2016 (1) TMI 1021 - AT - Income Tax

Expenditure in respect of project management study - revenue v/s capital - Held that - The expenditure under consideration, in our considered view, did not give rise to creation of a capital asset. It would, at the most, give operational efficiency to the assessee company. The assessee company is already in business. The Ld. CIT(A) has also accepted these facts correctly. The only objection of Ld. CIT(A) that project management study is intended to drastically alter the assessee level of activities in India and therefore, these expenses should be treated as capital in nature, in our view is not acceptable in the eyes of law, especially in the given facts and circumstances of this case. Therefore, keeping in view the facts and circumstances of the case and the judicial pronouncements, as were relied upon by the Ld. Counsel in the submissions made before Ld. CIT(A) and before us, we hold that the expenses incurred by the assessee for an amount of ₹ 4.21 crores in respect of project management study, are revenue in nature. Disallowance made by the AO in this regard is deleted. - Decided in favour of assessee Nature of expenditure - revenue v/s capital - Held that;- CIT(A) has rightly observed that the AO has not questioned the revenue nature of these expenditure but held that as part of expenditure has been incurred for unutilized space, it had to be disallowed as capital in nature. The issue cropped up only because the assessee had furnished the details of expenditure to TPO to determine the appropriate transfer price in its transaction with foreign associates and the TPO had required the AO to determine the nature of some of the expenses. The assessee being in initial years of operations, was in expansion mode and necessarily had to take on lease extra space anticipating business in future. It appears that anticipated business took time while the assessee had to incur the expenditure which it had committed. In our view, Ld CIT(A) is legally and factually correct in holding that the fact that some space, which the assessee had taken on lease, remained unutilized, does not alter the nature of expenses it had incurred. We agree with the findings of Ld CIT(A) that the nature of expenses is revenue and have been incurred for the purpose of business, and therefore, the conclusion of the AO that expenses pertaining to unutilized space was capital in nature, is not correct.- Decided in favour of assessee Expenses relating to setting up of new service lines - CIT(a) treated as revenue - Held that - CIT(A) has rightly held that the AO has dealt with the issue perfunctorily, and factual and proper analysis of these expenses has not been made by him to inquire whether these were incurred to acquire fixed assets or only to meet routine expenses. Moreover, as per the decision of Honble Supreme Court cited by the assessee, other relevant factors have to be taken into account. The assessee has stated that the three new lines are in the nature of IT enabled services, which is regular business run by it. The control and management is same for all the 17 lines, which constitutes the business activities. No fresh capital has been sourced to commence these new activities and the profits from all the activities are consolidated and reported together. It is worth noting that, as was submitted by the assessee company, all these expenses have been recovered subsequently in the normal billing cycle of the assessee. The AO has not brought anything on record to controvert these submissions. In our considered view, the findings of Ld. CIT(A) are also well reasoned and in accordance with law and facts, no interference is called for therein - Decided in favour of assessee

Issues Involved:
1. Jurisdiction of the Transfer Pricing Officer (TPO) to issue directions to the Assessing Officer (AO).
2. Treatment of expenses on project management study as capital or revenue expenditure.
3. Treatment of expenses related to idle capacity as capital or revenue expenditure.
4. Treatment of expenses related to setting up new service lines as capital or revenue expenditure.

Issue-wise Detailed Analysis:

1. Jurisdiction of the TPO:
The primary issue raised was whether the TPO had the jurisdiction to issue directions to the AO. The assessee argued that the TPO's directions were illegal and void ab initio, rendering all subsequent proceedings by the AO invalid. The Tribunal noted that the TPO's observations were suggestions rather than binding directions. The Tribunal distinguished the present case from the Bombay High Court's decision in ICICI Home Finance Co. Ltd., which dealt with the reopening of assessments under Section 147. The Tribunal concluded that the AO had inherent jurisdiction under Section 143(3) to examine the issues independently of the TPO's suggestions. Thus, the Tribunal dismissed the assessee's objection regarding the TPO's jurisdiction.

2. Project Management Study Expenses:
The assessee claimed that the Rs. 4.21 crore paid for a project management study was revenue expenditure. The AO and CIT(A) treated it as capital expenditure, arguing that the study provided enduring benefits. The Tribunal analyzed the nature of the expenses and the legal principles governing capital and revenue expenditure. It concluded that the study aimed to enhance operational efficiency without creating a capital asset. The Tribunal referenced several judicial precedents, including the Supreme Court's decision in Empire Jute Co. Ltd. vs. CIT, which emphasized that not all enduring benefits lead to capital expenditure. The Tribunal held that the expenses were revenue in nature and allowed the assessee's claim.

3. Idle Capacity Expenses:
The AO disallowed Rs. 1.79 crore related to idle capacity, treating it as capital expenditure. The assessee argued that these were routine business expenses incurred during its expansion phase. The Tribunal noted that the expenses were for rent, utilities, and maintenance, which are typically revenue expenses. The Tribunal agreed with the CIT(A) that the nature of the expenses did not change merely because some space was unutilized. The Tribunal upheld the CIT(A)'s decision, treating the expenses as revenue in nature.

4. New Service Lines Expenses:
The AO treated Rs. 75.99 lakh incurred for setting up new service lines as capital expenditure, arguing that these were new ventures. The assessee contended that these were extensions of its existing IT-enabled services, managed and controlled under the same business framework. The Tribunal found that the new service lines were part of the assessee's ongoing business operations, with no fresh capital investment. The expenses were recovered in subsequent billing cycles, indicating their revenue nature. The Tribunal upheld the CIT(A)'s decision, treating the expenses as revenue in nature.

Conclusion:
The Tribunal dismissed the cross-objection filed by the assessee due to it being filed beyond the period of limitation and not pressed by the assessee's counsel. The assessee's appeal was partly allowed, with the Tribunal ruling in favor of the assessee on the treatment of project management study expenses. The revenue's appeal was dismissed, with the Tribunal upholding the CIT(A)'s decisions on the treatment of idle capacity and new service lines expenses as revenue in nature. The judgment emphasized the importance of understanding the nature and purpose of expenses in determining their classification as capital or revenue.

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