Income Tax Appellate Tribunal - Mumbai
United Home Entertainment Pvt. Ltd., ... vs Dcit, Cir. 7(3), Mumbai on 12 July, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL "F" BENCH, MUMBAI
BEFORE SRI MAHAVIR SINGH, JM AND SRI RAJESH KUMAR, AM
ITA No.1602/Mum/2015
(A.Y:2010-11)
United Home Entertainment Pvt. Dy. Commissioner of Income
Ltd. Tax, Circle 7(3) Mumbai
1st Floor, Building No.-14 Solitaire
Corporate Park, Guru Hargovindji Vs.
Marg, Chakala, Andheri,
Mumbai-400 093
PAN No. AAACU6668D
Appellant .. Respondent
Assessee by .. Shri Farookh V Irani, AR
Revenue by .. Shri T.A. Khan, DR
Date of hearing .. 28-06-2017
Date of pronouncement .. 12-07-2017
ORDER
PER MAHAVIR SINGH, JM:
This appeal by the assessee is arising out of the orders of CIT(A)- 14, Mumbai, in appeal No. CIT(A)-13/IT-124/12-13 dated 19-12-2014. The Assessment was framed by DCIT Circle-7(3), Mumbai for the A.Y. 2009-10 vide order dated 31-01-2013 u/s 143(3) of the Income Tax Act, 1961 (hereinafter 'the Act').
2. The first issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of expenses related to Central Support Fee made by the AO. For this assessee has raised following ground No.1.
"On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals)-14, Mumbai ['CIT(A)'] has erred in confirming the disallowance of central support fee of Rs.3,56,00,000/- made by the Assessing Officer ('AO')."
ITA No . 16 0 2/ Mu m/ 20 1 5 United Home Entertainment Pvt. Ltd. ( A. Y :2 0 10 - 1 1)
3. Briefly stated facts are that the assessee company is running TV channel named Hungama which is a kids' channel. The AO during the course of assessment proceedings noticed that the assessee company paid an amount of Rs.7.12 crores to Walt Disney Company (India) Pvt. Ltd (WDCPL), towards Central Support Fee. According to AO WDCPL is a related party as specified under section 40A(2)(b) of the Act. According to AO, the assessee's explanation was asked for payment of high magnitude of Central Support Fee paid to WDCP. The AO noted that the WDCPL is a major shareholder in the assessee company and total turnover of company is only Rs. 44 crores. Therefore, going into the reasons such as low turnover and payment made to the party, the AO was of the view that payment of this party is treated as unreasonable and excessive to the extent of 50% and accordingly he disallowed the same at Rs. 3.56 crores. Aggrieved, assessee preferred the appeal before CIT(A).
4. The CIT(A) agreed with the contention of the assessee that the provisions of section 40A(2)(b) of the Act will not apply. However, he confirmed the disallowance by applying the provisions of Section 37 of the Act by stating that the claim made by assessee is unsupported by any rational and actual figure of expenses to justify the payment more than 100% of original agreed fee of Rs. 20 lakhs. The CIT(A) observed in Para 3.11 as under: -
"3.11 After going through these details where in the details of actual expenses are also not available and cost was worked out on estimated basis I am in agreement in principle with the AO that appellant has been showing payments on estimated and the fluctuation is more than 100% as is visible that the expenses which were estimated at Rs.20,00,000/- initially within the year have been estimated at Rs.47,33,333/-, that too after the lapse of that year. It is a crucial fact that for the year for which return of Page 2 of 15 ITA No . 16 0 2/ Mu m/ 20 1 5 United Home Entertainment Pvt. Ltd. ( A. Y :2 0 10 - 1 1) income was filed, books of accounts were audited and still allocation has been given on estimated basis. In view of this, appellant's reliance upon decision given in their appeal for A.Y. 2009-10 during assessment proceedings when they have not been able to support their claim with the facts and reason thereof, I am in agreement with the AO's observation that the expenses are on excessive side and have no basis or support for the same. The assessing officer has made the disallowances u/s.40A(2) (b). As it is known that the appellant are 100% subsidiary of TWDCI, I have gone through the section 40A(2)(b) and agree with appellant that provisions of sec.40A(2)(b) in absence of any market standard cannot be applied. However, it is noted that even for the reason that expenses are on the higher side, they are not allowable u/s.37 of the Act the extent they have been claimed being unsupported any rational and actual figures of expenses to justify the payment more than 200% of originally agreed fee of Rs.20,00,000/-. Hence for the reasons discussed on the given facts in the case expenses debited as Central support fee cannot be admitted as genuine business expenses in total and hence disallowance made to the extent of Rs.3,56,00,000/- [i.e. 50% of Rs.7,52,00,000/- as central support fee] are upheld. The ground no.1 is dismissed. "
Aggrieved, against the order of CIT(A), now assessee is in second appeal before Tribunal.
