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TMI Blog2019 (8) TMI 1119X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 delet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. Both the learned representatives take us to the learned CIT(A) s identical findings on both the issues read as under:- 04. Ground No.1 arises on account of the action of the Ld. AO / TPO in making an upward adjustment of INR 3,00,00,000 to the total income of the appellant in respect of pre operating management fees paid/payable by the appellant to Gleneagles Management Services Pte Ltd., Singapore (hereinafter referred to as 'GMSPL') tinder the 'Joint Venture Agreement' (hereinafter referred to as 'JVA') for the alleged reason that the activities performed by GMSPL during the relevant previous year are merely in the nature of shareholder activities for which no independent enterprise would have paid anything in an arm's length situation and hence, according to the Ld.AO/ TPO, the arm's length price of such activities is Nil. The impugned matter has been dealt with by the Ld. AO as under: On 22.12.2006 the order under section 92CA(3) of the I.T.Act, as issued by Transfer Pricing Officer was received, where no adjustment was suggested for the Management Services paid for ₹ 1,00,73,148 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TP report, in order to determine whether a payment to associated enterprises for management services is at arm's length it is necessary to determine a. whether any services were rendered by the associated enterprise to the appellant? and if yes, b. whether the assessee would have paid the same amount to an independent enterprise in an arm's length scenario for similar services? 5.3 The appellant firmly believes that both the above tests have been satisfied in relation to the payment of pre commissioning management fees and hence the payment should be treated to be at arm's length in toto and thus believes that the TPO's order (and consequently, the AO's order) in this regard are erroneous in law and is based on a misconstrued understanding of facts and hence should be reversed by your kindself. 5.4 The TPO seems to be of an understanding that since Apollo Hospitals Group and the Singapore based Parkway Group are shareholders/Joint Venture partners for this project, the niche learning and expertise gathered over the years by them which has been shared with the appellant would be on acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Generally review and recommendations on all aspects of the planning, design, construction and completion of the hospital; Review and recommendations on the policies and procedures in the areas of human resources, finance, marketing, quality management, materials management, fire safety; plant operations, information systems, medical records, nursing administration, intensive care units, diagnostic imaging, laboratory, accident and emergency unit, cardiovascular laboratory, operating theatre, outpatient clinics and patient wards of the Hospital; Review and recommendations on the selection of key management staff, nurses and medical doctors; and Review and recommendations on the organization chart of staff positions for the personnel to be employed in connection with the operation of the Hospital. Taking cue from above mentioned OECD guidelines and comparing them with the project management (pre operative) services provided by GMSPL it can be inferred that the services received by the appellant are more in the nature of stewardship activities and thus entitles GMSPL (provider of services) to remuneration. The OECD gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the benefits claimed to have been received by the assessee under the aforesaid agreement would not be ones for which an independent enterprise would be willing to pay. 5.10 The Ld. AR of the appellant while making detailed submissions during the course of appellate proceedings has pointed out that the TPO/AO failed to demonstrate in his order that any of the circumstances as mentioned in clause (a), (b), (c) and (d) of sub section (3) of section 92C of the Act existed in the instant case necessitating the TPO/AO's intervention in determining the arm's length price of the international transaction. Further, the TPO did not comply with the provision of subsection (1) and (2) of section 92C of the Act while computing the arm's length price of the aforesaid international transaction at 'NIL' value. In this regard the appellant has relied upon the decision of the Hon'ble Kolkata Tribunal in the case of N L C Nalco India Ltd. vs. Deputy Commissioner of Income tax Circle 10, Ko/kata [2016] 71 taxmann.comS7 (Kolkata Trib.) / [2016] 177 TT) 156 (Kolkata Trib.) 06. DECISION: 1. I have carefully considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O had not applied any of the methods prescribed under sub section (1) read with sub section (2) of section 92C of the Act for determining the arm's length price of the aforesaid international transactions at NIL value. My aforesaid view has been confirmed by the Hon'ble Kolkata Tribunal in the case of N L C Nalco India Ltd. vs. DCIT Circle 10. 