Rockwell Automation India Pvt. Ltd., Delhi V. DCIT, New Delhi

ITA 504/DEL/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7535 (ITAT-DELHI)
• Duration Of Justice: 10 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-12-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 17-12-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 28-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Additional evidence; Capital expenditure
• Section: 143(3); 32; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH - I : NEW DELHI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER ITA NO. 6262 /DEL /201 2 ASSESSMENT YEAR: 200 8 - 20 0 9 ROCKWELL AUTOMATION INDIA PVT. LTD. 131, FUNCTIONAL INDUSTRIAL AREA PATPARGANJ, NEW DELHI - 110092 VS. DCIT, CIRCLE - 1 5 (1), NEW DELHI. ITA NO. 504 /DEL /201 4 ASSESSMENT YEAR: 200 9 - 2010 ROCKWELL AUTOMATION INDIA PVT. LTD. VS. DCIT, CIRCLE - 15(1), 131, FUNCTIONAL INDUSTRIAL AREA, NEW DELHI. PATPARGANJ, NEW DELHI - 110092 (APPELLANT) (RESPONDENT ) ASSESSEE BY : SHRI K.M. GUPTA , ADVOCATE . RESPONDENT BY: SHRI PEEYUSH JAIN, CIT.D.R. PER: GEORGE GEORGE K., J.M. 1. TH E S E ARE APPEAL S , AT THE INSTANCE OF THE ASSESSEE DIRECTED AGAINST THE ASSESSMENT ORDER S PASSED U/S 143(3) R.W.S . 144C OF THE I.T. ACT , 1961 DATED 09.10.2012 AND 31.12.2013, PERTAINING TO THE AS SESSMENT Y EAR S 2008 - 09 & 2009 - 10 RESPECTIVELY . 2. SINCE COMMON ISSUE S ARE INVOLVED IN THESE APPEALS AND THEY PERTAIN TO THE SAME ASSESSEE , THEY ARE DISPOSED OF F IN THIS CONSOLIDATED ORDER. WE SHALL FIRST TAKE UP FOR ADJUDICATION ITA NO. 6262/D/2012 PERTAINING TO THE A.Y. 2008 - 09. 2 ITA NO S . 6262 /DEL /201 2 ITA NO.504/D/2014 ITA NO. 6262/D/2012 (A.Y. 2008 - 09) 3. ASSESSEE HAS RAISED 14 GROUNDS IN THE M EMORANDUM OF APPEAL. GROUND NOS. 1 TO 1 2 RELATES TO TRANSFER P RICING ISSUES AND GROUND NOS. 13 AND 14 RELATES TO THE CORPORATE TAX MATTERS. THE BRIEF FACTS OF THE CASE ARE AS UNDER: 4. THE ASSESSEE IS ENGAGED IN MANUFACTURING/ASSEMBLING AUTOMATION AND INDUSTRIAL CONTROL PRODUCTS/SYSTEMS. APART FROM MANUFACTURING/ASSE MBLING, THE ASSESSEE COMPANY IS ALSO ENGAGED IN TRADING IN CERTAIN PRODUCTS. THE ASSESSEE COMPANY IS ALSO PROVIDING SERVICES LIKE INFORMATION TECHNOLOGY AND ENGINEERING BASED CONSULTANCY SERVICES, TRAINING ETC. DURING THE RELEVANT ASSESSMENT YEAR, ASSESSEE HAD UNDER TAKEN THE FOLLOWING INTERNATIONAL TRANSACTIONS , WITH ITS AE S : S.NO. NATURE OF INTERNATIONAL TRANSACTION METHOD SELECTED VALUE OF INTERNATIONAL TRANSACTION (INR) 1 EXPORT OF FINISHED GOODS TNMM 3,95,64,400 2. IMPORT OF PRODUCTS/COMPONENTS 166,27,89,247 3. IMPORT OF CAPITAL GOODS 1,16,47,164 4. RECEIPTS OF SERVICES 57,80,247 5. PROVISION OF SERVICES 2,47,39,568 6. PAYMENT OF MANAGEMENT FEE 10,29,82,002 7. COST RECHARGES OF GROUP COMPANIES CUP 5,11,75,520 TOTAL 189,86,78,148 5 . ALL T HE INTERNATIONAL TRANSACTION OF THE ASSESSEE, EXCEPT PAYMENT OF M ANAGEMENT FEE TO ROCKWELL AUTOMATION ASIA PACIFIC LTD. (RAAPL )( AE ) WERE ACCEPTED TO BE AT ARM S LENGTH BY THE TPO. DURING THE YEAR, ASSESSEE HAD ENTERED 3 ITA NO S . 