Income Tax Appellate Tribunal - Delhi
Mccann Erickson (India) (P) Ltd., New ... vs Department Of Income Tax on 19 March, 2010
ITA NO. 2845/DEL/2010 A.Y. 2005-06 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH "E" NEW DELHI BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. No. 2845/Del/2010 A.Y. : 2005-06 Dy. Commissioner of Income vs. M/s McCann Erickson (India) (P) Tax, Ltd., Circle 6(1), 204-206, Tolstoy House, Room No. 413, C.R. Bldg., 15, Tolstoy Marg, New Delhi New Delhi - 110 001 (PAN: AAACT 0835D) (Appellant ) (Respondent ) Asseessee by : SH. SURESH RAM CHANDANI, ADV.
Department by : Sh. N.K. CHAND, Sr. D.R. PER SHAMIM YAHYA: AM
This appeal by the revenue is directed against the order of the Ld. Commissioner of Income Tax (Appeals) dated 19.3.2010 pertaining to assessment year 2005-06.
2. The first issue raised is that Ld. Commissioner of Income Tax (Appeals) erred in deleting the addition of ` 11,79,889/- made by the Assessing Officer by disallowing business expenses.
2.1 In this regard, Assessing Officer observed that from the profit and loss account, it has been noticed that the assessee company has debited an amount of ` 14,74,861/- in the profit and loss account and termed it has Business Development Expenses. He further noted that 1 ITA NO. 2845/DEL/2010 A.Y. 2005-06 such expenses were incurred in the earlier year also. He further observed that the then Assessing Officers have not allowed these expenses by observing that the assessee company derives enduring benefit by incurring these expenses over a number of years. Thus, these expenses were treated as deferred revenue expenses in earlier years. He proceeded to disallow a sum of ` 11,79,889/- and allowed 20% only i.e. ` 2,94,972/-. Thus, an addition of ` 11,79,889/- is made to the total income of the assessee company.
2.2 Before the Ld. Commissioner of Income Tax (Appeals) it was submitted that Assessing Officer has found that entire expenditure could not be said to be relatable exclusively to the year under consideration and allowed the claim of expenditure @ 20% per year spread over a period of five years. It was further submitted that ITAT for previous assessment years from 1996-97 to 1998-99 and held that the entire expenditure was allowable. The Ld. Commissioner of Income Tax (Appeals) noted that the tribunal had adjudicated this issue in assessee's own case by holding that the concept of deferred revenue expenditure is not recongnised in the Income Tax Act and as the authenticity of the expenditure was not doubted, the Assessing Officer was directed to allow the deduction in full. Accordingly, following the order of the tribunal, Ld. Commissioner of Income Tax (Appeals) held that the business development was allowable in full.
2.3 Against this order revenue is in appeal before us.
2.4 We have heard both the counsel and perused the records. Ld. counsel of the assessee submitted that the issue was covered in favour of the assessee by the decision of the ITAT for the assessment years 1998-99 and 2001-02.
2ITA NO. 2845/DEL/2010 A.Y. 2005-06 2.5 Ld. Departmental Representative could not controvert these submissions.
2.6 Accordingly, adhering to the doctrine of the staire decises, we uphold the order of the Ld. Commissioner of Income Tax (Appeals) and decide the issue in favour of the assessee.
3. The next issue raised is that Ld. Commissioner of Income Tax (Appeals) erred in deleting the addition of ` 2,12,500/- made by the Assessing Officer on account of difference between the sum appearing in the 3CD Report and that in the computation of income filed.
3.1 On this issue Assessing Officer noted that assessee company had added back the amount of ` 41,45,729/- in the statement of taxable income as per provisions of section 40(a) of the IT Act as per the observations of the auditors in column number 17(f) of the Tax Audit Report. In Appendix VI, where the details of such disallowances is given, the amount mentioned is ` 43,58,229/-. The assessee company was asked to explain as to why the balance amount of ` 2,12,500/- should not be added to the total income of the assessee. Assessee responded that difference between amount mentioned in Form 3CD and Appendix VI for disallowance u/s 40(a) of ` 2,12,500/- is on account of media provisions where TDS is not deductible. It was further stated that assessee company was not liable to deduct TDS on the different amount. Assessing Officer did not accept these contentions. He added the sum of ` 2,12,500/- to the total income of the assessee company as the assessee company has not deducted tax at source on these payments. In addition to this, he further added back an amount of ` 5,00,000/- on estimate basis being the purchases 3 ITA NO. 2845/DEL/2010 A.Y. 2005-06 relating to Media and Non- Media cost, the payments in respect of which have been made by the assessee company without deducting tax at source. Thus the total disallowance was made of ` 7,12,500/-.
