Transitions Optical India Private Limited, Bangalore V. ACIT, Bangalore

ITA 880/BANG/2011

• Counselvise Citation: 88021114 RSA 2011
• Duration Of Justice: 11 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 10-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A SUNDARARAJAN
• Assessee Lawyers: K R GIRISH
• Keywords: Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE C BENCH, BANGALORE BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V.VASUDEVAN, JUDICIAL MEMBER I.T.A.NO.880(B)/2011 (ASSESSMENT YEAR : 2007-08) M/S TRANSITIONS OPTICAL INDIA PVT.LTD., FIRST FLOOR, ROYALE MANOR, NO.48, ST. JOHNS HOSPITAL ROAD, BANGALORE-560 042 PAN NO.AABCT 2529D APPELLANT VS THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-12(4), BANGALORE. RESPONDENT ASSESSEE BY : SHRI K.R.GIRISH, CA REVENUE BY : SHRI A. SUNDARA RAJAN, JCIT DATE OF HEARING : 24 -09-2012 DATE OF PRONOUNCEMENT : -09-2012 O R D E R PER SHRI N.V.VASUDEVAN, JM: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 26- 07-2011 OF CIT(A)-III, BANGALORE, RELATING TO ASSES SMENT YEAR 2007- 08. 2. GROUND NO.1 RAISED BY THE ASSESSEE READS AS FOLL OWS; 1.THE CIT(A) HAS ERRED IN UPHOLDING THE DISALLOWAN CE OF INR 246,932/- BEING COST TO COST REIMBURSEMENT OF E XPENSES TO GROUP COMPANY AND PAYMENT FOR SERVICES TO GOOD I MAGES MARKETING PTE LTD.,(SINGAPORE) ON ACCOUNT OF NON-DE DUCTION OF TAX AT SOURCE. ITA NO.880(B)/2011 2 3. THE ASSESSEE IS A COMPANY ENCAGED IN THE PRODUC TION, PROCESSING AND TRADING IN OPHTHALMIC LENSES. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICE THAT THE ASSESSEE MADE A PAYMENT OF RS.95,515/- TO M/S TRANSITIONS OPTICALS INDIA PTE L TD., SINGAPORE AND ANOTHER SUM OF RS.1,51,417/- TO M/S GOOD IMAGES MARKETING PTE LTD., SINGAPORE. BOTH THE RECEIPIENTS OF THE A FORESAID PAYMENTS WERE NON-RESIDENT. SINCE THE AFORESAID PAYMENTS WER E MADE TO NON- RESIDENTS, THE AO WAS OF THE VIEW THAT THE ASSESSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE ON THE PAYMENTS SO MADE AS P ER THE PROVISIONS OF SEC.195 OF THE INCOME TAX ACT, 1961 ( THE ACT). SINCE THE ASSESSEE HAD NOT DEDUCTED TAX AT SOURCE, THE AO DISALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF THE AFORESAI D SUMS, WHILE COMPUTING THE TOTAL INCOME. THE AO DID NOT MAKE AN Y REFERENCE TO ANY PROVISION OF LAW UNDER WHICH HE MADE DISALLOWAN CE. APPARENTLY, THE AO RELIED ON THE PROVISIONS OF SEC. 40(A)(I) OF THE ACT. IT IS NOT IN DISPUTE BEFORE US THAT THESE PROVISION S WOULD BE ATTRACTED ONLY WHEN THE AMOUNT PAID BY THE ASSESSEE IS CHARGEABLE TO TAX IN INDIA IN THE HANDS OF THE NON-RESIDENT. 