2017-TII-51-ITAT-MUM-INTL

SHAH RUKH KHAN Vs ACIT : MUMBAI ITAT (Dated: March 17, 2017)

Income Tax - Sections 2(24)(iv), 23(1)(a), 24(a), 37(1), 143(3) - DTAA netween India & UAE - Article 6

Keywords: commercial expediency - gratuitous payment - deemed ALV - income from gifted immovable property - professional fees - unutilized amount - appearance and promotions

The assessee, an individual, is a Film Actor by profession. It had declared income from profession based on cash method. AO noticed that assessee had claimed an expenditure of Rs.10 crores under the head ‘Professional fees returned to Star India Private Limited’. The said amount represented payment by assessee to Knight Riders Sports Pvt. Ltd. on behalf of Star India Private Ltd. for grant of sponsorship rights for IPL Season -2. On being asked to explain, assessee contended that in terms of an Artist Service Agreement with Star India Pvt. Ltd. it was liable to act as anchor and host of the programme to be produced by Star India Ltd., namely ‘Kaun Banega Crorepati’ for a total of 104 Episodes, divided into two seasons of 52 Episodes each. The total consideration payable was Rs.72 cores, which was received by assessee in advance and had been offered for tax in an earlier year on receipt basis. It was explained that assessee rendered the services for the first season of 52 Episodes but for second season comprising of the balance 52 Episodes no service was rendered as the programme was discontinued by Star India Pvt. Ltd. for commercial reasons. The assessee explained that as the balance Episodes were not delivered, Star India Pvt. Ltd wanted to recover the value of the unutilized amount from the assessee for non-shooting of the 2nd Season and, therefore, in terms of a mutually agreed arrangement, assessee agreed to get for Star India Pvt. Ltd. the following:- (a) a key sponsorship association with Kolkota Knight Riders team for calendar year 2009 (IPL Season 2); and, (b) other accompanying sponsorship rights and deliverables detailed in the arrangement. Such accompanying deliverables included certain ‘Appearances and Promotions’ by assessee in press conferences in London and Dubai. The arrangement did not envisage any liability of Star India Pvt. Ltd. in respect of any fee or costs, etc. to be incurred by assessee or Knight Rider Sports Pvt. Ltd. in relation to the deliverables mentioned and the sponsorship rights. It was explained that for procuring the sponsorship rights of Knight Rider Sports Pvt. Ltd. for IPL Season -2, assessee paid Rs.10 crores on behalf of the Star India Pvt. Ltd. to Knight Rider Sports Pvt. Ltd. This amount was claimed as a professional expenditure.

As per AO, assessee was under no obligation to refund any amount to Star India Pvt. Ltd. because non-shooting of the balance 52 Episodes was not for reasons attributable to the assessee. In this context, AO referred to the Artist Service Agreement between the assessee and Star India Pvt. Ltd. to point out that the assessee was liable to refund the amount only if breach of contract was attributable to assessee and in the present case the reason for discontinuation was not attributable to assessee. Secondly, AO also observed that during the year under consideration no income of any nature had been received by the assessee from Star India Pvt. Ltd. and, therefore, the expenditure of Rs.10 crores debited under the head ‘Professional fees returned to Star India Pvt. Ltd.’ does not have any nexus or bearing on any of the professional receipts earned during the year under consideration, and therefore, the impugned expenditure could not be allowed as deduction in the year under consideration. Thirdly, AO has also referred to the response of Star India Pvt. Ltd. to certain queries whereby it was clear that the entire amount of Rs.72 crores paid to the assessee has been accounted for as an expenditure in the hands of Star India Pvt. Ltd. As per AO none of the amount comprised in the receipt of Rs.72 crores from Star India Pvt. Ltd. was refundable by assessee.

On appeal, CIT(A) disagreed with assessee, as according to him, the impugned payment could not be construed as ‘commercially expedient’ since the amount was neither payable nor enforceable in terms of the terms and conditions of agreement with Star India Pvt. Ltd. As per CIT(A), the payment was gratuitous in nature and, therefore, on this count also the said amount was not deductible as an expenditure. CIT(A) noted that as the expenditure related to the income of Rs.72.00 crores which was offered to tax on receipt basis in a preceding year and, thus, such expenditure was not relatable to incomes of current year, was a prior period expenditure in so far as the current year was concerned. Thus, CIT(A) sustained the action of AO disallowing the expenditure of Rs.10 cores.

