Income Tax Appellate Tribunal - Mumbai
Kitara Capital P. Ltd, Mumbai vs Ito 6(3)(2), Mumbai on 21 June, 2017
आयकर अपीऱीय अधिकरण, मुंबई न्यायपीठ "के" मुंबई
IN THE INCOME TAX APPELLATE TRIBUNAL "K" BENCH, MUMBAI
BEFORE SHRI G.S.PANNU, AM AND SHRI SAKTIJIT DEY, JM
श्री जी.एस. पन्नू, ऱेखा सदस्य एवं श्री शक्तिजीि दे न्याययक सदस्य
I.T.A. No.130/Mum/2014
(निर्धारण वर्ा / Assessment Year : 2010-11)
M/s Kitara Capital Private Limited, बनाम/ Income Tax Officer -Ward 6(3)(2),
507, Ceejay House, 5th floor, Aaykar Bhavan,
Dr.A B Road, Shiv Sagar Estate, Vs. M K Road, Near Churchgate,
Worli, Mumbai-400020
Mumbai-400018
ऱेखा सं.:PAN : AACCH2339E
अपीऱधर्थी ओर से / Assessee by Shri Ajay R Singh
प्रत्यर्थी की ओर से/Revenue by Shri Saurabh Deshpande
सन
ु वाई की तारीख / Date of Hearing : 2.5.2017
घोषणा की तारीख /Date of Pronouncement : .6.2017
आदे श / O R D E R
PER SAKTIJIT DEY, Judicial Member:
Captioned appeal of the assessee is directed against the order dated 22.11.2011 of CIT(A)-15, Mumbai for the assessment year 2010-11.
2. In ground no.1 of the appeal, assessee has challenged the disallowance of deduction claimed u/s 35D of the Income Tax Act, 1961 (the Act). 2
ITA 130/M/2014
3. Briefly stated facts are, the assessee a domestic company is engaged in the business of advisory services relating to carrying out research for private equity investments. During the course of assessment proceedings, the AO noticing that the assessee has claimed deduction of an amount of Rs.1,16,03,152/- under section 35D of the Act called upon the assessee to justify its claim. After perusing the submissions of the assessee along with the details submitted, the AO found that the assessee had entered into an agreement for lease of premises on 10.6.2009 and for furniture on 18.1.2010. The AO observed, in absence of furniture and fixture in the office, the assessee could not have started/commenced its business operation. He therefore, was of the opinion that the expenditure incurred prior to the date of execution of the furniture agreement dated 18.1.2010 are in the nature of pre-operative expenses. Therefore, he directed the assessee to show cause as to why the expenditures claimed being in the nature of pre-operative expenses should not be restricted to the amount as per the provisions of section 35D of the Act. Though the assessee objecting to proposed disallowance submitted that it has commenced its business activity from June, 2009 and the expenditure incurred were after commencement of the business activities, however, the AO rejecting the claim of the assessee worked out the allowable expenses u/s 35D at Rs.9,95,000/- and restricted the deduction to 1/5th of the allowable expenses so worked out by quantifying it at Rs.1,99,000/-. Resultantly, the excess amount of 3 ITA 130/M/2014 Rs.1,06,08,152/- out of the expenditure claimed by the assessee was added back to the total income of the assessee. Assessee challenged the disallowance before the ld.CIT(A). However, ld.CIT(A) also sustained the addition by observing that the assessee had not produced supporting evidence to establish that the business has commenced from June 2009.
4. The ld. AR submitted that the assessee has entered into the agreement for leave and license of premises for commencing its advisory business on 10.6.2009. He submitted, the subsequent agreement for lease of furniture executed on 10.1.2010 refers to the lease agreement dated 10.6.2009. He submitted, debit note issued by the assessee clearly establishes the commencement of the business from June, 2009 as they are for expenditure incurred from June, 2009 onwards. He submitted, though the assessee raised the sale invoice in December, 2009, however, it pertained to the expenditures incurred towards the services rendered from June, 2009 onwards. The ld. AR submitted, as per the agreement assessee was to be remunerated at cost plus 17.5%. In this context, the ld.AR drew our attention to the debit note raised by the assessee. He also referred to the bank statement to demonstrate that assessee was receiving funds from AE and other group entities for the purpose of incurring expenditures for the period prior to incurred the expenditures for the period prior to commencement of operation. The ld. AR submitted, though, in the course of assessment proceedings as well as proceedings before the FAA, 4 ITA 130/M/2014 the assessee has produced material to demonstrate that commencement of business has started from June, 2009, the departmental authorities have not properly appreciated the evidences produced. To demonstrate that the business has commenced from June, 2009 and the expenditures were after commencement of the business, the ld. AR relied upon the report of the Independent Auditor.
