DCIT, Circle - 9(1), Kolkata , Kolkata V. M/s Apollo Gleneagles Hospitals Ltd., Kolkata

ITA 2509/KOL/2017

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 2974 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 21-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RADHESHYAM
• Assessee Lawyers: PRASANT KHANDELWALA FCA LD
• Keywords: Depreciation; Transfer pricing; Business expenditure; International transaction; Fair market value; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 92C; 143(3); 10B; 37; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : KOLKATA [BEFORE HONBLE SHRI J. SUDHAKAR REDDY, AM & HONBLE SHRI S.S. GODARA, JM ] I .T.A NO. 2509/ KOL/201 7 ASSESSMENT YEAR : 200 4 - 05 DCIT, CIRCLE - 9(1), KOLKATA - VS - M/S. APOLLO GLENEAGLES HOSPITALS LTD. PA N: AA ECA 5407E (APPELLANT) (RESPONDENT) FOR THE APPELLANT : SHRI RADHE SHYAM. CIT(DR) FOR THE RESPONDENT : SHRI PRASANT KHANDELWALA, FCA, LD.AR DATE OF HEARING : 21.06 .2019 DATE OF PRONOUNCEMENT : 21 .08.2019 ORDER SHRI S.S. GODARA, JM : 1. THIS REVENUES APPEAL FOR ASSESSMENT YEAR 20 04 - 05 ARISES AGAINST THE CIT(A), 2 2 , KOLKATAS ORDER DATED 26 - 09 - 2017 PASSED IN CASE NO. 1 7 /CIT(A) - 2 2 / 04 - 05/17 - 18/ KOL INVOLVING PROCEEDINGS U/S 143(3) OF THE INCOME - TAX ACT, 1961 ( IN SHORT ACT). 2 . IT TRANSPIRES AT THE OUTSET THAT THE REVENUES INSTANT APPEAL SUFFERS FROM 12 DAYS DELAY STATED TO BE ATTRIBUTABLE TO VARIOUS PROCEDURAL APPROVALS AT DEPARTMENTAL L EVEL . THE ASSESSEE IS FAIR ENOUGH IN NOT DISPUTING ALL THESE CONTENTION S . WE THEREFORE CONDONE THE IMPUGNED DELAY IN FILING THE MAIN APPEAL. THE CASE IS NOW TAKEN UP FOR ADJUDICATION ON MERITS. HEARD BOTH THE PARTIES. CASE FILE PERUSED. 3. THE REVENUE HAS PLEADED AS MANY AS FOUR SUBSTANTIVE GROUNDS IN THE INSTANT APPEAL. BOTH THE LEARNED REPRESENTATIVES AT THE OUTSET STATE THAT THE REVENUES FORMER TWO SUBSTANTIVE GROUNDS SEEK TO REVIVE THE TRANSFER PRICING OFFICER( THE TPO ) S ACTION 2 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 2 MAKING UPW ARD ADJUSTMENT OF PROJECT MANAGEMENT ( P RE - OPERATIVE) SERVICE FEES OF RS.3,00,00,000/ - AND PRE - OPERATING MANAGEMENT FEE PAID/ PAY ABLE OF RS.1,50,00,000/ - ; RESPECTIVELY. BOTH THE L EARNED REPRESENTATIVE S 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 AP PELLANT 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 PRE VIOUS 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 IM PUGNED 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 RS. 1,00,73,148 TO THE ASSOCIATED ENTERPRISES GLENEAGLES MANAGEMENT SERVICES PTE LTD., SINGAPORE ASSOCIATED TO GLENEAGLES DEVELOPMENT (P) LTD., SINGAPORE ONE OF THE TWO JOINT PROMOTERS OF THE ASSESSEE COMPANY. HOWEVER, HE SUGGESTED THAT THE MANAGEMENT SERVICES WERE ACTUALLY 'BRAND ROYALTY' PAYMENT, WHICH IS ALLOWABLE REVENUE EXPENDITURE, AS IT IS LINKED TO GROSS REVENUE. IN THE SAID ORDER PAYMENT OF RS. 3,00,00,000 MADE TO THE SAID ASSOCIATED FOREIGN COMPANY FOR PREOPERATIVE SERVICES PAID AS PROJECT MANAGEMENT SERVICES WERE SUGGESTED FOR DISALLOWANCE. AS PER THE JOINT VENTURE AGREEMENT DT. 30 07 2002, THIS PAYMENT WAS TO BE MADE TO ONE OF THE PROMOTERS, GLENEAGLES DEVELOPMENT (P) LTD, SINGAPORE, AS CONSULTANCY FEE. HOWEVER, WITH AN INTERNAL ARRANGEM ENT, THE GDPL ASKED THE COMPANY TO REMIT THE FEES AS PROJECT MANAGEMENT SERVICES FEE TO ONE OF ITS ASSOCIATES, GMSPL. FOR REASONS, ELABORATELY DISCUSSED IN THE TPO'S ORDER 22.12.2006, IT WAS SUGGESTED TO BE DISALLOWED. THE ASSESSEE CLUBBED THIS EXPENSE A S PREOPERATIVE EXPENSE AND IN THE PROFIT AND LOSS ACCOUNT CHARGED 20% OF THE TOTAL OF THE PREOPERATIVE EXPENDITURE AS DEFERRED REVENUE. FOR INCOME TAX PURPOSE, A SEPARATE COMPUTATION OF ME/LOSS WAS FURNISHED WHERE THE DEFERRED 3 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 3 REVENUE ACCOUNT CHARGED IN PROFIT AND LOSS ACCOUNT AS ADDED BACK AND THE ENTIRE PREOPERATIVE EXPENDITURE WAS CHARGED AS REVENUE EXPENSE. AS SUGGESTED BY THE TPO, THEREFORE, THE ENTIRE AMOUNT OF RS. 3,00,00,000/ CHARGED IN THE COMPUTATION IS DISALLOWED. 05. DURING THE COURSE OF THE APPEAL HEARING, THE APPELLANT / LD. A.RS FOR THE APPELLANT HAVE SUBMITTED AS UNDER: 5.1 THE PRINCIPLE ISSUE UNDERLYING THE TP ORDER (AND CONSEQUENTLY, THE AO'S ORDER) IS THE DISALLOWANCE OF PRE COMMISSIONING MANAGEMENT FEES A MOUNTING TO INR 3,00,00,000. THE DISALLOWANCE HAS BEEN MADE BY THE TPO ON BASIS OF AN UNDERSTANDING THAT THE SERVICES RENDERED BY THE ASSOCIATED ENTERPRISE (BEING GMSPL) IS IN THE NATURE OF (SHAREHOLDER ACTIVITY FOR WHICH NO INDEPENDENT ENTERPRISE WOULD H AVE PAID ANYTHING IN AN ARM'S LENGTH SITUATION). THE TPO HAS FURTHER HELD THAT NO SERVICES HAVE BEEN RENDERED HENCE THE ENTIRE PAYMENT HAS BEEN DISALLOWED. 5.2 AS IT HAS BEEN RECOGNIZED BY THE TPO IN HIS ORDER UNDER SECTION 92 CA (3) AND ALSO AS THE APPEL LANT HAS CONTENDED IN ITS 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 APPEL LANT? A ND 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 P AYMENT 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 U NDERSTANDING 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 L EARNING AND EXPERTISE GATHERED OVER THE YEARS BY THEM WHICH HAS BEEN SHARED WITH THE APPELLANT WOULD BE ON ACCOUNT OF SHAREHOLDERS INTEREST IN SUCH PROJECT. 5.5 THE APPELLANT HUMBLY PLEADS THAT BEING A SHAREHOLDER TO THE PROJECT SHOULD NOT PREJUDICE 8 TH E FACT THAT RENDERING SERVICES WHICH ARE VERY CRITICAL TO (I) THE PROJECT COMING INTO EXISTENCE AND (II) CREATE A SEPARATE NICHE MARKET FOR ITSELF SHOULD BE REMUNERATED. THE SAME SERVICES, HAD 4 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 4 THEY BEEN RENDERED BY APOLLO HOSPITALS GROUP AND THE SINGAPORE BASED PARKWAY GROUP, NOT IN SHAREHOLDER CAPACITY WOULD HAVE BEEN JUSTIFIED. THE APPELLANT CONTENTION IS THAT AS THERE IS ALSO A SHAREHOLDER INTEREST IN THE PROJECT, IT SHOULD NOT MAKE THE KNOWLEDGE AND EXPERTISE SHARED FOR THE PROJECT, TO BE CHARACTERIZED AS SERVICES RENDERED IN THE INTEREST OF SHAREHOLDERS. 