4. BEFORE THE CIT(A), THE ASSESSEE POINTED OUT THA T THE SUM OF RS.95,515/- PAID TO M/S TRANSITIONS OPTICAL INDIA P TE, SINGAPORE, WAS REIMBURSEMENT OF EXPENSES INCURRED BY THE SAID COMPANY ON BEHALF OF THE ASSESSEE. IT WAS POINTED OUT THAT WHE RE THERE IS REIMBURSEMENT OF COST THERE CAN BE NO INCOME CHARGE ABLE TO TAX ATTRACTING THE PROVISIONS OF SEC.40(A)(I) OF THE AC T. IN THIS REGARD, THE ASSESSEE HAD POINTED OUT THAT SINGAPORE COMPANY HAD BROUGHT OUT AN ADVERTISEMENT IN A MAGAZINE OPTIC PLUS ON BEHALF OF THE ASSESSEE AND THE SUM PAID TO THE SAID SINGAPORE COMPANY WAS NOTHING BUT RE-IMBURSEMENT OF SUCH COST. AS FAR AS SUM OF RS.1 ,51,417/- PAID TO M/S GOOD IMAGES MARKETING PTE, SINGAPORE, THE AS SESSEE POINTED OUT THAT THIS SINGAPORE COMPANY HAD PURCHASED A U.V LAMPS AND PRINTED ASSESSEES LOGO ON IT. IT WAS SUBMITTED T HAT U.V.LAMPS ARE TO BE PROVIDED TO THE DISTRIBUTORS TO HELP THEM DEM ONSTRATE TO THEIR ITA NO.880(B)/2011 3 CUSTOMERS, THE LENSES CAPABILITY TO FILTER U.V RAYS . IT WAS ALSO SUBMITTED THAT THE ASSESSEE MERELY REIMBURSED THE C OST TO THE SINGAPORE COMPANY AND THERE IS NO ELEMENT OF INCOME EMBEDDED IN SUCH REIMBURSEMENT. THE BILL OF ENTRY FOR HOME CONS UMPTION EVIDENCING IMPORT OF THESE U.V.LAMPS FROM SINGAPORE WAS ALSO FILED. 5. APART FROM THE AFORESAID SPECIFIC ARGUMENTS, TH E ASSESSEE ALSO TOOK A STAND THAT THE REVENUE AUTHORITIES HAVE PROC EEDED ON THE FOOTING THAT PAYMENT IN QUESTION BY THE ASSESSEE TO THE SINGAPORE COMPANIES WERE A PAYMENT FOR RENDERING TECHNICAL SE RVICES BY THE SINGAPORE COMPANY. IN THIS REGARD, THE ASSESSEE SU BMITTED THAT AS PER ARTICLE-12(4) OF THE INDIA SINGAPORE TREATY FE ES FOR TECHNICAL SERVICES (FTS) CAN BE BROUGHT TO TAX ONLY IF SUCH SERVICES (MAKE AVAILABLE) TECHNICAL KNOWLEDGE, EXPERIENCE, SKILLS, ETC., TO THE RECIPIENT OF THE SERVICES AND ONLY THEN THE PAYMENT CAN BE SAID TO BE A PAYMENT FOR FTS. THE ASSESSEE SUBMITTED THAT T HE SINGAPORE COMPANY DID NOT MAKE AVAILABLE ANY TECHNICAL KNOWLE DGE, EXPERIENCE, SKILLS ETC. TO THE ASSESSEE FOR WHICH T HE ASSESSEE MADE PAYMENTS. 6. THE CIT(A) HOWEVER DID NOT DEAL WITH ANY OF THE SE SUBMISSIONS. ON THE OTHER HAND, THE CIT(A) SUSTAINED THE ADDITIO N MADE BY THE AO BY OBSERVING AS FOLLOWS; 6.3 THE AMOUNT OF RS.95,515/- PAID TO TRANSITIONS OPTICALS PTE LTD., SINGAPORE WAS TOWARDS COST TO COST REIMBURSEM ENT FOR SERVICES AVAILED. SIMILARLY, THE PAYMENT OF RS.1,51 ,417/- TO GOOD IMAGES MARKETING PTE LTD., SINGAPORE IS TOWARD S PURCHASE OF GOODS ALONG WITH LOGO PRINTING SERVICES. I AM OF THE OPINION THAT GIVEN THE FACT THAT THE SE RVICES WERE AVAILED BY THE APPELLANT, TAX SHOULD HAVE BEEN DEDU CTED AT SOURCE ON THE PAYMENTS UNDER THE ACT AND THE TREATY . IN SUCH VIEW OF THE MATTER, THE ACTION OF THE AO IS UPHELD WITH RESPECT TO THESE TWO TRANSACTIONS. 7. