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Income Tax Appellate Tribunal, DELHI BENCH ‘B’ : NEW DELHI
Before: SHRI R.S. SYAL & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, Cheil India Private Limited (hereinafter referred to as ‘the assessee’) by filing the present appeal sought to set aside the impugned order dated 20.10.2014 passed by the Commissioner of Income-tax (Appeals)-VI, New Delhi qua the assessment year 2011-12 on the amended grounds (filed vide order dated 11.03.2015) inter alia that :-
“On the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals), New Delhi - VI ('learned CIT(A)') has erred in passing the appellate order under section 250(6) of the Income-tax Act, 1961 ('Act') after considering the following: Each of the ground is referred to separately, which may kindly be considered independent of each other.
That the appellate order passed by the learned CIT(A) is contrary to the facts of the case and against the provisions of law and has been passed with pre-conceived notions and is based on conjectures and surmises and is therefore liable to be quashed.
2. That the assessment order has been passed by Deputy Commissioner of Income-tax, Circle 3(1), New Delhi ('learned AO') under section 144 read with section 143(3) of the Act in absolute haste and arbitrary manner without giving an opportunity to the Appellant to justify the false and unjust allegations made in the assessment order which is bad in law and learned CIT(A) has erred in holding such order as valid. 3. That the learned CIT(A) has erred on facts and in law by rejecting the contention of the Appellant that it acts as agent of its clients and disregarding the net basis method of accounting followed by the Appellant which is in accordance with the Accounting Standard ('AS') 9 "Revenue Recognition" as recommended by ICAI and now also prescribed by Central Government as part of Companies (Accounting Standards) Rules, 2006. 4. That the learned CIT(A) has erred on facts and in law in confirming an addition of Rs.65,52,74,478 being the amount paid/payable by Appellant to third party vendors on the sole premise that such vendors did not respond to the notice issued by the learned AO under section 133(6) of the Act.
5. That the learned CIT(A) has grossly erred both on facts and in law in holding that amount not confirmed by vendors should be disallowed under section 68 of the Act.
6. That the learned CIT(A) has erred on facts and in law by making an adhoc addition of Rs.23,93,44,462 being 50% of the amount paid/ payable to the vendors to whom no notices were sent by the learned AO under section 68 of the Act.
That the notice issued by learned CIT(A) for enhancement of additions made by learned AO and enhancement so made is illegal, bad in law, unjust and without jurisdiction.
8. That the learned CIT(A) has grossly erred on facts and in law in exceeding her jurisdiction and in enhancing the income of the Appellant by making addition on issue which was never raised by the learned AO.
9. That the learned CIT(A) has erred on facts and in law in disallowing the payment of Rs.27,50,306 made to its vendors for supply of materials without deduction of tax at source under section 40(a)(ia) of the Act on the ground that these payments are made for work undertaken by the vendors and are subject to withholding tax under section 194C of the Act.
That the learned CIT(A) has erred on facts and in law in disallowing the payment of Rs.1,89,784 made to its vendors for supply of materials without deduction of tax at source under section 40(a)(ia) of the Act on adhoc basis and presuming that even such payments are subject to withholding tax. 11. That the learned CIT(A) has erred on facts and in law in disallowing pass through cost under section 40(a)(ia) as the same is not warranted since such pass through costs are incurred by the Appellant on behalf of its customers.
Without prejudice to above, since pass through costs are incurred by the Appellant on behalf of its customers and same are recovered from them along with the agreed commission, such amount is not an expense of the Appellant and by adding such amount to the income of the Appellant without reducing corresponding amount recovered from its customers would be unjustifiable.
13. Without prejudice to the above grounds, in view of the facts and circumstances of the case and in view of the insertion of second proviso to section 40(a)(ia) of the Act, no such disallowance made by learned CIT(A) under section 40(a)(ia) of the is uncalled for. 14. Without prejudice to the above grounds, the benefit of second proviso to section 40(a)(ia) of the Act should be allowed in the year in which TDS is deemed to be deducted and paid.