5. We find that as far as the disallowance made by invoking the provisions of section 40A(2)(b) of the Act, the CIT(A) agreed with the assessee that the same cannot be applied in the absence of any market Page 3 of 15 ITA No . 16 0 2/ Mu m/ 20 1 5 United Home Entertainment Pvt. Ltd. ( A. Y :2 0 10 - 1 1) standard and Revenue has not preferred the appeal against this finding. It means that the deletion made by CIT(A) for disallowance under section 40A(2)(b) of the Act has become final. The learned counsel for the assessee also drew out attention to Tribunal's order in assessee's own case for AY 2008-09, wherein Revenue's appeal was dismissed by the Tribunal on the very same issue by observing as under: -
"8. When we put it to the learned Departmental Representative as to how the conditions under section 40A(2)(b) are satisfied in this case, he did not have much to say beyond placing his reliance on the stand of the Assessing Officer. We can understand his plight. The stand of the Assessing Officer is indeed indefensible. As learned counsel points out, the efforts of applying disallowance under section 40A(2) on the notion of group entities, without specifically fulfilling the conditions set out in Section 40A(2)(b), have been repelled by Hon'ble High Court in the case of CIT Vs VRV Breweries & Bottling Industries Ltd [(2012) 347 ITR 249 (Del)]. While doing so, Their Lordships have, inter alia, observed as follows:
23. This brings us to the issue as to whether the AO could have invoked the provisions of s. 40A(2)(a) of the Act in the facts and circumstances of the present case. As is noticed in the earlier part of our judgment, the AO in the asst. yr. 1997-98 after recording that the shares of the assessee were held by six (6) entities goes on to observe that the assessee "became a subsidiary of Shaw Wallace Group of Companies". There is no finding recorded by the AO that SWCL had acquired substantial interest i.e., 20 per cent Page 4 of 15 ITA No . 16 0 2/ Mu m/ 20 1 5 United Home Entertainment Pvt. Ltd. ( A. Y :2 0 10 - 1 1) or more of the share capital with attending voting rights, whether directly or beneficially.
If that is so, then the provisions of s.
40A(2)(a) could not have got triggered. It is noticed that the CIT(A) in the asst. yr. 1998- 99 has returned a finding that there were five (5) limited companies apart from two (2) individuals who held shares in the assessee, but none of the entities adverted to, by the AO, both in the asst. yr. 1997-98 and 1998- 99 is SWCL. As a matter of fact, the CIT(A) in asst. yr. 1998-99 records that not a single share in the assessee is held by SWCL. The CIT (A) further records a finding of fact that, on a perusal of list of shareholders, it is clear that even the employees of SWCL did (sic-
not) have ownership of a controlling share holding interest in the assessee. CIT(A) records that six (6) individuals held ten (10) shares each in the assessee while, one gentleman by the name of Mr. Suraj P. Gupta held 8,61,610 shares who was neither an employee of the assessee and nor was any payment made to Mr. Suraj P. Gupta or his relative or to a company of which he was a director. The CIT(A) went on to hold that, in the instant case, payments had not been made to persons specified under s. 40A(2)(b) and therefore, the provisions of s. 40A(2) were not applicable. Both CIT(A) as well as the Tribunal have also accepted the explanation given by the assessee with regard to difference in payment of bottling charges vis-à-vis Balbir Industries Ltd. and the assessee. The reference to which we Page 5 of 15 ITA No . 16 0 2/ Mu m/ 20 1 5 United Home Entertainment Pvt. Ltd. ( A. Y :2 0 10 - 1 1) have already made hereinabove. We find no perversity in the findings of the Tribunal and those recorded by CIT(A) in asst. yr. 1998- 99.