Addition regarding Professional Fees

In terms of the understanding with Star India Pvt. Ltd., assessee was to secure sponsorship rights of Kolkata Knight Riders Cricket team for IPL Season-II for which assessee had paid the relevant consideration to M/s. Knight Riders Sports Pvt. Ltd. on behalf of M/s. Star India Pvt. Ltd. As a part of understanding, assessee had agreed to attend one press conference each at London and Dubai on mutually suitable dates for promotion of M/s. Star India Pvt. Ltd. as sponsorer of Kolkata Knight Riders Cricket team. AO required assessee to explain as to why assessee had not shown any professional receipt on this count since he had agreed for ‘Appearances and Promotions’, which is a part of his normal professional activity. AO observed that assessee was earning professional receipts from films, advertisements & endorsements and stage performances. AO further noticed that activity of appearing in a press conference was also in the realm of assessee’s professional activity. According to AO, the enormous brand equity enjoyed by assessee was exploited for such an arrangement both by M/s. Star India Pvt. Ltd. and M/s. Knight Riders Sports Pvt. Ltd. and that incidentally the substantial shareholder of M/s. Knight Riders Sports Pvt. Ltd. was M/s. Red Chillies Entertainment Pvt. Ltd. in which assessee and his wife were the shareholders. AO also noticed that in subsequent year, assessee had acquired substantial shares in M/s. Knight Riders Sports Pvt. Ltd. and, therefore, the benefits which accrued to the said concern from endorsement by assessee had benefitted the assessee in a roundabout manner, which was reflected in the acquisition of shares of the said company by assessee. AO estimated the value of such arrangement at Rs. 7 crores being the average rate of endorsement fee charged by assessee and the same was brought to tax as Professional fee. On appeal, CIT(A) upheld the addition made by AO.

Addition regarding ALV of Dubai Villa

Assessee was gifted a villa in Dubai by Nakheel PJSE and possession was received by assessee on 18/06/2008. AO show caused the assessee to explain as to why the deemed annual letting value within the meaning of section 23(1)(a) should not be adopted in respect to the said property. Before AO, assessee contended that in view of the provisions of Para -1 of Article - 6 of DTAA between India and UAE, no income in respect of the said property was required to be assessed. However, AO did not accepted the plea of assessee and estimated ALV at Rs.96.00 lacs and thereafter, allowing the deduction u/s 24(a) amounting to Rs.28,80,000/-, the income from house property was assessed at Rs.67,20,000/-. On appeal, CIT(A) upheld the stand of AO in the light of the Notification Nos.90 & 91 of 2008 dated 28/08/2008 issued by the CBDT. As per CIT(A), in view of the aforesaid notifications, the ALV of the said property was includible in the total income of the assessee.

Having heard the matter, the Tribunal held that,

Whether expenses falling within the scope of the expression "wholly and exclusively for the purpose of business or profession" as per section 37(1) can be disallowed - NO: ITAT

