ACIT Vs VLCC Health Care Ltd (ITAT Delhi)
Conclusion: Since expenses claimed as share of surplus with the collaborator, it was only sharing of revenue and not the claim of expenditure, as per the terms of agreement, the collaborator did not render any service to the assessee, therefore, the provisions of TDS had no application as sharing of revenue and its impact of taxability vis-à-vis application of TDS provision depend upon the method of accounting adopted by respective assessee.
Held: Assessee was engaged in the business of slimming and beauty services. During assessment proceedings, AO observed that assessee was carrying substantial credit balances as current liabilities under the head ‘Advance from customers’. Client card or client services ledger were maintained at the centers in the name of each client for slimming /beauty packages. At the end of the year, the progress of each client for the various packages given to him was evaluated vis-a-vis the amount received from him and the sales corresponding to the services which remained to be rendered were claimed as unexecuted packages i.e. in the nature of liability in the B/S. Assessee claimed that no package was of a duration of more than one year meaning thereby that the unexecuted package claimed as a liability in one loss account in any particular year was calculated. AO observed that based on the balance sheet outstanding balance of UEP as on 31.03.2009, assessee had not made any provision for refund of the amount received from customers. Since there was no change in the facts and circumstances of the case for this year and additions on account of difference in closing and opening value of UEP was liable to be added to the total income of the assessee for the current year. AO observed that assessee had claimed huge expenses of Rs.2,39,80,342/- under the head ‘Share of profit of collaborators’. AO observed that the nature and details of such expenses were not furnished by assessee and it furnished a copy of one agreement and calculation of such share of profit amounting to Rs.12,14,541/- against the sum of Rs.2,39,80,342. Assessee claimed such expenses as share of profits of collaborators. AO however, disallowed such expenses u/s 40(a)(ia) due to non-deduction of tax u/s 194-I. It was held that assessee was sharing the revenue based on the franchise agreement and as far as claiming the expenditure or sharing of surplus depend upon the method adopted by assessee. It follows two method i.e. (a) franchise method; and (b) JV method. In franchise model, the revenue and expenses were under control of collaborator. Assessee only shared the income/loss. Whereas in JV model, all the revenues were recorded by assessee and shares the surplus/loss which were recorded by the assessee and shares the surplus/loss with the collaborator. Assessee had claimed the sharing of surplus, which was under dispute. AO had mixed up with the methods adopted by assessee. Whatever expenses claimed as share of surplus with the collaborator, it was only sharing of revenue and not the claim of expenditure, as per the terms of agreement, the collaborator did not render any service to the assessee. sharing of revenue and its impact of taxability vis-à-vis application of TDS provision depend upon the method of accounting adopted by respective assessees. In this case, the franchise agreement and method of sharing the revenue based on computation sheet clearly showed that assessee record all the revenue and share the surplus with the franchisee/ collaborator after adjusting the expenditure. In this case, assessee followed the JV model and incurred all the expenditure and shared only the surplus with the franchisee that means it was clearly share the surplus and all the facilities were operated and controlled by assessee. The issue was whether the provisions of TDS will apply in this case. Merely sharing the revenue and the collaborator did not render any service to assessee, hence the provisions of TDS had no application. In the given case, assessee was claiming expenditure for sharing the surplus which was nothing but sharing of revenue as per the agreement with the parties. Therefore, the grounds raised by Revenue were dismissed.