24. Therefore, for the foregoing reasons, we are of the view that the Tribunal in the impugned judgment and the CIT(A) in its order dt. 15th May, 2000 passed in the asst.
yr. 1998-99 has correctly appreciated the provisions of s. 40A(2) of the IT Act thus the contention of the Revenue even on this aspect has to be rejected.
9. In view of these discussions, as also bearing in mind entirety of the case, we approve the well- reasoned findings of the learned CIT(A) and decline to interfere in the matter."
Hence, the deletion by the CIT(A) on account of disallowance u/s 40A(2)(b) of the Act has become final and need no interference.
6. As regards to the disallowance made by CIT(A) under section 37 of the Act, the learned Counsel for the assessee Shri Farookh V Irani made submissions that under section 37 of the Act it is not open to the department to adopt a subjective standard of reasoning's. We find that the assessee has given complete details of central support fee claimed by assessee, which are filed by AO as well as before CIT(A) as Annexure-4 and reproduced in the order of CIT(A). The assessee entered into agreement TWDCI which is for providing services as per clause 2 to the assessee by the TWDCI. The services as per schedule 1 provide as under: -
a. Production and programming services b. Advertising sales services Page 6 of 15 ITA No . 16 0 2/ Mu m/ 20 1 5 United Home Entertainment Pvt. Ltd. ( A. Y :2 0 10 - 1 1) c. Affiliate distribution services d. Marketing services e. Accounting/ finance services.
f. Legal services.
g. Information Technology services.
h. Personal Services.
There are also a separate facility agreement entered into with TWDCI for reimbursement of facilities which is for the use of premises situated at 4th Floor, Peninsula Tower-1, Peninsula Corporate Park, Ganpatrao Kadam marg, Off Senapati Bapat Marg, Lower Parel, Mumbai-4000 013 and premised situated C-301, 3rd Floor Ansal Plaza, Hudco Place, Andrews Ganj, Near South extension, Khel Gaon marg, New Delhi-110. And also use of premises at The Millenia, "C"Annexe, next to Citibank ATM, no.1 &2 Marfi Road, Ulsoor, Bangalore, 560 008, use of premises situated at Singravelu Street, 4th Floor, C.V.R Complex T Nagar, Chennai 600 017 and also use of premises situated at 309 DBS house, 1-7-43-46 Sardar Patel Road, Secunderabad 500 003. The other facilities includes electricity, air-conditioning, canteen facilities, dedicated communication facilities, housekeeping services, repairs and maintenance services for all information technology equipment, other equipments and materials, internet facilities, administration, information technology support service, water facility and security personnel. We find that these expenses are claimed by the assessee with a scientific basis and use of facilities. In such circumstances, it is not open to the Revenue to adopt a subjective standard of reasonableness and disallow a part of business expenditure as being unreasonably large or decide what type of expenditure the assessee should incur and in what circumstances. Once the Revenue authorities has accepted in part and there is no allegation as regards to genuineness of expenditure, part of expenditure cannot be disallowed.Page 7 of 15
ITA No . 16 0 2/ Mu m/ 20 1 5 United Home Entertainment Pvt. Ltd. ( A. Y :2 0 10 - 1 1) Accordingly, we allow the claim of the assessee and this issue of assessee's appeal is allowed.
7. The next issue in this appeal of assessee is against the order of CIT(A) confirming the addition of non-reconcile figures with the accounts of the assessee and that ITS data. For this assessee has raised following ground No.2: -
"2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not deleting the addition of Rs.25,81.,822 made by the AO on account of non-reconciliation of ITS data."
8. At the outset, the learned Counsel for the assessee took us through the Tribunal orders in assessee's own case for AY 2009-10 in ITA No. 4608/Mum/2013 order dated 31-03-2016 where Tribunal has set aside the matter to the file of the AO by observing in Para 30 as under: -
"30. Having heard the rival contentions and having perused the material on record, we are of the considered view that the matter is required to be remitted to the file of the Assessing Officer for adjudication de novo by way of a speaking order and in accordance with the law. The nature of ITS detail, which is not reflected in the books of the assessee, needs to be set out and the assessee be asked to explain the particular entries which are not so reflected in the books of accounts. The non reconciliation of ITS detail can only be a starting point of exploring the matter further with respect to making the additions in respect of the revenues which are not accounted for but just because there is some reconciliation difference, the amount of difference cannot be added to income of the assessee. In any event, these inputs are to be dealt Page 8 of 15 ITA No . 16 0 2/ Mu m/ 20 1 5 United Home Entertainment Pvt. Ltd. ( A. Y :2 0 10 - 1 1) with on merits of each input and the explanation of the assessee is to be taken into account for that purpose. Keeping in view these discussions, as also bearing in mind entirety of the case, the matter stands restored to the file of the Assessing Officer on this point."
