Indian Kanoon - Search engine for Indian Law

Income Tax Appellate Tribunal - Bangalore

Transitions Optical India Private ... vs Assessee on 24 September, 2012

            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. John's 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

                              ORDER

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 assessment year 2007-

08.

2. Ground no.1 raised by the assessee reads as follows;

"1.The CIT(A) has erred in upholding the disallowance of INR 246,932/- being cost to cost reimbursement of expenses to group company and payment for services to Good Images Marketing Pte Ltd.,(Singapore) on account of non-deduction of tax at source.

3. The assessee is a company encaged in the production, 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 Ltd., Singapore and another sum of Rs.1,51,417/- to M/s Good Images Marketing Pte Ltd., Singapore. Both the receipients of the aforesaid payments were non-resident. Since the aforesaid payments were 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 per 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 aforesaid sums, while computing the total income. The AO did not make any reference to any provision of law under which he made disallowance. Apparently, the AO relied on the provisions of sec.40(a)(i) of the Act. It is not in dispute before us that these provisions 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 that the sum of Rs.95,515/- paid to M/s Transitions Optical India PTE, Singapore, was reimbursement of expenses incurred by the said company on behalf of the assessee. It was pointed out that where there is reimbursement of cost there can be no income chargeable to tax attracting the provisions of sec.40(a)(i) of the Act. 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 assessee pointed out that this Singapore company had purchased a U.V lamps and printed assessee's logo on it. It was submitted that U.V.Lamps are to be provided to the distributors to help them demonstrate to their 3 ITA No.880(B)/2011 customers, the lenses capability to filter U.V Rays. It was also submitted that the assessee merely reimbursed the cost to the Singapore company and there is no element of income embedded in such reimbursement. The bill of entry for home consumption evidencing import of these U.V.lamps from Singapore was also filed.

5. Apart from the aforesaid specific arguments, the assessee also took a stand that the revenue authorities have proceeded on the footing that payment in question by the assessee to the Singapore companies were a payment for rendering technical services by the Singapore company. In this regard, the assessee submitted that as per Article-12(4) of the India Singapore Treaty 'fees 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 the Singapore company did not make available any technical knowledge, experience, skills etc. to the Assessee for which the Assessee made payments.

6. The CIT(A) however did not deal with any of these submissions. On the other hand, the CIT(A) sustained the addition 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 reimbursement for services availed. Similarly, the payment of Rs.1,51,417/- to Good Images Marketing Pte Ltd., Singapore is towards purchase of goods along with logo printing services. I am of the opinion that given the fact that the services were availed by the appellant, tax should have been deducted 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 assessee has raised ground no.1 before the Tribunal.

8. We have herd the submissions of the learned counsel for the assessee, who reiterated the stand of the assessee as were put forth before the CIT(A). The learned DR relied on the order 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 cost 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-resident. Since the payment made by the assessee to the non-resident was 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 authorities. Ground no.1 raised y the assessee is allowed.

10. Ground no.2 raised y the assessee reads as follows;

"2. The CIT(A) has erred in upholding the disallowance of INR 1,121,660/- being market research expenses, holding 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 aforesaid two companies, while computing its total income. The assessee claimed that the aforesaid expenses were market research expenses. The AO was of the view that the expenditures resulted in an enduring benefit to the assessee and therefore, was capital expenditure and cannot be allowed as deduction. The CIT(A) confirmed the order of the AO and in doing so, followed the decision of the Hon'ble Delhi High 5 ITA No.880(B)/2011 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 the assessee is encaged in the business of importing and trading in optical lenses since 2000. During the year under consideration, with the intention of analyzing the level of brand awareness of its products, the assessee availed the services of business consultants to carry our market research activities. Such research expenses were undertaken to get an understanding of the consumer and the market. The assessee undertakes similar research every year to understand the latest trends and the market in general. The expenditure incurred by the assesse for various assessment years is as tabulated below:

Fin year Market Research Turnover Market Research Expenses(INR) (INR) 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 years, the AO has not made any disallowance of similar expenses. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Empire Jute Co.,Ltd., (1980) 3 Taxman 69(SC), besides, the decision of the Hon'ble Karnataka High Court in the case of Hindustan Mahine Tools Ltd., 40 Taxman 43(Kar). The learned DR relied on the orders of the CIT(A) from the decision in the case of Triveni Engg. Works Ltd., supra.

13. We have considered the rival submissions. From the reading of the AO's order it is clear that he has proceeded on the basis that the expenditure in question would bring enduring benefit to the Assessee for a period beyond the previous year. In our view, this is 6 ITA No.880(B)/2011 not the basis on which it can be said that the expenditure was capital expenditure. It has not been denied that the 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 assessee's product. Such understanding of the consumer and the market expenses incurred for doing so are purely revenue expenses. The Bombay Bench of the Tribunal in the case of MIRC Electronic Works Ltd., in ITA No.1652/Mum/2010 has held that spending money for analysis of market and trends in the market is revenue expenditure. So also the Delhi Bench of the Tribunal 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 Hon'ble Delhi High Court in the case of Triveni Engg.Works Ltd., (supra) is not applicable to the facts of the assessee's case. The expenditure in that case, was in connection with manufacture of a new product, whereas the expenditure in the case of the asseseee in this appeal is in respect of existing product. For the reasons given above, we direct that the expenditure in question be allowed as deduction.

14. In the result, the appeal filed by the assessee 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(B'lore)
 7.    GF(Delhi)
                                                                By Order
                                  Sr. Private Secretary, ITAT, Bangalore