2014 (12) TMI 927 - AT - Income Tax

Transfer pricing adjustment Determination of ALP Payments made to AE at Nil Assessee derived any benefit from services rendered by AE or not - Held that - Following the decision in Commissioner of Income Tax-I Versus M/s. Cushman And Wakefield (India) Pvt. Ltd. 2014 (5) TMI 897 - DELHI HIGH COURT - TPO cannot determine arm s length price of the payments made by the assessee to its AE at nil for the reason that assessee did not derive any benefit from services rendered by AE the TPO is to conduct a Transfer Pricing analysis to determine the arm s length price (ALP) and not to determine whether there is a service from which assessee has derived benefit or not - the exercise to determine whether assessee had derived any benefit or not from payment of such management fee is to be examined by the AO and appropriate disallowance u/s 37 is called for the TPO had determined the ALP of payment of management fees at NIL by holding that the assessee did not derive any benefit from services rendered by the AE - AO has to determine whether the assessee has derived any benefit from payment of professional fees and if any benefit had derived, whether such payment is commensurate to comparable transaction has to be examined by the TPO thus, the matter is remitted back to the AO/TPO for fresh consideration Decided in favour of assessee. Expenses on interior of a lease hold premises disallowed Held that - Assessee has incurred a sum of ₹ 40,017,141/- on interiors of lease hold premises - majority of these expenditures are expended for major renovation and these expenses are clearly capital in nature as decided in assessee s own case, it has been held that prima facie the expenses were of capital in nature - Even if the premises were on lease, because of the provision to Explanation (i) to section 32 of the Act the expenditure of capital nature on the construction of any structure or doing of any work in or in relation to and by way of renovation or expansion or improvement to the building, it is to be assumed as if the said structure or work is a building owned by the assessee the authority is justified in disallowing a sum of ₹ 4,00,17,141/- as capital expenditure and allowing depreciation on the same Decided against assessee.

Summary

Issues Involved:
1. Transfer Pricing issues related to the payment of Management Fees.
2. Disallowance of expenses incurred on leasehold premises as capital expenditure.
3. Granting depreciation on the amount disallowed as capital expenditure in past assessment years.

Detailed Analysis:

Transfer Pricing Issues (Ground Nos. 1 to 12 for A.Y. 2008-09 and all grounds for A.Y. 2009-10):
The assessee engaged in various international transactions with its Associated Enterprises (AEs), including the payment of management fees to Rockwell Automation Asia Pacific Ltd. (RAAPL). The Transfer Pricing Officer (TPO) rejected the assessee's method of aggregating this transaction with others using the Transactional Net Margin Method (TNMM). Instead, the TPO applied the Comparable Uncontrolled Price (CUP) method and determined the Arm's Length Price (ALP) of the management fees to be 'NIL'. The TPO's reasoning included the lack of evidence proving the receipt of services, benefits derived, and cost-benefit analysis.

The Dispute Resolution Panel (DRP) upheld the TPO's adjustment, stating that the assessee failed to demonstrate direct and substantial benefits from the services, and an independent enterprise would not have paid for such services.

Upon appeal, it was agreed by both parties that the issue should be reconsidered in light of the Delhi High Court's judgment in CIT-I vs. Cushman and Wakefield (India) (P.) Ltd. The High Court ruled that the TPO's role is to determine the ALP, not to assess the existence or benefit of the services, which is the AO's responsibility. The case was remanded to the AO/TPO for fresh consideration based on this judgment.

Disallowance of Expenses on Leasehold Premises (Ground No. 13 for A.Y. 2008-09):
The assessee incurred expenses on the interior of leasehold premises, which the AO classified as capital expenditures. The DRP confirmed this classification, noting that the expenses were for major renovations, providing enduring benefits, and thus capital in nature as per Explanation 1 to Section 32 of the Act. The Tribunal upheld the AO's decision, referencing past disallowances in similar circumstances for the assessee. The Tribunal agreed that such capital expenditures could be capitalized, and depreciation claimed.

Granting Depreciation on Past Capital Expenditures (Ground No. 14 for A.Y. 2008-09):
The assessee requested depreciation on amounts disallowed as capital expenditures in previous years. The DRP directed the AO to verify and allow depreciation on leasehold improvements capitalized earlier. However, the AO had not implemented this direction. The Tribunal ordered the AO to verify the details and grant depreciation accordingly.

Conclusion:
For A.Y. 2008-09, the appeal was partly allowed for statistical purposes, with the Transfer Pricing issue remanded for fresh consideration and directions given to grant depreciation on past capital expenditures. For A.Y. 2009-10, the appeal was allowed for statistical purposes, with the Transfer Pricing issue similarly remanded for re-evaluation in line with the High Court's judgment.

(Order pronounced in the Open Court on 22.12.2014.)