5.6 REGARDING THE NATURE OF SERVICES RECEIVED BY THE APPELLANT FROM GMSPL, THE RELEVANT EXTRACT OF THE SUBMISSIONS FILED BY THE APPELLANT IS AS UNDER: GMSPL PROVIDED THE APPELLANT FOLLOWING PRE CO M MI SSIONIN G CONSULTANCY SERVICES DURING THE PERIOD UNDER REVIEW: REVIEW AND RECOMMENDATIONS ON THE ARCHITECTURAL PLANS, INTERIOR DESIGN, ROOM SIZES AND LAYOUTS AND OPERATIONAL AND DESIGN PHILOSOPHY OF THE HOSPITAL; REVIEW AND RECOMMENDATIONS ON THE SPECIFICATIONS, QUALITY AND QUANTITY OF HOSPITAL, MEDICAL, SANITATION, KITCHEN, LAUNDRY AND OTHER EQUIPMENT, TELEPHONE SYSTEM, NURSE CALL AND PAGING SYSTEMS, LIFTS, AND OTHER MECHANICAL AND ELECTRICAL SYSTEMS; REVI EW AND RECOMMENDATIONS ON THE SPECIFICATIONS, QUALITY AND QUANTITY OF MEDICAL AND HOSPITAL EQUIPMENT AND SUPPLIES FOR THE WARDS, THEATRES, INTENSIVE CARE UNITS, PHYSIOTHERAPY CLINICS, CLINICAL LABORATORIES, IMAGING DEPARTMENT, LABOUR ROOMS AND ALL OTHER ME DICAL AND HOSPITAL FACILITIES FOR THE HOSPITAL; REVIEW AND RECOMMENDATIONS ON THE INSTALLATION OF SANITATION , KITCHEN, AND OTHER OPERATING EQUIPMENT AND OF MEDICAL AND HOSPITAL EQUIPMENT FOR THE WARDS, THEATRES, INTENSIVE CARE UNITS, PHYSIOTHERAPY CLI NICS, CLINICAL LABORATORIES, IMAGING DEPARTMENT, NURSERY, ACCIDENT AND EMERGENCY UNIT, CENTRAL STERILIZING DEPARTMENT, LA BOUR ROOMS AND ALL OTHER MEDICAL AND HOSPITAL FACILITIES; REVIEW AND RECOMMENDATIONS ON THE INSTALLATION OF A COMPUTER SYSTEM, BOTH AS TO HARDWARE AND SOFTWARE, SUITABLE FOR THE HOSPITAL'S MANAGEMENT INFORMATION SYSTEM; AND GENERALLY REVIEW AND RECOMMENDATIONS ON ALL ASPECTS OF THE PLANNING, DESIGN, CONSTRU CTION AND COMPLETION OF THE HOSPITAL; 5 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 5 REVIEW AND RECOMMENDATIONS ON THE POLICIES AND PROCEDURES IN THE AREAS OF HUMAN RESOURCES, FINANCE, MARKETING, QUALITY MANAGEMENT, MATERIALS MANAGEMENT, FIRE S AF ET Y ; PLANT OPERATIONS, INFORMATION SYSTEMS, MEDICAL RE CORDS, NURSING ADMINISTRATION, INTENSIVE CARE UNITS, DIAGNOSTIC IMAGING, LABORATORY, ACCIDENT AND EMERGENCY UNIT, CARDIOVASCULAR LABORATORY, OPERATING THEATRE, OUTPATIENT CLINICS AND PATIENT WARDS OF T H E HOSPITAL; REVIEW AND RECOMMENDATIONS ON THE SELE CTION 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 O ECD GUIDELINES AND COMPARING THEM WITH THE PROJECT MANAGEMENT (PRE OPER A TIVE) 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 S ERVICES) TO REMUNERATION. THE OECD GUIDELINES PROVIDES FOR A SPECIFIC AMBIT OF THE TERM 'SHAREHOLDER SERVICE' AND IN THE HUMBLE CONTENTION OF THE APPELLANT, THE TPO'S ACTION OF CHARACTERIZATION OF THE SERVICES PROVIDED BY GMSPL AS 'SHAREHOLDER SERVICE' IS BASED ON A MISCONSTRUED NOTION OF LAW AND HAS ARISEN DUE TO NON COGNIZANCE OF THE FACTS UNDERLYING THE APPELLANT'S CIRCUMSTANCES. 5.7 IN ORDER TO SHOW EXISTENCE OF SIMILAR PROJECT MANAGEMENT SERVICES IN THE HEALTHCARE INDUSTRY THE APPELLANT HAD SUBMITTE D BEFORE THE LEARNED TPO COPIES O F SOME AGREEMENTS AVAILABLE WITH THE ASSESSEE FOR DIFFERENT LOCATIONS. THESE AGREEMENTS ESTABLISH THE FACT THAT SUCH A PRACTICE IS PREVALENT IN THE HEALTHCARE INDUSTRY. THE NATURE OF SERVICES MAY VARY IN EACH CASE, DEPENDIN G UPON THE NEED OF EACH PROJECT AND THUS THE NEED WOULD GOVERN THE EXTENT OF INVOLVEMENT IN EACH CASE. BASED ON THE EXTENT OF INVOLVEMENT, MAGNITUDE OF THE PROJECT, THE EXPERTISE INVOLVED FOR A PROJECT AND OTHER DYNAMICS WOULD ASCERTAIN THE QUANTUM OF REMU NERATION. THE TPO DID NOT GIVE DUE COGNIZANCE TO THE FACT ABOUT SUCH INDUSTRY PRACTICE. 5.8 THE LD. AR HAS ALSO SUBMITTED DURING THE APPELLANT PROCEEDINGS THE DOCUMENTS ON SAMPLE BASIS EVIDENCING PROVISION OF SERVICES BY GMSPL DURING THE RELEVANT FINAN CIAL YEAR AND THE ECONOMIC OR COMMERCIAL VALUE THAT IT HAS RECEIVED TO ENHANCE ITS COMMERCIAL POSITION. YOUR KINDSELF MAY 6 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 6 PLEASE FURTHER APPRECIATE THAT AN INDEPENDENT ENTERPRISE IN COMPARABLE CIRCUMSTANCES WOULD HAVE BEEN WILLING TO PAY FOR THE ACTIVITY I F PERFORMED FOR IT BY AN INDEPENDENT ENTERPRISE OR WOULD HAVE PERFORMED THE ACTIVITY IN HOUSE FOR ITSELF. IN THIS REGARD THE LD. AR HIGHLIGHTED THE FOLLOWING OBSERVATION MADE BY KOLKATA TRIBUNAL . 5.9 THE LD. AR SUBMITTED DURING APPELLATE PROCEEDINGS THAT IN THE CASE OF MCCANN ERICKSON INDIA (P.) LTD. V. ADDL. CIT [2012J 24 TAXMANN.COM 21 (DELHI) ME DELHI TRIBUNAL HAS HELD THAT IT IS ONLY A PARTICULAR BUSINESS EXPERT WHO CAN EVALUATE THE TRUE INTRIN SIC AND CREATIVE VALUE OF INTRA GROUP SERVICES AND IN ANY CASE, THE VALUE OF THESE SERVICES CANNOT BE TAKEN AT NIL. HOWEVER, IN THE INSTANT CASE, THE TPO JUDGED THE REASONABLENESS OF THE AFORESAID MANAGEMENT FEES AND COMPUTED THE ARM'S LENGTH PRICE OF T HE INTERNATIONAL TRANSACTIONS UNDER REVIEW AT 'NIL' VALUE BASED ON HIS MAIN ALLEGATION THAT 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 P AY. 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 SUB SECTION (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 KO L KATA 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.) / [2 0 16 ] 177 TT) 156 (KOLKATA TRIB.) 06. DECISION: 1. I HAVE CAREFULLY CONSIDERED THE ENTIRE FACTS AND CIRCUMSTANCES OF THE CASE AND THE SUBM ISSIONS FILED BY THE LD. ARS FOR THE APPELLANT COMPANY AGAINST THE ACTION OF THE LD. AO/TPO IN MAKING THE IMPUGNED ADDITIONS. IT IS TO BE STATED THAT THE LD. AO HAS MADE THE IMPUGNED ADDITIONS SOLELY BASED ON THE ALLEGATION MADE BY THE LD. TPO THAT THE ACT IVITY PERFORMED BY GMSPL ARE SHAREHOLDER ACTIVITY. IN THIS CONNECTION, I HAVE ALSO THOUGHTFULLY CONSIDERED THE DECISION OF THE HON'BLE SUPREME COURT OF 7 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 7 INDIA IN THE MATTER OF DIT (INTERNATIONAL TAX) VS. MORGAN ST AN LEY AND CO. INC. (SUPRA) IN WHICH THE COUR T HAS DEFINED THE TERM 'STEWARDSHIP ACTIVITY'. DURING THE COURSE OF APPELLATE PROCEEDINGS, THE APPELLANT HAS SUBMITTED THE DOCUMENTARY EVIDENCES OF RECEIPT OF SERVICES ON SAMPLE BASIS AND THE DETAILED CLARIFICATION THEREON REGARDING THE NATURE OF BENEFIT RECEIVED BY THE APPELLANT COMPANY IN RELATION TO ITS BUSINESS. IT IS NOTED THAT THE SERVICES RENDERED BY GMSPL ARE NOT SIMILAR TO THE SERVICES MENTIONED IN PARAGRAPH NO . 7.10 OF THE OECD TRANSFER PRICING GUIDELINES. IN THE FACTUAL MATRIX EMERGING ON THE CAS E, IN MY CONSIDERED VIEW OF THE MATTER, THE SERVICES RENDERED BY GMSPL TO T HE APPELLANT COMPANY ARE THOSE FOR WHICH INDEPENDENT ENTERPRISES WOULD HAVE BEEN WILLING TO PAY FOR OR TO PERFORM IN HOUSE FOR THEMSELVES AND HENCE, THE V ALUE OF THE AFORESAID SERVI CES IN COMPARABLE UNCONTROLLED TRANSACTIONS COULD NOT BE 'NIL'. SUCH A VIEW HAS ALSO BEEN CONFIRMED AND ENDORSED BY THE HON'BLE JURISDICTIONAL KOLKATA TRIBUNAL IN THE CASE OF N L C NALCO INDIA LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 10, KOLKATA [2016] 71 TAXMANN.COM 57 (KOLKATA TRIB)/[2016] 177 TTJ 156 (KOLKATA TRIB). 2. IN THE TRANSFER PRICING STUDY REPORT, THE APPELLANT HAD APPLIED OVERALL TRANSACTIONAL NET MARGIN METHOD ('TNMM'). NO ADVERS E COMMENT WAS FOUND IN THE LD. TPO'S ORDER IN RESPECT OF THE ARM'S LENGTH ANALYSIS UNDERTAKEN BY THE APPELLANT UNDER THE TNMM CONSIDERING EXTERNAL COMPARABLE COMPANIES. IN THE INSTANT CASE, NOTHING WAS FORTHCOMING IN THE LD. TPO'S ORDER WHICH WAS INDICATIV E OF THE EXISTENCE OF ANY OF THE CIRCUMSTANCES PRESCRIBED UNDER CLAUSE (A) TO (D) OF SECTION 92C (3) OF THE ACT WHICH NECESSITATES INTERVENTION OF THE LD. AO/TPO FOR DETERMINATION OF ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. IT IS FURTHER NOTED T HAT THE LD. TPO HAD NOT APPLIED ANY OF THE METHODS PRESCRIBED UNDER SUBSECTION (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 B EEN 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 I S DIRECTED TO DELETE THE IMPUGNED ADDITION OF RS. 