Subsidiary
company reimbursed part of the rent for the portion of premises used by
it, to its holding company, TDS is not deductible on such reimbursement
in the absence of the lessor-lessee relationship between holding and
subsidiary
[2012] 23 taxmann.com 93 (Delhi - Trib.) IN THE ITAT DELHI BENCH 'F'
Assistant Commissioner of Income-tax, Circle - 15(1)
v.
Result Services (P.) Ltd.[ASSESSMENT YEAR 2008-09]
FACTS
•
The assessee, M/s Result Services Pvt. Ltd., a 100% subsidiary of M/s
McCann-Erickson (India) Pvt. Ltd., is engaged in the business of direct
marketing, advertisement and sales promotion. During the assessment year
2008-09, the assessee company had reimbursed Rs. 56,23,456 towards its
portion of rent, for the premises which was used by the holding company
as well as by the assessee. Further such reimbursement was made without
any deduction of tax.
A.O.'s ORDER
•
The Assessing Officer, disallowed the amount of Rs. 56,23,456 invoking
the provisions of section 40(a)(ia), stating that the TDS should have
been deducted by the assessee under section 194-I of the IT Act, 1961.
CIT APPEAL'S ORDER
•
On appeal by the assessee, the CIT (A) deleted the addition made by the
assessing officer considering the lease deeds submitted by the
assessee, which expressly allowed the use of the premises by the
subsidiaries and the group entities of the holding company. Thus it was
held that in the absence of the relation of lessor and lessee, between
the holding and the subsidiary company, the assessee was not liable to
deduct the TDS on the amount reimbursed by it to its holding company.
ARGUMENTS MADE BY DR
•
Before the ITAT, the DR stated that the Explanation (i) of section
194-I, which defines "Rent" provides that rent means any payment by
whatever name called under any lease, sub-lease, tenancy or any
agreement or arrangement for the use of (either separately or together)
any land or building or land appurtenant to building (including factory
building) etc. whether or not any or all of the land or building are
owned by the payee. Therefore, section 194-I was applicable on the
assessee and thus TDS should have been deducted on the payment made to
its holding company.
ARGUMENTS MADE BY AR
• On the other hand, the AR mentioned that:-
(i)
As per the lease deeds, the holding company was liable to make the
payment of the rent directly to the lessor and the premises were
permitted to be used by its subsidiaries as well.
(ii) The holding company did not earn any rental income that could be taxable under the head "Income from House Property".
(iiii)
In addition, it was mentioned that the same practice was followed by
the assessee for the past several years but no objection was raised by
the revenue earlier.
DECISION
(i) The Tribunal, appreciated the below mentioned facts;
(ii)
the relation of lessor and lessee is not there the lease deeds
expressly permitted the use of the premises by the subsidiaries and the
group companies;
(iii) the holding company has not claimed the whole rent paid by it but only for the portion occupied by it;
(iv)
the same practice of reimbursement of rent was followed by the assessee
in past years but was never objected by the department.
• In light of the above, the appeal of the revenue was dismissed.
ORDER
2.
The assessee company is engaged in the business of direct marketing,
advertisement and sales promotion. The return of income was filed on
30.09.2008 declaring income at Rs. 11,46,223/-. The assessment was
finalized after making a disallowance u/s 40a(ia) of Income-tax Act,
1961 of Rs. 56,23,456/-. The CIT (A) deleted the addition by holding as
under :-
"4.2
I have carefully considered the assessment order and the submissions
made by the ld. AR in this regard. As per the facts of this case, the
appellant company is a 100% subsidiary of the holding company M/s
McCann-Erickson (India) Pvt. Ltd. M/s McCann Erickson has taken on rent
office premises in Delhi and Mumbai vide separate lease deeds with the
landlords. M/s McCann has permitted common use of the above premises by
the appellant company. The full rent for the premises have been paid
directly by the holding company to the landlords after deducting tax at
source u/s 194-I of the Act. During the year under consideration, the
appellant has paid Rs. 56,23,456/- to M/s McCann towards its portion of
rent on account of the above use of office premises. The AO has
disallowed the above payment u/s 40(a)(ia) by holding that TDS should
also have been deducted by the appellant company on the above amount u/s
194-I of the Act. In this regard, it is argued by the ld. AR that the
above arrangement has been in existence for the last 10-15 years and has
been accepted by the department without making any additions. It is
argued that the AO has wrongly presumed that the lease deed does not
permit use of the above premises by subsidiary company, whereas actually
the said lease deeds do permit the appellant to allow use of the said
premises by its subsidiaries and group entities. Copy of the lease deeds
are furnished by the ld. AR which had also been furnished before the AO
during assessment proceedings. It is argued that in any case TDS on the
full amount has been made by the parent company as per law and the
reimbursement of a part of it by the appellant company is not separately
exigible to TDS in terms of the amended clause (i) of Explanation to
section 194-I of the Act. It is further argued that the relation between
the holding company and the appellant is not that of a lesser and
lessee and hence the said payment cannot be subject to TDS u/s 194-I.