15. Without prejudice to the above, learned CIT(A) has erroneously computed additional income as Rs.1,54,98,15,194 instead of Rs.90,08,18,069.
16. That the learned CIT(A) has erred on facts and in law in upholding the addition made by the learned AO of Rs.3,01,15,968 on account of decrease in the net profit ratio based on presumptions, assumptions conjecture and surmises and without giving adequate opportunity to Appellant to support its claim. 17. That the learned CIT(A) has erred on facts and in law in directing learned AO to initiate penalty proceedings under section 201 (1) of the Act 18. That the learned CIT(N has grossly erred on facts and in law by completely ignoring the provisions of law, submissions made by the Appellant, evidences placed and the material available on record and has passed a perverse order in utmost haste without giving adequate opportunity of being heard which is against the principles of natural justice.”
Briefly stated the facts of this case are : assessee’s return of income qua Assessment Year 2011-12 declaring income at Rs.9,08,88,229/- was subjected to scrutiny and ld. AR for the assessee filed Form No.3CEB etc. but thereafter failed to turn up and consequently, AO proceeded to decide assessment proceedings ex-parte.
Assessee company is into the business of advertisement, brand promotion and other related activities for the Samsung Group encompassing creating and conceptualizing the advertising content, creative preparation of advertisement, media, retail publicity material. AO noticed steep fall of about 9% in the Net Profit (NP) i.e. 24.43% of the turnover (Rs.31,70,10,189/-) in the assessment year under consideration as against NP of 35% of the turnover (Rs.34,70,31,473/-) in the last year. AO also noticed that substantial increase in various heads of the expenses. On failure of the assessee company to justify the fall in the NP rate, AO made an addition of Rs.3,01,15,968/- to the income of the assessee being 9.5% of the total turnover.
AO noticed that the assessee company had shown receipt of Rs.31,70,10,189/- but as per the information available on Form No.26AS, the total receipt is Rs.163,17,01,764/- and thereby shown the less receipt of Rs.131,46,91,575/- (Rs.163,17,01,764/- minus Rs.31,70,10,189/-), which the AO has treated the deemed income of the assessee u/s 199 of the Income-tax Act, 1961 (for short ‘the Act’. AO also found income from other sources of Rs.82,86,371/- has not been tallied with Form No.26AS as disclosed by the assessee. Assessee company has failed to reconcile the receipts shown in the profit & loss account with TDS certificates, nor filed any copy of account of the vendors to whom the payment has been made nor any PAN number and address of the vendors have been filed and as such, the claim of the assessee remained unverifiable. Consequently, the short receipts shown by the assessee amounting to Rs.1,31,46,91,575/- is treated as income of the assessee and made addition thereof.
Assessee carried the matter before the ld. CIT (A) by way of filing the appeal who has dismissed the same. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUND NO.1 7. Ground No.1 is being general in nature needs no specific adjudication, hence decided accordingly.
GROUND NO.2
Ground No.2 is not pressed by the ld. AR for the assessee company, hence same is determined against the assessee company.
The contention of the ld. DR that assessee is a sub-contractor and not agent is not tenable as this issue has already been determined by the coordinate Bench of Tribunal in assessee’s own case qua AY 2005-06 and 2010-11.
GROUNDS NO.3, 4, 5, 6, 7, 8 & 18 10. First challenge made by assessee that AO erred in treating the difference between revenue disclosed by the assessee in P&L account and the amount of the receipts shown in Form No.26AS as deemed income. Undisputedly, assessee company disclosed its revenue in P&L account at Rs.31,70,10,89/- whereas as per Form No.26AS, the total receipts were Rs.163,17,01,764/-, which excludes receipt from income from other sources and resultantly shown less income of Rs.131,46,91,575/-.
