DCIT CC 4 2 MUMBAI, MUMBAI vs. RED CHILLIES ENTERTAINMENTS PVT. LTD., MUMBAI

The brief facts of the case are that the assessee is production house and engaged in making feature films. The assessee had filed its return of income for AY 2012-13 on 22.11.2012 declaring total loss of Rs. (73,93,36,152)/-. The assessment u/s 143(3) was completed vide order dated 27.03.2015 assessing the income at a loss Rs.(-)73,56,76,900. Subsequently, the case of the assessee company was reopened vide notice dated 31.03.2019 u/s 148 of the Act, on the basis of following reasons recorded by the ld. AO for reopening the assessment u/s 147 are as under:- “1. In this case, the assessee filed his return of income on 22-11-2012 declaring income at (-) ₹ 73,93,36,152. Subsequently, the return of income was selected for scrutiny and assessment u/s 143(3) of the IT Act was completed with an assessed loss of (-) 73,56,76,900.

On going through the case record of the assessee, it is found that M/s Red Chillies Entertainment Pvt. Ltd. (RECPL) reimbursed the expenses to Winford Production Ltd (WPL) an amount of Rs. 61,69,68,987. The assessee had claimed entire amount reimbursed as expenses in its books but had not offered any incentive received from UK Government which should be fairly @25% of the cost in this line of producer. Further, the assessee is showing to have paid and amount of Rs. 6.93 Crore to Mr. Shahrukh Khan but Mr. Shahrukh Khan is not showing in his books as the same has been received. Thus the income of Rs. 68,62,68,987 has escaped assessment in the hands of (the assessee).

In response, the assessee company filed its return of income on 30.04.2019 and asked for the copy of reasons for reopening, which was provided to the assessee on 10.09.2019. Thereafter, notice u/s. 143(2) dt. 25.09.2019 was issued and served upon the assessee. Objections filed by the assessee were disposed off by the AO on 08.11.2019. Thereafter, AO passed order u/s 143(3) r.w.s. 147 of the Act dt. 30.12.2019, computing the income of the assessee at a loss of Rs. (-) 11,87,07,913/-.

The Learned Counsel for the assessee challenging the reopening proceedings submitted that the case was reopened beyond 4 years sand without any tangible material. He draws out attention to the reasons recorded which start with the sentence that “as per assessment records……”. He thus submitted that with regard to the issue involved, during assessment proceeding, Ld. AO verified the same and passed the order. He referred details available in paper book which was submitted during original assessment proceeding. Further with regard to salary paid to Mr. Shahrukh Khan, he CO No.290/Mum/2024 Red Chillies Entertainment Pvt. Ltd., submitted that the reasons recorded is irrelevant and there is no such facts exist and in the order passed U/s 143(3) r.w.s. 147 no addition made on this issue. Accordingly, he submitted that reopening notice issued beyond four years without any tangible material is nothing but change of opinion, which is not permissible. Reliance in this regard was placed by him on the decision of the Hon'ble Supreme Court in the case of CIT v. Kelvinator of India Ltd. [2010] 187 Taxman 312/320 ITR 561.

On the other hand Ld. DR submitted that AO has reasonable belief that the assessee had claimed entire amount reimbursed as expenses in its books but had not offered any incentive received from UK Government which should be fairly @25% of the cost in this line of producer. This aspect was not examined specifically by the AO in the original assessment proceedings, therefore, he is justified in reopening the case on this ground alone. He thus relied upon the orders of the authoties below on this issue.

We have heard rival submissions and perused the materials available on record. Here in this case, the original assessment completed u/s. 143(3) was sought to be reopened u/s.147 of the Act after recording the aforesaid reasons to believe that income of the assessee had escaped assessment. Admittedly, this is a case of reopening of assessment made after four years from the end of the relevant assessment year in which the assessment was framed. From perusal of the reasons of reopening, it is evident that AO was not in possession of any CO No.290/Mum/2024 Red Chillies Entertainment Pvt. Ltd., information or tangible material coming on record before him. In his opening reason to believe, he starts with, “On going through the case record of the assessee, it is found that…..” This goes to prove that the ld. AO while recording the reasons is revisiting very same materials that were available with him in the assessment records and he had had no tangible material whatsoever with him which would enable him to form a ‘reasonable belief’ that income of the assessee had escaped assessment, warranting reopening u/s.147 of the Act after 4 years from the end of the relevant assessment year. To acquire jurisdiction post 4 years in terms of proviso to section 147, there has to be failure ascribed on part of the assessee to disclose truly and all material facts necessary for assessment. Apart from that, if the Ld. AO takes a different view subsequently from the same record which was there on record and examined, then again it would not clothe him with jurisdiction to issue notice u/s 148. The scope to reopen the completed assessment u/s 143(3) within the ambit of the proviso to section 147, the conditions and limitation provided therein has to be satisfied whether there was any failure on the part of the assessee to disclose fully and truly all material facts or not. In the case under consideration, notice u/s 148 had been issued only on 29.3.2019, that is, after four years from the end of relevant assessment year and apparently, no such failure is either evident from the assessment order or the reasons recorded by the AO nor has been pointed out before us by the ld. Department Representative.

