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2019 (8) TMI 1119 - AT - Income TaxTP Adjustment - project Management (Pre-operative) service fees and pre-operating management fee - HELD THAT - We find that the Revenue s identical plea in support of adjustment of such payments arising out of arm s length price being determined at Nil stands declined by the tribunal s coordinate bench in NLC Nalco India Ltd V/s. DCIT 2016 (3) TMI 639 - ITAT KOLKATA CIT(A) has also taken note of above various judicial precedents whilst coming to the conclusion that the TPO could not have adjusted assessee s twin expenditure claims by holding that the arm s length price thereof was nil in uncontrolled market conditions. We therefore confirm the CIT(A) s findings under challenge as far as first head of project management (service fee) is concerned. Neither the TPO nor the AO have brought any material on record indicating assessee s excessive element in the assessee s excessive impugned payments. There is hardly any dispute that the statutory provision in question is applicable only for excessive component of the relevant heads of the expenditure than that in entirety. The Revenue s further reliance on section 37 also carries no merit in view of our preceding findings taking into consideration various judicial precedents. The CIT(A) action deleting the upward adjustment is affirmed on both counts. Disallowance of assessee s success fee payment - HELD THAT - There existed an agreement between the assessee and the payee(s) regarding payment of Success Fee to M/s. HSBC. We further notice there is no rebuttal to the learned CIT(A) clinching findings that the sum in question is not ₹ 6 crores as per by the Assessing Officer, but ₹ 22.29 crores. It is for this correct figure that the assessee has paid the impugned success fee payment to M/s. HSBC going by corresponding agreement. Learned departmental representative fails to indicate any material in the case file which could suggest that the assessee s corresponding agreement is not a valid one. As relying on WALCHAND AND COMPANY PVT. LIMITED. 1967 (3) TMI 2 - SUPREME COURT to conclude that it is not open for the department to question commercial expediency of an assessee s day to day running of business affairs We uphold the CIT(A) s findings under challenge deleting the impugned addition. Disallowance of severance fees - prior period revenue expenditure - severing the tie from using intellectual property as well as trade name - DR reiterates the assessment findings that the Assessing Officer has rightly treated assessee s severance expenditure as capital and not revenue expenditure - HELD THAT - We see no substance in Revenue s instant argument. It is clear from a perusal of corresponding agreement s clauses that assessee had not acquired any asset but made the impugned payment in order to ensure smooth day to day running of its business affairs. It has chosen to part its ways with the payee in other words in lieu of the impugned severance fee not covered under any specific head of capital expenditure as per accounting standard (AS) issued by the Institute of Chartered Accountants of India. We thus affirm the CIT(A) findings qua this last issue as well.
Issues Involved:
1. Delay in filing the appeal. 2. Upward adjustment of ?3,00,00,000 for pre-operative management fees paid to Gleneagles Management Services Pte Ltd. (GMSPL). 3. Upward adjustment of ?1,50,00,000 for pre-operative management fees paid to Apollo Hospital Enterprises Ltd. (AHEL). 4. Disallowance of success fee payment of ?1,12,85,608 to HSBC. 5. Disallowance of severance fees amounting to ?58,72,410 paid to AHEL. Detailed Analysis: 1. Delay in Filing the Appeal: The Revenue's appeal was delayed by 12 days due to procedural approvals at the departmental level. The assessee did not dispute this delay, and therefore, the delay was condoned, allowing the case to proceed on merits. 2. Upward Adjustment of ?3,00,00,000 for Pre-Operative Management Fees to GMSPL: The Revenue challenged the CIT(A)'s decision to reverse the TPO's upward adjustment of ?3,00,00,000 paid to GMSPL under the Joint Venture Agreement (JVA). The TPO had deemed the services rendered by GMSPL as shareholder activities with an arm’s length price of Nil, arguing that no independent enterprise would pay for such services. The CIT(A) found that the services provided by GMSPL were essential for the project and would have been paid for by an independent enterprise. The CIT(A) also noted that the TPO did not apply any prescribed methods for determining the arm's length price and directed the deletion of the addition, treating the pre-commissioning management fees as capital expenditure with corresponding depreciation allowed. The Tribunal upheld the CIT(A)'s findings, referencing judicial precedents that support the view that the TPO cannot arbitrarily determine the arm's length price as Nil without proper application of transfer pricing methods. 3. Upward Adjustment of ?1,50,00,000 for Pre-Operative Management Fees to AHEL: The Revenue also contested the CIT(A)'s decision to reverse the TPO's upward adjustment of ?1,50,00,000 paid to AHEL. The TPO had applied similar logic as with GMSPL, asserting that the payments were excessive and not relevant for business, thus attracting disallowance under Section 40A(2)(b) and Section 37 of the Act. The CIT(A) found that the services provided by AHEL were necessary and prevalent in the healthcare industry, and the payments were not excessive. The CIT(A) directed the deletion of the addition, treating the project management fees as capital expenditure with corresponding depreciation allowed. The Tribunal affirmed the CIT(A)'s findings, noting the lack of evidence from the TPO to demonstrate the excessiveness of the payments and referencing judicial precedents that emphasize the need to judge business expenditures from the perspective of the businessman, not the Revenue. 4. Disallowance of Success Fee Payment of ?1,12,85,608 to HSBC: The Revenue challenged the CIT(A)'s decision to reverse the disallowance of ?1,12,85,608 paid to HSBC as success fees for identifying a joint venture partner. The Assessing Officer had deemed the payment excessive and not revenue in nature. The CIT(A) found that the services provided by HSBC were necessary and the fees were reasonable. The CIT(A) directed the deletion of the addition, treating the payment as revenue expenditure. The Tribunal upheld the CIT(A)'s findings, noting that the payment was for services rendered and not linked to the amount of capital invested by the identified partner, and referencing judicial precedents that support the allowability of such expenses. 5. Disallowance of Severance Fees Amounting to ?58,72,410 Paid to AHEL: The Revenue contested the CIT(A)'s decision to reverse the disallowance of ?58,72,410 paid to AHEL as severance fees. The Assessing Officer had treated the payment as capital expenditure, arguing that it was a premium payment for severing ties to allow the use of the Gleneagles name. The CIT(A) found that the payment was for severing ties with AHEL as a project consultant and did not result in acquiring any asset or right to use the Gleneagles name. The CIT(A) directed the deletion of the addition, treating the payment as revenue expenditure. The Tribunal affirmed the CIT(A)'s findings, noting that the payment was necessary for the smooth running of the business and not covered under any specific head of capital expenditure. Conclusion: The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on all counts, including the condonation of delay, deletion of upward adjustments for pre-operative management fees to GMSPL and AHEL, and disallowances of success fee to HSBC and severance fees to AHEL. The Tribunal emphasized the importance of proper application of transfer pricing methods and judicial precedents in determining the arm's length price and allowability of business expenditures.
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