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 C APITAL IN NATURE. IN MY CONSIDERED VIEW THE TREATMENT OF THE PRE COMMISSIONING MANAGEMENT FEES SHOULD ALSO BE SIMILAR, AND ACCORDINGLY THE ABOVE 8 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 8 AMOUNT IS TO BE TREATED AS CAPITAL EXPENDITURE, ON WHICH THE RELEVANT DEPRECIATION IS ALSO TO BE ALLOWED TO TH E APPELLANT ASSESSEE. THE AFORESAID GROUNDS OF APPEAL ARE ALLOWED IN FAVOUR OF THE APPELLANT COMPANY. 07. GROUND NO. 2 ARISES ON ACCOUNT OF THE ACTION OF THE LD. AO IN MAKING AN UPWARD ADJUSTMENT OF INR 1,50,00,000 TO THE TOTAL INCOME OF THE APPELLANT IN RESPECT OF PRE OPERATING MANAGEMENT FEES PAID/PAYABLE BY THE APPELLANT TO APOLLO HOSPITAL ENTERPRISES LTD. (HEREINAFTER REFERRED TO AS 'AHEL') UNDER THE 'JOINT VENTURE AGREE MENT (HEREINAFTER REFERRED TO AS 'JVA') FOR THE ALLEG ED REASON THAT THE ACTIVI TIES PERFORMED BY AHEL ARE NOT RELEVANT FOR BUSINESS AND FOR WHICH NO INDEPENDENT ENTERPRISE WOULD HAVE PAID ANYTHING TO AN UNRELATED PARTY AND HENCE, ACCORDING TO THE LD. AO, PROVISIONS OF SECTION 40A(2)(B) IS ALSO ATTRACTED AND THE EXPENDITURE IS NOT ALL OWABLE UNDER SECTION 37 OF THE I T ACT. THE DISPUTED MATTER HAS BEEN DEALT WITH BY THE LD. AO AS UNDER: PROJECT MANAGEMENT FEES, WERE PAID TO AHEL AND GMSPL AS PER JOINT VENTURE AGREEMENT DT. 30 07 2002. FOR REASONS ELABORATED BY THE TPO, PAYMENT TO GM SPL IS DISALLOWED. IN THE CASE OF PAYMENT TO AHEL, SIMILAR LOGIC APPLIES. SRI S.K. VENKATRAMAN, ONE OF THE SIGNATORIES OF THE JOINT VENTURE AGREEMENT AS AHEL NOMINEE WAS ALSO DIRECTOR OF THE COMPANY. THE AHEL INDUCTED RS. 6 CRORES IN THE PRE COMMISSIONING PERIOD FOR EXPENSES IN CONNECTION WITH THE PROJECT. AS PER THE JOINT VENTURE AGREEMENT AHEL GOT THE SAID MONEY CONVERTED INTO 49% SHARE OF THE COMPANY ALONG WITH RS. 1.05 CRORES AS UNSECURED ZERO COUPON SUBORDINATED LOAN TO THE COMPANY AND FURTHER, IN THE SAID AGREEMENT A CLAUSE WAS MADE, COMPULSIVELY BIND I NG THE COMPANY TO PAYBACK RS. 1 CRORE IMMEDIATELY ON EXECUTION OF THE AGREEMENT TO AHEL, ANOTHER 1 CRORE ON FINALIZING THE LOAN RESTRUCTURING OF THE COMPANY WITH FINANCIAL INSTITUTIONS AND FURTHER RS. 3 CRORES WITHIN 1 YEAR OF E COMMISSIONING OF THE HOSPITAL, ALL AS CONSULTING FEE. THE OBLIGATION OF PAYMENTS AS ABO V E, WAS MADE BINDING ON THE ASSESSEE WITHOUT EVEN EVALUATING ANY SUCH NEED OF CONSULTATION FOR FEES WERE TO BE PAID. THUS, THE PAYMENT OF RS. 1.5 CRORES PAID TO AHEL DURING THE YEAR AN CHARGED IN THE COMPUTATION, ALONG WITH RS. 3 CRORES PAID TO GMSPL, ARE CONSIDERED AS N OT AT ALL RELEVANT FOR BUSINESS. NO INDEPENDENT COMPANY WOULD HAVE UNDERTAKEN TO MAKE SU CH PAYMENTS TO ANY UNRELATED PARTY. HER E THE PAYMENTS WERE MADE WITHOUT ANY PROPER BUSINESS EXPEDIENCY. PROVISIONS OF SEC. 40A(2)(B) IS ALSO ATTRACTED. THE EXPENDITURE IS NOT ALLOWABLE U/S. 37. THIS 9 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 9 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 RS. 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 FE ES 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 OR DER 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 EXPEDIE NCY. THE LD. AR HAS ALSO SUBMITTED THAT THE DISALLOWANCES HAVE BEEN MADE UNDER TWO DIFFERENT SECTIONS OF THE I. T.ACT, SECTION 92 IN C ASE OF INTERNATIONAL TRANSACTION WHERE ARMS LENGTH ARE REQUIRED TO BE DETERMINED AND SECTION 40A(2) WHERE THE EXCESSIVE A ND REASONABLENESS OF THE EXPENDITURE IS REQUIRED TO BE DETERMINED. THE LD. AO IN ITS ORDER HAS CONTENDED THAT THE LOGIC FOLLOWED IN THE TP ORDER ALSO APPLIES TO THE PAYMENTS MADE TO DOMESTIC ENTITY AHEL. 8.2 THE LD. AR HAS ALREADY SUBMITTED EARLIER ABOUT THE FACTS THAT APOLLO HOSPITALS GROUP HAS DEVELOPED CONSIDERABLE AND COMPREHENSIVE KNOW HOW AND TECHNICAL EXPERTISE OF INTERNATIONAL STANDARD IN RELATION TO CONCEIVING, COMMISSIONING AND MANAGING SPECIALTY HOSPITALS. SINGAPORE BASED GMSPL (PART OF PARKWAY GROUP HEALTHCARE) A PIONEER IN THE HEALTHCARE IN DUSTRY PRIDES ITSELF ON BRINGING CUSTOMERS QUALITY SERVICE AND STATE OF THE ART FACILITIES. THUS AS EVIDENT IT IS THE COMBINED EFFORTS OF THESE TWO HEALTHCAR E GIANTS THAT BREATHED A NEW LIFE INTO THE PROJECT. CONVERGENCE OF THEIR EXPERTISE AND EXPERIENCE HAS BEEN THE KEY FACTOR OF REVIVAL OF THE PROJECT. AHEL ON ITS PART HAS ALSO PROVIDED THE APPELLANT THE PRE COMMISSIONING CONSULTANCY' SERVICES RELATING TO TE CHNOLOGICAL, FINANCIAL AND OTHER SUPPORTS. THE APPELLANT HUMBLY PLEADS THAT BEING A SHAREHOLDER TO THE PROJECT SHOULD NOT PREJUDICE THE FACT THAT RENDERING SERVICES WHICH ARE VERY CRITICAL TO THE PROJECT COMING INTO EXISTENCE AND CREATE A SEPARATE N ICHE MARKET FOR ITSELF SHOULD BE REMUNERATED 10 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 10 8.3 THE APPELLANT CONTENTION IS THAT AS THERE IS ALSO A SHAREHOLDER INTEREST IN THE PROJECT, IT SHOULD NOT MAKE THE KNOWLEDGE AND EXPERTISE SHARED FOR THE PROJECT, TO BE CHARACTERIZED AS SERVICES RENDERED IN T HE INTEREST OF SHAREHOLDERS. 8.4 THE APPELLANT HEREBY REFUTES THE VIEW TAKEN BY THE LEARNED OFFICER THAT NO INDEPENDENT COMPANY WOULD HAVE UNDERTAKEN SUCH PAYMENTS TO AN UNRELATED PARTY WITHOUT ANY BUSINESS EXPEDIENCY. IN THIS REGARD THE APPELLANT HEREBY SUBMITS THAT SUCH PRACTICE IS PREVALENT IN THE HEALTH CARE INDUSTRY AND HAS ALREADY SUBMITTED EARLIER REGARDING THE EXISTENCE OF THE PROJECT MANAGEMENT SERVICES PREVALENT IN THE HEALTHCARE INDUSTRY IN INDIA AND HAD CITED CERTAIN AGREEMENTS TO SUPPORT ITS VIEW. THE NATURE OF SERVICES MAY VARY IN EACH CASE DEPENDING UPON THE NEED OF THE RESPECTIVE PROJECT. TO SUBSTANTIATE ITS VIEW THE APPELLANT HAS PRESENTED A SHORT SYNOPSIS THE FEW ARRANGEMENTS IT HAD ACCESS TO. INDEPENDENT COMPANIES ARE PROVIDING SIMILAR SERVICES TO THE UNRELATED PARTIES IN THE HEALTH 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 TH IS IS NOTHING BUT WITHDRAWAL OF CAPITAL. IN THIS REGARD THE APPELLANT HEREBY SUBMITS THAT THE PROJECT MANAGEMENT FEES WERE ONE TIME FEES THAT WERE PAID TO AHEL AND GMSPL FOR SETTING UP THE PROJECT. THE PROJECT MANAGEMENT (PRE OPERATIVE) SERVICES RECEIVED B Y THE APPELLANT ARE P RE COMMISSIONING CONSULTANCY SERVICES RELATED TO PRE OPERATING 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 SET TING 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 THOUG H 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 MCCANN ERICKSON INDIA (P.) LTD. V. ADDL. CIT [2012) 24 TAXMANN.COM 21 (DELHI) THE DEL HI TRIBUNAL HAS HELD THAT IT IS ONLY A PARTICULAR BUSINESS EXPERT WHO CAN EVALUATE THE TRUE INTRINSIC AND CREATIVE VALUE OF INTRA GROUP SERVICES AND IN ANY CASE, THE VALUE OF THESE SERVICES CANNOT BE TAKEN AT NIL. HOWEVER, IN THE INSTANT CASE, THE A O JUDG ED THE REASONABLENESS OF THE AFORESAID MANAGEMENT FEES AND CONSIDERED AS NOT AT ALL RELEVANT FOR 11 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 11 BUSINESS AND CLAIMED THAT NO INDEPENDENT ENTERPRISE WOULD BE WILLING TO MAKE PAYMENTS TO AN UNRELATED PARTY. 