9. On query from the Bench the learned Sr. DR fairly conceded the position and stated that the matter can be restored back to the file of the AO to file the direction as given in AY 2009-10. We have heard the rival contention and gone through the facts and circumstances of the case and we also restore the matter back to the file of the AO to decide in term of directions in Tribunal's order for AY 2009-10. This issue of assessee's appeal remanded back to the file of the AO for fresh adjudication. This issue of assessee's appeal is allowed for statistical purposes.
10. The next issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in making addition of dubbing cost. For this assessee has raised following ground No.3: -
"3. On the facts and in the circumstances of the case and in law, the learned CIT(A) despite' fully allowing dubbing cost as a deductible expense, has erred in mentioning the amount towards such cost as Rs. 25,75,334 instead of 2,57,53,334."
11. Briefly stated facts are that the assessee during the year under consideration incurred dubbing cost of Rs. 3,21,91,668/- and this dubbing cost represents the cost incurred by the assessee to translate programmers in Indian languages. The AO amortized the dubbing cost and allowed the 1/5th dubbing cost in this year by observing in Para 6.3 as under: -
"6.3 The contention of the assessee is not acceptable. Given that dubbing cots is incurred in Page 9 of 15 ITA No . 16 0 2/ Mu m/ 20 1 5 United Home Entertainment Pvt. Ltd. ( A. Y :2 0 10 - 1 1) relation to the content acquired under license, the treatment of dubbing cost should be same as inventory. Therefore, the dubbing costs incurred by the assessee should be considered on same lines as cost of acquisition. It has been submitted that the license cost is amortised over a maximum period of years, depending on the tenure of the license. A deduction for 115 of the dubbing cost is allowed and the balance dubbing cost is added back to the total income of the assessee."
Aggrieved, assessee preferred the appeal before CIT(A) who also confirmed the action of the AO by observing in Para 5.2 as under: -
"5.2 I have gone through both the orders. Alter going through the decision given by Hon'ble JTAT Mumbai in addressing dubbing expenses case, I am in agreement with the appellant that dubbing expenses having paid to dubbing studio and the artist are revenue in nature. The appellant have already submitted that they are related to programs which are their inventory, meaning thereby they were their source of revenue and hence expenses incurred to earn the revenue which are directly linked so have to be treated as revenue expenses. For the reasons discussed and relying upon the decision given by Hon'ble ITAT Mumbai in the case of Ajay Singh Deol, the claim for dubbing cost has to be allowed and hence addition made for Rs.25,81,822/- i.e. Rs. 25,75,334 incurred as dubbing cost is allowed. The ground no.3 is allowed."
Aggrieved, now assessee is in appeal before us.
13. At the outset, the learned Counsel for the assessee stated that there is a factual mistake in the figure mentioned by AO as well as by Page 10 of 15 ITA No . 16 0 2/ Mu m/ 20 1 5 United Home Entertainment Pvt. Ltd. ( A. Y :2 0 10 - 1 1) CIT(A) i.e. Rs. 25,75,334/- instead of figure of Rs. 2,57,53,334/-. First of all, the learned Counsel for the assessee stated that this figure should be corrected and on this, the learned Sr. DR also not objected. We directed the AO to find out the correct figure and adopted the same accordingly. The learned Counsel for the assessee took us through the tribunals order and very fairly conceded that this issue in assessee's own case for the AY 2009-10 by the Tribunal in ITA No. 4608/Mum/2013 for AY 2009-10 vide order dated 31-03-2016 has confirmed the action of the lower authorities by observing in Para 34 and 35 which reads as under: -
"34. While the argument of the learned counsel that there is no concept of deferred revenue expenditure, and, as such, once an expenditure is revenue expenditure, it should be allowed in the year in which the expense is incurred, does indeed seem very attractive at the first blush, it may not hold good in the present case. It is a case in which entire useful period, during which the assessee will reap the fruits for investment in the dubbing costs, is known at the point of time when expenses are incurred. The period for which the assessee holds the licence to use the program is known with precision. The benefit of dubbing the program will be available at least for this period. It is in this background that we may refer to the following observations of Hon'ble Supreme Court in the case of Madras High Court in Madras Industrial Investment Corpn. Ltd. vs. CIT [(1997)) 225 ITR 802 (SC)] "...Sec. 37(1) further requires that the expenditure should not be of a capital nature.