Ld. AR for the assessee contended that such difference arisen due to accounting policy followed by the assessee which is easily verifiable and filed the reconciliation. The total value of the invoice raised and revenue is as under :-
Particulars Amount Amount (in INR) (in INR) Total value of invoices raised by 1,853,561,419 Cheil India on its clients during the year Less : Opening unbilled debtors (75,723,613) Add : Closing unbilled debtors 60,746,866 Less : Pass through cost (1,521,574,483) Revenue as per P&L account 317,010,189
12. Assessee further contended that the ld. CIT (A) has also erred in not treating the assessee as agent by misinterpreting the business model and accounting policy. First of all, when audited books of accounts of the assessee has been accepted and the assessee has been following this accounting policy since long, it is difficult to accept the findings returned by ld. CIT (A) that the assessee is not acting as agent of its client.
Identical issue has already been dealt with in AY 2005-06 dated 30.11.2010 in assessee’s own case by the ITAT, Delhi Bench ‘B’, New Delhi (order available at page 1 to 45 of the paper book) and has been answered in favour of the assessee. Moreover, the assessee has been held to have borrowed in the capacity of an agent and this proposition of fact and law has also been accepted by the ld. DRP in its order for AY 2009-10 lying at page 47 to 63 of paper book 1. So, impugning the accounting policy followed by assessee by ld. CIT (A)/AO is mis-interpretation of settled proposition in assessee’s own case by the ITAT as well as DRP.
14. So far as question of confirming the addition of Rs.65,52,74,478/- by CIT (A) being the amount paid/payable by the assessee to third party vendors on the ground that such vendors did not respond to the notice issued by the AO u/s 133 (6) of the Act, is concerned, the ld. CIT (A) proceeded to confirm the disallowance of Rs.65,52,74,478/- on the sole premise that there should not be any reason for non-confirmation of the transaction and as such it can be safely concluded that the expenditure/pass through cost shown for the unconfirmed party is bogus. Ld. CIT (A) computed the total disallowance u/s 68 out of pass through cost at Rs.89,46,18,890/- (Rs.65,52,478/- + Rs.23,93,44,462/-), detailed as under :-
Particulars Amount (in Rs.) Pass through cost 152,15,74,483 (less) confirmed transaction 38,76,11,081 Balance 113,39,63,402 (Less) Unconfirmed transaction 65,52,74,478 Balance 47,86,88,924
No doubt, AO issued notice u/s 133 (6) of the Act to 22 vendors of the assessee on random basis to confirm the transaction entered into between the assessee and the vendors out of which 10 vendors have responded and again out of 10 vendors, 8 vendors have confirmed the transaction with the assessee. However, in case of 2 vendors, amount confirmed did not match with the amount claimed by the assessee.
On the basis of confirmations received by the AO, forwarded to ld. CIT (A), the CIT (A) has tabulated the confirmation/non- confirmation as under :-
A.Y.2011-12 Sl. Name of the Payment Confirmation Confirmation Remarks No. Vendors made as per received not received appellant 1. TLG India Ltd. 100037369 Confirmation - Confirmation received received 2. Bates India Ltd. 196120891 - Confirmation The not received unconfirmed amount of Rs.196120891 is disallowed. 3. Platinum 108749269 37210001 71539268 The Communication unconfirmed Pvt. Ltd. amount of Rs.71539268 is disallowed 4. ESPN Software 30000000 - Confirmation The India Pvt. Ltd. not received unconfirmed amount of Rs.30000000 is disallowed 5. Electrospark 52240742 - Confirmation The not received unconfirmed amount of Rs.52240742 is disallowed 6. Communique 29368205 - Confirmation The Marketing not received unconfirmed Solutions Pvt. amount of Ltd. Rs.29368205 is disallowed 7. New Colour 47228208 Confirmation - Confirmation Screen Pvt. Ltd. received received 8. Tata 24076097 - Confirmation The Teleservices not received unconfirmed Ltd. amount of Rs.24076097 is disallowed 9. Lustra Print 51638180 - Confirmation The Process Pvt. not received unconfirmed Ltd. amount of Rs.51638180 is disallowed 10. Shark Design 60860053 Confirmation - Confirmation Studio Pvt. Ltd. received received 11. Times 39500158 2788741 36711417 The Innovates unconfirmed Media Ltd. amount of Rs.36711417 is disallowed.