++ there is a subsisting professional relationship between assessee and Star India Pvt. Ltd. and the impugned arrangement has to be viewed from the prism of a Principal – client relationship. In terms of the Artist Service Agreement dated 30/03/2007, assessee was to shoot for 104 Episodes but no shooting took place for 52 Episodes on account of a decision of Star India Pvt. Ltd., whereas the consideration for the entire Episodes was paid to the assessee in advance. In such a situation, intention of Star India Pvt. Ltd to obtain or recover the value of the unutilized amount from assessee for non-shooting of the balance 52 Episodes is quite plausible. As per the Revenue, the Artist Service Agreement dated 30/03/2007 did not obligate the assessee to refund the unutilized amount because the non-shooting on a decision taken by Star India Pvt. Ltd. No doubt, the point made by the Revenue may be correct in the context of the terms and conditions of the Artist Service Agreement dated 30/03/2007 but the allowability of the impugned expenditure has to be examined in the context of its commercial expediency. The assessee entered into an arrangement with Star India Pvt. Ltd. on a mutually agreed basis whereby the loss suffered by Star India Pvt. Ltd. was sought to be recouped with the earnings from the sponsorship of Kolkata Knight Riders Cricket Team for which assessee incurred Rs.10 crores on behalf of Star India Pvt. Ltd. In our considered opinion, it is not the legal necessity to spent the expenditure which is determinative of its allowability; rather, it is the existence or otherwise of commercial expediency which guides the allowability of expenditure u/s 37(1). From the point of view of commercial expediency, it is abundantly clearly that assessee had a long-standing professional relationship with Star India Pvt. Ltd. and there is a nexus between the impugned expenditure and the purpose of business. In the present case, there is no challenge to the bonafides of the expenditure incurred and, in our view, the same can be understood to have been incurred wholly and exclusively for the purposes of business within the meaning of section 37(1). In fact, SC in the case of Sassoon J. David has held that the expression "wholly and exclusively" used in section10(2)(xv) of the Income Tax Act, 1922 ( which is pari-materia to section 37(1) does not mean that expenditure has to be "necessarily" incurred. As per SC, an expenditure incurred voluntarily and without any necessity would be allowable so long as it has been incurred for promoting the business of the assessee. In our considered opinion, the commercial expediency canvassed by the assessee in the instant case clearly establishes that the impugned expenditure falls within the scope of the expression "wholly and exclusively for the purpose of business or profession" within the meaning of section 37(1). Therefore, on this aspect, assessee has to succeed. Accordingly, order of CIT(A) is set-aside and AO is directed to delete the addition of Rs.10 crores. Thus, assessee succeeds on this Ground;

Addition regarding Professional Fees

Whether in the event of no appearances and promotions have actually been carried out by assessee, an addition in his income on notional basis can be considered justified - NO: ITAT

++ the impugned addition of Rs. 7 crores is merely an assessment of a notional income, which is neither supported by receipt or accrual of income. It cannot be overemphasised that what is required to be assessed to income-tax is the real income and not a hypothetical or notional income. As per SC in the case of Godhra Electricity Co. Ltd. in case of accrual of income or receipt of income, what is of relevance is to assess an income which materialises. If an income does not result at all, obviously there cannot be taxation of such an income. As per Revenue, the assessee, on account of his professional standing, enjoys brand equity and, therefore, the appearances and promotions has added value to the entities on behalf of which such appearances take place. In the present case, as per the Revenue, the brand equity of M/s. Knight Riders Sports Pvt. Ltd. and M/s. Star India Pvt. Ltd. was enhanced because of such appearances by the assessee. It is also noted that in the subsequent year, assessee had purchased the shares of M/s. Knight Riders Sports Pvt. Ltd. from M/s. Red Chillies Entertainment Pvt. Ltd. and in this manner the events have been so planned that the brand of M/s. Knight Riders Sports Pvt. Ltd. was promoted by the assessee in this year itself. Because of the aforesaid arrangement, the Revenue contends that there is a certain amount of income which can be attributable to such services rendered by the assessee. Thus, the aforesaid proposition made out by Revenue is entirely mis-conceived inasmuch as no such appearances and promotions have indeed been carried out. Further, as per the Revenue because of such an arrangement, assessee has earned a benefit within the meaning of Sec. 2(24)(iv). On this aspect also, in our view, the action of lower authorities is completely misdirected and is devoid of any factual support. The Assessing Officer has not been able to establish as to what benefit has been obtained by assessee within the meaning of Sec. 2(24)(iv) the instant year as nothing is shown to have been received by the assessee. Therefore, the addition of Rs. 7 crores made by Assessing Officer is purely on conjectures and surmises and is untenable in law and also on facts. Therefore, on this aspect also, assessee succeeds;

Addition regarding ALV of Dubai Villa

Whether the ALV of an immovable property situated in Dubai, gifted to an Indian national, can be deemed to be included in his income earned in India as per DTAA provisions - YES: ITAT

++ the action of the lower authorities deserves to be upheld in view of the Notification Nos.90 & 91/2008 dated 28/08/2008. In fact, the entire controversy is arising from the understanding of the expression "may be taxed in that other State" as mentioned in Para-1 of Article-6 of the DTAA between India and UAE. In view of the aforesaid precedent, it has to be held that income from the Dubai Villa is liable to be taxed in India inasmuch as the same is includible in the return of income and whatever taxes that may have been levied in the other contracting State, the credit thereof is required to be allowed as per law. Therefore, in view thereof we hold the issue against the assessee and direct the AO to rework the final tax liability in accordance with aforesaid direction. Thus, on this aspect assessee fails on its Ground. In the result, appeal of the assessee is partly allowed, as above.

