Project Management Study expense to facilitate existing business is revenue in nature

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

• Ld. Counsel has drawn our attention on para 8 of the order passed by the TPO dated 28.02.2006, which reads as under:

“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.”

•  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 reasons comprising of belief formed by the AO for escapement of income of assessee. In that context, it was held by the Hon’ble High Court that the belief made by the AO should be independent and on the basis of application of own mind of the AO, and that it should not be on the basis of directions of any superior authorities. Thus in this specific context, it was observed by the Hon’ble High Court that belief of escapement of income must be determined by the AO himself and he cannot blindly follow information of an audit authority for the purpose of arriving at a belief that income has escaped assessment.5.4. It is noted by us that the facts of this case, stand on an all together different pedestal. First of all, the impugned assessment proceedings were not commenced u/s 147. These proceedings have been carried out u/s 143(3) of the Income Tax Act. The parameters laid down under the law for assumption of jurisdiction for initiating and carrying out the proceedings u/s 143(3) and u/s 147 are totally different. There is no such 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. It is worth noting that proceedings initiated under section 147 for reopening of an already concluded assessment, have been couched by the legislature in a special framework of provisions contained in sections 147 to 151 of the Income Tax Act, 1961. All these provisions provide some fetters on the powers of the AO, and these have to be strictly complied with by the AO for reopening of the case and framing of the reassessment order. On the other hand, in the proceedings u/s 143(3), the legislature has given ample powers to the AO to make requisite inquiries with the assessee or other connected persons, for the purpose of finding out the authenticity of the claims made by the assessee in the return of income filed by it and also for the purpose of determination of the taxable of the assessee and taxable payable thereon, as per law. Thus, in our considered view, both the situations are not comparable, on the angle as suggested by Ld Counsel, and therefore, his submissions on this issue are not acceptable under the law. Further, without prejudice, even if we expunge the directions of the TPO, we find that 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). 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.

• The Hon’ble Tribunal while delivering its Judgment relied on the Judgment of Assam Asbestos Ltd 263 ITR 357, where it was held that 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 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 report regarding installing a captive power station was held revenue as the report by itself did not bring into existence the power plant. In Kesoram Industries and Cotton Mills Ltd v. CIT 196 ITR 845, legal and other expenses incurred in connection with proposed cement factory project, were found to be expenses pertaining to exploring the feasibility of expanding or extending the existing business and were therefore held to be allowable deduction.

• Further the Hon’ble Tribunal held that expenses incurred in the form of payments made on the account of salary to the employees or expenses incurred on training of the employees provides benefits of enduring nature. Similarly, is with the case of advertisement which also provide benefits of enduring nature in the longer term.
• Further, it was held that ‘benefits of enduring nature’ is not the sole factor to categorise an expense as capital expense. Before the expenditure can be put into capital field, it has to pass the twin tests i.e. one the expense should provide benefit of enduring nature, and two- the expense should give rise to creation of a capital asset.
• In the present case the Expenditure made has not created any capital asset. It has only been made for “operational efficiency” and therefore expenditure made regarding Project Management Study will be considered as Revenue in Nature.

• Accordingly, the Appeals of Assessee were allowed.