4. At this stage when the bench raised a query regarding the observations of the ld.CIT(A) that assessee failed to produce supporting evidence to justify its claim, that it is rendering advisory services between the period from June 2009 to December, 2009 and what are evidences to justify such claim, the ld. AR admitted the fact that such details were not produced before the departmental authorities and sought indulgence of the Bench to produce certain documentary evidences to demonstrate that it is rendering services from June, 2009 onwards, which could establish the commencement of business. He requested the Bench to admit them as additional evidence and remit the matter back to the file of the AO for adjudicating the issue afresh after assessing the evidences as may be placed by the assessee before the AO.
6. Ld.DR submitted, since the assessee was not able to produce any evidence before the AO and ld.CIT(A), in spite of adequate opportunity being given such evidence should not be admitted now. Relying upon the observations 5 ITA 130/M/2014 of the CIT(A) and AO, the ld.DR submitted, the assessee having failed to establish the commencement of the business from June, 2009, deduction claimed by the assessee prior to commencement of business cannot be allowed fully. He, therefore, submitted, the decision of the ld.CIT(A) be affirmed.
5. We have considered the rival submissions and perused the material on record. As could be seen, the dispute in relation to assessee's claim of deduction u/s 35D arises in limited context; viz, when the business of the assessee can be said to have commenced. Though, the assessee has claimed that the business has commenced from June, 2009, however, the AO has rebutted the claim relying upon the furniture agreement executed on 18.1.2010 by observing that the business could not have commenced without furniture and fixtures. Whereas, taking note of the fact that the first sale invoice was raised by assessee in December, 2009 and in absence of any other evidence relating to commencement of business the CIT(A) has allowed assessee's claim of deduction u/s 35D from December, 2009. As could be seen from material on record, neither before the AO nor before the ld. CIT(A), the assessee has brought any evidence to conclusively prove the fact that it has commenced its business activities by rendering any advisory services from June, 2009. In fact, only in response to the query raised by the Bench the assessee had furnished certain documentary evidences by way of additional evidence to demonstrate that it has 6 ITA 130/M/2014 rendered advisory services from June, 2009. Undisputedly, these evidences were not filed either before the AO or before the ld.CIT(A). However, considering the fact that these evidences may have crucial bearing for determining the actual date of commencement of assessee's business, we are inclined to admit the additional evidences. However, these documents were not filed before the departmental authorities. Therefore, to give a fair chance to the department, we are inclined to remit the issue to the file of the AO for fresh adjudication after examining the evidences furnished by the assessee on their own merit. Suffice to say, if the assessee through evidence is able to establish that it has started rendering advisory services from June,2009 onwards then its claim of deduction u/s 35D would be eligible . The AO must afford reasonable opportunity of being heard to the assessee before deciding the issue afresh.
6. In ground no.2, assessee is challenging the decision of ld.CIT(A) in upholding the disallowance of Rs.8,23,275/- made by the AO u/s 40(a)(ia) of the Act.
7. Briefly stated facts are, during the assessment proceedings the AO noticed that assessee had debited an amount of Rs.8,23,275/- towards subscription fees to M/s Bloomberg Data Services India Pvt.Ltd which according to the AO is in the nature of payments towards professional services hence, liable for TDS u/s 194J, . Therefore, he called upon the assessee to explain why the payments should not be disallowed u/s 40(a)(ia) of the Act for failure to 7 ITA 130/M/2014 deduct tax at source while making the payments. In response, it was submitted by the assessee that the payment made by the assessee to M/s Bloomberg Data Services India Pvt.Ltd was not for any managerial or technical consultancy services. It was submitted, such data is accessible by any subscriber on payment of requisite fee. He, therefore submitted, the payment made does not attract the provisions of section 194J of the Act. However, the AO, did not find merit in the submissions of the assessee and disallowed an amount of Rs.8,23,275/- u/s 40(a)(ia) of the Act. Though the assessee challenged the decision of the AO before the ld.CIT(A), he refused to interfere with the same.