Further in the case of Priyanka Carbon & Chemical Industries (P) Ltd. vs. DCIT (2008) 15 DTR (Guj.) 31, Hon'ble High Court held that when factual data was available with the AO at the time of assessment, on the same very material, if the AO takes a different view subsequently and that too after expiry of four years from the end of the relevant assessment year, that would not confer any jurisdiction on the AO to issue notice u/s 148 of the Act. Similar view was taken in ACIT vs. Jagdishbhai Nanubhai Tekrawala (2008) 12 DTR (Guj) 270, 5.5 In Vareli Weavers Pvt. Ltd. vs. DCIT (1999) 240 ITR 77 (Guj) also notices under section 148 read with section 147 of the Act were quashed by the Hon'ble High Court, there being no whisper in the reasons recorded by the AO about

Further, the AO in his reasons for reopening has also alleged that an amount of Rs 6.93 crore has been paid to Mr. Shahrukh Khan but the said income is not shown in his books. However, no such addition was made in the assessment order as the said observation of the AO lacked merit. Thus, this further shows the blind approach adopted by the AO while re-opening the instant case.

Thus, keeping view the aforesaid, we hold that in the facts and circumstances of the present case, the initiation of reassessment proceedings by the Assessing Officer can’t be sustained. Accordingly, we quash the notice dated 31/03/2019, issued under Section 148 of the Act as well as the Assessment Order, dated 30/12/2019, passed under Section 143(3) read with Section 147 of the Act. Accordingly, the Assessment Order, dated 27/03/2015, passed under Section 143(3) of the Act is reinstated. Thus, Ground No. 1 to 3 raised by the Assessee are allowed.

Coming to merits of the case, wherein the revenue has raised 2 grounds. The first ground deals with addition of Rs. 15,42,42,246/- made on account of incentive received from UK without properly appreciating the facts of the case that the UK Film Tax Relief is available to Film Production companies.

On the other hand, the learned AR of the assessee submitted that the issue is with regard to production of film ‘Ra One’ and the assessee company has given all the rights to Eros International Media Ltd(EIML) as per agreement available on page 36-56 of paper book for a total consideration of Rs. 130 Crore and the same was duly considered as receipt in the hands of assessee company. Reference was also drawn to page 10 & 12 of the paperbook which was the business receipt statement of Film RA.One given by EIML to the assessee company wherein EMIL considering receipt of USD 3609465 as tax credit incentive receipt from UK Govt. This receipt is part of total receipt by EMIL out of which share of assessee company as per agreement i.e. 130 crore received by it. Further it was argued that since the tax incentive has been accounted for by EIML, no further addition can be made in the hands of the assessee company.

We have considered the rival submission as well as relevant material on record. From the combined reading of the aforementioned documents, we find merit in arguments made by the Ld.AR. As per the agreement entered in October 2011 between the Assessee Company and EMIL, it is seen that CO No.290/Mum/2024 Red Chillies Entertainment Pvt. Ltd., EMIL has agreed to take the rights/copyrights on sole and exclusive basis from the assessee company. For such assignment of rights it was agreed between the parties that the following payment terms: 12(i) Payment Subject to the full, complete and timely performance and observance by the Assignor of all its obligations and warranties and as the agreed consideration for the irrevocable, sole and exclusive assignment of all rights of the said Film granted to the Assignee, theAssignee hereby agrees to pay to the Assignor a total consideration of INR.130,00,00,000/- (Rupees One Hundred and Thirty Crores only) vide Clause 12(iii). (a) On the Assignee recovering sum of Rs. 162,00,00,000/- (One Hundred and Sixty Two Crores Only) (net realization] from the exploitation of all rights of the said Film for the Term and Territory the Assignee shall pay to the Assignor 50% of all monies in excess of Rs. 162,00,00,000/- (One Hundred and Sixty Two Crores Only) as stated above, (aa) It is clarified that on recovery of sum of Rs.157,00,00,000/- out ofRs.162,00,00,000/- referred to clause (a) above the Assignee shall pay to the Assignor a sum of Rs.5,00,00,000/- and thereafter on recovery of Rs. 162,00,00,000/- the Assignee shall pay to the Assignor 50% of all monies in excess of Rs.162,00,00,000/-(One Hundred and Sixty Two Crores Only) as stated in clause (a) above. (b) Net Realization in clause 12(i)(a) shall mean all revenues accrued from the exploitation of all rights of the said Film less all taxes including entertainment taxes, exhibitor's share and all costs, charges, expenses including but not limited to expenses towards prints, publicity, advertising and freight and transportation expenses and all other expenses incurred by the Assignee for exhibition, exploitation and distribution of all said rights of the said film.”