3. In view of the above, and considering the judicial view of the Hon'ble Jurisdictional ITAT in the cases referred, as discussed above, the Ld. AO is directed to delete the impugned addition of ₹ 3,00,00,000. It is also pertinent to bring on record here that the appellant company has accepted the treatment given by the Ld.AO in respect of Project Document Charges in the Assessment order as being Capital in nature. In my considered view the treatment of the Pre commissioning Management Fees should also be similar, and accordingly the above amount is to be treated as Capital expenditure, on which the relevant depreciation is also to be allowed to the appellant assessee. The aforesaid grounds of appeal are allowed in favour of the appellantcompany. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture is not allowable u/s. 37. This is nothing but withdrawal of the capital employed in a round about way. The assessee cannot get the benefit of deduction for taxation purpose on this entire sum of ₹ 4,50,00,000. 08. During the course of the appeal hearing, the appellant / Ld. A.Rs for the appellant have submitted as under: 8.1 The entire pre commissioning Project Management Fees paid to GMSPL and Apollo Hospitals Enterprises Ltd. (AHEL) the Joint Venture Partners were disallowed by the Learned Officer in its order. While disallowing the payments made to AHEL the Learned Officer has contended that the logic followed in the TP Order also applies to the payments made to AHEL. Further the learned officer has also contended in the order that no independent company would have undertaken such payments to any. unrelated party and the payment were made without any proper business expediency. The Ld. AR has also submitted that the disallowances have been made under two different sections of the I. T.Act, Section 92 in case of international transaction where arms length are required to be determined and section 40A(2) where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h care industry to provide the necessary expertise that they possess for setting up the project of this size and capacity . 8.5. The appellant also hereby refutes the view taken by the learned officer that this is nothing but withdrawal of capital. In this regard the appellant hereby submits that the Project Management Fees were onetime fees that were paid to AHEL and GMSPL for setting up the project. The project management (pre operative) services received by the appellant are pre commissioning consultancy services related to preoperating period and are in the nature of unique services to the business of the appellant. The pre commissioning services cover an essential range of support, without which the setting up of the hospital would be almost impossible. The appellant has submitted earlier that the services provided by experts in their respective fields cannot be linked to as shareholders activity and as such any sum paid as fees to any expert (even though a shareholder) cannot be construed as repayment of capital invested by the shareholder. 8.6 The Ld. AR also submitted during appellate proceedings that in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Project passing through rough periods in the past and lying standstill for several years without any progress was in legitimate need of support from the experts in the field. This was the result of the expertise made available by the two giants of Health Care Industry that the hospital project in Kolkata came to the completion and is experiencing gradual growth thereafter. c. The services have genuinely and actually been provided and as per the various evidences and supporting provided it has been established that nature of services provided were highly valuable for the existence and growth of hospital project a d commands remuneration. d. Based on the extent of involvement, magnitude of the project, the expertise required and provided for a project and other dynamics, the charges paid in case of appellant was not unreasonable. The services were provided at reasonable cost. Costs incurred for such services as per the comparative study submitted was found to be higher than the costs incurred by the Company. 8.10 The appellant therefore refutes the basis of disallowance that expenses incurred were without considering the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... So far as the legitimate business needs of an assessee or the benefit derived by or assuring to the assessee from goods, services or facilities, etc. are concerned, these are not to be just from the view point of a revenue officer but from the view point of a businessmen. (vi) In CIT v/s Dayalal Meghji Tobacco Products Pvt. Ltd. (CC No. 3685 of 1998: G.I (1998)233 ITR (St.) 1 (Se), their Lordship of the Supreme Court have, by an order dated 01 05 1998, dismissed the special leave petition filed by the Department against the judgement dated 22 9 1997 of the Madhya Pradesh High Court in ITR No. 95 of 1996, whereby the High Court rejected the reference application of the Department on the question, whether the Tribunal in law in holding that the assessee company was entitled to deduction of ₹ 12,05,118 disallowed by the assessing officer under section 40A (2) from out of conversion charges paid to a person specified in Section 40A(2). 8.12 The appellant hereby prays your kindself that services obtained by the Company were quite essential and inevitable for putting up the Hospital project and these by no stretch of imagination were unreason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould also be allowed to the appellant company. The aforesaid grounds of appeal are accordingly allowed. 