The question whether a particular expenditure is revenue expenditure incurred for the purpose of business must be Page 11 of 15 ITA No . 16 0 2/ Mu m/ 20 1 5 United Home Entertainment Pvt. Ltd. ( A. Y :2 0 10 - 1 1) determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of the business, that it may be regarded as an integral part of the profit making process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. Any liability incurred for the business of obtaining a loan would be revenue expenditure. Ordinarily,revenue expenditure which is incurred wholly and exclusively for the purposes of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debenture, the payment is to secure a benefit over a number of years.
There is a continuing benefit to the business of the company over the entire period. The Page 12 of 15 ITA No . 16 0 2/ Mu m/ 20 1 5 United Home Entertainment Pvt. Ltd. ( A. Y :2 0 10 - 1 1) liability should, therefore, be spread over the period of debentures.
35. These observations will be equally applicable in the fact situation before us, particularly as the period over which the benefits will be enjoyed by the assessee is clearly established. The dubbing costs should indeed be, therefore, amortized over this period. In this view of the matter, we see no infirmity in the stand of the authorities below. We confirm the order of the CIT(A) on this point and decline to interfere in the matter."
12. In view of the above, the learned Counsel for the assessee made only one request that the correct figure of dubbing cost should be amortized and this is to be carried forward from last year also. We have gone through the facts and find that this issue is squarely covered in favour of Revenue and against assessee by co-ordinate Bench decision in assessee's own case for AY 2009-10. Respectfully, following the same and taking consistent view, we order accordingly. However, the AO is directed to recompute the dubbing cost correctly after amortizing the dubbing cost as claimed by assessee and even correction should be done from earlier year figures. Accordingly, this issue is allowed in favour of Revenue but for verification purposes the matter is restored back to the file of the AO.
13. The other issues are regarding interest on the refund, levy of interest under section 234D, 234B and granting of TDS credit raised by way of following ground Nos. 4,5,6 and 7 reads as under: -
"4. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the addition of alleged refund of Rs. 1,62,69,171 and interest on such refund of Page 13 of 15 ITA No . 16 0 2/ Mu m/ 20 1 5 United Home Entertainment Pvt. Ltd. ( A. Y :2 0 10 - 1 1) Rs.20,65,974 made by the AO while computing the total tax payable by the Appellant.
5. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not directing the AO to not levy interest of Rs. 722,098 under section 234D of the Income Tax Act, 1961 ('Act').
6. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not directing the AO to not levy interest of Rs.54,22,592 under section 234B of the Act.
7. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not directing the AU to grant the TDS credit of Rs. 10,02,421/-."
14. At the outset, the learned Counsel for the assessee very fairly agreed that these are consequential issues and AO may be directed to re-compute the correct figures after allowing TDS credit. On this the learned Sr. DR fairly agreed. After hearing both the sides, we are of the view let the AO allow correct credit of TDS and re-compute the refund and charging of interest under section 234B and D of the Act.
15. In the result, appeal of assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 12-07-2017.
Sd/- Sd/-
(RAJESH KUMAR) (MAHAVIR SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 12-07-2017
Sudip Sarkar /Sr.PS
Page 14 of 15
ITA No . 16 0 2/ Mu m/ 20 1 5
United Home Entertainment Pvt. Ltd. ( A. Y :2 0 10 - 1 1) Copy of the Order forwarded to:
1. The Appellant
2. The Respondent.
3. The CIT (A), Mumbai.
4. CIT
5. DR, ITAT, Mumbai
6. Guard file. //True Copy// BY ORDER, Assistant Registrar ITAT, MUMBAI Page 15 of 15