8.7 FURTHER THE APPELLANT HAS ALSO HIGHLIGHTE D THE DEPARTMENTAL CIRCULAR ELABORATING THE SCOPE AND EFFECT OF THE PROVISIONS OF SECTION 40A(2) HAS STATED THAT 'SUCH PORTION OF EXPENDITURE WHICH IN THE OPINION OF THE INCOME TAX OFFICER, IS EXCESSIVE OR UNREASONABLE ACCORDING TO THESE CRITERIA IS TO BE DISALLOWED IN COMPUTING THE PROFITS OF THE BUSINESS OR PROFESSION.' 'THE INCOME TAX OFFICER IS EXPECTED TO EXERCISE HIS JUDGMENT IN A REASONABLE AND FAIR MANNER. IT SHOULD BE BORNE IN MIND THAT THE PROVISION IS MEANT TO CHECK EVASION OF TAX THROUGH EXCESSIVE OR UNREASONABLE PAYMENTS TO RELATIVES AND ASSOCIATE CONCERNS END SHOULD NOT BE APPLIED IN A MANNER WHICH WI LL CAUSE HARDSHIP IN BONA FIDE CASES. ' 8.8 THE INTENTION OF THE LEGISLATION AS MENTIONED IN THE CIRCULAR IS NOT TO DISALLOW ALL SUCH PAY MENTS BUT TO CHECK THE EVASION OF TAX THROUGH EXCESSIVE OR UNREASONABLE PAYMENTS TO RELATIVES OR ASSOCIATES. IN VIEW OF THE ABOVE, THE PAYMENTS MADE TO AHEL AND GMSPL FOR THE SERVICES RENDERED BY THEM SHOULD NOT BE DISALLOWED UNLESS: A. PAYMENT HAS NOT B EEN MADE F OR LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OR THE BENEFIT DERIVED BY OR ACCRUING TO THE TAXPAYER FROM THE EXPENDITURE AND B. THE EXPENDITURE IS NOT REASONABLE AND EXCESSIVE. 8.9 THE APPELLANT HAS SUBMITTED THAT BASED ON SUBMISSIONS M ADE FROM TIME TO TIME AND EVIDENCES PROVIDED, THE FOLLOWING POINTS HAVE BEEN ESTABLISHED: A. THE SERVICE PROVIDERS HAVE TECHNICAL KNOWLEDGE AND EXPERTISE IN RESPECT OF THE SERVICES PROVIDED BY THEM. IN FACT THEY ARE THE MARKET LEADERS HAVING PROVEN TRACK RECORD OF KNOWLEDGE, EXPERIENCE AND SKILL IN THEIR FIELD OF OPERATION. B. THE COMPANY'S HOSPITAL 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 E XPERTS 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. 12 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 12 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 T HE 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 SER VICES 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 BUSINESS EXPEDIENCY. SUCH PRAC TICE IS PREVALENT IN HEALTH CARE INDUSTRY AND GIVEN THE FACT THAT IN CASE OF THE COMPANY ALL THESE ARE ESSENTIAL TO OBTAIN SUCH SERVICES, IT WOULD CAUSE UNDUE HARDSHIP TO THE APPELLANT IF THESE ARE NOT APPROPRIATELY CONSIDERED. 8.11 THE APPELLANT HAS RELIED ON CERTAIN JUDICIAL PRONOUNCEMENTS DEALING WITH ALLOWABILITY OF EXPENSES ON REASONABLENESS WHICH WOULD BE RELEVANT TO THE CONTEXT: (I) UPPER INDIA PUBLISHING HOUSE (P) LTD. V. CIT (1979) 117 ITR 569(SC). EXPENDITURE MUST FIRST BE PROVED AS EXCESSIVE AND UNREASONABLE. SECTION 40A (2) (A) CANNOT HAVE ANY APPLICATION UNLESS IT IS FIRST HELD THAT THE EXPENDITURE WAS EXCESSIVE AND UNREASONABLE. (II) CIT V. WALCHUND AND COMPANY (P) LTD. (1967) 65 ITR 381,385 (SC); JK WOOLLEN MANUFACTURERS V. CIT (1969) 72 ITR 612 (SC); ALUMINIUM CORPORATION OF INDIA LTD. V. CIT (1972) 86 ITR 11, 17 (SC); CIT V. PANIPAT WOOLLEN AND GENERAL MILLS COMPANY LTD. (1976) 103 ITR 66, 71 (SC); JAMSHEDPUR MOTOR ACCESSORIES STORES V. CIT (1974) 95 ITR 664 (PATNA); STEEL CONTAINERS LTD . V. CIT (1978) 112 ITR 995,1008 (CAL). 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 JUST FROM THE POINT OF VIEW OF BUSINESSMEN AND NOT OF THE RE VENUE. (III) SHREE CONSTRUCTION AND INVESTMENT COMPANY V. ASST. CIT (2003) 262 ITR 73 (GAUHATI). MERELY BECAUSE A PAYMENT IS MADE TO RELATED PERSON, 13 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 13 IT CANNOT BE UNDERSTOOD AS BEING NON GENUINE OR THAT IT IS EXCESSIVE OR UNREASONABLE. IN ABSENCE OF SUCH A FINDING IN THIS REGARD, THE PAYMENT FOR CONSULTANCY CHARGES PAID BY A FIRM OF DEVELOPERS TO THE CONSULTANTS COULD NOT HAVE BEEN DISALLOWED BY THE TRIBUNAL. (IV) T. T. PVT. LTD. VIS ITO (1980) 121 ITR 551 (KARNATAKA). THE CRUCIAL WORDS IN SECTION 40A( 2)(A) ARE 'FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES'. IF THE PAYMENT IN RESPECT OF SUCH SERVICES, ETC., REPRESENT A FAIR MARKET VALUE, THERE IS NO LIMITATION OR CEILING ON THE TOTAL AMOUNT PAID EVEN IF THE PAYEE IS ONE OF THE VULNERABLE PERS ON ENUMERATED IN SECTION 40A(2)(B). (V) VOLTAMP TRANSFORMERS PVT. LTD. VIS CRR (1981) 129 ITR 105,113 (GUJARAT) G.I YARDSTICK TO BE THE BUSINESSMEN'S VIEW POINT: 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 D AYALAL MEGHJI TOBACCO PRODUCTS PVT. LTD. (CC NO. 3685 O F 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. 9 5 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 RS. 12,05,118 DISALLOWED BY THE ASSESSING OFFICER UNDER S ECTION 40A (2) FROM OUT OF CONVERSION CHARGES PAID TO A PERSON SPECIFIED IN SECTION 40A(2 ) . 8.12 THE APPELLANT HEREBY PRAYS YOUR KINDSE L F THAT SERVICES OBTAINED BY THE COMPANY WERE QUITE ESSENTIAL AND INEVITABLE FOR PUTTING UP THE HOSPITAL PROJECT AND THE SE BY NO STRETCH OF IMAGINATION WERE UNREASONABLE AND UNNECESSARY. THERE IS NO QUESTION OF EVASION OF TAX IN THE ASSESSEE'S CASE AND PAYMENTS MADE HAVE BEEN BONAFIDE AND GENUINE IN ALL RESPECT. RECIPIENTS ARE ESTABLISHED MARKET LEADERS IN THEIR FIELD OF OP ERATION. MERE FACT THAT THE SERVICE PROVIDERS WERE SHAREHOLDER OR ASSOCIATE OF THEM WOULD NOT AND CANNOT BE CAUSE OF DISALLOWANCE OF THE EXPENDITURE. 09. DECISION: 1. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE BY THE LD. A R ON THE SIMILAR PRACTI CE ARRANGEMENT PREVALENT IN HEALTH CARE INDUSTRY AND ALSO THE FACT THAT THE TEST OF COMMERCIAL EXPEDIENCY FOR DETERMINING WHETHER 14 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 14 THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS, REASONABLENESS OF THE EXPENDITURE HAS TO BE JUST FROM THE POINT OF VIEW OF BUSINESSMEN AND NOT OF THE REVENUE. SERVICE RECIPIENTS ARE ESTABLISHED MARKET LEADERS IN THEIR FIELD OF OPERATION AND THE FACT THAT THE SERVICE PROVIDERS ARE ALSO THE SHAREHOLDERS OR ASSOCIATE OF THEM WOULD NOT AND CANNOT BE CAUSE OF DISALLOWANCE OF THE EXPENDITURE. 2. I HAVE CAREFULLY CONSIDERED THE ENTIRE FACTS AND CIRCUMSTANCES OF THE CASE AND THE SUBMISSIONS FILED BY THE LD. AR FOR THE APPELLANT COMPANY. I HAVE ALSO CAREFULLY PERUSED THE REASONS RECORDED BY THE LD. AO WHILE. MAKING THE IMPUGNED DISALLOWANCE. I HAVE ALSO CONSIDERED THE DECISIONS OF THE CASES UPON WHICH RELIANCE HAS BEEN PLACED BY THE APPELLA NT! LD. A. R FOR THE APPELLANT COMPANY TO HELP ADVANCE THE CONTENTIONS. I HAVE ALSO CONSIDERED THE FACT THAT THE LD. AO HAS CONSIDERED DISALLOWANCES ON THE SAME GROUND AS IT HAS DISALLOWED SIMILAR PAYMENT TO GMSPL OF RS. 3,00,00,000. THE APPELLANT'S APPEAL ON GROUND 1 ON THE ABOVE MATTER WHERE THERE IS NO MATERIAL CHANGE IN THE FACTS HAS BEEN UPHELD BY ME EARLIER IN THE ORDER, SUPRA. 