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TMI Blog2016 (1) TMI 1021X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground also, adjudication of Cross Objection may not be required, and therefore, same was not pressed by the ld. Counsel. In view of this, Cross Objection field by the assessee is dismissed, as not pressed. Now, we take up assessee s appeal in ITA No.5301/Mum/2011. 3. The grounds raised by the assessee in the appeal memo are reproduced below: Aggrieved by the order passed by the Commissioner of Income-tax (Appeals)-17, Mumbai [hereinafter referred to as the learned CIT(A)], under section 250 of the Income-tax Act, 1961 (Act) and based on the facts and circumstances of the case, J.P. Morgan Services India Pvt. Ltd. [hereinafter referred to as 'the Appellant'] respectfully submits that the learned CIT(A) erred in partly upholding the order of the Income-tax Officer- Range 8(2)(2), by treating an amount of ₹ 42,100,000 in respect of project management study as being capital expenditure and disallowing the same. Without prejudice to the above, the Appellant submits that the learned CIT(A) erred in not allowing depreciation under section 32 of the Act on the amount of fees paid for the project management study upheld as capital expenditure. The Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des on this issue, and it is noted by us that the additional grounds raised by the assessee are purely legal and do not require any investigation of fresh facts. Thus, in view of judgment of Hon ble Supreme Court in the case of National Thermal Power Co. Ltd., supra, these additional grounds were admitted for adjudication, and with the consent of the parties, we proceeded further to hear and decide the appeal on merits viz-a-viz additional grounds and other grounds. First we take up additional grounds: 5. The main issue raised by the Ld. Counsel in the additional grounds is that disallowances/additions were made by the AO in the assessment order on the basis of directions given by the Transfer Pricing Officer (in short TPO ), in its order. Thus, primary objection raised by the Ld. Counsel was that since the TPO had no jurisdiction to issue any such directions to the AO, these were bad in law and all subsequent proceedings taken by thereafter in this regard, including the query letters issued by the AO on the impugned issues were bad in law, and further, the disallowance/additions made by the AO in the assessment order, having been made on the basis of these directions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Finance Co. Ltd., supra, was not applicable upon the facts of the present case. In nut shell, it was argued by him that objections raised by the Ld. Counsel were without any legal basis and sound reasoning and therefore, these should be dismissed. 5.3. We have heard both the sides and gone through the material placed before us. In our considered opinion, Ld. Counsel has misunderstood or mis-appreciated the facts of the case and conceptual frame work of law on this issue. Firstly, the observations made by the TPO in its order were not any sort of directions . These may at the best constitute suggestions to the AO. Ld. Counsel has vehemently relied upon the judgment of Hon ble Bombay High Court in the case of ICICI Home Finance Co. Ltd. (supra). It is noted that this judgment is rendered by the Hon ble High Court in an all together different context. This judgment was delivered by the Hon ble High Court in the context of defining scope of power that has been bestowed upon the AO to reopen, u/s 147 of the Income Tax Act, a completed assessment. It was in this context, when the Hon ble High Court held that before reopening the case, the AO is obliged under the law to record the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to examine the impugned issues during the course of assessment proceedings and making assessment of the same as per law, in the assessment order passed by him u/s 143(3). Thus, in our considered view, the submission of the Ld. Counsel, viewed from any angle, has no legs to stand and therefore, primary objection raised by the assessee by way of additional grounds is dismissed. Now, we shall deal with the main ground raised by the assessee in the appeal memo. 6. The assessee has challenged the action of Ld CIT(A) in confirming the action of the AO in making of ₹ 4,21,00,000/, in respect of fee paid for project management study, by treating the same as capital expenditure. 6.1. During the course of assessment proceedings it was noted by the AO that the assessee has claimed an amount of ₹ 4.21 crores being consultancy charges paid to M/s. Mckinsay Co. for project management study. It was noted by the AO that the study was undertaken for addressing the matters relating to programme management methodology and defining a preliminary roadmap covering issues such as site contingency and potential of increasing off shoring services to JPM Services. It was held by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have held that preparation of a project management or feasibility report, especially where it is incurred in connection with an existing business, constitutes revenue expenditure. Ld. Counsel, placing reliance on various decisions in his favour, drew our attention on the propositions held in the decisions of DCIT vs Assam Asbestos Ltd 263 ITR 357, ITO vs Jacob Pacadiyil 43 ITD 459, Usha Alloys and Steels Ltd vs DClT 55 ITD 418 and Kesoram lndsutreis and Cotton Mills Ltd vs CIT 196 ITR 845. It was submitted that in Empire Jute Co. Ltd. vs CIT, 124 ITR 1, the Supreme Court held that there might be cases where expenditure even if incurred for obtaining an advantage of enduring benefit, would be on revenue account, and that what is material is to consider the nature of the advantage in a commercial sense. If the advantage consists, in merely facilitating the asessee's trading operations while keeping the assessee's capital untouched, the expenditure would be on revenue account. 