4. The Revenue vehemently contends during the course of hearing that the CIT(A) has erred in law as well as on facts in reversing both the lower authorities action making the impugned upward transfer pricing adjustments of ₹ 3,00,00,000/- and ₹ 1,50,00,000/- in respect of pre-operating management fees paid to M/s. Gleneagles Management Services Pt. Ltd., Singapore (hereinafter referred to as GMSPL ) and M/s. Apollo Hospital Enterprises Ltd (hereinafter referred to as AHEL ). And that the Transfer Pricing Officer, in short TPO had rightly concluded in very clear terms that both the impugned heads are in the nature of shareholders activity requiring any payments at all. More so, when recipient of services is the assessee i.e associate enterprise of the payees. It further emphasizes that the T.P.O had rightly determined the impugned market price at Nil. More particularly when the T.P.O has held that the assessee shareholders/associate enterprises had not rendered any such services. We find that the Revenue s identical plea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the ass.essee to decide So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning ... 20. Ld. Counsel also relied on the case of CIT v. Walchand Co. etc. [1967] 65 ITR 381, the Hon'ble Apex Court has held that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. The essence is that a businessman himself is the best judge in determining the reasonableness / usefulness / benefit of an expenditure which is wholly and exclusively laid out for the purpose of business. The Revenue has no role to play ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the authorities below showing rendering of the certain services against the payments made to the associated enterprises. In the arena in which the assessee company is functioning, it will be difficult to imagine a successful business entity in the global environment without receipt of the services which carries huge intrinsic and creative value. In our considered view, it is only a particular business expert who can evaluate the true intrinsic and creative value of such services. In view of these facts, it shall be just to avoid any guesswork to evaluate or judge value of these services in isolation or individually. In any case, the value of these services cannot be taken at nil which the AO as well as TPO originally sought to do The term benefit to a company in relation to its business has a very wide connotation. It is difficult to accurately measure these benefits in terms of money value separately. Therefore, we find no justification to sustain any addition in this regard on this issue. We direct to delete the addition and this ground is allowed. 22. We have gone through the case of McCann Erickson India (P.) Ltd (supra), the Delhi Tribunal has held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; value. The CITCA) held that the action of TPO in arriving at the ALP of the relevant international transactions at nil was without any basis and accordingly he deleted the addition made on account of the transfer pricing adjustments made by A.O./TPO holding the same to be unsustainable. The Tribunal observed that the exercise of benchmarking made by the assessee to show that the price charged by its associated enterprise for providing IT support services was at arm's length had not been disputed by TPO. It was also observed by the Tribunal that the arm's length price of the international transaction under review was determined by the TPO at nil without applying any of the prescribed methods and the entire payment made by the assessee for availing the IT support services from its associated enterprise was added as TP adjustment. In view this, the Tribunal had given the decision that the addition made by A.O./TPO on account of TP adjustments in respect of the international transactions of the assessee company with its AE involving availing of IT support services was not sustainable either in law or on the facts of the case. The Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take a contrary view in respect of any issue which has been accepted by the Department for succeeding assessment year based upon the similar set of facts. Thus, by following the above principle laid down by the Hon'ble Calcutta High Court, we feel that the action of TPO in making disallowance of the intra group service charge paid/payable by assesse to Nalco Pacific for the assessment year 2004 05, after allowing the same for the assessment years 2005 06,2006 07,2007 08 and 2008 09 based on the same facts, has no leg to stand. Ld. Counsel referred to the relevant information in the tabular format: Intra group Service Charges Assessment Year Associated Enterprise Intra group Service Charge allowed as deduction (Rs. '000) 2005 06 Nalco Pacific Pte Ltd 19,543 2006 07 Nalco Pacific Pte Ltd 31,128 2007 08 Nal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rendered by Nalco Pacific to assessee were intragroup services for which independent enterprises would have been willing to pay for or to perform in house for themselves and hence, the value of the aforesaid services in comparable uncontrolled transactions could not be 'nil'. The paragraph no. 7.12 of the OECD Guidelines provides that there are some