3. BASED ON ABOVE, I DIRECT THE LD. AO TO DELETE THE ADDITION OF RS.L, 50,00,000/ MADE ON THIS COUNT. FURTHER, AS HAS ALREA DY BEEN HELD WHILE ADJUDICATING GROUND NO 1, THE APPELLANT COMPANY HAS ALREADY ACCEPTED THE TREATMENT OF THE LD.AO IN RESPECT OF PROJECT DOCUMENT CHARGES IN ITS ASSESSMENT ORDER AS BEING CAPITAL IN NATURE. IN MY CONSIDERED VIEW THEREFORE, THE TREATMENT FOR PROJECT MANAGEMENT FEES SHOULD ALSO BE SIMILAR, AND ACCORDINGLY THE ABOVE AMOUNT SHOULD BE TREATED AS CAPITAL EXPENDITURE ON WHICH CORRESPONDING DEPRECIATION SHOULD ALSO BE ALLOWED TO THE APPELLANT COMPANY. THE AFORESAID GROUNDS OF APPEAL ARE ACCORDING LY 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 ADJUSTMENT S OF RS.3,00,00,000/ - AND RS. 1,50,00,000/ - IN RESPECT OF PRE - OPERATI NG 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 15 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 15 BOTH THE IMPUGNED HEADS ARE IN THE NATURE OF SHAREHOLDERS ACTIVITY REQUIRING ANY PAYMENT S AT ALL . MORE SO, WHEN RECIPIENT OF SERVICES IS THE ASSESSEE I.E ASSOCIATE ENTERPRISE OF THE PAYEES . IT FURTHER EMPHASIZE S 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 S UCH SERVICES . WE FIND THAT THE R EVENUES IDENTICAL PLEA IN SUPPORT OF ADJUSTMENT OF SUCH PAYMENTS ARISING OUT OF ARMS LENGTH PRICE BEING DETERMINED AT NIL STANDS DECLINED BY TH E TRIBUNALS CO - ORDINATE BENCH IN NLC NALCO INDIA LTD V/S. DCIT IN ITA NOS . 529/KOL/08 & 1256/KOL/09 DT. 03 - 02 - 2016 IN (2016) 71 TAXMANN.COM 57 AS UNDER: - 19. WE HAVE GONE THROUGH THE DATA AS WELL THROUGH THE DETAILS FILED BY ASSESSEE IN ITS PAPER BOOK AND THE TPO HIMSELF MENTIONED IN HIS ORDER THAT THE ASSESSEE PERFORMED ARM'S LENGTH ANALYSIS IN RESPECT OF ALL THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY ASSESSE WITH ITS ASSOCIATED ENTERPRISES UNDER SECTION 92C OF THE ACT READ WITH RULE 10B AND 10C OF THE RULES. AND THAT NOTHING WAS FOUND IN THE TPO'S ORDER WHICH WAS INDICATIVE OF THE EXISTENCE OF ANY OF THE CIRCUMSTANCES PRESCRIBED UNDER (A) TO (D) OF SEC TION 92C (3) OF THE ACT WHICH NECESSITATES INTERVENTION OF THE AO /TPO FOR DETERMINATION OF ARM'S LENGTH PRICE. BUT TPO, DETERMINED THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS UNDER REVIEW AT 'NIL' VALUE, BASED ON HIS MAIN ALLEGATION THAT THE BENEFITS CLAIMED TO HAVE BEEN RECEIVED BY THE ASSESSE FROM NALCO PACIFIC UNDER THE AGREEMENT WOULD NOT BE ONES FOR WHICH AN INDEPENDENT ENTERPRISE WOULD BE WILLING TO PAY. IN THIS CONNECTION LD. COUNSEL REFERRED TO THE DECISION OF THE HON'BLE DELHI HIGH CO URT IN THE CASE OF CIT V. EKL APPLIANCES [2012] 24 TAXMANN.COM 199 (DELHI), WHEREIN THE HON'BLE HIGH COURT HAS EXAMINED THE ISSUE AS TO WHETHER THE TPO HAS POWER TO RESTRICT THE VALUE OF AN INTERNATIONAL TRANSACTION TO NIL WHEN HE WAS SUPPOSED TO HAVE DETE RMINED THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. THE HON'BLE HIGH COURT AFTER EXAMINING THE FACTS OF THE CASE HELD AS UNDER: '19 IN CIT V. WALCHAND& CO. ETC. [1967] 65 ITR 381, IT WAS HELD BY THE SUPREME COURT 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 ... NLC NAL CO INDIA LTD.AY 2003 04& 2004 05 16 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 16 22. EVEN RULE 10B(1)(A) DOES NOT AUTHORIZE DISALLOWANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE W AS UN REMUNERATIVE 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 I NTO 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 T HE 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 / BENEFI T OF AN EXPENDITURE WHICH IS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS. THE REVENUE HAS NO ROLE TO PLAY IN DETERMINING THE REASONABLENESS / USEFULNESS / BENEFIT OF A BUSINESS EXPENDITURE. HOWEVER, IN THE INSTANT CASE, THE TPO HAD JUDGED THE REASONABLENESS OF THE AFORESAID INTRA GROUP SERVICE CHARGE (REGARDING WHICH THERE WAS NO DISPUTE THAT THE SAME WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS) FROM HIS OWN POINT OF VIEW AND COMPUTED THE ARM'S LENGTH PRICE OF THE INTERN ATIONAL TRANSACTIONS UNDER REVIEW AT 'NIL' VALUE BASED ON HIS MAIN ALLEGATION THAT THE BENEFITS CLAIMED TO HAVE BEEN RECEIVED BY THE ASSESSEE FROM NALCO PACIFIC UNDER THE AFORESAID AGREEMENT WOULD NOT BE ONES FOR WHICH AN INDEPENDENT ENTERPRISE WOULD BE W ILLING TO PAY. HENCE, THE FIRST GROUND FOR CONFIRMING THE DISALLOWA N CE BY CIT (A) WILL NOT STAND. LD. COUNSEL ALSO REFERRED TO THE CASE OF CIT V. EKL APPLIANCES (SUPRA), THE HON'BLE DELHI HIGH COURT HAS HELD THAT RULE 10 B OF THE RULES DOES NOT AUTHORIZE DI SALLOWANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE WAS UN REMUNERATIVE. THE HON'BLE HIGH COURT HAS FURTHER HELD THAT THE QUANTUM OF EXPENDITURE CAN BE EXAMINED BY THE TPO AS PER LAW AND 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. BUT IN THE PRESENT CASE BEFORE US, THE TPO JUDGED THE REASONABLENESS OF THE AFORESAID INTRA GROUP SERVICE NLC NALCO INDIA LTD. AY 2003 04& 2004 05 CHARGE AND COMPUTED THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS UNDER REVIEW AT 'NIL' VALUE BAS ED ON HIS MAIN 17 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 17 ALLEGATION THAT THE BENEFITS CLAIMED TO HAVE BEEN RECEIVED BY THE ASSESSEE FROM NALCO PACIFIC UNDER THE AFORESAID AGREEMENT WOULD NOT BE ONES FOR WHICH AN INDEPENDENT ENTERPRISE WOULD BE WILLING TO PAY. THE CIT (A) ALSO CONFIRMED HIS ORDER. 21. ATTENTION WAS FURTHER INVITED TO THE DECISION OF HON'BLE DELHI TRIBUNAL OF MCCANN ERICKSON INDIA (P.) LTD VS. ADDL. CIT [2012] 24 TAXMANN.COM 21 (DELHI), WHEREIN THE TRIBUNAL, FOLLOWING THE AFORESAID DECISION OF THE HON'BLE DELHI HIGH COURT, HAS INTE RALIA HELD THAT: '9. WE HAVE HEARD BOTH SIDES AND HAVE ALSO GONE THROUGH THE ORDERS OF THE AO, TPO AND DRP .... THE EVIDENCES HAVE BEEN SUBMITTED BEFORE THE AUTHORITIES BELOW SHOWING RENDERING OF THE CERTAIN SERVICES AGAINST THE PAYMENTS MADE TO THE ASSO CIATED 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 CO NSIDERED 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 IND IVIDUALLY. 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 TH ESE 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 I NDIA (P.) LTD (SUPRA), THE DELHI TRIBUNAL HAS HELD THAT IT IS ONLY A PARTICULAR BUSINESS EXPERT WHO CAN EVALUATE THE TRUE INTRINSIC AND CREATIVE VALUE OF INTRA GROUP SERVICES AND IN ANY CASE, THE VALUE OF THESE SERVICES CANNOT BE TAKEN AT NIL. HOWEVER, IN THE INSTANT CASE, THE TPO JUDGED THE REASONABLENESS OF THE AFORESAID INTRA GROUP SERVICE CHARGE AND COMPUTED THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS UNDER REVIEW AT 'NIL' VALUE BASED ON HIS MAIN ALLEGATION THAT THE BENEFITS CLAIMED TO HAV E BEEN RECEIVED BY THE ASSESSE FROM NALCO PACIFIC UNDER THE AFORESAID AGREEMENT WOULD NOT BE ONES FOR WHICH AN INDEPENDENT ENTERPRISE WOULD BE WILLING TO PAY. THE CIT CA) ACCEPTED THE VALUATION OF THE INTRA GROUP SERVICES MADE BY THE TPO AT 'NIL' VALUE. WE HAVE OBSERVED FROM THE FACTS OF THE CASE THAT IN THE INSTANT CASE, THE TPO DETERMINED THE ARM'S LENGTH PRICES OF THE INTRA GROUP SERVICES CLAIMED TO HAVE BEEN RECEIVED BY ASSESSEE FROM NALCO PACIFIC AT 'NIL' VALUE WITHOUT APPL YING 18 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 18 ANY OF THE TRANSFER PRICING METHOD PRESCRIBED UNDER SECTION 92C OF THE ACT READ WITH RULE 10 B AND 10 C OF THE RULES. IN THIS CONNECTION, CO ORDINATE BENCH DECISION OF MUMBAI TRIBUNAL IN THE MATTER OF DCIT VS. DIEBOLD SOFTWARE SERVICES CP.) NLC NALCO IN DIA LTD.AY 2003 