8. The ld. AR submitted that the payment made by the assessee is merely for accessing the data of the payee company. It was submitted, since the payment made was for terminal charges for online information and data base access and retrieval services, no TDS u/s 194J was required to be deducted since such payments was for subscription of financial e-magazine. The ld. AR submitted that the ITAT, Mumbai Bench in the case of M/s. India Capital Markets P. Ltd. V/s DCIT in ITA.No.2948/Mum/2010 and 4851/Mum/2010( Ay 2006-2007) dated 12-12-2012 while considering similar payment made to the same company has held that such payments do not require deduction of tax at source u/s 194J. The ld. AR submitted even otherwise also, the payee has certified that the payments received by it have been shown as income and due tax has been paid. Therefore, since payee has already treated it as income and has paid taxes, no 8 ITA 130/M/2014 deduction u/s 40(a)(ia) can be made in view of the second proviso to section 40(a)(ia).
9. The ld.DR supporting the decision of the departmental authorities submitted that the payments made by the assessee is in the nature of royalty, hence liable, for deduction at source. u/s 194J of the Act. For the said proposition, he relied upon the decision of Karnataka High Court in the case of CIT V/s Samsung Electronics Co.Ltd (2011) 16 taxmann.com 141 (Kar).He also relied upon the decision of Authority for Advance Rulings (Income Tax) New Delhi in the case of Cargo Community Network Pte Ltd in AAR No.688 of 2006 dated 22.1.2007.
10. We have heard the parties and perused material placed on record. After analyzing the relevant facts we have noted that the subscription fee paid by the assessee to M/s Bloomberg Data Services India Pvt.Ltd data service was for accessing the database and is in the nature of subscription of e- magazine/journal. Therefore, the payment made cannot be treated as royalty or Fees Paid for Technical Services coming within the purview of section 194J. Notably, the aforesaid view has also been expressed by the Co-ordinate Bench of the Tribunal in the case of M/s. India Capital Markets P. Ltd (supra). Even otherwise also, the ld.DR has failed to controvert the contention of the assessee that the payee has offered the income received towards subscription charges as in the return filed by it. In the aforesaid view of the matter, neither there is 9 ITA 130/M/2014 requirement for the assessee to deduct tax at source on payment towards subscription charges paid to M/s Bloomberg Data Services India Pvt.Ltd. nor the assessee can be treated as an assessee in default u/s 201(1) read with sec.40(a)(ia). Consequently, the disallowance made u/s 40(a)(ia) cannot be made. Ground raised by the assessee is allowed.
11. In ground no.3, assessee has challenged the addition made of Rs.14,64,898/- on account of transfer price adjustment.
12. Briefly stated facts are, as discussed earlier the assessee is in the business of advisory services. During the relevant previous year, the assessee entered into international transaction of provision of advisory services to its AE. The assessee conducted an independent TP analysis by adopting Transactional Net Market Method (TNMM) as the most appropriate method. The assessee selected 11 companies as comparables with average margin of 22.60% as compared to 17.50% shown by it. Therefore, price charged for international transaction to the AE was found to be at Arm's Length. The AO, however, was not agreeable to the Transfer Price analysis made by the assessee. He was of the view that certain comparables selected by the assessee were not having data for the year ending March, 2009 and 2010, hence, the arithmetical mean in respect of the comparables can not be determined. According to the AO those comparables are to be ignored. In respect of three other comparables, the AO found that they have negative markup, therefore cannot be compared with the assessee. Thus, 10 ITA 130/M/2014 he finally found three companies having positive margin to be comparables with the assessee. The Arithmetic mean of these comparables worked out to 22.60%. By adding further 5% to the arithmetic mean of 22.60% of the three comparables AO worked out the margin of the comparables at 27.60%. Thereafter, by applying the margin of 27.60% to the total expenses/cost of Rs.1,45,03,938/-,he worked out profit at Rs.40,03,087/-. The assessee having shown mark up of Rs.25,38,189/-, the difference of Rs.14,64,898/- was treated as adjustment to Arms Length Price. Though, the assessee challenged the Transfer Price adjustment before the FAA, has also confirmed the addition.