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSES SEE HAS RAISED GROUND NO.1 BEFORE THE TRIBUNAL. ITA NO.880(B)/2011 4 8. WE HAVE HERD THE SUBMISSIONS OF THE LEARNED COU NSEL FOR THE ASSESSEE, WHO REITERATED THE STAND OF THE ASSESSEE AS WERE PUT FORTH BEFORE THE CIT(A). THE LEARNED DR RELIED ON THE OR DER OF THE CIT(A). 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FROM THE EVIDENCE ON RECORD, IT IS CLEAR THAT A SUM OF RS.95,515/- IS CO ST TO COST REIMBURSEMENT OF EXPENSES INCURRED BY THE SINGAPORE COMPANY AS SALES PROMOTION EXPENSES. THE PAYMENTS MADE TO GOOD IMAGES MARKETING, SINGAPORE IS FOR PURCHASE OF U.V. LAMPS WITH THE LOGO OF ASSESSEE PRINTED ON IT. THE BILL OF ENTRY FILED BY THE ASSESSEE CLEARLY BRINGS OUT THE FACT THAT IT WAS A CASE OF PURCHASE AND THERE WAS NO RENDERING OF ANY TECHNICAL SERVICES BY THE NON-RESI DENT. SINCE THE PAYMENT MADE BY THE ASSESSEE TO THE NON-RESIDENT WA S NOT CHARGEABLE TO TAX IN INDIA IN THE HANDS OF THE NON- RESIDENT, PROVISIONS OF SEC.195(1) OF THE ACT WERE ATTRACTED. CONSEQUENTLY, NO DISALLOWANCE U/S 40(A)(I) OF THE ACT WOULD BE MADE . WE THEREFORE, DELETE THE DISALLOWANCE MADE BY THE REVENUE AUTHORI TIES. GROUND NO.1 RAISED Y THE ASSESSEE IS ALLOWED. 10. GROUND NO.2 RAISED Y THE ASSESSEE READS AS FOL LOWS; 2. THE CIT(A) HAS ERRED IN UPHOLDING THE DISALLOW ANCE OF INR 1,121,660/- BEING MARKET RESEARCH EXPENSES, HOL DING THE SAME TO BE IN THE NATURE OF CAPITAL EXPENDITURE . 11. THE ASSESSEE HAD MADE A PAYMENT OF RS.7,27,695 /- TO TNS INDIA PVT.LTD., AND ANOTHER SUM OF RS.3,93,965/- TO M/S IMRB INTERNATIONAL. THE ASSESSEE CLAIMED AS DEDUCTION OF THE AFORESAID SUMS TOTALING RS.11,21,660/- BEING PAYMENTS TO AFOR ESAID TWO COMPANIES, WHILE COMPUTING ITS TOTAL INCOME. THE ASSESSEE CLAIMED THAT THE AFORESAID EXPENSES WERE MARKET RESEARCH EX PENSES. THE AO WAS OF THE VIEW THAT THE EXPENDITURES RESULTED IN A N ENDURING BENEFIT TO THE ASSESSEE AND THEREFORE, WAS CAPITAL EXPENDI TURE AND CANNOT BE ALLOWED AS DEDUCTION. THE CIT(A) CONFIRMED THE ORDER OF THE AO AND IN DOING SO, FOLLOWED THE DECISION OF THE HONB LE DELHI HIGH ITA NO.880(B)/2011 5 COURT IN THE CASE OF TRIVENI ENGINEERING WORKS LTD ., VS CIT 232 ITR 639 (DEL.). 12. THE PLEA OF THE ASSESSEE BEFORE US WAS THAT TH E ASSESSEE IS ENCAGED IN THE BUSINESS OF IMPORTING AND TRADING IN OPTICAL LENSES SINCE 2000. DURING THE YEAR UNDER CONSIDERATION, W ITH THE INTENTION OF ANALYZING THE LEVEL OF BRAND AWARENESS OF ITS PR ODUCTS, THE ASSESSEE AVAILED THE SERVICES OF BUSINESS CONSULTAN TS TO CARRY OUR MARKET RESEARCH ACTIVITIES. SUCH RESEARCH EXPENSE S WERE UNDERTAKEN TO GET AN UNDERSTANDING OF THE CONSUMER AND THE MARKET. THE ASSESSEE UNDERTAKES SIMILAR RESEARCH EV ERY YEAR