cases where an intra group service performed by a group member such as a shareholder or coordinating centre relates only to some group members but incidentally provides benefits to other group members. Examples could be analysing the question whether to recognise the group, to acquire new members, or to terminate a division. These activities may constitute intragroup services to the particular group members involved, for example those members who will make the acquisition or terminate one of their divisions, but they may also produce economic benefits for other group members not involved in the object of the decision by increasing efficiencies, economies of scale, or other synergies. The incidental benefits ordinarily would not cause NLC Nalco India Ltd.AY 2003 04 2004 05 these other group members to be tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of success fees paid to HSBC of Rs.l,12,85,608. The impugned matter has been dealt with by the Ld.AO as under: Similarly payment to HSBC as success fees for roping in Gleneagles group in the project of the assessee as a joint promoter and major capital contributor is again not at all revenue in character. Moreover, payment of ₹ 1,12,85,608 for an introduction of ₹ 6,00,00,000 as capital is hugely excessive. Therefore, this payment too is not allowed as revenue item. 11. During the course of the appeal hearing, the appellant / Ld. A.Rs for the appellant have submitted as under: 11.1 The issue is the disallowance of success fees amounting to ₹ 112,85,608 paid to M/s HSBC Investment Bank Asia Limited. The disallowance of ₹ 112,85, 608 has been made by the Ld. AO on basis of an understanding that the success fees for roping in Gleneagles Group in the project of the appellant as a joint promoter and major capital contributor, is not at all revenue in nature and the payment of ₹ 112,85,608 for an introduction of ₹ 600,00,000 as capital is hugely excessive and were not allowed as rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial production actually begins is prolonged, all expenses incurred during this period Is also sometimes treated as Deferred Revenue Expenditure to be amortised over a period not exceeding 3 to 5 years after the commencement of commercial production. 11.7 For the reasons stated these expenses were not relatable/allocable to any specific identifiable fixed assets and hence were not capitalized / allocated to fixed assets on commencement of the commercial operations by the appellant. Considering the nature of the expenses though these were treated as deferred revenue expenses in the books of account, these being revenue in nature were so claimed in the computation of income during the Assessment Year 2004 05. 11.8 The appellant therefore believes that the learned officers contention that the expenses are excessive and not revenue in nature is erroneous in law and is based on a misconstrued understanding of facts and hence should be reversed by your kindself. 12. DECISION: 1. I have carefully considered the entire facts and circumstances of the case and the submissions filed by the Ld. AR of the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement is not a valid one. We thus quote CIT V/s. Walchand Co. etc. (1967) 65 ITR 381, S.A Builders Ltd V/s. CIT 288 ITR 1 (SC) CIT V/s. Dalmia Cement P.Ltd 254 ITR 377 (Del), 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. 9. Lastly comes the fourth issue of correctness of severance fees disallowance amounting to ₹ 58,72,410/- paid to M/s. AHEL. The learned CIT(A) has deleted the impugned disallowance vide following detailed discussion:- 13. Ground No. 4 emanates on account of the disallowance made by the Ld. AO in respect of severance fees paid to AHEL of ₹ 58,72,410/ . The impugned matter has been dealt with by the Ld. AO as under: The payments to Apollo group and brokerage payment to HSBC Bank was made on account of the assessee company and now it is claiming it as deduction as prior period revenue expenditure. The payment made to Apollo Chennai was not for any revenue earning, rather it was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and operations of the hospital. The expenses being not relatable / allocable to the project as such and thereby to any specific identifiable fixed assets were not capitalized / allocated to fixed assets on commencement of the commercial operations by the appellant. 14.4 Further, Para 9.5 of Accounting Standard Accounting for Fixed Assets (AS 10) issued by the Institute of Chartered Accountants of India state that: If the interval between the date a project is ready to commence commercial production and the date at which commercial production actually begins is prolonged, all expenses incurred during this period is also sometimes treated as Deferred Revenue Expenditure to be amortised over a period not exceeding 3 to 5 years after the commencement of commercial production 14.5 Based on the above these expenses being not directly attributable to the cost of fixed asset '; or acquisition of any intangible right and belong to revenue field and hence these have not been capitalized in these accounts. Considering the nature of the expenses though these were treated as deferred revenue expenses in the books of account, these ..... X X X X Extracts X X X X X X X X Extracts X X X X
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