2015 (7) TMI 478 - HC - Income Tax

Relocation expenses including the brokerage fee - whether was capital expenditure or not? - Held that - It is not disputed that if the figure of ₹ 1,11,73,078/- is duly accounted for and taken into consideration, then the operating margin of the respondent/assessee come to 17.80%, which is higher than the comparable operating margin of 17.09%, taken as a benchmark by the TPO. Submission on behalf of the appellant that the parent company should have shared the burden or a part thereof is not legally tenable. The said expenditure was incurred by the Indian company because of peculiar problems faced by them as a result of which they had to shift the place from where they were operating. The abnormality and difficulty resulting in extra expenditure was not created or caused by the associated enterprise. They were not responsible or liable for the said payments/expenditure. The associated enterprise did not have legal or contractual obligation to make extra or additional payment beyond the true and correct value of the transaction. - Decided against revenue.

Summary

Issues:
1. Disallowance of adjustment in computing Arm's Length Price for international transactions.
2. Disallowance of relocation expenses during office shifting.
3. Consideration of relocation expenses as capital or revenue expenditure.
4. Dispute regarding the nature of business operations and necessity of relocation.

Issue 1: Disallowance of adjustment in computing Arm's Length Price:
The Tribunal applied Transactional Net Margin Method for benchmarking international transactions. The Transfer Pricing Officer rejected some comparables and included others, resulting in a required adjustment of &8377; 1,38,85,561/-. The Dispute Resolution Panel also upheld this decision. However, the Revenue did not allow the adjustment of &8377; 1,11,73,078/- in determining the weighted average, leading to the appeal.

Issue 2: Disallowance of relocation expenses during office shifting:
The respondent claimed relocation expenses of &8377; 32,88,224/-, additional rent of &8377; 39,72,626 for two months, and salary for unproductive hours of &8377; 45,78,633/- due to shifting from a residential to an industrial area. The Tribunal found a dip in turnover during the shifting period, supporting the necessity of the expenses.

Issue 3: Consideration of relocation expenses as capital or revenue expenditure:
The Tribunal held that relocation expenses were revenue expenditures as they did not result in enduring benefits. Citing legal precedents, the Tribunal allowed the claim under section 37(1) of the IT Act, emphasizing the absence of capital field benefits.

Issue 4: Dispute regarding the nature of business operations and necessity of relocation:
The Tribunal rejected the contention that operations could have been shifted over a weekend without disruption. It reasoned that dismantling and reinstalling equipment required time and technical skills. The Tribunal also supported the respondent's argument that paying additional rent did not negate the disruption caused by the sealing drive, as infrastructure setup and equipment installation were time-consuming processes.

In conclusion, the Tribunal found that the respondent's operating margin, considering the disputed expenses, was higher than the comparable benchmark. The court dismissed the appeal, stating that the parent company was not obligated to share the burden of the expenses as they were incurred due to peculiar problems faced by the Indian company. The judgment emphasized that the associated enterprise was not responsible for the extra expenditure, leading to the dismissal of the appeal without any substantial question of law.