TO UNDERSTAND THE LATEST TRENDS AND THE MARKET IN GENE RAL. THE EXPENDITURE INCURRED BY THE ASSESSE FOR VARIOUS ASS ESSMENT YEARS IS AS TABULATED BELOW: FIN YEAR MARKET RESEARCH EXPENSES(INR) TURNOVER (INR) MARKET RESEARCH EXPENSES AS A PERCENTAGE OF TURNOVER 2006-07 1,121,660 107,653,641 1.40% 2007-08 2,000,917 142,187,796 1.41% 2008-09 1,468,251 385,624,178 0.38% IT WAS OF FURTHER SUBMITTED THAT IN THE EARLIER YEA RS, THE AO HAS NOT MADE ANY DISALLOWANCE OF SIMILAR EXPENSES. RELIANC E WAS PLACED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF EMPIRE JUTE CO.,LTD., (1980) 3 TAXMAN 69(SC), BESIDES, THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF HINDUST AN MAHINE TOOLS LTD., 40 TAXMAN 43(KAR). THE LEARNED DR RELI ED ON THE ORDERS OF THE CIT(A) FROM THE DECISION IN THE CASE OF TRIV ENI ENGG. WORKS LTD., SUPRA. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FRO M THE READING OF THE AOS ORDER IT IS CLEAR THAT HE HAS PROCEEDED ON THE BASIS THAT THE EXPENDITURE IN QUESTION WOULD BRING ENDURING BENEFI T TO THE ASSESSEE FOR A PERIOD BEYOND THE PREVIOUS YEAR. IN OUR VIEW, THIS IS ITA NO.880(B)/2011 6 NOT THE BASIS ON WHICH IT CAN BE SAID THAT THE EXPE NDITURE WAS CAPITAL EXPENDITURE. IT HAS NOT BEEN DENIED THAT T HE PAYMENTS WERE MADE TO PERSONS ENGAGED IN MARKET RESEARCH AND THAT THE AMOUNT IN QUESTION WAS PAID FOR ANALYZING THE LEVEL OF BRAND AWARENESS OF THE ASSESSEES PRODUCT. SUCH UNDERSTANDING OF THE CON SUMER AND THE MARKET EXPENSES INCURRED FOR DOING SO ARE PURELY RE VENUE EXPENSES. THE BOMBAY BENCH OF THE TRIBUNAL IN THE CASE OF MIR C ELECTRONIC WORKS LTD., IN ITA NO.1652/MUM/2010 HAS HELD THAT S PENDING MONEY FOR ANALYSIS OF MARKET AND TRENDS IN THE MARK ET IS REVENUE EXPENDITURE. SO ALSO THE DELHI BENCH OF THE TRIBU NAL IN THE CASE OF KJS INDIA (P)LTD.,(2011) 45 SOT 17, TAKEN A SIMILAR VIEW. WE ARE ALSO OF THE VIEW THAT THE DECISION OF THE HONBLE D ELHI HIGH COURT IN THE CASE OF TRIVENI ENGG.WORKS LTD., (SUPRA) IS NOT APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. THE EXPENDITURE IN THAT CASE, WAS IN CONNECTION WITH MANUFACTURE OF A NEW PRODUCT, WHERE AS THE EXPENDITURE IN THE CASE OF THE ASSESEEE IN THIS APP EAL IS IN RESPECT OF EXISTING PRODUCT. FOR THE REASONS GIVEN ABOVE, W E DIRECT THAT THE EXPENDITURE IN QUESTION BE ALLOWED AS DEDUCTION. 14. IN THE RESULT, THE APPEAL FILED BY THE ASSESSE E IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON TH DAY OF SEPT., 2012. (N. BARATHVAJA SANKAR) (N.V.VASUDEVAN) VICE PRESIDENT JUDICIAL MEMBER PLACE: BANGALORE DATED: AM* COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3. CIT(A) 4. CIT 5. DR 6. GF(BLORE) 7. GF(DELHI) BY ORDER SR. PRIVATE SECRETARY, ITAT, BANGALORE