J.P. MORGAN SERVICES INDIA P. LTD, MUMBAI V. ITO RG 8(2)(2), MUMBAI

ITA 5301/MUM/2011

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 2564 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 3 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Next Hearing Date: 10-02-2015
• Assessment Year: 2003-2004
• Appeal Filed On: 12-07-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S S KUMARAN
• Assessee Lawyers: F V IRANI
• Keywords: Capital asset; Depreciation; Transfer pricing; Business expenditure; Period of limitation; Revenue expenditure; Capital expenditure
• Section: 143(3); 32; 147

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES J, MUMBAI , , , BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER, AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER ITA NO.5301/MUM/2011 ASSESSMENT YEAR: 2003-04 J.P. MORGAN SERVICES INDIA P. LTD. 9 TH FLOOR, B WING, PRISM TOWERS MINDSPACE, MALAD (W) MUMBA-40004 / VS. ITO RG 8(2)(2) 707A, C-10 7 TH FLOOR, BANDRA KURLA COMPLEX BANDRA (E) MUMBAI-51 (ASSESSEE ) (REVENUE) P.A. NO. AABCD0503B ITA NO.5130/MUM/2011 ASSESSMENT YEAR: 2003-04 ITO RG 8(2)(2) 707A, C-10 7 TH FLOOR, BANDRA KURLA COMPLEX BANDRA (E) MUMBAI-51. / VS. J.P. MORGAN SERVICES INDIA P. LTD. 9 TH FLOOR, B WING, PRISM TOWERS MINDSPACE, MALAD (W) MUMBA-40004 (REVENUE ) (RESPONDENT) P.A. NO. AABCD0503B J.P. MORGAN SERVICES 2 C.O. NO.294/MUM/2013 ASSESSMENT YEAR: 2003-04 J.P. MORGAN SERVICES INDIA P. LTD. 9 TH FLOOR, B WING, PRISM TOWERS MINDSPACE, MALAD (W) MUMBA-40004 / VS. DCIT 8(2) R.NO.216-A, AAYAKAR BHAVAN, M.K. RD. MUMBAI-20 (ASSESSEE ) (REVENUE) P.A. NO. AABCD0503B APPELLANT BY SHRI F. V. IRANI (AR) RESPONDENT BY SHRI S.S. KUMARAN (DR) / DATE OF HEARING : 09/09/2015 / DATE OF ORDER: 30/10/2015 / O R D E R PER ASHWANI TANEJA (ACCOUNTANT MEMBER): THESE ARE CROSS APPEALS AND CROSS OBJECTIONS, FILED BY THE ASSESSEE AND THE REVENUE AGAINST THE ORDER OF LD. COMMISSIONER OF INCOME TAX (APPEALS) -17, MUMBAI {I N SHORT, CIT(A)}, FOR THE ASSESSMENT YEAR 2003-04 DATED 29 .03.2006, DECIDED AGAINST THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (IN SHORT AO) U/S 143(3) OF THE ACT. WE FIRST TAKE UP CROSS OBJECTION FILED BY THE ASSES SEE: 2 . IT IS NOTED THAT THE CROSS OBJECTION HAS BEEN FIL ED BY THE ASSESSEE BEYOND THE PERIOD OF LIMITATION. DURING TH E COURSE OF J.P. MORGAN SERVICES 3 HEARING, LD. COUNSEL OF THE ASSESSEE SUBMITTED THA T SINCE THE ASSESSEE HAS FILED ADDITIONAL GROUND ALSO, ADJUDICA TION OF CROSS OBJECTION MAY NOT BE REQUIRED, AND THEREFORE, SAME WAS NOT PRESSED BY THE LD. COUNSEL. IN VIEW OF THIS, CROSS OBJECTION FIELD BY THE ASSESSEE IS DISMISSED, AS NO T PRESSED. NOW, WE TAKE UP ASSESSEES APPEAL IN ITA NO.5301/MUM/2011. 