6262 /DEL /201 2 ITA NO.504/D/2014 INTO SERVICES AGREEMENT S WITH RAAPL FOR AVAILING VARIOUS ADMINISTRATIVE AND SUPPORT SERVICES. THE ASSESSEE HAD TO PAY THE MANAGEMENT FEES TO RAAPL WHICH IS EQUAL TO COST INCURRED BY RAAPL ON A MARK - UP OF 5%. IN THE YEAR UNDER DISPUTE , ASSESSEE HAD MADE A PAYMENT OF RS.10,29,82,002/ - T O THE AE (RAAPL) , ON ACCOUNT OF ADMINISTRATIVE AND SUPPORT SERVICES. THE ASSESSEE DID NOT BENCHMARK THIS TRANSACTION SEPARATELY AND AGGREGATED IT WITH OTHER TRANSACTIONS USING TRANSACTIONAL NET MARGIN METHOD (TNMM) TO ESTABLISH THAT ALL THE TRANSACTIONS IN CLUDING PAYMENT OF MANAGEMENT FEE WERE AT ARM S LENGTH . HOWEVER, THE TPO BENCHMARKED IT SEPARATELY AND HELD THAT THE ASSESSEE WAS NOT ABLE TO PROVE (I) SERVICES WERE ACTUALLY RECEIVED BY IT (II) ANY BENEFITS WERE DERIVED BY IT FROM SUCH SERVICES (III) IT C OULD NOT FURNISH ANY EVIDENCE AS TO THE COST BENEFIT ANALYSIS VIS - - VIS OTHER INDEPENDENT SUPPLIERS ON SUCH SERVICES (IV) NO INDEPENDENT PARTY WOULD HAVE MADE PAYMENT FOR SUCH SERVICES IN UNCONTROLLED ENVIRONMENT AND, THEREFORE, DETERMINED THE ARM S LENGTH PRICE OF THIS T RANSACTIONS AT NIL FOLLOWING CUP METHOD. THE RELEVANT FINDING OF THE TPO IN REJECTING THE ASSESSEE S TRANSFER PRICING IN RESPECT OF MANAGEMENT FEES READS AS UNDER: 12.1 ON THE BASIS OF THE ABOVE FOLLOWING POINTS ARE NOTICED: THE ASSESSEE HAS NOT BEEN ABLE TO PROVE THE BENEFITS THAT IT HAD DERIVED FROM THE SERVICES PURPORTEDLY PROVIDED BY THE AE. NO INDEPENDENT ENTRY WOULD PAY FOR SUCH SERVICES WITHOUT ANY COST BENEFIT ANALYSIS. THE ASSESSEE HAS NOT FURNISHED ANY EVIDENCE AS TO THE COST BENEFIT ANALYSIS WITH REGARD TO THE INDEPENDENT SUPPLIERS. NO THIRD PARTY WOULD LIKE TO AVAIL SERVICES WITHOUT ANY COST BENEFIT ANALYSIS WITH REGARD TO AE VS. INDEPENDENT SUPPLIER. THE DOCUMENTATION PRODUCED BY THE ASSESSEE TO SUPPORT ITS CLAIM FOR THE RECEIPT OF MANAGEMENT SERVICES IS TOO GENERIC. THE BENCHMARKING DONE BY THE ASSESSEE IS NOT IN ACCORDANCE WITH THE LAW AND THEREFORE CUP METHOD IS REQUIRED TO BE APPLIED IN THIS CASE. 4 ITA NO S . 6262 /DEL /201 2 ITA NO.504/D/2014 6 . FURTHER, TP O CONCLUDED AS UNDER: - ( AT PARA 13.5) THE ASSESS EE HAS NOT BEEN ABLE TO SHOW AS TO WHAT COST BENEFIT ANALYSIS HAS BEEN DONE BY THE ASSESSEE WITH REGARD TO THE PURPORTED RECEIPT OF SERVICES FROM THE AE. NO INDEPENDENT PARTY WOULD HAVE MADE A PAYMENT IN UNCONTROLLED CIRCUMSTANCES. THEREFORE, BY THE APPLIC ATION OF CUP, THE ARMS LENGTH OF THIS TRANSACTION OF PAYMENT OF SERVICE FEE IS DETERMINED AT NIL AS AGAINST RS.10,29,82,002/ - DETERMINED BY THE ASSESSEE. THE ASSESSING OFFICER SHALL ENHANCE THE INCOME OF THE ASSESSEE BY RS.10,29,82,002/ - . THE ASSESSING OFFICER MAY EXAMINE FEASIBILITY OF INITIATION OF PENALTY U/S 271(1)(C) OF THE ACT IN ACCORDANCE WITH EXPLANATION 7 OF THE SAME. 7 . BASED ON THE TPO S ORDER, THE ASSESSING OFFICER PASSED A DRAFT ASSESSMENT ORDER . IN THE DRAFT ASSESSMENT ORDER, T HE ASSESSING OFFICER ALSO DISALLOWED A SUM OF RS.4 , 0 , 017,141/ - INCURRED ON LEASEHOLD PREMISES , F OR THE REASON THAT THESE EXPENDITURE INCU RRED WERE CAPITAL IN NATURE. 