Yum Restaurants (India) (P) Ltd. v. Addl. CIT

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The Tax Publishers2012 TaxPub(DT) 1971 (Del-Trib) : (2012) 014 ITR (Trib) 0420 INCOME TAX ACT, 1961 --Business expenditure--AllowabilityPre-paid expenses--The special auditor has quantified certain expenses which are prepaid in nature. According to the special audit report, assessee had incurred certain expenses whose benefit will not be available in the present assessment year rather it will be available in the next assessment year. Assessing officer has disallowed those expenses on the ground that these are prepaid expenses. Appeal to the Commissioner (Appeals) did not bring any relief to the assessee. Held: assessing officer had disallowed the claim of assessee on the basis of various defects in its account and the opinion expressed by the special audior. This is purely a factual issue. There are discrepancies pointed out by the special auditor in the maintenance of accounts and those discrepancies have been affirmed by the revenue authorities below. Thus, Commissioner (Appeals) has rightly disallowed the claim. Income Tax Act, 1961 Section 37(1) Income Tax Act, 1961 Section 4 INCOME TAX ACT, 1961 --Income from undisclosed sources--Addition under section 68Invoices allegedly raised but not for receiving payment being pieces of paper--The brief facts of the case are that assessee is in the business of franchising 'Pizza Hut and KFC Restaurant in India for which it has entered into technology licence agreement with the respective brand owners, i.e., KFC and Pizza Hut I LLC. It has entered into a service agreement on 1-4-2001 with M/s. TRI USA ( now known as YRI (YRI). The assessee has raised through separate invoices of M/s YRI / TRI amounting to Rs. 9,39,30,265, Rs. 3,20,91,724 and Rs. 6,82,217 totalling to Rs. 12,67,04,206 the amount which has been treated by the assessing officer as income from other sources. It emerges out that two invoices for a sum of Rs. 9,39,30,265 and Rs. 3,20,91,724 alleged to have been raised on Pizza Hut International and KFC I were available in the accounts. The first two invoices raised on YRI /TRI, i.e., for a consideration of Rs. 9,39,30,265 and Rs. 3,20,91,724 were signed by Mr. RB, Manager Finance of the assessee company. The third invoice is under the signature of Mr. AB, Director Finance of the assessee. Whereas the copies of the alleged two invoices have been raised on Pizza Hut LLC and KFC IH were under the signature of Mr. A. The case of the assessing officer is that assessee has raised two separate invoices on Pizza Hut LLC and KFC IH totalling to Rs. 12,60,21,989. It has filed to disclose these receipts. On the other hand, case of the assessee is that service agreement which was entered with YRI and YRIPL for the first time on 1-4-2001. Prior to this agreement, a similar agreement was entered into by YRIPL directly with KFCIH and Pizza Hut LLC for assessment year 2001 and earlier years. This year no such agreement was available with these two concerns. Inadvertently on the basis of past practice invoices have been prepared for assessment year 2002-03 also. The invoices were prepared for raising them on KFCIH, PHLLC as well as YRI. The amount could be collected only from YRI. The amounts mentioned in the first two invoices alleged to have been raised of YRI and KFC Pizza Hut are similar. Thus, according to the assessee in fact, no amount was to be received from KFC and Pizza Hut. These invoices were prepared inadvertently and lying in the accounts. The assessing officer did not accept this contention. He observed that invoices alleged to be raised inadvertently, were attached with original voucher, Advances othersÃ¢â‚¬ was debited instead of the name of the party in the voucher. Why different invoices were signed on the same day by different persons, etc., Commissioner (Appeals) has deleted the addition by observing that assessing officer has made the addition only on presumption basis. The said assumption is purely on two pieces of paper, whether they have been acted upon or not? How the money has travelled not discernable.? Held: Justified. Assessee has explained its position that these invoices were prepared inadvertently. It has filed the affidavit of the Director Mr. AB who has