3 . THE GROUNDS RAISED BY THE ASSESSEE IN THE APPEAL MEMO ARE REPRODUCED BELOW: AGGRIEVED BY THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS)-17, MUMBAI [HEREINAFTER REFERR ED TO AS THE LEARNED CIT(A)], UNDER SECTION 250 OF THE IN COME-TAX ACT, 1961 (ACT) AND BASED ON THE FACTS AND CIRCUMST ANCES OF THE CASE, J.P. MORGAN SERVICES INDIA PVT. LTD. [HEREINAFTER REFERRED TO AS 'THE APPELLANT'] RESPEC TFULLY SUBMITS THAT THE LEARNED CIT(A) ERRED IN PARTLY UPH OLDING THE ORDER OF THE INCOME-TAX OFFICER- RANGE 8(2)(2), BY TREATING AN AMOUNT OF RS 42,100,000 IN RESPECT OF P ROJECT MANAGEMENT STUDY AS BEING CAPITAL EXPENDITURE AND DISALLOWING THE SAME. WITHOUT PREJUDICE TO THE ABOVE, THE APPELLANT SUBMI TS THAT THE LEARNED CIT(A) ERRED IN NOT ALLOWING DEPRECIATI ON UNDER SECTION 32 OF THE ACT ON THE AMOUNT OF FEES PAID FO R THE PROJECT MANAGEMENT STUDY UPHELD AS CAPITAL EXPENDIT URE. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMI T, SUBSTITUTE OR AMEND THE GROUND OF APPEAL, AT ANY TI ME BEFORE OR AT, THE TIME OF HEARING OF THE APPEAL, SO AS TO ENABLE THE HONOURABLE INCOME-TAX APPELLATE TRIBUNAL TO DECIDE THIS APPEAL ACCORDING TO LAW. J.P. MORGAN SERVICES 4 4. DURING THE COURSE OF HEARING, IT WAS NOTED THAT AS SESSEE HAD FILED FOLLOWING GROUNDS AS ADDITIONAL GROUNDS V IDE ITS LETTER DATED 30 TH DECEMBER 2013: 1. THE DISALLOWANCE OF PROJECT MANAGEMENT STUDY FE ES OF RS 4,21,00,000 BY THE INCOME-TAX OFFICER -8(2)(2), MUMBAI ('THE ITO') AS CAPITAL EXPENDITURE, OUGHT TO HAVE B EEN DELETED, AS THE SAME WAS ILLEGAL, VOID-AB INITIO AN D WITHOUT/ IN EXCESS OF JURISDICTION, INTER-ALIA, AS: I) IT WAS MADE BY THE ITO PURSUANT TO DIRECTIONS GI VEN TO HIM BY THE ADDITIONAL COMMISSIONER}; OF INCOME-TAX - TRANSFER PRICING (2), MUMBAI ('THE TPO'); II) IN ANY EVENT AND WITHOUT PREJUDICE TO (I) IMMED IATELY ABOVE, THE AFORESAID DIRECTIONS OF THE TPO WERE THEMSELVES ILLEGAL, VOID-AB INITIO AND WITHOUT/ IN EXCESS OF JURISDICTION. 2. THE DISALLOWANCE OF EXPENDITURE OF RS1,79,00,000 ALLEGEDLY IN CONNECTION WITH IDLE CAPACITY AND THE DISALLOWANCE OF EXPENDITURE OF RS.75,99,000 IN CONN ECTION WITH NEW SERVICE LINE COST AS CAPITAL EXPENDITURE B Y THE ITO, OUGHT TO HAVE BEEN HELD AS ILLEGAL, VOID-AB IN ITIO AND WITHOUT/IN EXCESS OF JURISDICTION, INTER-ALIA, AS: I) IT WAS MADE BY THE ITO PURSUANT TO DIRECTIONS GI VEN TO HIM BY THE TPO; II) IN ANY EVENT AND WITHOUT PREJUDICE TO (I) IMMED IATELY ABOVE, THE AFORESAID DIRECTIONS OF THE TPO WERE THEMSELVES ILLEGAL, VOID-AB INITIO AND WITHOUT/ IN EXCESS OF JURISDICTION. 