8 . AGGRIEVED BY THE DRAFT ASSESSMENT ORDER, THE ASSESSEE FILED OBJECTION BEFORE THE DRP. THE DRP DISPOSED OFF THE ASSESSEE S OBJECTIONS VIDE ORDER/DIRECTION DATED 25.09.2012. THE DRP CONFIRMED THE TRANSFER PRICING ADJUSTMENT AS WELL AS THE DISALLOWANCE OF RS.4 , 0 , 017,141/ - . THE RELEVANT FINDING OF THE DRP WITH REFERENCE TO AFFIRMATION OF THE TRANSFER PRICING ADJUSTMENT READS AS UNDER: - (PARA 12.5) AFTER GOING THROUGH THE SUBMISSIONS OF THE ASSESSEE, THE PANEL IS OF THE VIEW TH AT THE ASSESSEE HAS NOT BEEN ESTABLISH THAT IT DERIVED DIRECT AND SUBSTANTIAL BENEFIT FROM SUCH SERVICES AND THE ASSESSEE WOULD NOT HAVE AVAILED SUCH SERVICES HAD IT BE AND INDEPENDENT ENTERPRISE. WE ARE, THEREFORE, IN AGREEMENT WITH THE CONCLUSION DRAWN B Y THE TPO THAT EVEN IF THE SERVICES WERE RENDERED TO THE ASSESSEE, THEY WERE IN THE NATURE OF DUPLICATE SERVICES AND INDEPENDENT ENTERPRISE WOULD NOT HAVE PAID ANY SEPARATE CONSIDERATION FOR SUCH SERVICES. ACCORDINGLY, PANEL UPHOLDS THE ACTION OF TPO, I.E. , THE ALP OF SUCH SERVICES SHALL BE TAKEN AS NIL AND THE OBJECTION RAISED BY THE ASSESSEE IS REJECTED. 5 ITA NO S . 6262 /DEL /201 2 ITA NO.504/D/2014 9 . BASED ON THE DIRECTION OF THE DRP FINAL ASSESSMENT ORDERS WERE PASSED U/S 143(3) R.W.S. 144C OF THE ACT. 10 . AGGRIEVED ASSESSEE IN APPEAL BEFORE US. BOTH THE SIDES AGREED THAT THE TRANSFER PRICING ISSUE IS TO BE RESTORED TO THE AO/TPO FOR FRESH CONSIDERATION IN THE LIGHT OF THE JUDGMENT OF THE HON BLE JURISDICTIONAL HIGH COURT OF DELHI IN THE CASE OF CIT - I VS. CUSHMAN AND WAKEFIELD (INDIA) (P.) LTD. REPORTED IN [2014] 46 TAXMANN.COM 317 (DELHI). 1 1 . WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CUSHMAN AND WAKEFIELD (INDIA) (P.) LTD. (SUPRA) HELD T HAT TPO CANNOT DETERMINE ARM S LENGTH PRICE OF THE PAYMENTS MADE BY THE ASSESSEE TO ITS AE AT NIL FOR THE REASON THAT ASSESSEE DID NOT DERIVE ANY BENEFIT FROM SERVICES RENDERED BY AE. THE RELEVANT FINDING OF THE HON BLE JURISDICTIONAL HIGH COURT READS AS UNDER: - 34. THE COURT FIRST NOTES THAT THE AUTHORITY OF THE TPO IS TO CONDUCT A TRANSFER PRICING ANALYSIS TO DETERMINE THE ALP AND NOT TO DETERMINE WHETHER THERE IS A SERVICE OR NOT FROM WHICH THE ASSESSEE BENEFITS. THAT ASPECT OF THE EXERCISE IS LEFT TO THE AO. THIS DISTINCTION WAS MADE CLEAR BY THE IT AT IN DRESSER - RAND INDIA (P.) LTD V. ADDL. CLT (2011) 47 SOT 423/13 TAXXMANN. COM 82 (MUM.): 8. WE FIND THAT THE BASIC REASON OF THE TRANSFER PRICING OFFICER'S DETERMINATION OF ALP OF THE SERVICES RECEIVED UNDER COST CONTRIBUTION ARRANGEMENT AS 'NIL' IS HIS PERCEPTION THAT THE ASSESSEE DID NOT NEED THESE SERVICES AT ALL, AS THE ASSESSEE HAD SUFFICIENT EXPERTS OF HIS OWN WHO WERE COMPETENT ENOUGH TO DO THIS WORK. FOR EXAMPLE. THE TRANSFER PRICING OFF ICER HAD POINTED OUT THAT THE ASSESSEE HAS QUALIFIED ACCOUNTING STAFF WHICH COULD HAVE HANDLED THE AUDIT WORK AND IN ANY CASE THE ASSESSEE HAS PAID AUDIT FEES TO EXTERNAL FIRM. SIMILARLY, THE TRANSFER PRICING OFFICER WAS OF THE VIEW THAT THE ASSESSEE HAD M ANAGEMENT EXPERTS ON ITS ROLLS, AND. THEREFORE, GLOBAL BUSINESS OVERSIGHT SERVICES WERE NOT NEEDED. IT IS DIFFICULT TO UNDERSTAND, MUCH LESS APPROVE, THIS LINE OF REASONING. IT IS ONLY ELEMENTARY THAT HOW AN ASSESSEE CONDUCTS HIS BUSINESS IS ENTIRELY HIS PR EROGATIVE AND IT IS NOT FOR THE REVENUE AUTHORITIES TO DECIDE WHAT 6 ITA NO S . 