04& 2004 05 LTD. [2014] 48 TAXMANN.COM 26 (MUMBAI TRIB) WAS REFERRED, WHEREIN THE PRINCIPLE LAID DOWN BY TRIBUNAL ALONG WITH BRIEF FACTS ARE AS UNDER: THE ASSESSEE RECEIVED INFORMATION TECHNOLOGY (IN SHORT, 'I.T.')SERVICES FROM ITS ASSOCIA TED ENTERPRISE AND PAID SERVICE CHARGE TO THE LATTER. THE ASSESSEE CLUBBED THE AFORESAID INTERNATIONAL TRANSACTION TOGETHER WITH OTHER INTERNATIONAL TRANSACTIONS, APPLIED THE TNMM AS THE MOST APPROPRIATE METHOD AND SELECTED A SET OF EXTERNAL COMPARABLES. A S PER THIS ANALYSIS, THE INTERNATIONAL TRANSACTIONS COVERED UNDER THE TNMM, WERE AT ARM'S LENGTH. THE AFORESAID ANALYSIS BY ASSESSEE WAS NOT DISPUTED BY THE TPO. THE ASSESSEE WAS CALLED UPON BY TPO TO PROVIDE THE BASIS OF PRICING OF THESE TRANSACTIONS. THE ASSESSEE WAS ALSO REQUIRED BY THE TPO TO PROVIDE NECESSARY DETAILS ALONG WITH ALLOCATION KEYS AND BASIS OF CALCULATION OF PAYMENT MADE FOR I. T. SUPPORT SERVICES, ACCORDING TO TPO, THE ASSESSEE, HOWEVER, FAILED TO COMPLY WITH THESE REQUIREMENTS AND THE ALP OF THE RELEVANT TRANSACTIONS THEREFORE WAS DETERMINED BY TPO AT 'NIL' 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 F OR 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 TRIBUNAL UPHELD THE ORDER OF CIT(A). 23. ACCOR DING TO ASSESSEE THE AFORESAID DECISION IS SQUARELY APPLICABLE TO THE CASE OF ASSESSEE. IN THE INSTANT CASE, TPO COMPUTED THE ARM'S LENGTH 19 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 19 PRICE OF INTRA GROUP SERVICES RECEIVED BY ASSESSEE FROM NALCO PACIFIC UNDER THE AFORESAID AGREEMENTS AT 'NIL' VALUE W ITHOUT APPLYING ANY OF THE TRANSFER PRICING METHODOLOGIES PRESCRIBED UNDER SECTION 92C OF THE ACT READ WITH RULE L0B AND L0C OF THE RULES. ACCORDINGLY, THE ACTION OF THE TPO IN ARRIVING AT THE ARM'S LENGTH PRICE OF THE RELEVANT INTERNATIONAL TRANSACTIONS A T 'NIL' VALUE WITHOUT APPLICATION OF ANY TRANSFER PRICING METHODOLOGY, WAS WITHOUT ANY BASIS AND HENCE, WAS NOT SUSTAINABLE. IN THE INSTANT CASE, TPO WAS AUTHORISED TO DETERMINE, BY ORDER IN WRITING, THE ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION I N ACCORDANCE WITH SECTION 92C (3) OF THE ACT. THE TPO MENTIONED IN HIS ORDER THAT DURING THE COURSE OF HEARING IN RESPONSE TO NOTICE ISSUED UNDER SECTION 92CA (2) OF THE ACT, ASSESSEE HAD ATTENDED THE OFFICE OF THE TPO FROM TIME TO TIME AND FILED DETAILS A S REQUISITIONED BY THE TPO WHICH WERE PLACED ON RECORDS. THE TPO HAD EXAMINED THE DETAILS FILED BY ASSESSEE AND BASED ON SUCH EXAMINATION, HE HELD IN HIS ORDER THAT THE PRICING OF THE AFORESAID AGREEMENTS WAS NLC NALCO INDIA LTD.AY 2003 04& 2004 05 JUSTIFI ED BY ASSESSEE ON THE BASIS OF THE TNMM. WE FIND THAT THE TPO DID NOT MAKE ANY ADVERSE COMMENTS IN HIS ORDER UPON THE ARM'S LENGTH ANALYSIS CARRIED OUT BY ASSESSE UNDER THE TNMM AS PER SECTION 92C OF THE ACT READ WITH RULE ROB OF THE RULES. ACCORDINGLY, WE FEEL THAT TPO MADE PROPER ENQUIRY AND APPLIED HIS MIND TO THE DETAILS BROUGHT ON RECORD BY ASSESSEE. HE HAD AGREED WITH THE ASSESSEE THAT THE INTERNATIONAL TRANSACTIONS COVERED BY THE TNMM ANALYSIS (INCLUDING THE INTRA GROUP SERVICE CHARGE PAID /PAYABLE T O NALCO PACIFIC) ADHERED TO THE ARM'S LENGTH PRINCIPLE TRANSFER PRICING REGULATION. 24. FURTHER, IT IS ALSO A FACT THAT THE AFORESAID INTRA GROUP SERVICE CHARGE WAS ALLOWED AS DEDUCTION BY TPO FOR THE ASSESSMENT YEARS 2005 06, 2006 07, 2007 08 AND 2008 0 9. IN THIS CONNECTION, LD. COUNSEL REFERRED TO THE DECISION OF THE HON 'BLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. BRITANNIA INDUSTRIES LTD 257 ITR 225, WHEREIN HON'BLE CALCUTTA HIGH COURT HAS HELD THAT THE DEPARTMENT CANNOT TAKE A CONTRARY VIEW IN RE SPECT 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 D ISALLOWANCE 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. C OUNSEL REFERRED TO THE RELEVANT INFORMATION IN THE TABULAR FORMAT: INTRA GROUP SERVICE CHARGES ASSESSMENT YEAR ASSOCIATED ENTERPRISE INTRA GROUP SERVICE CHARGE 20 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 20 ALLOWED AS DEDUCTION (RS. '000) 2005 06 NALCO PACIFIC PTE LTD 19,543 2006 07 NALCO PACIFIC PTE LTD 31,128 2007 08 NALCO PACIFIC PTE LTD 27,157 2008 09 NALCO PACIFIC PTE LTD 28,120 WE ALSO FIND FROM THE RECORDS THAT ASSESSE SUBMITTED VARIOUS EVIDENCES OF RECEIPT OF INTRA GROUP SERVICES TO THE TPO WHICH ARE ENCLOSED IN PAGE N O. 71 79, 103 124, 129 132, 133 138, 139 140, 143 144 AND 157 162 OF THE ASSESSEE'S PAPER BOOK. THE ASSESSE ALSO FURNISHED EXPLANATION IN REGARD TO THE NATURE OF THE AFORESAID SERVICES IN PAGE NO. 9, NAND 12 OF ITS FIRST SUBMISSIONS. FURTHER, IN APPEAL BE FORE CIT(A)ALSO ASSESSE SUBMITTED A CERTIFICATE OF SERVICES DATED 01.09.2008, ISSUED BY LIAWHINHAO, FINANCE DIRECTOR, NALCO NLC NALCO INDIA LTD.AY 2003 04& 2004 05 PACIFIC. COPY OF THE CERTIFICATE WAS ALSO SUBMITTED BEFORE US AND MARKED THE SAME AS ANNEXUR E NO. 1. THE CERTIFICATE CONTAINS THE NATURE OF SERVICES RENDERED BY NALCO PACIFIC TO NALCO ASIA PACIFIC GROUP OF COMPANIES INCLUDING, THE PERSONNEL/DEPARTMENT ENGAGED IN RENDERING SERVICE, EXPENSES INCURRED BY VARIOUS PERSONNEL/ DEPARTMENTS IN RENDERING S ERVICES FROM THE YEAR 2002 TO 2004 (SEPARATELY FOR EACH YEAR) AND THE INTRA GROUP SERVICE FEES CHARGED (BILLING) BY NALCO PACIFIC TO VARIOUS GROUP COMPANIES INCLUDING THE ASSESSE COMPANY FROM THE YEAR 2002 TO 2004 (SEPARATELY FOR EACH YEAR). THE ASSESSE AL SO SUBMITTED VARIOUS EVIDENCES OF RECEIPT OF INTRA GROUP SERVICES TO CIT (A) WHICH ARE ENCLOSED IN PAGE NO.195 216, 243, 249 252 OF THE ASSESSEE'S PAPER BOOK. THE ASSESSE ALSO FILED EXPLANATIONS IN REGARD TO THE NATURE OF THE AFORESAID SERVICES IN PAGE NO. 10 OF ITS FIRST SUBMISSIONS. 25. IN THE INSTANT CASE, NALCO PACIFIC OPERATED AS THE REGIONAL HEADQUARTERS COMPANY IN RELATION TO NALCO ASIA PACIFIC GROUP OF COMPANIES INCLUDING ASSESSEE. IT FUNCTIONED AS A GROUP SERVICE CENTRE AND RECRUITED REGIONAL EMPLOYEES, THOUGH LOCATED IN SINGAPORE, EXCLUSIVELY FOR THE PURPOSE OF RENDERING SERVICES TO NALCO ASIA PACIFIC GROUP OF COMPANIES INCLUDING ASSESSEE. NALCO PACIFIC INCURRED EXPENSES FOR THE PAYMENT OF SALARIES & OTHER BENEFITS TO THE REGIONAL EMPLOYEES. WE FIND THAT THE SERVICES RENDERED BY NALCO PACIFIC TO ASSESSEE UNDER THE AGREEMENT WERE SIMILAR TO THE SERVICES MENTIONED IN PARAGRAPH NO. 7.14 OF THE DECD GUIDELINES. IN VIEW OF THIS, WE APPRECIATE THAT' THE SERVICES RENDERED BY N ALCO PACIFIC TO ASSESSEE WERE INTRA GROUP 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 B E 'NIL'. THE PARAGRAPH NO. 7.12 OF THE OECD GUIDELINES PROVIDES THAT THERE ARE SOME 21 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 21 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 BEN EFITS 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 INTRA GROUP SERVICES TO THE PARTICULAR GROUP MEMBERS INVOLVED, FOR EX AMPLE 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 S YNERGIES. THE INCIDENTAL BENEFITS ORDINARILY WOULD NOT CAUSE NLC NALCO INDIA LTD.AY 2003 04& 2004 05 THESE OTHER GROUP MEMBERS TO BE TREATED AS RECEIVING INTRA GROUP SERVICES BECAUSE THE ACTIVITIES PRODUCING THE BENEFITS WOULD NOT BE ONES FOR WHICH AN INDE PENDENT ENTERPRISE ORDINARILY WOULD BE WILLING TO PAY. BUT IN THE INSTANT CASE NO SUCH BENEFITS SUCH AS THOSE MENTIONED IN PARAGRAPH NO. 7.12 OF THE OECD GUIDELINES ACCRUED TO ASSESSEE UNDER THE AGREEMENT AND HENCE, NO INCIDENTAL BENEFITS ACCRUED UNDER THE AGREEMENT. 