4.1 . IT WAS SUBMITTED BY THE LD. COUNSEL DURING THE CO URSE OF HEARING THAT THE AFORESAID ADDITIONAL GROUNDS DO NO T NEED ANY INVESTIGATION OF FRESH FACTS, AND THESE ARE PURELY LEGAL IN NATURE AND RAISE FUNDAMENTAL ISSUE OF JURISDICTION GOING TO THE VERY ROOT OF THE LEGALITY OF THE ADDITIONS/DISALLOW ANCE MADE AND REQUIRE ADJUDICATION IN THE INTEREST OF JUSTICE . RELIANCE WAS PLACED BY THE LD. COUNSEL, IN SUPPORT OF ADMISS ION OF THESE GROUNDS, ON THE JUDGMENT OF HONBLE SUPREME C OURT IN J.P. MORGAN SERVICES 5 THE CASE OF NATIONAL THERMAL POWER CO. LTD. VS. CIT 229 ITR 383. ON THE HAND, LD. DR SUBMITTED THAT ADDITIONAL GROUNDS RAISED BY THE ASSESSEE MAY BE ADMITTED SO LONG AS T HESE DO NOT REQUIRE ANY INVESTIGATION OF FRESH FACTS. 4.2. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE, AND IT IS NOTED BY US THAT THE ADDITIONAL GROUNDS RAISED BY T HE ASSESSEE ARE PURELY LEGAL AND DO NOT REQUIRE ANY INVESTIGATI ON OF FRESH FACTS. THUS, IN VIEW OF JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CO. LTD., SUPRA, THESE ADDITIONAL GROUNDS WERE ADMITTED FOR ADJUDICATION, AND WITH THE CONSENT OF THE PARTIES, WE PROCEEDED FURTHER TO HEAR AND DECIDE THE APPEAL ON MERITS VIZ-A-VIZ ADDITIONAL GR OUNDS AND OTHER GROUNDS. FIRST WE TAKE UP ADDITIONAL GROUNDS: 5. THE MAIN ISSUE RAISED BY THE LD. COUNSEL IN THE ADDITIONAL GROUNDS IS THAT DISALLOWANCES/ADDITIONS WERE MADE BY THE AO IN THE ASSESSMENT ORDER ON THE BASIS OF D IRECTIONS GIVEN BY THE TRANSFER PRICING OFFICER (IN SHORT TP O), IN ITS ORDER. THUS, PRIMARY OBJECTION RAISED BY THE LD. CO UNSEL WAS THAT SINCE THE TPO HAD NO JURISDICTION TO ISSUE ANY SUCH DIRECTIONS TO THE AO, THESE WERE BAD IN LAW AND ALL SUBSEQUENT PROCEEDINGS TAKEN BY THEREAFTER IN THIS REGARD, INC LUDING THE QUERY LETTERS ISSUED BY THE AO ON THE IMPUGNED ISSU ES WERE BAD IN LAW, AND FURTHER, THE DISALLOWANCE/ADDITIONS MADE BY THE AO IN THE ASSESSMENT ORDER, HAVING BEEN MADE ON THE J.P. MORGAN SERVICES 6 BASIS OF THESE DIRECTIONS OF THE TPO, WERE ILLEGAL AND VOID AB INITIO. LD. COUNSEL HAS DRAWN OUR ATTENTION ON PARA 8 OF THE ORDER PASSED BY THE TPO DATED 28.02.2006, WHICH REA DS AS UNDER: THE ASSESSEE HAS INCURRED CERTAIN EXPENDITURE AND HAS DEBITED THE SAME TO ITS P&L A/C. THIS EXPENDITURE P RIMA FACIE APPEARS TO BE IN THE NATURE OF CAPITAL EXPEND ITURE. THE AO MAY EXAMINE THIS EXPENDITURE VIS.. PROJECT FEASIBILITY STUDY COSTS-RS.4.41 CRORES, COSTS IN CO NNECTION WITH IDLE CAPACITY/UNUTILIZED SPACE RS.1.79 CRORES , NEW SERVICE LINE COSTS-RS.75.99 LAKHS AND FEES FOR RENT AL OPTIONS/BROKERAGE -RS.72.09 LAKHS, TO ARRIVE AT A F INDING WHETHER THIS EXPENDITURE IS TO BROUGHT TO TAX OR NO T. 5.1. IT WAS ARGUED BY THE LD. COUNSEL THAT THESE OBSERV ATIONS MADE BY THE LD. TPO IN ITS ORDER, CONSTITUTE DIREC TIONS, WHICH THE TPO WAS NOT AUTHORISED TO GIVE TO THE AO. IT WA S FURTHER