELLANTS CLAIM IS B ONA FIDE, IT COULD HAVE PRODUCED DOCUMENTS IN THE FORM OF AUDITED FINANCIALS AND THE ASSESSMENT ORDER COMPLET ED IN THE NAME OF ITS ASSOCIATED ENTERPRISES SHOWING T HE INCLUSION OF RS. 1,21,54,146/- BEING THE REIMBURSEMENT RECEIVED FROM THE APPELLANT. IN THE ABSENCE OF ANY CLEAR EVIDENCE TOWARDS THIS, I AM OF THE CONSIDERED VIEW THAT THE AO FOR BEING NON-BUSINESS IN NATURE AND AL SO UNDER THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT . ITA NO. 1084/D/2011 6 THEREFORE, THE ACTION OF THE AO IS UPHELD AND GROUND OF APPEAL NO. 4 IS DISMISSED. 8. BEING AGGRIEVED WITH THE ORDER OF LD. CIT(A), TH E ASSESSEE IS IN APPEAL BEFORE US AND HAS TAKEN FOLLOWING GROUNDS OF APPEAL : - 1. REIMBURSEMENT OF EXPENSES MADE TO ASSOCIATED ENTERPRISES (AE) RS. 12,154,146/- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW: A) THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE ASSISTANT DIRECTOR OF INCOME TAX, CIRCLE 1(2), INTERNATIONAL TAXATION, NEW DELHI (THE LD. AO) OF RS. 12,154,146/- BEING THE REIMBURSEMENT OF EXPENSES TO AE U/S 40(A)(I) OF THE INCOME-TAX ACT, 1961 (THE ACT). B) THE LD. CIT(A) HAS FAILED TO TAKE COGNIZANCE OF THE DOCUMENTATION SUBMITTED BEFORE THE LD. AO SUPPORTING THAT THE REIMBURSEMENTS WERE PURELY ON COST TO COST BASIS, NOT GIVING RISE TO INCOME IN TH E HANDS OF AE AND, THEREFORE, NOT LIABLE TO WITHHOLDING TAXES U/S 195 OF THE ACT AND CONSEQUENTLY, THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT ARE NOT APPLICABLE. C) THE LD. CIT(A) HAS ERRED IN NOT APPRECIATING THE DETAILED SUBMISSION MADE BY THE APPELLANT SUPPORTING THE FACT THAT THE AFORESAID REIMBURSEMENT OF EXPENSES WERE FOR THE PURPOSE OF BUSINESS OF THE APPELLANT AND THEREFORE, DEDUCTIBLE U/S 37(1) OF THE ACT. ITA NO. 1084/D/2011 7 2. UNABSORBED DEPRECIATION RS. 2,081,601/- FOR A.Y. 2002-03 WITHOUT PREJUDICE TO GROUND NO. 1, THE LD. CIT(A) H AS ERRED IN NOT ALLOWING THE CLAIM OF SET OFF OF UNABSORBED DEPRECIATION AMOUNTING TO RS. 2,081,601/- BROUGHT FORWARD FROM AY 2002-03, BY OBSERVING THAT THE SAME DOES NOT PERTAIN TO THE AY 2005-06 UNDER APPEAL. 3. THE ORDER PASSED U/S 250(6) OF THE ACT IS WRONG AND BAD IN LAW. 4. THE LD. CIT(A) HAS ERRED IN LEVYING INTEREST U/S 23 4B, SECTION 234D AND SECTION 234A OF THE ACT. 9. LD. COUNSEL FOR THE ASSESSEE REFERRED TO PAGE 11 OF THE PAPER BOOK, WHEREIN THE APPENDIX C TO FORM NO. 3CEB CONTAININ G DETAILS/PARTICULARS IN RESPECT OF ANY OTHER TRANSACTION IS CONTAINED. I N THIS CHART SUMMARY OF EXPENSES REIMBURSED TO DIFFERENT AES IS GIVEN. LD . COUNSEL FURTHER REFERRED TO PAGE 66 TO 68 OF THE PAPER BOOK, WHEREIN THE DET AILS OF EXPENSES INCURRED BY AES ARE CONTAINED. LD. COUNSEL FURTHER REFERRED TO PAGE 80 ONWARDS TO DEMONSTRATE THAT THE COPIES OF THE BILLS WERE ALSO FILED IN RESPECT OF THE VARIOUS EXPENSES REIMBURSED TO AES. HE, THEREFORE, SUBMITTED THAT LD. CIT(A), WITHOUT EXAMINING THE DETAILS, OBSERVED THA T IF AT ALL THE ASSESSEES CLAIM WAS BONA FIDE, IT COULD HAVE PRODUCED DOCUMEN TS IN THE FORM OF AUDIT REPORT AND ASSESSMENT ORDER COMPLETED IN THE NAME O F ITS ASSOCIATED ENTERPRISE SHOWING THE INCLUSION OF RS. 1,21,54,146 /- BEING THE ITA NO. 1084/D/2011 8 REIMBURSEMENT RECEIVED FROM THE ASSESSEE. HE SUBMI TTED THAT THE ENTIRE DISALLOWANCE HAS BEEN MADE AS THE DETAILS HAVE NOT PROPERLY BEEN EXAMINED. 10. LD. DR RELIED ON THE ORDER OF LD. CIT(A). 