12. Alternative 37121053 - Confirmation The Brand not received unconfirmed Solutions Ltd. amount of Rs.37121053 is disallowed 13. Tim Delhi 34254600 Confirmation - Confirmation Airport received received Advertising Pvt. Ltd.
Signature 31323234 Confirmation - Confirmation Display Pvt. received received Ltd.
15. OM D Signs 28642996 - Confirmation The not received unconfirmed amount of Rs.28642996 is disallowed 16. Orienta Cine 27205657 - Confirmation The Advertising not received unconfirmed Pvt. Ltd. amount of Rs.27205657 is disallowed 17. Priyanka Mimi 25000000 Confirmation - Confirmation Chopra received received 18. Design 24773829 Confirmation - Confirmation Dimension & received received Space 19. RMA 24553037 - Confirmation The Consultants not received unconfirmed Pvt. Ltd. amount of Rs.24553037 is disallowed 20. Google India 24213802 - Confirmation The Pvt. Ltd. not received unconfirmed amount of Rs.24213802 is disallowed 21. Y Design 24135046 Confirmation - Confirmation received received 22. Superwell 21843133 - Confirmation The Services not received unconfirmed amount of Rs.21843133 is disallowed Total Amount 1146643611 387611081 655274478
The CIT (A) proceeded to conclude that out of payments made in case of 22 parties, unconfirmed payments/transactions amounting to Rs.65,52,74,478/- is treated as unexplained and disallowed as unexplained income u/s 68 of the Act and considered the expenditure/pass through cost shown from unconfirmed parties as bogus.
Again, the issue in controversy has already been dealt with by the ITAT, Delhi Bench ‘B’, New Delhi in for AY 2010-11 dated 17.08.2016 in assessee’s own case vide which the matter was restored to the file of the AO for deciding this issue afresh after seeking details from the assessee and vendors. For facility of reference, operative part of the order passed in assessee’s own case for AY 2010-11 is reproduced as under :- “8. We have heard the rival submissions and perused the relevant material on record. The assessee is carrying on the business of doing advertisement mainly for Samsung group of companies in print and electronic media. This work is outsourced from vendors. The vendors raise bill on the assessee for the amount payable to them and the assessee raises bill for the amount payable to vendors plus its remuneration on its clients. The assessee drew its Profit & Loss Account, a copy of which is available on page 64 of the paper book, by showing its remuneration as revenue. In other words, the assessee did not declare the receipts from its clients on income side and payments to vendors on the expenditure side. In our view, the mere fact of the assessee adopting a particular way of presenting its accounts, cannot per se be conclusive of under-statement of income, which needs to be determined on the touchstone of the factual and legal position prevailing in a case. Adverting to the facts of the instant case, we find that the assessee has been consistently adopting this approach of declaring income, which has been constantly rejected by the AO by making similar additions in the earlier years. This issue has been the subject matter of attention by the tribunal in earlier years, which has restored the matter to the AO for procuring requisite details from the vendors by the exercise of his powers and, thereafter, making reconciliation with the transactions recorded in the assessee's books of account before making any addition for deficiency or otherwise. A copy of the Tribunal order for the immediately preceding assessment year, namely, 2009-10 is available on page 93 of the paper book. As the facts and circumstances of the instant year are mutatis mutandis similar to those of the earlier years, respectfully following the precedent, we set aside the impugned order and remit the matter to the file of the AO for deciding this issue afresh after seeking details from the assessee and vendors and, thereafter, reconciling the position. If the payments are proved to have been genuinely made by the assessee to the vendors, then, of course, no addition can be made to that extent. If however, the payments are found to be not genuinely made, then such alleged payments would qualify for addition.”