explained the mistake. The TPO had also accepted the case of assessee about arm's length prices. The invoices involved an international transaction. Had they paid by virtue of the alleged invoices then there should be entries in the bank account and there should be trail of the money. Assessing officer has unnecessarily treated two documents as sufficient for demonstrating the alleged undisclosed income. The assessee has explained its position properly and no addition deserves to be made. First Appellate Authority has considered this issue elaborately and has rightly deleted the addition. There is no reason to interfere in his finding. This ground of appeal is rejected. Income Tax Act, 1961 Section 68 INCOME TAX ACT, 1961 --Tax deduction at source--Disallowance under section 40(a)(ia)Business receipt passed on to subsidiary with TDS--Assessee has a wholly owned subsidiary company by the name of YUM RMPL. YRMPL). This company was incorporated on 8-6-1999 as a private limited company after taking prior approval from the competent authorities. This company was formed with a sole objective of undertaking advertising media and promotional activities exclusively for the assessee and its franchise at the regional and national level. According to the assessee, the object of forming this company was to ensure that franchise concentrate on business of running restaurant while marketing and promotional activities are being taken by other entities which is wholly owned subsidiary company. The assessee used to carve out budget for advertisement and promotional activities at the commencement of every year. This was carved out after consultation with the franchise. Each franchise is required to contribute certain fixed percentage of its sales for advertising, media and promotional activities to YRMPL. Any deficit in the budget as compared to the contributory receipt form the franchise is being met by the assessee in the form of its contribution towards advertisement, marketing , promotional activities. Apart from all these Pizza Hut and Kentucky Fried Chicken restaurants, products of P are also sold exclusively as per the joint marketing agreement entered into between YRIPL and P. As the product of P are also advertised in the promotional material for Pizza Hut and Kentucky Fried Chicken Restaurant, P is also required to contribute towards the advertisement for media and promotional activities. The PF had paid a sum of Rs. 39,50,000 to the assessee in financial year 2001-02. For this purpose, assessee has raised debit note for P for receiving this contribution. While making the payment to the assessee P had deducted taxes at source. The assessee had passed on this amount to its subsidiary company, i.e., YRIPL to be incurred on advertising media and promotional activities. It had not deducted any tax at source while making this payment. The assessing officer has made the addition on the ground that P has made the payment to the assessee. The assessee on its own has raised a debit note. Credit for taxes deducted at source by P was claimed by the assessee in its return of income. The assessee did not claim the amount transferred to its subsidiary concern, i.e., YRIPL as its expenditure. It has not deducted taxes at source at the time of transferring the amount. In this way assessing officer has made the addition. Commissioner (Appeals) accepted the contention of assessee on the ground that as far as transmission of this amount to the subsidiary is concerned there is no dispute. The payment of the amount to the subsidiary is an allowable expense because it was to be incurred towards advertising media and promotional activities. The assessing officer has alleged that assessee has not deducted the TDS on this reasoning First Appellate Authority is of the opinion that section 40(a)(ia) were not applicable to the assessment year under appeal, i.e., assessment year 2002-03. It had come on the statute book subsequently. Held: The income is business income and for marketing and promotional activities, therefore, TDS ought to have been deducted or not therefore, finding of Commissioner (Appeals) is remitted to assessing officer for the adudication. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 1971 (Del-Trib) : (2012) 014 ITR (Trib) 0420

