Brief of the case:
In the case of M/s NYK Line (India) Ltd Vs. Addl. CIT Mumbai Bench of ITAT have held that payment made to professional firm for conducting a Feasibility Study Report for establishing a BPO business for assessee’s own function, cannot be treated as capital expenditure, or for non business purpose or any kind of pre-operative expenses. It was held that nothing has been brought on record that some kind of new line of business was to be set up or was to be controlled by different management. In assessee’s case BPO business could not take off and whatever expenditure has been incurred has to be allowed either as business expenditure or as a business loss incurred during the course of business.
Facts of the case:
- Assessee is a shipping agent in respect of shipping activity of its principal, NYK Japan in India.
- The primary activity of the assessee company was to derive income from shipping agency services in India to its overseas principal, for which it receives commission income only.
- The assessee had made an investment in shares and mutual funds for sums aggregating to Rs. 10,33,85,369/- on which it has earned a dividend income of Rs. 30,29,856/- which was claimed as exempt.
- Assessee claimed depreciation @ 60% on purchase of printers and UPS which was restricted to 15% by treating it as plant & machinery.
- Assessee has claimed payment made for purchase of print server software as revenue expenditure, which has been disallowed by the AO on the ground that it has an enduring benefit to the assessee.
- The shipping agency services of the assessee are governed by the agency agreement. The activities of the assessee included booking of container cargo for ships owned or operated by NYK Japan.
- The activities of the assessee included booking of container cargo for ships owned or operated by NYK Japan.
- The assessee collects the freight and other receipts arising in the course of shipping business of its principal in India and remit back to its overseas principal i.e. NYK in accordance with the regulation prescribed under FEMA.
- Container detention Charges (CDC) represented on such receipts collected and remitted by the assessee on behalf of the principal in India. CDC is a charge levied for the detainment of the containers in excess of the permissible time period.
- Reserve Bank of India vide its circular has directed to retain container detention charges at US $ 1.5 per day per 20 ft. equivalent units as ‘administrative charges’ for an agent’s local use.
- AO noticed that contention detention charges (CDC) was shown as liability in balance sheet.
- During the year, the assessee has reported international transaction of Rs. 14,83,83,874/- on account of agency commission and other services.
- For benchmarking the transaction, the assessee has adopted TNMM as a most appropriate method (MAM) and selected 9 comparables after taking PLI as operating profit to total sales.
- TPO noted out of above comparable that there were 5 common comparables which were in the earlier three years also including one comparable, Wuhu Port Storage and Transportation Co., which the assessee had rejected this year on the ground of excess profit.
- The assessee had appointed McKinsey & Co. a professional firm for conducting the Feasibility Study for setting up of BPO Unit and had advanced an amount of Rs. 26,02,846/- towards the professional fees.
- Later on, the company took a decision that BPO activity will not be suitable for it and accordingly, certain amount was written off and claimed as an expenditure.
Contention of the assessee:
- No expenditures have been incurred directly or indirectly for earning of the dividend income for the reason that;
Firstly, the entire investment was made out of its own funds and
