Payment of Upfront Fees by Delhi International Airport Limited (DIAL) Held To Be Revenue Expenditure
Recently, in ACIT vs. Delhi International Airport Pvt. Ltd. [ ITA No. 2720/DEL/2011, decided on 14.12.2017] Revenue had challenged the finding of the CIT (A) in treating the “Upfront fees” of Rs. 150,00,00,000/- as revenue expenditure instead of capital expenditure treated by the AO.
Briefly, in the above-mentioned appeals, pursuant to “Operation, Management and Development Agreement” (hereinafter referred to as OMDA), a lease deed was simultaneously entered into between Airport Authority of India (AAI) and ‘Delhi International Airport Limited’ (hereinafter referred to as ‘assessee’ or ‘DIAL’ or JVC) for the lease of ‘Airport site’ which had an area of more than 4609 acres, at a very nominal lease rent of Rs. 100 per annum for a period of 30 years and this was further extendable for another period of 30 years at the discretion of the parties. Apart from that, the assessee was also required to pay “Upfront Fees” of Rs. 150 crores; and also ‘Annual fees’ expressed in the terms of percentage of revenue, which was determined at 45.99% of the gross revenue for allowing the assessee to carry on the function of development, operation and management of the Delhi Airport. The AO treated the amount of Rs. 150 crores paid as ‘license fee’ for acquiring the licence in the nature of enduring benefit and accordingly, held that it is to be allowed as deduction to the assessee on spread over basis, that is, over the period of 30 years and consequently he allowed 1/30th of the said payment.CIT (A) decided this issue in favour of the assessee after noting following important facts:-
Upfront fee was refundable only if certain conditions were not fulfilled within 3 months from the date of OMDA 4.04.2006.
RFP clearly specified that the assessee was required to pay only a nominal rent of Rs.100 per annum along with an upfront fee of Rs.150 crore to AAI and that tax has been deducted from the payment of upfront fees under section 194-1 and AAI has offered the upfront fee to tax.
The payment of upfront fee has not resulted in acquisition/ creation of any capital asset. In fact, owing to the payment of upfront fee, the appellant was required to pay only a nominal annual lease rent The tenure of the agreement was limited, i.e., for 30 years and the rights under the OMDA were not granted/transferred to the assessee and upon the termination of OMDA (after the expiry of 30 years), the assessee was obliged to Transfer back assets specified in OMDA to AAI which would include the airport site leased to the assesse for operating and managing the airport.
The learned Members of the Delhi ITAT observed that the nature of dispute was whether the lump-sum payment which was payable only once during the term of the agreement of Rs. 150 crores was; for the lease of the airport for 30 years; or was in lieu of transfer of any kind of rights to develop, operate and manage the airport. As can be deduced from the OMDA as well as the intention of the parties given in RFP, the parties have agreed for distinctly two kinds of payment, one for the lease of ‘Airport Site’ which leased on a nominal lease rent of Rs.100 per annum and ‘upfront fee’ of Rs. 150 crores; and second payment was for the given to the assessee for development, operation and management of the airport. Nowhere in the OMDA agreement, is it borne out that the ‘upfront fee’ was for acquiring any tangible or intangible assets. The rights as envisaged had been granted by the AAI to the assessee to undertake some of the functions of AAI in connection with the operation, management and development of the airport for which the consideration paid is by way of ‘annual fees’. The entire airport site with the facilities had been handed over to the assessee to perform the activity which was earlier carried out by the AAI under revenue sharing basis.
For making the distinction between the capital and revenue expenditure several ‘tests’ have come up for consideration before the judicial forums from time immemorial and way back in year 1955, Hon’ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT(1955) 27 ITR 34 had summarised following tests:-
“i. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment……..
ii. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade…… If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether.
iii. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital.”
The learned Members of the Delhi ITAT observed that if we apply the aforesaid tests on the facts of the present case, then the payment of Rs. 150 crores is neither for initiation nor for extension of a business or for substantial replacement of equipment and nor it brings any capital asset. The expenditure can be neither be held to have been incurred which has brought any fixed capital of business or is part of circulating capital. Albeit the payment here is for securing a lease period of 30 years of the airport for carrying out the operation and development of Airport and is part of the lease consideration. Hon’ble Supreme Court in the case of Empire Jute Company (1980) 124 ITR 1, wherein the Hon’ble Supreme Court has repelled the theory of expenditure of enduring nature in very elucidate manner. The Hon’ble Supreme Court after taking note of various judicial decisions and various tests evolved for distinguishing the capital and revenue expenditure, held that no test is paramount or conclusive as every case has to be decided on its facts keeping in mind the broad picture of whole operation in respect of which the expenditure has been incurred. Hon’ble Apex Court has also added a caution in such cases in the following manner:
” … There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably white leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.”
Nowhere the Hon’ble Apex Court has laid down the proposition that, under the Income Tax law there is a concept of ‘deferred revenue expenditure’.
The learned Members of the Delhi ITAT held that mere entry in the books of accounts and classifying the said payment as capital, i.e., it has been capitalised in the books will not at all be determinative as it has to be seen on the facts whether such a payment or expenditure falls in the capital filed or revenue field. One more important aspect in this case was that, if the assessee had acquired any right by making payment of Rs. 150 crores, then under the terms of OMDA it was clearly stipulated that the payment of ‘annual fee’ of 45.99% of the gross revenue of the year was not made continuously then the OMDA agreement will come to an end. On this fact also the assessee had not acquired any licence or right by the payment of Rs. 150 crores. The learned Members of the Delhi ITAT affirmed the order of CIT(A) allowing expenditure and finally, held that that the payment of Rs. 150 crores was to be treated as revenue expenditure.