Under the facts and circumstances as stated above, I find that the
impugned addition made by the AO cannot be sustained either on facts or
in law. The same is, therefore, deleted.
3. Revenue is in appeal before us by taking the following ground :-
"1.
That on the facts and circumstances of the case and in law, the Ld.
CIT(A) has erred in deleting the addition of Rs. 56,23,456/- made by the
AO u/s 40(a)(ia) of the IT Act, 1961. The Ld. CIT(A) has not
appreciated the fact that for the purpose of section 194-I in the
explanation (i) of the said section the 'Rent' means any payment
whatever name called under any lease, sub lease, tenancy or any
agreement or arrangement for the sue of (either separately or together)
any (a) land or (b) building or (c) land appurtenant to building
(including factory building) etc. whether or not any or all of the land
or building are owned by the payee. Therefore, the' subsidiary company
was liable to deduct tax on the rent payment made to the holding
company.
2. The appellant craves to be allowed to add any fresh grounds of appeal and/or delete or amend any of the grounds of appeal."
4.
The only issue involve din the appeal is against the deletion of
addition of Rs. 56,23,456/- made u/s 40a(ia) of the Income-tax Act,
1961. While pleading on behalf of the revenue, the ld. DR relied on the
order of the Assessing Officer and also submitted that the CIT (A) has
failed to appreciate the fact that for the purpose of section 194-I in
Explanation (i) of that section, the rent has been defined as 'rent'
means any payment whatever name called under any lease, sub lease,
tenancy or any agreement or arrangement for the sue of (either
separately or together) any (a) land or (b) building or (c) land
appurtenant to building (including factory building) etc. whether or not
any or all of the land or building are owned by the payee. He pleaded
that during the year, the company has debited the amount of Rs.
64,86,806/- as expenditure on account of rent. Out of this, an amount of
Rs. 56,23,456/- was paid to the holding company, M/s. McCann Erickson
India Pvt. Ltd. No TDS was deducted on this amount. The payment has been
made by the subsidiary company to the holding company for the use of
the factory building. Therefore, as per the definition of the rent as
provided in Explanation (i) of section 194-I of the Act, such
arrangements for the use of factory premises was liable to deduct tax on
the payment of the rent on the holding company. Since the assessee has
not deducted TDS, therefore, provisions of section 40a(ia) read with
section 194-I are clearly applicable to the facts of the assessee's
case, therefore, Assessing Officer was justified in making the addition
and the CIT (A) has wrongly deleted the addition and he prayed to set
aside the order of the CIT (A).
5.
On the other hand, the ld. AR relied on the order of the CIT (A) and
pleaded that this expenditure of Rs. 56,23,456/- was a reimbursement of
the rent paid to the holding company. This rent was in respect of two
properties located at Delhi and Mumbai. In Delhi, the property was hired
by the holding company from CEPCO Industries Pvt. Ltd. As per clause 5
at page 31 (further covenant with Lessor) of the Lease Deed, the
premises were to be used by the subsidiary and associate companies as
well. The liability to pay the rent was of the Lessee (holding company).
For the Mumbai premises, as per clause 7 (d) of Lease and Licence
Agreement between National Organic Chemical Industries Limited and
Mafatlal Industries Ltd. and holding company, Mccann Erickson India Pvt.
Ltd., the premises were allowed to be used by the subsidiaries,
affiliates, group entities and associates. Assessee had paid the amount
as reimbursement for the use of premises as per agreement. Therefore,
this amount was reimbursement to the holding company. Ld. AR further
pleaded that holding company has debited in the books of account rent
only related to the portion occupied by it only. Mccann Erickson India
Pvt. Ltd. was not deriving any rental income and it has not declared any
rental income under the head 'Income from house property'. It is also
submitted that this position continued for several years, even when the
provisions of section 40a(ia) were not in existences. The provisions of
section 194-I were inserted in statute by Finance Act, 1994, w.e.f.