Keeping in view the identical facts of the case at hand and the fact that the assessee is carrying on the business of advertisement for Samsung Groups of company in print and electronic media by way of outsourcing from the vendors, When the vendor raises the bill on the assessee for the payment of the amount, then assessee raises bill for the amount payable to the vendors plus its remuneration on its clients. Perusal of P&L account, available at page 74 of the paper book 1 of 2, shows that the assessee has not declared its receipt from its clients on income side and payment to the vendors on the expenditure side which otherwise does not amount to under-statement of income. This issue requires to be determined on the basis of factual and legal position applicable in this case and by following the order dated 17.08.2016 (supra) passed by the coordinate Bench for AY 2010- 11, applicable to the identical facts of this case, the impugned order is set aside and the matter is restored to the AO for deciding this issue afresh after providing an opportunity of being heard to the assessee. In case, the payment is actually made by the assessee to the vendors in terms of the Agreement then no addition can be made otherwise addition on account of alleged payment can be made.
The next question arises for determination in this case is as to making ad hoc addition of Rs.23,93,44,462/- being 50% of the amount paid/payable to the vendors to whom no notices were sent by the AO u/s 68 of the Act, is concerned, when no notice has been sent to the vendors to whom the payments have been made by assessee by raising bills to his clients along with its remuneration, no ad hoc addition can be made. We are of the considered view that this issue is also required to be restored to the AO to decide afresh after issuing notice and procuring requisite information under the law and to decide the issue afresh after providing an opportunity of being heard to the assessee in the light of the findings returned in the preceding paras. So, grounds no.3, 4, 5, 6, 7, 8 & 18 are determined in favour of the assessee.
GROUNDS NO.9, 10, 11, 12, 13 & 14 21. Assessee challenged the disallowance of payment of Rs.27,50,306/- made to its vendors for supply of material without deduction of tax at source (TDS) u/s 40(a)(ia) of the Act and disallowance of the payment of Rs.1,89,784/- made to the vendors for supply of material without deduction of tax at source u/s 40(a)(ia) of the Act on ad hoc basis on the ground that during the appellate proceedings, the CIT (A) made an enhancement on new issue which has never been considered and determined by AO and the expenses which were disallowed by ld. CIT (A) have been incurred by the assessee on behalf of its customers and same are recovered from them on the agreed commission.
CIT (A) disallowed the aforesaid amount u/s 40(a)(ia) on the ground that the assessee has not submitted any documentary evidence to prove that the payments had been made under the given heads of salary as reimbursement of expenses, air ticketing etc.; that most of the payments do not qualify as a transaction of sale but involves use of labour for packing, assembling, dismantling hence falls within the definition of work contract liable for TDS u/s 194C of the Act and thereby disallowed the amount of Rs.27,50,306/- and Rs.1,89,784/- i.e. 50% out of the remaining balance claim under section 40(a)(ia) of the Act.
First disallowance of payment of Rs.27,50,306/- has been made by the ld. CIT (A) made to the vendors for supply of materials without deduction of TDS u/s 40(a)(ia) of the Act on the ground that these payments are made for work undertaken by the vendors.
Vide notice dated24.07.2014, ld. CIT (A) called upon the assessee to file details of payment having been made to third party vendors, details of tax deducted on all invoices received from such vendors and reasons for not deducting the taxes on such payments.
Assessee filed detail, available at pages 303 to 335 of Volume 2 of paper book, and then called upon the assessee to show cause as to why payment made to such parties without deducting TDS should not be allowed u/s 40(a(ia) of the Act. Ld. AR for the assessee contended that first of all, CIT (A) has no power to enhance the assessment by discovering new source of income which were not considered by the ITO in the order appealed against. However, this contention of the assessee has already been rejected by coordinate Bench of the Tribunal in for AY 2010-11 (supra) in assessee’s own case by relying upon the judgment rendered by Hon’ble Delhi High Court in Gurinder Mohan Singh Nindrajog vs. CIT – 248 ITR 170 (Del.) and concluded that the CIT (A) was empowered to enhance an assessment qua the net assessed sum u/s 251(1)(a) of the Act.
