2017 (11) TMI 54 - AT - Income Tax

Disallowance on account of lease premium - nature of expenditure - revenue or capital expenditure - Held that - As the issue under consideration is similar to AY 2010-11 and the ld. DR did not bring any contrary decision in this regard, following the decision of coordinate bench in AY 2010-11 wherein held that the assessee acquired the land on lease for 33 years, the capital structure did not undergo any change. The assessee has merely acquired the facility to carry on business profitably by paying nominal lease rent. The lease rent paid by the assessee was allowable as revenue expenditure, we uphold the order of the CIT(A) in deleting the disallowance made by the AO towards lease premium paid by the assessee following the order of ITAT in AY 2010- 11 and dismiss the grounds raised by the revenue. Transfer pricing adjustment with respect to reimbursements received from its Associated Enterprises (AEs ) - Held that - The concept of utilizing the expertise with other independent companies are not heard of in the market nor encouraged in the normal business. Since there are no comparable cases in the market, and also it is the business decision of the assessee to share the employee cost with other sister concerns on cost to cost basis. Accordingly, the addition of markup should be deleted. For the limited purpose of verification of transaction whether the transactions are routed through books, it is remitted to the AO. Accordingly, ground raised in C.O. is allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of lease premium as capital expenditure.
2. Transfer pricing adjustment on account of reimbursement of expenses received from Associated Enterprises (AEs).

Detailed Analysis:

1. Disallowance of Lease Premium as Capital Expenditure:

The primary issue was whether the lease premium of ?68,87,500 paid by the assessee for a 33-year lease should be treated as capital expenditure or revenue expenditure. The Assessing Officer (AO) considered the lease premium as capital expenditure, citing its one-time payment nature for acquiring lease rights over an extended period. This treatment was based on the precedent set in the assessee’s case for AY 2010-11.

However, the Commissioner of Income-tax (Appeals) [CIT(A)] deleted the disallowance, relying on the ITAT’s decision in the assessee’s favor for AY 2010-11. The CIT(A) referenced the decision of the Hon’ble Gujarat High Court in the case of DCIT vs. Sun Pharmaceuticals India Ltd., which held that lease rent paid for acquiring land on lease without changing the capital structure of the assessee should be treated as revenue expenditure.

The revenue contested this decision, arguing that the CIT(A) ignored the Supreme Court rulings in the cases of Panbari Tea Ltd. and Durga Das Khanna, which treated similar payments as capital expenditure. However, the ITAT found these cases distinguishable based on the facts. The ITAT upheld the CIT(A)’s decision, noting that the lease premium in the assessee’s case was akin to advance rent and thus allowable as business expenditure. Consequently, the revenue’s appeal on this ground was dismissed.

2. Transfer Pricing Adjustment on Account of Reimbursement of Expenses Received from AEs:

The second issue involved a transfer pricing adjustment of ?13,52,778 related to reimbursements received from Associated Enterprises (AEs). The AO/TPO imposed a 10% mark-up on the salary recharged to the AEs, arguing that no independent party would render such services without a mark-up and that reimbursements should be part of operating costs.

The assessee contended that the reimbursements were cost-to-cost and not operational in nature, merely acting as an intermediary. The CIT(A) upheld the TPO’s adjustment, agreeing that the reimbursements should include a mark-up.

Upon appeal, the ITAT noted that Dr. Srini Srinivasan, an employee of USP LLC, was transferred to USP India and continued to oversee operations for other USP affiliates. The ITAT found that it was common practice in multinational companies to share expertise without additional mark-ups. The ITAT remitted the case back to the AO to verify if the transactions were routed through the books. If not routed through the books, the TPO’s action would be sustained; otherwise, the mark-up should be deleted. Thus, the ground raised in the cross-objection was allowed for statistical purposes.

Conclusion:

The ITAT dismissed the revenue’s appeal regarding the lease premium, affirming it as revenue expenditure. The transfer pricing adjustment issue was remitted to the AO for verification, allowing the cross-objection for statistical purposes. The judgment emphasized the importance of factual distinctions in applying precedents and the practical considerations in multinational corporate practices.