6.4. Ld. Counsel, adverting to the facts of this case, submitted that the expenditure incurred by the assessee company on project management report did not bring into existence any asset or advanta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kind of expenditure incurred by the assessee would be revenue in nature because the assessee is already in the business and had added new lines to the business. If the assessee obtains a project report for running business more profitably, then the expenses would fall in revenue field and not in the capital field, though benefit might be enduring in nature. In various cases, it has been held by the courts that expenses incurred in connection with preparation of survey and feasibility report and various technical services for setting up a project would be revenue in nature, so long as the assessee is already in business. In the case of Assam Asbestos Ltd 263 ITR 357, expenses incurred by the Assessee in connection with survey and feasibility report to establish a mini cement plant to feed its asbestos unit were held as revenue expenses by Hon ble Gauhati High Court, as it did not bring into existence of new fixed capital. Similarly, in ITO vs. Jacob Pacadiyil 43 ITD 459, expense in connection with project report was held to be revenue as it was intended to bring about efficiency in business. In Usha Alloys and Steels Ltd vs DClT 55 ITD 418, expenses in connection with feasibility r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould derive, would be enduring in nature, and therefore, expenses of project management study should be treated as capital expenditure. In our view, here at this stage, while drawing conclusion, Ld. CIT(A) has gone wrong, in appreciating the correct legal position. The facts were analysed by the Ld. CIT(A) in the right context. But, what is to be seen is that under the income tax law, whether simply because if an expense would provide benefits of enduring nature to the assessee, shall make the expense as capital in nature. In our view, correct position of law is not like that. If an expense can be treated as capital expense merely on the basis of getting the benefits of enduring nature from the said expense, then virtually each and every expense can be placed in the category of capital expenses. Let us take example of expenses incurred in the form of payments made on the account of salary to the employees or expenses incurred on training of the employees. In such a situation, after getting the training, the employees may provide useful contribution to its employer-organization in the longer period, thereby providing benefits of enduring nature. We can take another example of expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endi ture of ₹ 1,79,00,000/- as revenue in nature, wi thout appreciating the fact that the expenditure was admittedly incurred by the assessee for enduring benefit and hence the A.O. rightly treated the same as capital in nature. 2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding expenditure relating to setting up new service lines amounting to ₹ 75,99,000/- as revenue in nature, without appreciating the fact that the expenditure would give the assessee enduring benefit and hence the A.O. rightly treated the same as capital in nature. 8. Ground No.1: In this ground, Revenue has challenged the action of Ld. CIT(A) in treating expenses of ₹ 1.79 crores as revenue in nature. 8.1. It was observed by the AO in the assessment proceedings that assessee has debited a sum of ₹ 1.79 crores as cost incurred in connection with idle capacity. With regard to the justification of this claim, it was explained by the assessee to the AO that it has been in stage of continuous expansion since the commencement of its operations and had planned its operations and infrastructure in a manner so as to take into account the an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cilities, although not fully utilized, were nevertheless utilized for the purpose of business. The assessee, for services rendered to its overseas entities, recovers its fees on the basis of cost incurred in rendering services plus an appropriate mark up, and keeping in view the fact that the assessee was in its initial phase of business, it could not naturally achieve full capacity of its operations. The operating costs in respect of the entire premises were required to be incurred. These were legitimate business expenditure, and therefore allowable as deduction u/s 30 or section 37(1). Reliance was placed on the following decisions:- i)Vijay International vs. ACIT 253 ITR 26 ii)CIT vs. Western India Sea Food (F) Ltd. 199 ITR 77 iii) Juderchand Harisam vs.CIT 23 ITR 437 iv) CIT vs. Malayalam Plantations 53 ITR 140 8.3. In view of the submissions of the assessee and case laws relied upon therein, Ld. CIT(A) held that these expenses were revenue in the nature and were incurred for the purpose of business, and accordingly, addition made by the AO was deleted by him. 8.4. We have gone through submissions made by both the sides very carefully and the orders of lower a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of new services lines costs. In response to the query raised by the AO, the assessee company explained that the assssee company has been in a stage of continuous expansion since its incorporation. It has been adding various services lines to its business from time to time. During the previous year relevant to the assessment year under consideration, the assessee company added following three new service lines in addition to its existing service lines viz: 1. Commercial Loan Services 2. Provision of services in relation to brokerage 3. Call centre services The company had incurred various costs in rendering services to its clients in relation to the above three service lines. As per the billing cycle of the company, typically the cost incurred by it in rendering services for a new service line is recovered from its clients two to three months later and the expenses were booked during the current year. The fees in this regard were due to company in the subsequent F.Y. i.e. during the year ended March 31, 2004. In view of these facts, it was observed by the AO that the assessee company has added three new different service lines in its own business, and since any new servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y part of bssiness of the assessee since commencement of its operations, b) The general management and control overlooking the functioning of these lines of business remains the same for all lines of business. c) No fresh capital has been brought into the business for commencement of these new lines of business. d) The profits from these lines of business are consolidated along with other lines of business and reported in the financial statements without bifurcation into various lines of activities. e) The basic facilities provided for these new lines of business are costs similar to the costs required for running other lines of business under the IT enables services f) Further, the expenditure incurred by the assessee on these new lines of business have not brought into existence any capital asset. In view of the aforesaid facts, it was submitted that the expenses incurred by the assessee were expenses incurred in rendering services under new lines of business as against expense for setting up new ventures as stated by the AO. The costs incurred in connection with new lines of business were not different from costs incurred on existing lines of business and have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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