However, when we examine the issue on merit the disallowance of payment of Rs.27,50,306/- to its vendors for supply of material without deduction of tax at source u/s 40(a)(ia) of the Act has not made on the sole ground that the service element was involved in the copy of invoices furnished by the assessee on sample basis. First of all, as discussed in the preceding paras, while determining grounds no.3 to 8, all the vendors have not come up before the AO and out of 22 vendors, only 8 vendors have confirmed the receipt and such an addition cannot be made by randomly picking up the facts. Secondly, when the issue has already been determined in favour of the assessee by the Tribunal in AY 2010-11 that the assessee is not a sub-contractor but an agent, the service element is apparently not there in the supply of material to attract section 194C of the Act. So, in the given circumstances, we are of the considered view that this issue is required to be determined afresh after providing an opportunity of being heard to the assessee after due verification.
So far as question of disallowance of payment of Rs.1,89,784/- i.e. 50% of the balance amount made to its vendors for supply of material without deduction of TDS u/s 40(a)(ia) of the Act on ad hoc basis is concerned, the same is also required to be determined afresh in the light of the findings returned on grounds no.3 to 8. Furthermore, the entire facts as to the supply of material by the vendors are yet to be brought on record by the AO by making discreet investigation. So, consequently, grounds no.9 to 14 are determined in favour of assessee.
GROUND NO.15 27. Ground No.15 has not been pressed by the ld. AR for the assessee, hence determined against the assessee.
GROUND NO.16 28. The assessee has also challenged the addition of Rs.3,01,15,968/- confirmed by ld. CIT (A) on account of decrease in the Net Profit (NP) ratio on the ground that the CIT (A) has not assigned any reason for confirming this addition; that in earlier years, no specific addition on the basis of fall in NP has been made and that this issue has already been dealt with and answered in favour of the assessee in its own case in qua AY 2010-11 (supra).
Assessee in order to support its argument that difference in NP ratio in the earlier years has never been a ground for addition made. A comparative chart of GP and NP for AY 2007-08 to AY 2013-14 is available at page 274 of the paper book part-1 of 2, which is reproduced asunder for ready perusal :-
Assessment Revenue Other Total Profit Net Year Income Revenue before tax Profit Ratio 2006-07 143,013,220 1,816,139 144,829,359 30,560,754 21.10 2007-08 134,109,758 4,817,889 138,927,647 18,046,140 12.99 2008-09 200,115,050 9,540,721 209,655,771 49,638,421 23.68 2009-10 275,714,832 - 275,714,832 104,731,275 37.99 2010-11 347,031,473 - 347,031,473 121,133,446 34.91 2011-12 317,010,189 11,876,654 328,886,843 80,347,767 24.43 2012-13 425,600,413 13,880,227 439,480,640 157,243,886 35.78 2013-14 640,623,649 50,173,602 690,797,251 250,276,456 36.23
Bare perusal of the comparative chart of GP and NP rates for AY 2007-08 and AY 2013-14 goes to prove that net profit ratio in the instant case has never been consistent and even otherwise, it cannot be consistent as it depends upon numerous reasons. When the audited books of account have not been rejected, merely making an addition on ground of fall in NP ratio is not sustainable in the eyes of law.
Moreover, the assessee has duly explained the reasons for fall in the net profit ratio in AY 2011-12 viz. fall in service income; increase in personnel expenses; and increase in depreciation charges which have been reproduced by the ld. CIT (A) at pages 21 to 23 of the impugned order but has not preferred to assign any reason for not accepting the contentions raised by the assessee. So, in view of the facts and circumstances of the case, we are of the considered view that in the absence of any cogent reasons, addition on the basis of fall in net profit ratio, that too without rejecting the books of account, is not sustainable, hence deleted. GROUND NO.17 32. Ground No.17 is premature, hence determined against the assessee. 33. Resultantly, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in open court on this 9th day of December, 2016.