6262 /DEL /201 2 ITA NO.504/D/2014 IS NECESSARY FOR AN ASSESSEE AND WHAT IS NOT. AN ASSESSEE MAY HAVE ANY NUMBER OF QUALIFIED ACCOUNTANTS AND MANAGEMENT EXPERTS ON HIS ROLLS, AND YET HE MAY DECIDE TO ENGAGE SERVICES OF OUTSI DE EXPERTS FOR AUDITING AND MANAGEMENT CONSULTANCY; IT IS NOT FOR THE REVENUE OFFICERS TO QUESTION ASSESSEE'S WISDOM IN DOING SO. THE TRANSFER PRICING OFFICER WAS NOT ONLY GOING MUCH BEYOND HIS POWERS IN QUESTIONING COMMERCIAL WISDOM OF ASSESSEE'S DECISION TO TAKE BENEFIT OF EXPERTISE OF DRESSER RAND US, BUT ALSO BEYOND THE POWERS OF THE ASSESSING OFFICER. WE DO NOT APPROVE THIS APPROACH OF THE REVENUE AUTHORITIES. WE HAVE FURTHER NOTICED THAT THE TRANSFER PRICING OFFICER HAS MADE SEVERAL OBSERVATIONS TO TH E EFFECT THAT, AS EVIDENT FROM THE ANALYSIS OF FINANCIAL PERFORMANCE, THE ASSESSEE DID NOT BENEFIT, IN TERMS OF FINANCIAL RESULTS, FROM THESE SERVICES. THIS ANALYSIS IS ALSO COMPLETELY IRRELEVANT, BECAUSE WHETHER A PARTICULAR EXPENSE ON SERVICES RECEIVED A CTUALLY BENEFITS AN ASSESSEE IN MONETARY TERMS OR NOT EVEN A CONSIDERATION FOR ITS BEING ALLOWED AS A DEDUCTION IN COMPUTATION OF INCOME, AND, BY NO STRETCH OF LOGIC, IT CAN HAVE ANY ROLE IN DETERMINING ARM'S LENGTH PRICE OF THAT SERVICE. WHEN EVALUATING T HE ARM'S LENGTH PRICE OF A SERVICE, IT IS WHOLLY IRRELEVANT AS TO WHETHER THE ASSESSEE BENEFITS FROM IT OR NOT; THE REAL QUESTION WHICH IS TO BE DETERMINED IN SUCH CASES IS WHETHER THE PRICE OF THIS SERVICE IS WHAT AN INDEPENDENT ENTERPRISE WOULD HAVE PAID FOR THE SAME. SIMILARLY, WHETHER THE AE GAVE THE SAME SERVICES TO THE ASSESSEE IN THE PRECEDING YEARS WITHOUT ANY CONSIDERATION OR NOT IS ALSO IRRELEVANT. THE AE MAY HAVE GIVEN THE SAME SERVICE ON GRATUITOUS BASIS IN THE EARLIER PERIOD, BUT THAT DOES NOT MEAN THAT ARM'S LENGTH PRICE OF THESE SERVICES IS 'NIL'. THE AUTHORITIES BELOW HAVE BEEN SWAYED BY THE CONSIDERATIONS WHICH ARE NOT AT ALL RELEVANT IN THE CONTEXT OF DETERMINING THE ARM'S LENGTH PRICE OF THE COSTS INCURRED BY THE ASSESSEE IN COST CONTRIBUT ION ARRANGEMENT. WE HAVE ALSO NOTED THAT THE STAND OF THE REVENUE AUTHORITIES IN THIS CASE IS THAT NO SERVICES WERE RENDERED BY THE AE AT ALL, AND THAT SINCE THERE IS NO. EVIDENCE OF SERVICES HAVING BEEN RENDERED AT ALL, THE ARM'S LENGTH PRI CE OF THESE SER VICES IS 'NIL'. 35. THE TPO'S REPORT IS, SUBSEQUENT TO THE FINANCE ACT, 2007, BINDING ON THE AO. THUS, IT BECOMES ALL THE MORE IMPORTANT TO CLARIFY THE EXTENT OF THE TPO'S AUTHORITY IN THIS CASE, WHICH IS TO DETERMINING THE ALP FOR INTERNATIONAL TRANSACTI ONS REFERRED TO HIM OR HER BY THE AO, RATHER THAN DETERMINING WHETHER SUCH SERVICES EXIST OR BENEFITS HAVE ACCRUED. THAT EXERCISE - OF FACTUAL VERIFICATION IS RETAINED BY THE AO UNDER SECTION 37 IN THIS CASE. INDEED, THIS IS NOT TO SAY THAT THE TPO CANNOT - AFTER A CONSIDERATION OF THE FACTS - STATE THAT THE ALP IS 'NIL' GIVEN THAT AN INDEPENDENT ENTITY IN A COMPARABLE TRANSACTION WOULD NOT PAY ANY AMOUNT. HOWEVER, THIS IS DIFFERENT FROM THE TPO STATING THAT THE ASSESSEE DID NOT BENEFIT FROM THESE SERVICES, WHICH AMOUNTS TO DISALLOWING EXPENDITURE. THAT DECISION IS OUTSIDE THE AUTHORITY OF THE TPO. THIS ASPECT WAS MADE CLEAR BY THE ITAT IN DELLOITE CONSULTING INDIA (P.) LTD. V. DY. CIT/ITO [2012] 137 ITD 21122 TAXMANN.COM 107 (MUM) : 7 ITA NO S . 