Assessee's appeal partly allowed

2017-TII-50-ITAT-BANG-INTL

AVESTHAGEN LTD Vs DCIT : BENGALURU ITAT (Dated: March 17, 2017)

Income Tax - Sections 9(1)(vii), 195, 201, 201(1A) & DTAA between India and Swiss confederation - Article 12(2)

Keywords: Fees for technical service - R&D services - joint venture - TDS - show cause notice - gross receipts - assessee in default & remittances made

The assessee, company was converted into a Public Limited Company and its name was changed to Avesthagen Ltd. Assessee with its subsidiaries and JV companies was engaged in business of scientific research and product development to provide preventive personalized medical care. It was providing R&D services in Bio-technology and Bio-informatics mainly to its JV group company and a subsidiary company. During FY 2007-08, it made various payments to M/s Selexis SA, a company incorporated under laws of Switzerland for providing certain services related to development cell lines using the technology of Selexis under an agreement. AO noticed that assessee had failed to deduct TDS on the said remittances as required u/s 195. Although the said remittances were characterized as "FTS" in the CAs certificate, the rate of withholding tax was wrongly taken at NIL relying on clause I of Article 12 of the Tax Treaty with the Swiss Confederation. It seemed to AO that assessee had over-looked the provisions of Clause 2 of Article 12 as per which FTS could be charged to tax in India as well @ 10% of gross receipts. Accordingly, AO initiated proceedings against the assessee u/s 201 (1) for non-deduction of TDS on the above remittances and after perusal of the assessee's written submissions, issued a final show cause notice to treat it as as an assessee in default for non-deduction of TDS u/s 201(1). AO finally held that payments made by it to Selexis for rendering services in connection with development of cell lines as FTS and it would constitute income chargeable to tax in the hands of Selexis under the Act as well as under the provisions of DTAA between India and Switzerland. Since assessee failed to deduct TDS, AO treated it as an assessee in default u/s 201(1) in respect of the tax deductible at source thereon and the interest payable in terms of Section 201(1A). On appeal, CIT(A) dismissed the appeal. The assessee filed an appeal before this Tribunal in ITA No 972 against the CIT (A) order. On being asked to file a separate appeal for each of the demands, the assessee filed an appeal in respect of the demand u/s 201(1A) and filed a revised grounds on the original appeal towards the demand u/s 201(1)

Having heard the matter, the Tribunal held that,

Whether payment made for goods imported unfit for human consumption and no commercial value cannot be treated as 'Fees for Technical services' - NO: ITAT

+ the CIT(A) after analyzing the agreement and other evidences held that there is no mention of Phase I (for sale of tangible goods) and Phase II ( licensing of Intellectual property) in the agreement as contended by the assessee. The payment of Rs. 2,10,16,078/- is fees for technical services u/s 9(1)(vii) as well as under Article 12 of the DTAA between India and the Swiss Confederation. Further, he found from the Chartered Accountants certificate that the impugned payment is described as towards "Fee for Technical Services" and no justification is stated for changing the assessee's stance that it is a consideration for import of goods. The CIT (A) also found from the export invoice Nos C-31 & C-38 dated 29.02.2008 & 18.04.2008 raised by Selexis on the assessee towards export of 45 & 42 vials, respectively, of "mammalian cell lines expressing recombinant proteins" that they were declared to be "samples for laboratory use only", "not for human use" , that they had "no commercial value" and that the assessee is patently wrong in contending that the remittance is towards import of tangible property of vials of cell Minipools. The import clearance letter dated 29.04.2008 issued by the Department of Biotechnology, Ministry of Science and Technology, Government of India is only a regulatory requirement and the classification of Recombinant Mammalian Cell Lines under Customs Tariff entry 3002.90.90 will not detract the position that payment is for technical services and not for supply of cell lines. After a detailed discussion , he has relied on the Jurisdictional Karnataka HC's decision in Samsung 2009-TII-25-HC-KAR-INTL. However, the assessee could not lay any material to assail the above findings and hence we find that the order of CIT (A) does not require any interference. In the result, both these appeals are dismissed. In the result, the appeals filed by the assessee are dismissed.

Assessee's appeal dismissed