Brief of the Case
ITAT Mumbai held In the case of J.P MORGAN SERVICES PVT LTD Vs. ITO held that ‘benefits of enduring nature’ is not the sole factor to categorise an expense as capital expense. Expenditure for improving “operational efficiency” regarding Project Management Study will be considered as Revenue in Nature.
It further held that AO cannot made disallowances/additions made on the directions of the Transfer Pricing Officer and has to act independently and the suggestions given by the TPO should not influence the Assessment Order and AO has requisite powers under the law, de-horse the impugned directions of TPO, 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). Further There is no obligation of formation of belief and recording of reasons for initiation of proceedings u/s 143(3), as are required in the proceedings initiated u/s 147.
Facts of the Case
In the present case, the assessee has claimed an amount of Rs. 4.21 crores being consultancy charges paid for project management study which 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 the AO that the aforesaid study was intended to provide operational advantage which was an enduring benefit to the assessee company over a period of time and therefore, such payment was capital in nature.
In the present facts after the mentioning of the Judgment of National Thermal Power Co. Ltd. vs. CIT 229 ITR 383, some additional grounds were taken by the Assessee which wasn’t not taken before the Lower Authorities in which it was mentioned that the present additions made in the case was made on the directions of TPO, which was agitated by the Assessee before the Hon’ble Tribunal and was contended that the TPO was not having any power to give suggestions to the “AO”.
Held by Ld. CIT(A)
The ld. CIT(A) held that Project Management Study was intended to enhance the level of activity of the assessee company in India, with view to take advantage of business opportunity available in India, which is enduring in nature.
Accordingly, the order of AO was upheld.
Arguments by Assessee
As, mentioned above the Ld. Counsel for the Assessee relied on the Judgement of National Thermal Power Co. Ltd. vs. CIT (supra) and contended that the additions have been made on the directions of the TPO who is having no Jurisdiction. Therefore, the order passed by the ITO is null and void.
Ld. Counsel argued that observations made by the Ld. TPO in its order, constitute ‘directions’, which the TPO was not authorised to give to the AO. It was further submitted that immediately after receipt of the TPO’s order, Ld. AO was prompted to issue query letter to the AO dated 08.03.2006 (i.e. within five working days), on the issues as were suggested by the TPO in its order. It was further argued that direction by the Ld. TPO was without the authority of the law, thereby vitiating the entire proceedings, taken up thereafter by the AO. In support of his arguments, reliance was placed upon the judgment of Hon’ble Bombay High Court in the case of ICICI Home Finance Co. Ltd. vs. ACIT 82 CCH 0103.
Regarding second issue, the Counsel for the assessee while making submissions relied on the Judgment of 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.
Further, it was submitted that the expenditure incurred by the assessee company on project management report did not bring into existence any asset or advantage of an enduring nature. Further, it was submitted that the impugned expenses were incurred for the purpose of same business, having same management and interlacing of funds, and therefore, the impugned expenses were revenue in nature.
Arguments of Revenue
Regarding the first issue, Ld. DR has submitted that these observations given by the TPO in its order were not any kind of ‘directions’. It was further submitted that these observations were not binding upon the AO. It was also submitted that AO had given opportunity to the assessee and inquiries were made independently. Lastly, it was submitted by the him that even if these direction were expunged, the AO had inherent jurisdiction to examine these issues in the course of assessment proceedings carried out u/s 143(3), as the law has given ample powers and scope of making requisite queries to the assessee with regard to verification to the claims made by the assessee in the return filed by it, under the aforesaid proceedings.
Regarding the second issue, the Counsel for the Revenue relied on the Order of CIT(A) and contended that prima facie it appears that expenses were incurred for starting a new project, and therefore, these expenses were capital in nature and not allowable against the income of the current year.
Judgment of the Hon’ble Tribunal
On the Issue of Addition based on Direction of TPO
“The assessee has incurred certain expenditure and has debited the same to its P&L A/c. This expenditure prima facie appears to be in the nature of capital expenditure. The A0 may examine this expenditure vis.. project feasibility study costs-Rs.4.41 crores, costs in connection with idle capacity/unutilized space -Rs. 1.79 crores, new service line costs-Rs. 75.99 lakhs and fees for rental options/brokerage -Rs. 72.09 lakhs, to arrive at a finding whether this expenditure is to brought to tax or not.”