6262 /DEL /201 2 ITA NO.504/D/2014 37. ON THE ISSUE AS TO WHETHER THE TRANSFER PRICING OFFICER IS EMPOWERED TO DETERMINE THE ARM'S LENGTH PRICE AT 'NIL', WE FIND THAT THE BANGALORE BENCH OF THE TRIBUNAL IN GEMPLUS INDIA (P.) LTD. V. ASSTT. CIT [IT APPEAL NO. 352 (BANG.) OF 2009, DATED 20 - 10 - 2010] HELD THAT THE ASSESSEE HAS TO ESTABLISH BEFORE THE TRANSFER PRICING OFFICER THAT THE PAYMENTS MADE WERE COMMENSURATE TO THE VOLUME AND QUALITY SERVICE AND THAT SUCH COSTS ARE COMPARABLE. WHEN COMMENSURATE BENEFIT AGAINST THE PAYMENT OF SERVICES IS N OT DERIVED, THEN THE TRANSFER PRICING OFFICER IS JUSTIFIED IN MAKING AN ADJUSTMENT UNDER THE ARM'S LENGTH PRICE. 38. IN THE CASE ON HAND, THE TRANSFER PRICING OFFICER HAS DETERMINED THE ARM'S LENGTH PRICE AT 'NIL' KEEPING IN VIEW THE FACTUAL POSITION AS TO WHETHER IN A COMPARABLE CASE, SIMILAR PAYMENTS WOULD HAVE BEEN MADE OR NOT IN TERMS OF THE AGREEMENTS. THIS IS A CASE WHERE THE ASSESSEE HAS NOT DETERMINED THE ARM'S LENGTH PRICE. THE BURDEN IS INITIALLY ON THE ASSESSEE TO DETERMINE THE ARM'S LENGTH PRI CE. THUS, THE ARGUMENT OF THE ASSESSEE THAT THE TRANSFER PRICING OFFICER HAS EXCEEDED HIS JURISDICTION BY DISALLOWING CERTAIN EXPENDITURE, IS AGAINST THE FACTS. THE TRANSFER PRICING OFFICER HAS NOT DISALLOWED ANY EXPENDITURE. ONLY THE ARM'S LENGTH PRICE WA S DETERMINED. IT WAS THE ASSESSING OFFICER WHO COMPUTED THE INCOME BY ADOPTING THE ARM'S LENGTH PRICE DECIDED BY THE TRANSFER PRICING OFFICER AT 'NIL'. THIS IS A SLENDER YET CRUCIAL DISTINCTION THAT RESTRICTS THE AUTHORITY OF THE TPO. WHILST THE REPORT O F THE TPO IN THIS CASE ULTIMATELY NOTED THAT THE ALP WAS 'NIL', SINCE A COMPARABLE ENTITY WOULD PAY 'NIL' AMOUNT FOR THESE SERVICES, THIS COURT NOTED THAT REMARKS CONCERNING, AND THE FINAL DECISION RELATING TO, BENEFIT ARISING FROM THESE SERVICES ARE PROPE RLY RESERVED FOR THE AO. 36. IN THIS CASE, THE ISSUE IS WHETHER AN INDEPENDENT ENTITY WOULD HAVE PAID FOR SUCH SERVICES. IMPORTANTLY, IN REACHING THIS CONCLUSION, NEITHER THE REVENUE, NOR THIS COURT, MUST QUESTION THE COMMERCIAL WISDOM OF THE ASSESSEE, OR REPLACE ITS OWN ASSESSMENT OF THE COMMERCIAL VIABILITY OF THE TRANSACTION. THE SERVICES RENDERED BY CWS AND CWHK IN THIS CASE CONCERN LIAISING AND CLIENT INTERACTION WITH IBM ON BEHALF OF THE ASSESSEE - ACTIVITIES FOR WHICH, ACCORDING TO THE ASSESSEE'S CLAIM - INTERACTION WITH IBM'S R EGIONAL OFFICES IN SINGAPORE AND THE UNITED STATES WAS NECESSARY. THESE SERVICES CANNOT - AS THE IT A T CORRECTLY SURMISED - BE DUPLICATED IN INDIA INSOFAR AS THEY REQUIRE INTERACTION ABROAD. WHETHER IT IS COMMERCIALLY PRUDENT OR NOT TO EMPLOY OUTSIDERS TO CONDUCT THIS ACTIVITY IS A MATTER THAT LIES WITHIN THE ASSESSEE'S EXCLUSIVE DOMAIN, AND CANNOT BE SECOND - GUESSED BY THE REVENUE. 