2018 (5) TMI 1101 - HC - Income Tax

TPA - Preoperative expenditure treated as deferred revenue expenditure to be written off over a period of five years - Held that - Tribunal was influenced by the fact that the assessee had started commercial production in the month of January 2002. The assessee had incurred preoperative expenditure of ₹ 5.29 crores upto 31.12.2001, which was prior to the commencement of commercial production. Out of this amount, an expenditure of ₹ 3.54 crores was nonoperating in nature. It was accounted as deferred revenue expenditure for the year under consideration, which came to ₹ 70.98 lakhs (rounded off). Since the expenditure was non-operating in nature, the assessee had disallowed the same while computing the income in order to claim markup on such operating costs. The Tribunal, therefore, was of the opinion that the issue was in tune with Para4 of the Agreement, under which the associate enterprise had agreed to reimburse the assessee the operational costs and besides others, 05% markup on such operational costs. We are partly in agreement with the view of the Tribunal and no question of law arises in this respect and therefore, they are not considered.

Summary

Issues:
1. Addition of questions by Revenue for amendment.
2. Exclusion of Alphageo India Ltd. from comparable companies.
3. Exclusion of depreciation from operating cost for calculating PLI.
4. Treatment of deferred revenue expenditure in computation of Arm's Length Price.
5. Disallowance of deferred revenue expenditure by TPO.
6. Tribunal's decision on deferred revenue expenditure exclusion.
7. Tribunal's consideration of preoperative expenditure.
8. Tribunal's interpretation of Para4 of the Agreement.
9. Tribunal's view on reimbursement by associate enterprise.
10. Tribunal's decision on markup for operational costs.
11. Assessment of Tribunal's decision on operational costs.
12. Waiver of notice of admission by the assessee's advocate.

Analysis:
1. The High Court considered the Revenue's request to add questions for amendment in each of the appeals. The draft amendment was granted, and the appeals were admitted for consideration of substantial questions of law. These questions included the exclusion of Alphageo India Ltd. from comparable companies for calculating Arm's Length Price and the justification for excluding depreciation from the operating cost for determining the profit level indicator (PLI) in transfer pricing analysis.

2. The Revenue proposed additional questions related to the computation of Arm's Length Price concerning deferred revenue expenditure written off and the requirement of markup on such expenditure. These questions arose from a Technology Research Agreement where the assessee was awarded a contract by a foreign associate enterprise. The Tribunal's decision on the exclusion of deferred revenue expenditure from the operating cost for calculating Arm's Length Price was analyzed in detail.

3. The Tribunal's reasoning for excluding the deferred revenue expenditure was based on the nature of the expenditure as preoperative and not operational cost. The Tribunal highlighted that the expenditure was incurred before the commencement of commercial operations and was not recovered from the associate enterprise as per the terms of the Agreement. The Tribunal's interpretation of the Agreement's clause regarding reimbursement of operating costs played a crucial role in their decision.

4. The Tribunal's decision was influenced by the fact that the assessee had disallowed the nonoperating expenditure while computing income to claim markup on operational costs. The Tribunal considered the Agreement's provision for reimbursement of operational costs and markup, leading to the exclusion of deferred revenue expenditure from the operating cost calculation. The High Court partially agreed with the Tribunal's view and found no legal question arising in this regard.

5. The Tribunal's analysis of the preoperative expenditure, the nature of deferred revenue expenditure, and the Agreement's provisions were crucial in determining the exclusion of certain expenses from the computation of Arm's Length Price. The Tribunal's decision was upheld based on the specific facts and circumstances of the case.

6. The advocate for the assessee waived notice of admission, indicating acceptance of the proceedings on behalf of the assessee.