11. WE HAVE CONSIDERED THE SUBMISSION OF BOTH THE P ARTIES AND HAVE PERUSED THE RECORD OF THE CASE. AS NOTED EARLIER, BEFORE LD. CIT(A) THE ASSESSEE HAD SPECIFICALLY ASSAILED THE OBSERVATIONS OF AO THAT ASSESSEE HAD FILED ONLY SUMMARY OF EXPENSES. ITS PLEA WITH REFERENCE TO PAGES 80 TO 122 OF THE PAPER BOOK HAS NOT AT ALL BEEN CONSIDERE D BY LD. CIT(A). IF AO HAD NOT EXAMINED THE EVIDENCE PROPERLY THEN LD. CIT (A) COULD CALL FOR A FURTHER REMAND REPORT AFTER CONSIDERING THE ASSESSE ES SUBMISSIONS. UNDER SUCH CIRCUMSTANCES, WE ARE OF THE OPINION THAT CONS IDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, IT IS NECESSARY THAT FRE SH REMAND REPORT BE CALLED FOR FROM THE ASSESSING OFFICER INVITING HIS COMMENT S ON THE DOCUMENTARY EVIDENCE IN THE FORM OF THIRD PARTY BILLS/INVOICES SUBMITTED BY THE ASSESSEE. FURTHER, WE FIND THAT LD. CIT(A) HAS NOT GIVEN ANY FINDINGS AS TO HOW THE PROVISIONS OF SECTION 40(A)(I) ARE APPLICABLE TO AS SESSEES CASE IN THE BACKDROP OF ASSESSEES PLEA THAT REIMBURSEMENT OF E XPENSES CANNOT BE CONSTRUED AS A FEE FOR SERVICES RENDERED SINCE WHAT IS ACHIEVED BY A REIMBURSEMENT IS A REPAYMENT OF WHAT HAS ALREADY BE EN SPENT AND IS NOT A ITA NO. 1084/D/2011 9 REWARD OR COMPENSATION FOR SERVICES RENDERED. WE F IND THAT LD. CIT(A)S ORDER IS COMPLETELY NON-SPEAKING ON THIS COUNT. UN DER SUCH CIRCUMSTANCES, WE SET ASIDE THE ORDER OF LD. CIT(A) AND RESTORE BA CK THE MATTER TO HIS FILE TO CALL FOR A REMAND REPORT FROM AO IN RESPECT OF VARI OUS DOCUMENTS ON WHICH HE DID NOT COMMENT IN SPITE OF THE SAME BEING FILED BEFORE HIM IN ACCORDANCE WITH LAW. FURTHER LD. CIT(A) WILL ALSO DECIDE REGARDING APPLICABILITY OF SECTION 40(A)(I) IN ASSESSEES CAS E. 12. IN VIEW OF THE ABOVE DISCUSSION, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 13. APROPOS GROUND NO. 2, BEFORE LD. CIT(A), THE AS SESSEE HAD, INTER-ALIA, TAKEN FOLLOWING GROUND OF APPEAL: - 5. WITHOUT PREJUDICE TO THE GROUNDS ABOVE 1 TO 4 THE APPELLANT SUBMITS THAT THE AO HAS ERRED IN NOT ALLOWING THE CLAIM OF UNABSORBED DEPRECIATION AMOUNTING TO RS. 2,081,601/- RESULTING FROM THE REVISED RETURN OF INCOME BY THE APPELLANT FOR AY 2002-03 WHICH WAS DULY ACCEPTED BY THE AO. 14. LD. CIT(A) DISMISSED THE ASSESSEES GROUND OF A PPEAL, INTER-ALIA, OBSERVING THAT SINCE THE GRIEVANCE OF THE ASSESSEE PERTAINS TO THE AY 2002- 03 AND NOT TO THE AY 2005-06. THEREFORE, THE SAME CANNOT BE ENTERTAINED IN THE PROCESS OF ADJUDICATION OF THE PRESENT APPEAL. ITA NO. 1084/D/2011 10 15. WE ARE NOT INCLINED TO ACCEPT THIS REASONING OF LD. CIT(A) BECAUSE IF AO HAS NOT ALLOWED SET OFF OF UNABSORBED DEPRECIATI ON IN ACCORDANCE WITH LAW THEN THE SAME CAN BE AGITATED BEFORE LD. CIT(A) . THEREFORE, LD. CIT(A) SHOULD HAVE ADJUDICATED THIS ISSUE. MOREOVER, UNAB SORBED DEPRECIATION IS TO BE ALLOWED AS PART OF CURRENT DEPRECIATION AND ON T HIS COUNT ALSO ASSESSEES CLAIM SHOULD HAVE BEEN ADJUDICATED. 16. CONSIDERING THE ENTIRETY OF FACTS AND CIRCUMSTA NCES OF THE CASE, WE RESTORE THIS GROUND TO THE FILE OF AO TO VERIFY THE ASSESSMENT RECORDS FOR AY 2002-03 AND DECIDE THE ASSESSEES CLAIM IN ACCORDAN CE WITH LAW. 17. IN THE RESULT, THIS GROUND IS ALLOWED FOR STATI STICAL PURPOSES. 18. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 14/12/2012 SD/- SD/- (U.B.S. BEDI) JUDICIAL MEMBER (S.V. MEHROTRA) ACCOUNTANT MEMBER DATED: 14/12/2012 *KAVITA ITA NO. 1084/D/2011 11 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. TRUE COPY BY ORDER ASSISTANT REGISTRAR