13. The ld. AR reiterated the stand taken before the lower authorities and submitted that assessee has shown margin of 17.50% which is within +/- 5% of the margin shown at 22.60% of comparables retained by TPO. Therefore, the adjustment made by the TPO by adding further 5% to the arithmetic mean of the comparables is unfair and unjust, hence should be struck down. The ld.AR submitted, the Co-ordinate Bench in case of Carlyle India Advisors (P) Ltd V/s ACIT (2016) 66 taxman.com 14 (Mumbai-Trib) which is in identical nature of business has acquitted the margin shown at. The ld. AR submitted in comparison assessee has shown margin of 17.50%. Therefore, it should be treated to be at ALP.
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ITA 130/M/2014
14. On the other hand, the ld.DR submitted that average margin retained by the AO on single year data would be 27.60%, therefore, the AO has applied that margin to work out the profit of the assessee. He submitted, the financial data for the current financial year is available in respect of only one comparable ie. Crisil Risk and Infrastructure Solutions Ltd which is at 27.44%. Therefore, the margin worked out by the AO is appropriate.
15. We have considered the submissions of the parties and perused the material on record. As could be seen from the observations of the AO in the assessment order, he has considered the arithmetic mean of three comparable i.e. Crisil Risk and Infrastructure Solutions Ltd, Future Capital Investment Advisors Ltd and ICRA Management Consulting Services Ltd on the basis of multiple year data to work out the average arithmetic mean of 22.60%. Surprisingly, he had added 5% to the arithmetic mean of the three companies to determine the markup at 26.20% and applied the same markup to work out the profit of the assessee. When the AO himself has accepted the average arithmetic mean of three comparables on multiple year data at 22.60%, there is no reason to add further 5% to the said arithmetic mean to arrive at markup of 26.20%. We are unable to understand under which method as provided under Rule 10B, the AO can make such addition to the average arithmetic mean of the comparables. Thus, the profit worked out by applying the markup of 26.20% 12 ITA 130/M/2014 being contrary to statutory provisions cannot be sustained. Resultantly, the TP adjustment made on that basis would not survive. Accordingly, we delete the addition. This grounds is allowed.
16. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 6.2017. (जी.एस. पन्नू /G.S.PANNU) (शक्तिजीि दे /SAKTIJIT DEY) ऱेखा सदस्य / Accountant Member न्याययक सदस्य / Judicial Member मंबई Mumbai; ददनांक Dated : . 6.2017 Sr.PS:SRL:
आदे श की प्रयिलऱपप अग्रेपषि/Copy of the Order forwarded to :
1. अपीऱाथी / The Appellant
2. प्रत्यथी / The Respondent
3. आयकर आयुक्त(अपीऱ) / The CIT(A)
4. आयकर आयुक्त / CIT - concerned
5. ववभागीय प्रतततनधि, आयकर अपीऱीय अधिकरण, मंब ु ई / DR, ITAT, Mumbai
6. गार्ड फाईऱ / Guard File आदे शानसार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीऱीय अधिकरण, मुंबई / ITAT, Mumbai 13 ITA 130/M/2014 Date Initials
1. Draft dictated on 2.5.2017 SPS
2. Draft placed before author 24.5.2017 SPS
3. Draft proposed & placed before the Second JM Member
4. Draft discussed/approved by Second Member AM
5. Approved Draft comes to the Sr. PS SPS
6. Kept for pronouncement on SPS
7. File sent to the Bench Clerk SPS
8. Date on which file goes to the Head Clerk
9. Date on which file goes to A.R.
10. Date of dispatch of order