Thereafter, it is seen that the assessee company is entitled to receive Rs. 130 crores irrespective of success or failure of the film. Further as per business statement provided by EMIL, it is seen that the credit of tax as alleged by the AO has been received and accounted for EMIL amounting to Rs 19,29,34,109/- (USD 3609465) while arriving at Net Realisation figure. Therefore, in our opinion CIT(A) has rightly deleted the addition as the same receipt cannot be added again in the hands of assessee company.

The second ground raised by the revenue relates to disallowance of Rs. 61,69,68,987/-u/s 40(a)(i) of the Act. The moot point is that the assessee company has reimbursed expenses to one Winford Production Ltd (UK based company)

Before us, the learned DR relied upon the finding given in the assessment order. The Assessing Officer has noted that the remittance of the money in question is for the service rendered by the payee through its employees and therefore, the said payment is in the nature of fee for technical services. Thus, the gross revenue received by the payee being FTS is liable to tax and expenses cannot be allowed as deduction. He further noted that once the payment is fee for technical services then the theory of reimbursement of expenses does not apply. AO noted that in case of payment to non-resident the assessee cannot take a unilateral decision that payments are not sum chargeable to taxes. The nature of the services provided by the payee is technical and expert's services and therefore, the payment against such services falls under the definition of fees for technical service.

On the other hand, learned AR of the assessee has submitted that amount paid by the assessee is not an income in the hands of the payee as it is only reimbursement of cost. He drew our attention to page 57-59 of paper book which contains agreement with Winford Production Ltd. He referred CO No.290/Mum/2024 Red Chillies Entertainment Pvt. Ltd., to the details of expenses which primarily consists arrangement of shooting locations, obtaining necessary permits/ licenses, arranging for customs clearance, make up cost and local commuting, food & lodging, hire of local artist. He has stated that as agreed upon between the parties the payments will be charged without mark up or the company shall directly compensate. He also submitted that as per agreement amount payable as production fee of GBP 50,000/- was remitted to them after deducting TDS which is an undisputed fact.

The learned AR has emphasized that in the absence of making available any technical knowledge; know how, the payment does not fall within the Article 13 of Indo-UK DTAA. Alternatively, the learned AR has submitted that even in case the payment are not treated as reimbursement the same are not taxable in India as business profits in the absence of P.E in India. He has also relied upon the following decisions:  CIT Vs De Beers India Minerals (P.) Ltd. 346 ITR 467 (Kar.)  CIT Vs Siemens Aktiongesellschaft 310  ACIT Vs CMS (India) Operations & Maintenance Co. (P.)  Abbey Business Services (India) (P.) Ltd. Vs DCIT 23 Taxman 346 (Bang.)  ITO Vs ISE Securities & Services Ltd. in ITA No. 6391/M/2009