3.2 Before the Ld. Commissioner of Income Tax (Appeals) assessee appealed again addition of ` 212500/- only.
3.3 Before the Ld. Commissioner of Income Tax (Appeals) assessee submitted the detailed submission and also drew attention to the CBDT Circular No. 715 dated 8.8.95 regarding clarifications on various provisions relating to tax deduction at source regarding the changes introduced through Finance Act, 1995. Ld. Commissioner of Income Tax (Appeals) also considered the clarification of Finance Minister during the course of consideration of the Finance Bill, 1995 and proceeded to decide the issue in favour of the assessee.
3.4 Against this order the revenue is in appeal before us.
3.5 We have heard both the counsel and perused the records. We find that assessee has not made detailed submission before the Assessing Officer as it submitted before the Ld. Commissioner of Income Tax (Appeals). In the CBDT's circular cited before the Ld. Commissioner of Income Tax (Appeals) on which the Ld. Commissioner of Income Tax (Appeals) has placed reliance was also not cited before the Assessing Officer. In our considered opinion, there is violation of Rule 46A in as much as submissions which were not made before the Assessing Officer have been made first time before the Ld. Commissioner of Income Tax (Appeals). Under the circumstances, in our considered opinion the matter should be remitted to the files of the Assessing Officer to consider the issue afresh in light of the 4 ITA NO. 2845/DEL/2010 A.Y. 2005-06 submissions made before the Ld. Commissioner of Income Tax (Appeals). Accordingly, the matter is remitted to the files of the Assessing Officer to consider the same afresh. Needless to add that the assessee should be given adequate opportunity of being heard.
4. The next issue raised is that Ld. Commissioner of Income Tax (Appeals) has erred in deleting the addition of ` 42,88,666/- made by the Assessing Officer u/s 40(a) of the IT Act.
4.1 On this issue Assessing Officer noted that in Appendix VI of Tax Audit Report, the Auditors have quantified the amount for disallowance u/s 40(a) of the IT Act and Auditors have also given following note:-
"The above disallowance u/s 40(a) excludes the following case of non-deduction of TDS on:
i) Certain categories of provision for purchase relating to media and non-deduction for which quantification is not readily ascertainable at this stage.
ii) Intercompany cost MCT of ` 42,88,666/- based on tax opinion obtained by the company.
From the above, Assessing Officer observed that assessee company had not deducted at source on the basis of tax audit obtained by it on MCT cost of ` 42,88,666/-. The assessee in this regard responded as under:-
"Intercompany cost MCT of ` 42,88,666/- has not been considered for disallowance u/s 40(a) as this is not subject to withholding tax u/s 195 of the Income Tax Act, 1961. 5
ITA NO. 2845/DEL/2010 A.Y. 2005-06 Attached is the opinion where the question of taxability of the same has been analysed in details. As per Annexure-B.
5.4 The opinion for non deduction of tax has been obtained by the assessee company from M/s Price Waterhouse Coopers who also happened to be the tax auditors in this case. The concluding para of their opinion is reproduced for ready reference.
"To conclude, the payments to be made by ME(assessee company) to MCT for provision of service identified under part 1 of Schedule B of the Agreement would not qualify as "royalty" as defined under section 9(1)(vi) of the Act."
Conclusion
1. MCT would not create a 'business connection' in India in terms of section 9(1)(i) of the Act.
2. The provision of services under the Agreement would not qualify as 'fees for technical services' as defined in the Act.
3. The consideration for the services would also not qualify as 'royalty' under the Act.
4. As a result of the above, the payments under the Agreement would not, in our opinion, be subject to any India income tax implications. ME is therefore under no obligation to deduct any tax at soruce thereon.