26. ACCORDINGLY, WE ARE OF THE VIEW THAT THE FIRST GROUND FOR CONFIRMING DISALLOWANCE BY CIT (A) THAT O INDEPENDENT DOCUMENTARY EVIDENCE HAD BEEN FURNISHED BY ASSESSE TO SHOW THAT THE FACT OF ACTUAL ICES HAVING BEEN RENDERED TO ASSESSEE AND NALCO PACIFIC T OO COULD NOT SUBSTANTIATE THE CLAIM FOR PROVISION OF ACTUAL SERVICES WITH DOCUMENTARY EVIDENCE, HAS NO LEG TO STAND. 5 . T HE CIT(A) HAS ALSO TAKEN NOTE OF ABOVE VARIOUS JUDICIAL PRECEDEN TS WHILST COMING TO THE CONCLUSION THAT THE TPO COULD NOT HAVE AD JUSTED ASSESSEES TWIN EXPENDITURE CLAIMS BY HOLDING THAT THE ARMS LENGTH PRICE THEREOF WAS NIL IN UN CONTROLLED MARKET CONDITIONS. WE THEREFORE CONFIRM THE CIT(A)S FINDINGS UNDER CHALLENGE AS FAR AS FIRST HEAD OF PROJECT MANAGEMENT (SERVICE FEE) IS CO NCERNED. 6 . L EARNED DEPARTMENTAL REPRESENTATIVE AT THIS STAGE SOUGHT TO SUPPORT THE TPOS ACTION HOLDING THAT ASSESSEES PAYMENT OF RS. 150,00,00,000/ - MADE FOR PRE - OPERATIVE MANAGEMENT FEE PAID TO M/S. AHEL WAS ALSO EXCESSIVE U/S. 40A(2 ) R.W.S 37 OF TH E ACT . WE OBSERVE THAT NEITHER THE TPO NOR THE A SSESSING OFFICER HAVE BROUGHT ANY MATERIAL ON RECORD INDICATING ASSESSEES EXCESSIVE ELEMENT IN THE ASSESSEES EXCESSIVE IMPUGNED PAYMENTS. THERE IS HARDLY A N Y DISPUTE THAT THE STATUTORY PROVISION IN QUESTION IS 22 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 22 APPLICABLE ONLY FOR EXCESSIVE COMPONENT OF THE RELEVANT HEAD S OF TH E EXPENDITURE THAN THAT IN ENTIRETY . THE REVENUES FURTHER RELIANCE ON SECTION 37 OF THE ACT ALSO CARRIES NO MERIT IN VIEW OF OUR PRECEDING FINDINGS TAKING INTO CONSIDERATION VARIOUS JUDICIAL PRECEDEN TS . THE CIT(A) ACTION DELETING THE UPWARD ADJUSTMENT OF RS.3,00,00,000/ - AND RS.1,50,00,000/ - IS AFFIRMED ON BOTH COUNTS . 7 . NEXT COMES THE THIRD ISSUE I.E DISALLOWANCE OF ASSESSEES SUCCESS FEE PAYMENT OF RS.1,12,85,608/ - T O M/S. HSBC DISALLOWED IN ASSESSMENT AND REVISED IN THE CIT(A)S ORDER AS UNDER: - 10. GROUND NO. 3 EMANATES ON ACCOUNT OF THE DISALLOWANCE MADE BY THE LD. AO 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 RS. 1,1 2,85,608 FOR AN INTRODUCTION OF RS. 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 RS.112,85,608 PAID TO M/S HSBC INVESTMENT BANK ASIA LIMITED. THE DISALLOWANCE OF RS. 112,85, 608 HAS BEEN MADE BY THE LD. AO ON BASIS OF AN UNDERSTANDING THAT THE SUCCESS FEES FOR ROPING I N 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 RS 112,85,608 FOR AN INTRODUCTION OF RS.600,00,000 AS CAPITAL IS HUGELY EXCESSIVE AND WERE NOT ALLOWED AS REVENUE ITEM. 11.2 THE APPELLANT HEREBY REFUTES THE VIEW TAKEN BY THE LEAMED OFFICER THAT THE PAYMENT OF SUCCESS FEES TO HSBC IS HUGELY EXCESSIVE AND NOT ALLOWED AS REVENUE ITEM. IN THIS REGARD AS SUBMITTED EARLIER, TO IDENTIFY A NEW PARTNER HSBC WAS APPOINTED AS CONSULTANT AND AN AGREEMENT DATED 21.04.1995 WAS ENTERED WITH THEM BY THE APPELLANT COMPANY. 23 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 23 11.3 THE SCOPE OF WORK AS PER PARA 2 OF THE AFORESAID AGREEMENT WAS AS FOLLOWS: (A) IDENTIFYING AND APPROACHING POTENTIAL JOINT VENTURE PARTNERS FOR DUNCANS; (B) ASSISTING DUNCANS IN DEALING WITH REQUESTS FOR INFORMATION FORM POTENTIAL JOIN PARTNERS; (C) ASSISTING DUNCANS IN THE APPOINTMENT OF OTHER PROFESSIONAL ADVISERS ( SUCH AS LAWYERS AND ACCOUNTANTS) AS MAY BE NECESSARY TO CONCLUDE THE TRANSACTION ; (D) CO ORDINATING THEWORK OF SUCH PROFESSIONAL AS DUNCAN MAY APPOINT I (E) CO ORDINATING AND ASSISTING IN SUCH DILIGENC E PROCESS AS A POTENTIAL JOINT VENTURE PARTNER MAY REQUIRE ; (F) ASSISTING DUNCAN IN ITS NEGOTIATIONS ( INCLUDING NEGOTIATIONS ON PRICING ) W ITH THE POTENTIAL JOINT VENTURE PARTNERS; (G) ASSISTING IN THE DOCUMENTATION RELATING TO THE JOINT VENTURE; AND (H) ADVISING ON STRATEGY GENERALLY. 11.4 FROM THE SCOPE OF WORK AND THE SERVICES PROVIDED BY HSBC TO THE APPELLANT COMPANY IT CAN BE INFERRED 'THAT THE APPOINTMENT OF HSBC WAS NOT ONLY FOR INDUCTION OF CAPITAL INSTEAD IT WAS FOR IDENTIFYING A PARTNER WHO CAN BRING IN NECESSARY EXPERTISE, KNOWLEDGE FOR SETTING UP A PROJECT OF THE SIZE AND CAPACITY WHICH THE APPELLANT COMPANY ENVISAGED. 11.5 THE APPELLANT HEREBY ALSO SUBMITS THAT GLENEAGLES HAVE INVESTED R S. 22.2 C RORES AND NOT RS. 6 CRORES AS STATED BY TH E LEA RNED OFFICER IN ITS AFORESAID ORDER. HENCE THE PAYMENT OF SUCCESS FEES OF RS. 1,12,85,608 IS NOT FOR INVESTMENTS OF RS. 6 CRORES BUT FOR RS. 22.29 CRORES. 11.6 THE APPELLANT DURING THE COURSE OF THE HEARING ALSO HIGHLIGHTED PARA 9.5 OF ACCOUNTING 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 WHI CH 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 PRODUCTI ON. 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 24 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 24 BY THE APPELLANT. CONSIDERING TH E 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 CO NSIDERED THE ENTIRE FACTS AND CIRCUMSTANCES OF THE CASE AND THE SUBMISSIONS FILED BY THE LD. AR OF THE APPELLANT AGAINST THE ACTION OF THE LD. AO IN MAKING THE IMPUGNED ADDITION. 2. THERE CAN BE NO DOUBT, IN MY CONSIDERED VIEW THAT THE SERVICES WERE PROV IDED BY THE HSBC AND WAS REQUIRED TO BE REMUNERATED FOR THE WORK DONE BY THEM FOR THE APPELLANT. AS REGARDS THE REASONABLENESS OF THE FEES, THE LD. AO DID NOT SHOW CLEARLY THAT THE PAYMENT WAS IN EXCESS OF THE LEGITIMATE BUSINESS NEEDS OF THE ASSESSEE. T HE DISCRETION GIVEN TO THE ITO UNDER SECTION 40A IS NOT AN UNTRAMMELLED DISCRETION. IT IS TRUE THAT THE ITO IS NOT BOUND INDEPENDENTLY TO COLLECT EVIDENCE AND DECIDE THAT THE ALLOWANCE CLAIMED IS EXCESSIVE OR UNREASONABLE BUT WHEN THE ASSESSEE, IN THE INST ANT CASE, PROVED THAT THE ACTUAL SERVICES HAD BEEN RENDERED BY THE RECIPIENT OF THE FEE AMOUNT AND THAT SUCH SERVICES HAD BENEFITED THE ASSESSEE, THE DECISION OF THE LD. AO TO HOLD THAT THE PAYMENT WAS EXCESSIVE OR UNREASONABLE, COULD NOT BE SAID TO BE WA RRANTED BY FACTS. I HAVE ALSO CONSIDERED THE DECISIONS OF THE CASES AS PROVIDED UNDER GROUND NO. 2 UPON WHICH RELIANCE HAS BEEN PLACED BY THE APPELLANT/ LD. A. R FOR THE APPELLANT COMPANY TO HELP ADVANCE THE CONTENTIONS. 3. THE ALLOWABILITY IN ANY CASE CANNOT BE LINKED TO THE AMOUNT OF CAPITAL INVESTED BY THE IDENTIFIED INVESTOR. FURTHER, AS THESE EXPENSES ARE NOT DIRECTLY RELATED TO THE PROJECT AND TO ANY SPECIFIC FIXED ASSETS THESE HAVE TO BE TREATED AS REVENUE IN NATURE. ACCORDINGLY, THE PAYMENTS MA DE TO HSBC WERE ALLOWABLE IN FULL. 4. IN VIEW OF THE ABOVE, I DIRECT THE LD. AO TO DELETE THE ADDITION OF RS.L,12,8S,608/ . THE DISALLOWANCE IS ACCORDINGLY DIRECTED TO BE DELETED. THE GROUND THEREFORE STANDS ALLOWED. 