37. AT THIS POINT, IT IS NOTEWORTHY THAT THE CIRCUMSTANCE THAT THE ASSESSEE HAD MARKET RESEARCH FACILITIES IN INDIA DOES NO T CORRESPOND TO THE PERFORMANCE OF SERVICES ABROAD, ESPECIALLY IN RELATION TO CLIENT INTERACTION SERVICES LOCATED OUTSIDE INDIA - ALBEIT FOR ULTIMATELY SOURCING THEM INTO THE INDIAN MARKET. THE E - MAILS CONSIDERED BY THE ITA T FROM MR. BRAGANZA AND MR. CHOU DHARY SO FAR AS THEY DEAL WITH SPECIFIC INTERACTION WITH IBM 8 ITA NO S . 6262 /DEL /201 2 ITA NO.504/D/2014 BY THOSE PERSONS, AND RELATE IT TO BENEFITS OBTAINED BY THE ASSESSEE, PROVIDE A SUFFICIENT BASIS TO HOLD THAT BENEFIT ACCRUED TO THE ASSESSEE. HOWEVER, THIS DETERMINATION REMAINS UNCLEAR AND INCH OATE. THE DEVIL HERE LIES IN THE DETAILS. THE DETAILS OF THE SPECIFIC ACTIVITIES FOR WHICH COST WAS INCURRED BY BOTH CWS AND CWHK (FOR THE ACTIVITIES OF MR. BRAGANZA AND MR. CHOUDHARY), AND THE ATTENDANT BENEFIT TO THE ASSESSEE, HAVE NOT BEEN CONSIDERED TI LL DATE. THIS MUST BE PROVIDED, IN ADDITION TO A CONSIDERATION OF THE ALP VIS - A - VIS THE TOTAL COST CLAIMED BY THESE AES. TO THIS EXTENT, FOR THE CONSIDERATION OF ALP IN RESPECT OF THESE TRANSACTIONS, THE MATTER IS REMANDED BACK TO THE FILE OF THE CONCERNED AO, FOR AN ALP ASSESSMENT BY THE TPO, FOLLOWED BY THE AO'S SSESSMENT ORDER IN ACCORDANCE WITH LAW. 12. T HE HON BLE HIGH COURT CATEGORICALLY HELD THAT THE TPO IS TO CONDUCT A TRANSFER PRICING ANALYSIS TO DETERMINE THE ARM S LENGTH PRICE (ALP) AND NOT TO DETERMINE WHETHER THERE IS A SERVICE FROM WHICH ASSESSEE HAS DERIVED BENEFIT OR NOT . T HE HON BLE COURT HELD THAT THE EXERCISE TO DETERMINE WHETHER ASSESSEE HAD DERIVED ANY BENEFIT OR NOT FROM PAYMENT OF SUCH MANAGEMENT FEE IS TO BE EXAMINED BY THE AO AND APPROPRIATE DISALLOWANCE U/S 37 IS CALLED FOR. IN THE INSTANT CASE, THE TPO HAD DETERMINED THE ALP OF PAYMENT OF MANAGEMENT FEES A T NIL BY HOLDING THAT THE ASSESSEE DID NOT DERIVE ANY BENEFIT FROM SERVICES RENDERED BY THE AE. THEREFORE, KEEPING IN VIEW T HE DICTUM LAID DOWN BY THE JUDGMENT OF THE HON BLE JURISDICTIONAL HIGH COURT, NECESSARILY AO AS TO DETERMINE WHETHER THE ASSESSEE HAS DERIVED ANY BENEFIT FROM PAYMENT OF PROFESSIONAL FEES AND IF ANY BENEFIT HAD DERIVED , WHETHER SUCH PAYMENT IS COMMENSURATE TO COMPARABLE TRANSACTION H AS TO BE EXAMINED BY THE TPO. FOR THE ABOVE SAID PURPOSE, THE TRANSFER PRICING ISSUE IS RESTORED TO AO/TPO FOR DE - NOVO CONSIDERATION. IT IS ORDERED ACCORDINGLY. 9 ITA NO S . 6262 /DEL /201 2 ITA NO.504/D/2014 GROUND NO.1 3 1 3 . IN THIS GROUND, ASSESS EE CHALLENGES DISALLOWANCE OF A SUM OF RS.40,017,141/ - AS CAPITAL EXPENDITURE . THE AMOUNT WAS EXP E NDED ON INTERIOR OF A LEASE HOLD PREMISES . THE DRP CONFIRMED THE AO DRAFT ASSESSMENT ORDER BY OBSERVING AS UNDER : (PARA 1.3) WE HAVE CONSIDERED THE SUBMISSIONS MADE BY THE ASSESSEE AND HAVE PERUSED THE MATERIAL ON RECORD. A PERUSAL OF THE DETAILS OF EXPENSES FILED BY THE ASSESSEE BEFORE THE AO VIDE ITS LETTER DATED 16.12.2011, WHICH HAVE BEEN REPRODUCED BY THE AO AT PAGE 3 AND 4 OF THE ASSESSMENT ORDER, SHOWS THAT THE ASSESSEE HAD INCURRED MAJOR EXPENSES ON RENOVATION OF THE LEASEHOLD PREMISES. SUCH EXPENSES ARE IN THE NATURE OF RENOVATION OF WORK, POP FALSE CEILING, PLY PANELLING AT WALLS, FIRE EXTINGUISHER, WOODEN FLOORING, FA LSE FLOORING ETC. THESE EXPENSES CANNOT BY ANY STRETCH OF IMAGINATION