We have considered the rival submissions as well as relevant material on record. The present case is a case of part CO No.290/Mum/2024 Red Chillies Entertainment Pvt. Ltd., reimbursement of expenses and therefore there is no income element present in part reimbursement. The services rendered by Winford Production Ltd. are generic expenses which are incurred for making of film and can no way be said to be technical services within the scope of treaty between India and U.K. Further, from the above it also cannot be said that the services have been 'made available' to the assessee to be taxable in India. Reference in this regard reliance was made before us to the judgement of ITAT Bangalore 'A' Bench In case of IDS Software Solutions (India (P) Ltd. 122 ITJ (Bang) 410. In this case of an employee of U.S. Company was seconded to the Indian Company under secondment agreement to provide managerial services in the business of the Indian Company. The seconded employee was reportable and responsible to the Indian Company and was required to devote the whole of his time, attention and skills to the duties required by the secondment agreement. The Indian company had the right to approve or reject the employee and if necessary to request the US Company to replace the employee if such employee is found not qualified to meet the requirements of the seconded arrangements. The seconded employee was required to act and serve as 'officers', authorized signatories, nominees and in other lawful capacity on behalf of the Indian company etc. On these facts the ITAT has held as under; "The next question is whether the amount can be considered as fees for technical services within the meaning of Expln. 2 below s. 9(1)(vii) of the IT.Act. Under this Explanation fees for technical services means any consideration including lump sum consideration for the rendering managerial, technical or CO No.290/Mum/2024 Red Chillies Entertainment Pvt. Ltd., consultancy services, including the provision of services of technical or other personnel, but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries ". It is not denied before us on behalf of the assessee that Dr. Sundarajan is a technical person. What is however submitted is that arts 11 and VI of the secondment agreement would be out of place in a contract for providing technical services. Article II as we have already seen contains eight clauses outlining the duties and obligations of the seconded employee. Article VI provides for indemnification which has also been earlier noticed by us. We are inclined to agree with the submission that these two articles are out of place in a contract for providing technical services. For example, Cls. (A) to (C) of art II make the seconded employee responsible and subservient to the assessee company which cannot be the case if the agreement is for providing technical services by IDS act as officer or authorized signatory or nominee or in any other lawful personal capacity for the assessee company, would also be out of place in the agreement for rendering technical services as it cannot be imagined that a technical person would also be required to act in non-technical capacities under an agreement for rendering technical services. Clause (H) on which considerable reliance was placed by the Department to contend that the agreement is one for rendering technical services, is merely a clause ensuring secrecy and confidentiality of the information accessed by the seconded employee in the course of his employment with the assessee company. Such confidentiality extends not only to technical information, which would be the case if the agreement is one for rendering technical services but also to financial or accounting Marks and Spencer Reliance India information, price or cost data and any other proprietary or business related information. Article VI which provides for indemnity, that is to say, the liability of the assessee company to indemnify the US company from all claims, demands, etc., consequent to any actor omission by the seconded employee is also inconsistent with the claim of the Department that this is an agreement for rendering technical services. The article further provides that nothing in the agreement shall be construed as a warranty of the quality of the seconded employee. It is not usual to find a stipulation in an agreement for rendering technical services."

Similarly in case of Louis Berger International Inc. 40 SOT 370 (Hyd) Hon'ble Hyderabad 1TAT in a case of reimbursement of expenses for providing consultancy services has held that such reimbursement of expenses is not taxable under India USA treaty and also under the Act.

Thus in the absence of make available technical knowledge, expertise, skill, know-how or process etc. it cannot be held that the payment is FTS as per article 13(4) of Indo UK DTAA. The term fee for technical service has been defined under par 4 of article 13 of Indo-UK DTAA as under: "4. for the purposes of paragraphs 2 of this Article, and subject of paragraph 5 of this Article, the terms "fees for technical services" means payment of any king of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which; (a) are ancillary and subsidiary to the application of enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received ;or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or (c) make available technical knowledge, experience, skill know- how or processes, or consist of the development and transfer of a technical plan or technical design".

Thus, merely providing the services such as arrangement of shooting locations, obtaining necessary permits/ licenses, arranging for customs clearance, make up CO No.290/Mum/2024 Red Chillies Entertainment Pvt. Ltd., cost and local commuting, food & lodging, hire of local artist would not constitute make available of the services of any technical or consultancy in nature. The Hon'ble High Court has observed in para 13 that as per the definition for fee for technical services means payment of any kind to any person in consideration for service or services of technical nature if such services make available technical knowledge, experience, skill know-how or process which enables the person acquiring the services to apply technology contained therein. Accordingly, in view the decision of Hon'ble Karnataka High Court in case of CIT vs. De Beers India Minerals (P.) Ltd. (supra), we hold that the said payment in question does not fall under the term fee for technical services as per provisions of Indo-UK DTAA.

Having held that the payment in question is not fees for technical services the same has to be examined in the light of relevant provisions of the Act and DTAA. Even, under the Income Tax Act, if the payment is only reimbursement of expenses the same cannot be regarded as income in the hand of the payee/recipient. In view of the above discussions, we do not find any error or illegality in the impugned order of CIT (A). We find that the arguments made the learned DR are not applicable in the facts case of the assessee, because there is no ambiguity. Accordingly, we do not find any merits in the appeal of the revenue. Therefore the ground raised by the revenue is quashed.