INCOME TAX ACT, 1961

--Business expenditure--AllowabilityPre-paid expenses--The special auditor has quantified certain expenses which are prepaid in nature. According to the special audit report, assessee had incurred certain expenses whose benefit will not be available in the present assessment year rather it will be available in the next assessment year. Assessing officer has disallowed those expenses on the ground that these are prepaid expenses. Appeal to the Commissioner (Appeals) did not bring any relief to the assessee. Held: assessing officer had disallowed the claim of assessee on the basis of various defects in its account and the opinion expressed by the special audior. This is purely a factual issue. There are discrepancies pointed out by the special auditor in the maintenance of accounts and those discrepancies have been affirmed by the revenue authorities below. Thus, Commissioner (Appeals) has rightly disallowed the claim.

Income Tax Act, 1961 Section 37(1)

Income Tax Act, 1961 Section 4

INCOME TAX ACT, 1961

--Income from undisclosed sources--Addition under section 68Invoices allegedly raised but not for receiving payment being pieces of paper--The brief facts of the case are that assessee is in the business of franchising 'Pizza Hut and KFC Restaurant in India for which it has entered into technology licence agreement with the respective brand owners, i.e., KFC and Pizza Hut I LLC. It has entered into a service agreement on 1-4-2001 with M/s. TRI USA ( now known as YRI (YRI). The assessee has raised through separate invoices of M/s YRI / TRI amounting to Rs. 9,39,30,265, Rs. 3,20,91,724 and Rs. 6,82,217 totalling to Rs. 12,67,04,206 the amount which has been treated by the assessing officer as income from other sources. It emerges out that two invoices for a sum of Rs. 9,39,30,265 and Rs. 3,20,91,724 alleged to have been raised on Pizza Hut International and KFC I were available in the accounts. The first two invoices raised on YRI /TRI, i.e., for a consideration of Rs. 9,39,30,265 and Rs. 3,20,91,724 were signed by Mr. RB, Manager Finance of the assessee company. The third invoice is under the signature of Mr. AB, Director Finance of the assessee. Whereas the copies of the alleged two invoices have been raised on Pizza Hut LLC and KFC IH were under the signature of Mr. A. The case of the assessing officer is that assessee has raised two separate invoices on Pizza Hut LLC and KFC IH totalling to Rs. 12,60,21,989. It has filed to disclose these receipts. On the other hand, case of the assessee is that service agreement which was entered with YRI and YRIPL for the first time on 1-4-2001. Prior to this agreement, a similar agreement was entered into by YRIPL directly with KFCIH and Pizza Hut LLC for assessment year 2001 and earlier years. This year no such agreement was available with these two concerns. Inadvertently on the basis of past practice invoices have been prepared for assessment year 2002-03 also. The invoices were prepared for raising them on KFCIH, PHLLC as well as YRI. The amount could be collected only from YRI. The amounts mentioned in the first two invoices alleged to have been raised of YRI and KFC Pizza Hut are similar. Thus, according to the assessee in fact, no amount was to be received from KFC and Pizza Hut. These invoices were prepared inadvertently and lying in the accounts. The assessing officer did not accept this contention. He observed that invoices alleged to be raised inadvertently, were attached with original voucher, Advances othersÃ¢â‚¬ was debited instead of the name of the party in the voucher. Why different invoices were signed on the same day by different persons, etc., Commissioner (Appeals) has deleted the addition by observing that assessing officer has made the addition only on presumption basis. The said assumption is purely on two pieces of paper, whether they have been acted upon or not? How the money has travelled not discernable.? Held: Justified.

Assessee has explained its position that these invoices were prepared inadvertently. It has filed the affidavit of the Director Mr. AB who has explained the mistake. The TPO had also accepted the case of assessee about arm's length prices. The invoices involved an international transaction. Had they paid by virtue of the alleged invoices then there should be entries in the bank account and there should be trail of the money. Assessing officer has unnecessarily treated two documents as sufficient for demonstrating the alleged undisclosed income. The assessee has explained its position properly and no addition deserves to be made. First Appellate Authority has considered this issue elaborately and has rightly deleted the addition. There is no reason to interfere in his finding. This ground of appeal is rejected.

Income Tax Act, 1961 Section 68

INCOME TAX ACT, 1961

--Tax deduction at source--Disallowance under section 40(a)(ia)Business receipt passed on to subsidiary with TDS--Assessee has a wholly owned subsidiary company by the name of YUM RMPL. YRMPL). This company was incorporated on 8-6-1999 as a private limited company after taking prior approval from the competent authorities. This company was formed with a sole objective of undertaking advertising media and promotional activities exclusively for the assessee and its franchise at the regional and national level. According to the assessee, the object of forming this company was to ensure that franchise concentrate on business of running restaurant while marketing and promotional activities are being taken by other entities which is wholly owned subsidiary company. The assessee used to carve out budget for advertisement and promotional activities at the commencement of every year. This was carved out after consultation with the franchise. Each franchise is required to contribute certain fixed percentage of its sales for advertising, media and promotional activities to YRMPL. Any deficit in the budget as compared to the contributory receipt form the franchise is being met by the assessee in the form of its contribution towards advertisement, marketing , promotional activities. Apart from all these Pizza Hut and Kentucky Fried Chicken restaurants, products of P are also sold exclusively as per the joint marketing agreement entered into between YRIPL and P. As the product of P are also advertised in the promotional material for Pizza Hut and Kentucky Fried Chicken Restaurant, P is also required to contribute towards the advertisement for media and promotional activities. The PF had paid a sum of Rs. 39,50,000 to the assessee in financial year 2001-02. For this purpose, assessee has raised debit note for P for receiving this contribution. While making the payment to the assessee P had deducted taxes at source. The assessee had passed on this amount to its subsidiary company, i.e., YRIPL to be incurred on advertising media and promotional activities. It had not deducted any tax at source while making this payment. The assessing officer has made the addition on the ground that P has made the payment to the assessee. The assessee on its own has raised a debit note. Credit for taxes deducted at source by P was claimed by the assessee in its return of income. The assessee did not claim the amount transferred to its subsidiary concern, i.e., YRIPL as its expenditure. It has not deducted taxes at source at the time of transferring the amount. In this way assessing officer has made the addition. Commissioner (Appeals) accepted the contention of assessee on the ground that as far as transmission of this amount to the subsidiary is concerned there is no dispute. The payment of the amount to the subsidiary is an allowable expense because it was to be incurred towards advertising media and promotional activities. The assessing officer has alleged that assessee has not deducted the TDS on this reasoning First Appellate Authority is of the opinion that section 40(a)(ia) were not applicable to the assessment year under appeal, i.e., assessment year 2002-03. It had come on the statute book subsequently. Held: The income is business income and for marketing and promotional activities, therefore, TDS ought to have been deducted or not therefore, finding of Commissioner (Appeals) is remitted to assessing officer for the adudication.