BE CONSIDERED AS REPAIRS EXPENSES. THE NATURE OF CIVIL WORK, ELECTRICAL FITTING ETC CARRIED OUT AT THE LEASEHOLD PREMISES ARE GOING TO GIVE A BENEFIT OF ENDURING NATURE TO THE ASSESSEE. A PERUSAL OF THE BILLS SUBMITTED AS ADDITIONAL EVIDENCE ALSO SHOWS THAT THESE EXPENSES ARE IN RESPECT OF MAJOR ELECTRICAL WORK, MAJOR CIVIL WORK, NETWORKING WORK, INSTALLATION OF FIRE ALARM INSTRUMENTS ETC., THESE EXPENSES ARE CLEARLY IN THE NATURE OF CAPI TAL EXPENDITURE. IN VIEW OF EXPLANATION 1 TO SECTION 32, IF SUCH CAPITAL EXPENDITURE IS INCURRED ON A LEASEHOLD PREMISES, IT WILL BE DEEMED AS IF THE SAID STRUCTURE OR WORK BY WAY OF RENOVATION OR IMPROVEMENT OF A LEASEHOLD BUILDING HAS BEEN DONE IN RESPEC T OF THE ASSESSEE S OWN BUILDING. ACCORDINGLY, THE PANEL IS OF THE VIEW THAT THE AO IS PERFECTLY JUSTIFIED IN HOLDING THE SAID EXPENDITURE TO BE CAPITAL IN NATURE. IN THIS REGARD, IT IS RELEVANT TO MENTION THAT IN THE ASSTT. YEARS 2003 - 04 AND 2004 - 05 DISAL LOWANCE OF RS.17,33,360/ - AND RS.8,81,164/ - RESPECTIVELY WAS MADE IN RESPECT OF LEASEHOLD IMPROVEMENTS HOLDING THE EXPENDITURE AS CAPITAL IN NATURE IN VIEW OF EXPLANATION 1 TO SECTION 32. THE DISALLOWANCE WERE UPHELD UPTO THE ITAT S LEVEL AND THE ASSESSEE DID NOT CHALLENGE THE SAME TO BE OF CAPITAL BEFORE THE HIGH COURT. SIMILARLY, THE ASSTT. YEAR 2006 - 07, DISALLOWANCE OF RS.51,20,021/ - IN RESPECT OF EXPENDITURE ON LEASEHOLD PREMISES WAS MADE IN THE ASSESSEE CASE HOLDING THE SAME TO BE OF CAPITAL IN NATURE. THE ASSESSEE DID NOT FILE ANY APPEAL BEFORE THE CIT(A) AGAINST THIS ORDER. THESE FACTS HAVE BEEN ADMITTED BY THE ASSESSEE VIDE ITS LETTER DATED 22.12.2011 FILED BEFORE THE AO (COPY AT PAPER BOOK NO.779 AND 780). IN VIEW OF THE FACTS STATED ABOVE AND THE P AST 10 ITA NO S . 6262 /DEL /201 2 ITA NO.504/D/2014 HISTORY OF DISALLOWANCE ON THE SAME ISSUE WHICH HAS BEEN ACCEPTED BY THE ASSESSEE AND HAS ATTAINED FINALITY THE PROPOSED ACTION OF THE AO IN HOLDING EXPENDITURE OF RS.4,00,17,141/ - TO BE OF CAPITAL IN NATURE IS UPHELD. 14 . WE HAVE HEARD RIVAL SUBMISSI ONS AND PERUSED THE MATERIAL ON RECORD. THE ASSESSEE HAS INCURRED A SUM OF RS.40,017,141/ - ON INTERIORS OF LEASE HOLD PREMISES. THE DETAILS OF THE EXPENDITURE ARE LISTED OUT IN THE ASSESSMENT ORDER AT PAGE S 3 & 4. ON PERUSAL OF THESE DETAILS, WE FIND THAT MAJORITY OF THESE EXPENDITURE S ARE EXP E NDED FOR MAJOR RENOVATION AND THESE EXPENSES ARE CLEARLY CAPITAL IN NATURE. IN VIEW OF EXPLANATION 1 TO SECTION 32 OF THE ACT , IF THE SAID CAPITAL EXPENDITURE IS INCURRED ON A LEASEHOLD PREMISES , THE SAME CAN BE CAPITALISED AND DEPRECIATION CAN BE CLAIMED . IN IDENTICAL FACTUAL SITUATION , THE TRIBUNAL IN ASSESSEE S OWN CASE FOR A.Y S . 2003 - 04, 2004 - 05 AND 2006 - 07 HAD DISALLOWED AN EXPENDITURE OF RS.17,33,360/ - , RS.8,81,164/ - AND RS.51,20,21/ - RESPECTIVELY. 