25 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 25 8 . W E HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO RIVAL CONTENTIONS. IT EMERGES FROM A PERUSAL OF CASE RECORD S THAT THERE EXISTED AN AGREEMENT BETWEEN THE ASSESSEE AND THE PAYEE(S ) REGARDING PAYMENT OF SUCCESS FEE TO M/S. HSBC. W E FURTHER NOT I CE THERE IS NO REBUTTAL TO THE LEARNED CIT(A) CLINCHING FINDINGS THAT THE SUM IN QUESTION IS NOT RS. 6 CRORES AS PER BY THE ASSESSING OFFICER , BUT RS. 22.29 CRORES. IT IS FOR TH IS CORRECT FIGURE THAT THE ASSESSEE HAS PAID THE IMPUGNED SUCCESS FEE PAYMENT TO M/S. HSBC GOING BY CORRESPONDING AGREEMENT. L EARNED DEPARTMENTAL REPRESENTATIVE FAILS TO INDICATE ANY MATERIAL IN THE CASE FILE WHICH COULD SUGGEST THAT THE ASSESSEES CORRESPONDING AGREEMENT IS NOT A VALID ONE. WE THUS QUOTE CIT V/S. WALCHAND & CO. ETC. (1967 ) 65 ITR 38 1, 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 ASSESSEES 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 RS. 58,72,410/ - PAID TO M/S. AHEL. THE LEARNED CIT(A) HAS DELETED THE IMPUGNED DI SALLOWANCE 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 RS. 58,72,410/ . THE IMPUGNED MATTER HAS BEEN DEALT WITH BY THE LD. AO AS UNDER: TH E 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 PREMIUM PAYMENT FOR SEVERING THE TIE, SO THAT GLENEAGLES GROUP CAN ENTER AND THE COMPANY CAN USE THE NAME 'GLENEAGLES' WHICH IS AN INTELLECTUAL PROPERTY AS WELL AS TRADE NAME OF THE GLENEAGLES GROUP. THEREFORE, THIS PAYMENT IS NOT A REVENUE ITEM. ' 26 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 26 14. DURING THE COURSE OF THE APPEAL HEARING, THE APPELLANT / LD. A.RS FOR THE APPELLANT HAVE SUBMITTED AS UNDER: 14.1 THE ISSUE IS THE DISALLOWANCE OF SEVERANCE FEES AMOUNTING TO RS. 58,72, 410 PAID TO AHEL. THE DISALLOWANCE OF RS. 58,72,410 HAS BEEN MADE BY THE LD. AO ON BASIS OF AN UNDERSTANDING THAT THE SEVERANCE PAID TO AHEL WAS NOT FOR ANY REVENUE EARNING, RATHER IT WAS A PREMIUM PAYMENT FOR SEVERING THE TIE SO THAT GLENEAGLES GROUP CAN ENTER AND THE COMPANY CAN USE THE NAME 'GLENEAGLES' WHICH IS AN INTELLECTUAL PROPERTY AS WELL A TRADE NAME OF THE 'GLENEAGLES' GROUP. THEREFORE, THIS PAYMENT IS NOT A REVENUE ITEM. 14.2 THE APPELLANT HEREBY REFUTES THE VIEW TAKEN BY THE LEARNED OFFICER THAT THE PAYMENT OF SEVERANCE FEES TO AHEL IS NOT A REVENUE ITE M. IN THIS REGARD THE APPELLANT HAS HUMBLY SUBMITTED EARLIER IN THE HISTORY OF THE GROUP THAT THE PROJECT WAS STARTED IN THE YEAR 1988 89 UNDER THE NAME OF JANPRIYA HOSPITALS OWNED BY DUNCANS INDUSTRIES LIMITED. AHEL WAS INVOLVED IN THE PROJECT AS PROJECT CONSULTANT AND FOR THE USE OF BRAND APOLLO. AHEL DID NOT HAVE ANY EQUITY PARTICIPATION IN THE PROJECT AT THAT TIME. THE PROJECT WAS DELAYED AND BOTH THE PARTNERS, DUNCANS AND APOLLO, WERE UNABLE TO INVEST THE FUNDS. AHEL WAS NOT INTERESTED IN PROVIDING FUN DS TO PROJECT AT THAT POINT OF TIME AND DUNCANS DID NOT HAVE THE EXPERTISE AS WELL AS FUNDS TO SET UP A HOSPITAL PROJECT OF THIS SIZE. IN VIEW OF THE ABOVE DUNCAN HAD TO SEVERE ITS TIES WITH APOLLO IN ORDER TO PAVE WAY FOR IDENTIFYING AND INDUCTING NEW JOI NT VENTURE PARTNER. FOR SEVERING THE TIES DUNCANS HAD TO PAY SEVERANCE FEES TO AHEL OF RS. 58,72,410. SUBSEQUENTLY IN 1995 THE DUNCANS GROUP APPOINTED HSBC INVESTMENT BANK ASIA LIMITED (HSBC) AS CONSULTANTS FOR IDENTIFYING ANY JOINT VENTURE PARTNER WHO CAN BRING IN THE NECESSARY EXPERTISE AS WELL AS THE FUNDS TO RESTART THE PROJECT. 14.3 DUE TO ABOVE THE COMMISSIONING OF THE PROJECT WAS DELAYED AND EVEN SUSPENDED FOR A LONG PERIOD. THE ABOVE EXPENDITURE HAS BEEN INCURRED KEEPING IN VIEW THE PROSPECTS AND O PERATIONS 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 APPELL ANT. 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: 27 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 27 '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 EXPENDIT URE 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 BEING REVENUE IN NATURE WERE SO CLAIMED IN THE COMPUTATION OF INCOME FOR THE ASSESSMENT YEAR 2004 05. 14.6 THE APPELLANT HEREBY ALSO SUBMITS THAT THE FEES WERE PAID TO AHEL FOR SEVERANCE ITS TIES. HAD THE PAYMENT BEEN MADE TO GLENEAGLES FOR OBTAINING THAT RIGHT IT COULD HAVE STILL BEEN CONSTRUED TO BE ACQUISITION OF A RIGHT TO USE THE WORD GLENEAGLES. BY PAYING SEVERANCE FEES TO AHEL THE APPELLANT COMPANY HAS NOT OBTAINED THAT RIGHT TO USE THE WORD GLENEAGLES. THE APPELLANT THEREFORE BELIEVES THAT THE LEARNED OFFICERS CONTENTION THAT THE EXPENSES HAS LED TO THE ACQUISITION OF RIGHT TO USE TRADE NAME IS ERRONEOUS IN LAW AND IS BASED ON A MISCONSTRUED UNDERSTANDING OF FACTS AND HENCE SHOULD BE REVERSED BY YOUR KLNDSELF. 15. DECISION: 1. I HAVE CONSIDERED THE ENTIRE FACTS AND CIRCUMSTANCES OF THE CASE AND THE SUBMISSIONS FILED BY THE LD. AR OF THE APPELLANT AGAINST THE ACTION OF THE LD. AO IN MAKING THE IMPUGNED ADDITION. THE FACT THAT THE FEES WERE PAID TO AHEL FOR SEVERANCE ITS TIES AS PROJECT CONSULTANT AND BY PAYING SUCH AMOUNT TO AHEL THE APPELLANT COMPANY HAS NOT AT ALL GOT THE RIGHT TO USE TRADE NAME GLENEAGLES. 2. FURTHER, AS THESE EXPENSES ARE NOT DIRECTLY RELATED TO THE PROJECT AND TO ANY SPECIFIC FIXED ASSETS THESE HAVE TO B E TREATED AS REVENUE IN NATURE. ACCORDINGLY, THE PAYMENTS MADE TO AHEL WERE ALLOWABLE IN FULL. IN VIEW OF THE ABOVE, I DIRECT THE LD. AO TO DELETE THE ADDITION OF RS. 58,72,410. THE DISALLOWANCE IS ACCORDINGLY DIRECTED TO BE DELETED. THE GROUND THEREFORE STANDS ALLOWED. 28 ITA NO.2509/KOL/2017 M/S. APOLLO GLENEAGLES HOSPITALS LTD. 28 1 0 . L EARNED DEPARTMENTAL REPRESENTATIVE VEHEMENTLY REITERATES THE ASSESSMENT FINDINGS THAT THE ASSESSING OFFICER HAS RIGHTLY TREATED ASSESSEES SEVERANCE EXPENDITURE AS CAPITAL AND NOT REVENUE EXPENDITURE. WE SEE NO SUBSTANCE IN R EVENU ES INSTANT ARGUMENT . IT IS CLEAR FROM A PERUSAL OF CORRESPONDING AGREEMENTS CLAUSE S THAT ASSESSEE HAD NOT ACQUIRED ANY ASSET BUT MADE THE IMPUGNED PAYMENT IN ORDER TO ENSURE SMOOTH DAY TO DAY RUNNING OF ITS BUSINESS AFFAIRS . I T HAS CHOSEN TO PART ITS WAYS WITH THE PAYEE IN OTHER WORDS IN LIEU OF THE IMPUGNED SEVERANCE FEE NOT COVERED UNDER ANY SPECIFIC HEAD OF CAPITAL EXPENDITURE AS PER A CCOUNTING S TANDARD (AS) ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. WE THUS AFFIRM THE C IT(A) FINDINGS QUA TH IS LAST ISSUE AS WELL. 1 1 . THIS REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 21 - 08 - 2019 SD/ - SD/ - [ J. SUDHAKAR REDDY ] [ S.S.GODARA ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 21 - 08 - 2019 **PRADIP, SR. PS C OPY OF THE ORDER FORWARDED TO: 1 . APPELLANT/DEPARTMENT: DCIT, C IRCLE - 9(1) , AAYKAR BHAWAN, 5 TH FLOOR, ROOM NO. 22, P - 7 CHOWRINGHEE SQ., KOLKATA - 69. 2. RESPONDENT/ASSESSEE: M/S. APOLLO GLEANGLES HOSPITALS LTD 58 CANAL CIRCULAR ROAD, KOLKATA - 54. 3..C.I.T (A) . - 4. C.I.T. - KOLKATA. 5. CIT(DR), KOLKAT A BENCHES, KOLKATA. TRUE COPY BY ORDER ASSISTANT REGISTRAR H.O.O/D.D.O KOLKATA