6ITA NO. 2845/DEL/2010 A.Y. 2005-06 The above is a brief analysis of the legal position on the subject. As and when required, we shall prepare a detailed legal submission to be filed with the tax authorities. We would also be pleased to represent the company before the tax authorities in the matter."
4.2 Assessing Officer did not accept the above contentions. He held that assessee was required to deduct at source on the payments made for technical services obtained namely MCT cost of ` 42,88,666/-. Accordingly, he made the above addition.
4.3 Before the Ld. Commissioner of Income Tax (Appeals) has made the elaborate submissions including case laws and CBDT circular.
4.4 Ld. counsel of the assessee fairly agreed that the detailed submission were made for the first time before the Ld. Commissioner of Income Tax (Appeals) and the same were not available before the Assessing Officer. Under the circumstances, in our considered opinion, there is a violation of Rule 46A. Accordingly, we remit this issue to the files of the Assessing Officer to consider the same afresh in light of the details submissions made before the Ld. Commissioner of Income Tax (Appeals). Needless to add that the assessee should be given adequate opportunity of being heard.
5. The last issue raised is that the Ld. Commissioner of Income Tax (Appeals) erred in deleting the addition of ` 2,91,125/- made by the Assessing Officer by capitalizing the expenses incurred for erecting the wooden partitions.
7ITA NO. 2845/DEL/2010 A.Y. 2005-06 5.1 While examining the case of the assessee company regarding the depreciation Assessing Officer found that assessee company had claimed 100% depreciation on the leasehold improvements costing ` 3.42.500/-.
5.2 The assessee company informed that these are temporary structures and are in the nature of wooden partitions and were installed in the company's Mumbai Branch Office. The assessee relied upon the several judicial decisions in this regard:-
i) C.I.T. vs. Madras Auto Service (P) Ltd.
ii) C.I.T. Vs. Bharat Commercial Corporation
iii) B&A Plantations and Industries Ltd. Vs. C.I.T.
iv) C.I.T. vs. Shri Ram Refrigeration Inds. Limited.
Assessing Officer did not find this explanation satisfactory. He was of the view that wooden partitions are not temporary erection but are permanent in nature which will give enduring benefit. Therefore, he disallowed 100% depreciation claim of the assessee company and allow only 15% depreciation on these wooden partitions at the rate applicable to 'Furniture and Fixtures' 5.3 Upon assessee's appeal Ld. Commissioner of Income Tax (Appeals) found that assessee's action was of renovating the rented premises does not bring into existence the asset of enduring nature.
The expenditure so incurred was on account of commercial expediency, for commercial use of the leased premises and also to 8 ITA NO. 2845/DEL/2010 A.Y. 2005-06 give proper outlook to the office and to create international standard and good working environment as per the multinational work culture.
The expenses on refurbishment such as wooden partition, paneling, flooring, plumbing etc. where incurred in respect of leased premises from which the assessee did not get any enduring benefit. Ld. Commissioner of Income Tax (Appeals) further noted that rent paid by the assessee was of ` 2,64,30,303/- whereas the claim of 100% depreciation was only ` 342,500/- and this is also material. Therefore, the Ld. Commissioner of Income Tax (Appeals) decided the issue in favour of the assessee holding that Assessing Officer should allow 100% depreciation as claimed by the assessee.
5.4 Against this order the revenue is in appeal before us.
5.5 We have heard both the counsel and perused the records.
We find that in the rented premises assessee has incurred certain expenditure on wooden partitions etc. The amount involved as also not material as compared to the rent paid for the premises. Under the circumstances, in our opinion, there is no infirmity and illegality in the order of the Ld. Commissioner of Income Tax (Appeals) on this issue.
Accordingly, we uphold the same.
6. In the result, the appeal filed by the revenue is partly allowed for statistical purposes.
9ITA NO. 2845/DEL/2010 A.Y. 2005-06 Order pronounced in the open court on 8/10/2010.
Sd/- Sd/-
[A.D. JAIN] [SHAMIM YAHYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date 8/10/2010
SRB
Copy forwarded to: -
1. Appellant 2. Respondent 3. CIT 4. CIT (A)
5. DR, ITAT
TRUE COPY
By Order,
Deputy Registrar,
ITAT, Delhi Benches
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