15. THE R ELEVANT FINDING OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR AY 2003 - 04 IN ITA NO. 2803/D/2007, IS REPRODUCED AS UNDER: ( AT PARA 29) 29 . WE HAVE HEAR D THE PA R T I ES AND CONS I DERED THE R I VAL SUBM I SS I ONS . THE ASSESSEE, AFTER TAKING VAR I OUS PREMISES ON RENT/LEASE IN DIFFERENT P L ACES ACROSS THE CO UN TRY , CARRIED OUT SUBSTANT I A L ALTERNATIONS AND MOD I F I CAT I ONS I N THE SA I D PREM I SES . THEREFORE , PRIMA FACIE THE EXPENSES WERE OF CAPITAL I N NATURE. EVEN I F THE PRE MI SES WERE ON LEASE, BECAUSE OF T HE PROV I S I O N TO E X PLANATION ( I ) TO SECT I ON 32 OF T H E AC T T H E EXPEND I TURE O F CAP I TA L NATURE ON THE C O N STRUCT I ON OF A N Y STRUCTURE O R DO IN G O F A NY WORK I N OR IN RELAT I ON TO AND B Y W A Y O F RENO V AT I ON OR E X PANSION OR I MPROVEME NT TO THE BUILD I NG , I T I S TO BE ASSUMED AS IF THE SA I D STRUCTURE OR WORK IS A BU IL D I N G O WN ED BY THE ASSESSEE. THE CASE OF MADRAS IN D U STR I AL INVES T MENT CORPORAT I ON L I M I TE D ( SUPRA) CANNOT BE APP LI ED TO T HE CASE OF THE ASSESSEE AS THE NATURE OF EXPE N SES IN THE SAID CASE WAS OF R EVENUE I N N AT UR E WHE R EAS I N THE PRESENT CASE OF THE ASSESSEE THE EXPEND I TURE I S OF CAP I TAL I N NATURE WH I CH I S DEEMED TO BE A 11 ITA NO S . 6262 /DEL /201 2 ITA NO.504/D/2014 BU I LD I NG OW N ED BY THE ASSESSEE. A REVENUE EXPEND I TURE WHOSE B ENEF I T EXTENDS OVER SOME YEARS WH I C H I S CLA I MED BY THE ASSESSEE CAN ON L Y BE S PR EAD OVER THAT PERIOD . THE AO IN OUR OP I N I ON , I S R I GHT IN DISALLOWING THE SAME. THERE F ORE, THE D I SAL L OWANCE BY THE C I T ( A) A ND T H E AO IS UPHELD. 1 6 . IN VIEW OF THE AFORESAID REASONING, WE HOLD THAT THE INCOME TAX AUTHORIT Y IS JUSTIFIED IN DISALLOWING A SUM OF RS.4 , 0 0 , 17,141/ - AS CAPITAL EXPENDITURE AND ALLOWING DEPRECIATION ON THE SAME. IT IS ORDERED ACCORDINGLY. GROUND NO.1 4 1 7 . IN THIS GROUND, ASSESSEE S PRAYER IS TO GRANT DEPRECIATION ON THE AMOUNT DISALLOWED AS CAPITAL EXPENDITURE IN THE PAST ASSESSMENT YEAR S. THE DRP WHILE DISPOSING OF THE ASSESSEE S OBJECTION DIRECTED THE AO TO VERIFY AND ALLOW DEPRECIATION ON LEASE HOLD IMPROVEMENT WHICH WERE CAPITALIZED IN THE EARLIER YEARS. WE FIND FROM THE ASSESSMENT ORDER, THE AO HAS NOT GIVEN EFFECT TO THE DIRECTION OF THE DRP. THEREFORE, WE DIRECT THE AO TO VERIFY THE DETAILS AND GRANT DEPRECIATION IN ACCORDANCE WITH LAW. IT IS ORDERED ACCORDINGLY. 1 8 . IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AS INDICATED ABOVE. ITA NO. 504/D/ 2014 (AY 2009 - 10) 1 9 . ALL THE GROUNDS IN THIS APPEAL, RELATES TO THE TRANSFER PRICING ISSUE WHICH IS IDENTICAL TO THE TRANSFER PRICING ISSUE CONSIDER BY US OF THE IMMEDIATELY PRECEDING ASSESSMENT YEAR , NAMELY , AY 2008 - 09. FOR THE REASON STATED IN THIS ORDER AT PARAGRAPH S 11 & 12, W E RESTORE THIS ISSUE TO AO/TPO TO FOLLOW THE DICTUM LAID DOWN BY THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT - I VS. CUSHMAN AND WAKEFIELD (INDIA) (P.) LTD. (SUPRA). 12 ITA NO S . 6262 /DEL /201 2 ITA NO.504/D/2014 20. I N THE RESULT , (I) A.Y. 2008 - 09: IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. (II) A.Y. 2009 - 10: IS ALLOWED FOR STATISTICAL PURPOSE. ( ORDER PRONOUNCED IN THE OPEN COURT ON 22.12. 2014. ) SD/ - SD/ - ( R.S. SYAL ) (GEORGE GEORGE K.) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED 22/12/ 2014. COPY FORWARDED TO 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST . REGISTRAR, ITAT, NEW DELHI