1.6.1994, The amendment in section 40 (a) w.e.f. 01.04.2006 by Taxation
Law (Amendment) Act, 2006 shall not effect the factual position with
regard to this. Assessee was reimbursing the amount of rent to holding
company since many past years. Without deducting TDS, there is no
material change in law and facts on the issue. Facts remain the same.
Therefore, any deviation in revenue's stand shall be a violation of rule
of consistency. The intent of the assessee to recognize the transaction
as a reimbursement is also evident from the audited accounts and also
to the note to tax audit report. Ld. AR also relied on the following
decisions:-
(i) CIT v. Woodward Governor India Pvt. Ltd. 294 ITR 451 (Delhi)
(ii) CIT v. Rajiv Grinding Mills 142 Taxman 567 (Delhi)
(iii) CWT v. RKKR International (P) Ltd. 145 Taxman 322 (Delhi)
(iv) CIT v. Neo Polypack Ltd. 245 ITR 492 (Delhi)
(v) Union of India v. Satish Panna Lal Shah 249 ITR 221 (SC)
(vi) Berger Paints India Ltd. v. CIT 266 ITR 99 (SC)
Ld. AR submitted that the order of CIT (A) may be sustained.
6.
We have heard both the sides. The assessee is a 100% subsidiary of
holding company of Mccann Erickson India Pvt. Limited. Mccann Erickson
India Pvt. Ltd. has taken on rent office premises located at Delhi and
Mumbai. Copies of these two Lease and Licence deeds entered with the
landlords are on record. The holding company, Mccann Erickson India Pvt.
Ltd., has permitted assessee to use part of theses premises. Assessee
had reimbursed the amount to holding company without deducting TDS. The
rent for the whole premises was paid directly by the holding company to
the Lessors and the tax was deducted as per provisions of section 194-I
of the Income-tax Act, 1961. The clause 5 of the lease deed for Delhi
premises dated 22.10.2007 between CEPCO Industries Pvt. Ltd. and Mccann
Erickson India Pvt. Ltd. read as following :
"5.
The LESSEE may use the Demised Premises or parts thereof for their
commercial use as well as for the offices of its subsidiaries and
associates and allied companies and for the purposes of companies /
firms and business in which the Directors of the LESSEE are interested
or concerned, however, any such companies / subsidiaries shall not
acquire any interest in the Demised Premises and liability for payment
of rent, other outgoing, etc. shall remain sole responsibilities of the
LESSEE."
Similarly,
the Lease & Licence Agreement between National Organic Chemical
Industries Limited and Mafatlal Industries Limited and Mccann Erickson
India Pvt. Ltd. also provide in clause 7 (d) as under:-
"d.
Not to sub-let or give on leave and license basis or on any other basis
the Licensed Premises or any portion thereof, nor permit any third
party to use and occupy the Licensed Premises or any portion thereof
save and except to its subsidiaries, affiliates, group entities,
associates, which shall be without any prior written consent of the
Licensor."
The
assessee is paying rent to the holding company as reimbursement since
last many years. This position has been accepted by the department all
through and it has been never disputed even when provisions for TDS were
on statute since 1994. Section 194-I of the Income-tax Act, 1961 was
inserted in Act w.e.f. 01.06.1994. Similarly, this position was also not
disputed even after the amendment in section 40(a)(ia) of the Act by
the Taxation Law (Amendment) Act, 2006 w.e.f. 1.4.2006. on this issue,
there is no material change in the facts and law during the year under
consideration. The lease deed provides for use of the premises by the
subsidiary companies. The actual payments made by the lessee (holding
company) to the lessor and necessary tax was deducted therefrom. The
holding company has also not debited the whole of rent to its books of
account. It has only debited the rent which pertains to the part of the
premises occupied by it. Therefore, in our considered view, there was no
lessor and lessee relationship between the holding company and assessee
where the provisions of section 194-I are attracted. Keeping these
facts in view, we find merits in the order of the CIT (A) in deleting
the addition made u/s 40(a)(ia) of the Act. We sustain the order of the
CIT (A) and dismiss revenue's appeal.
7. In the result, the appeal of the revenue is dismissed.
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