SUBMITTED THAT IMMEDIATELY AFTER RECEIPT OF THE TPO S ORDER, LD. AO WAS PROMPTED TO ISSUE QUERY LETTER TO THE AO DATED 08.03.2006 (I.E. WITHIN FIVE WORKING DAYS), ON THE ISSUES AS WERE SUGGESTED BY THE TPO IN ITS ORDER. OUR ATTENTI ON WAS FURTHER DRAWN ON THE AOS ORDER AT PAGE 2 PARA 3, W HEREIN AO HAD MADE REFERENCE TO THE ORDER OF THE TPO. LD. COU NSEL HAS ARGUED THAT GIVING OF DIRECTION BY THE LD. TPO WAS WITHOUT THE AUTHORITY OF THE LAW, THEREBY VITIATING THE ENTIRE PROCEEDINGS, TAKEN UP THEREAFTER BY THE AO. IN SUPPORT OF HIS AR GUMENTS, RELIANCE WAS PLACED UPON THE JUDGMENT OF HONBLE BO MBAY J.P. MORGAN SERVICES 7 HIGH COURT IN THE CASE OF ICICI HOME FINANCE CO. LT D. VS. ACIT 82 CCH 0103. 5.2. ON THE OTHER HAND, LD. DR HAS SUBMITTED THAT THESE OBSERVATIONS GIVEN BY THE TPO IN ITS ORDER WERE NOT ANY KIND OF DIRECTIONS. IT WAS FURTHER SUBMITTED THAT THESE O BSERVATIONS WERE NOT BINDING UPON THE AO. IT WAS ALSO SUBMITTED THAT AO HAD GIVEN OPPORTUNITY TO THE ASSESSEE AND INQUIRIES WERE MADE INDEPENDENTLY. LASTLY, IT WAS SUBMITTED BY THE HIM THAT EVEN IF THESE DIRECTION WERE EXPUNGED, THE AO HAD I NHERENT JURISDICTION TO EXAMINE THESE ISSUES IN THE COURSE OF ASSESSMENT PROCEEDINGS CARRIED OUT U/S 143(3), AS T HE LAW HAS GIVEN AMPLE POWERS AND SCOPE OF MAKING REQUISITE QU ERIES TO THE ASSESSEE WITH REGARD TO VERIFICATION TO THE CLA IMS MADE BY THE ASSESSEE IN THE RETURN FILED BY IT, UNDER THE A FORESAID PROCEEDINGS. IT WAS SUBMITTED THAT THUS, IN VIEW OF THE AFORESAID REASONS, THE JUDGMENT OF HONBLE BOMBAY H IGH COURT IN THE CASE OF ICICI HOME FINANCE CO. LTD., S UPRA, WAS NOT APPLICABLE UPON THE FACTS OF THE PRESENT CASE. IN NUT SHELL, IT WAS ARGUED BY HIM THAT OBJECTIONS RAISED BY THE LD. COUNSEL WERE WITHOUT ANY LEGAL BASIS AND SOUND REASONING AN D THEREFORE, THESE SHOULD BE DISMISSED. 5.3. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE MATERIAL PLACED BEFORE US. IN OUR CONSIDERED OPINIO N, LD. COUNSEL HAS MISUNDERSTOOD OR MIS-APPRECIATED THE FA CTS OF THE CASE AND CONCEPTUAL FRAME WORK OF LAW ON THIS I SSUE. FIRSTLY, THE OBSERVATIONS MADE BY THE TPO IN ITS OR DER WERE NOT ANY SORT OF DIRECTIONS. THESE MAY AT THE BEST CON STITUTE J.P. MORGAN SERVICES 8 SUGGESTIONS TO THE AO. LD. COUNSEL HAS VEHEMENTLY R ELIED UPON THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN T HE CASE OF ICICI HOME FINANCE CO. LTD. (SUPRA). IT IS NOTED THAT THIS JUDGMENT IS RENDERED BY THE HONBLE HIGH COURT IN A N ALL TOGETHER DIFFERENT CONTEXT. THIS JUDGMENT WAS DELIV ERED BY THE HONBLE HIGH COURT IN THE CONTEXT OF DEFINING SCOPE OF POWER THAT HAS BEEN BESTOWED UPON THE AO TO REOPEN, U/S 1 47 OF THE INCOME TAX ACT, A COMPLETED ASSESSMENT. IT WAS IN T HIS CONTEXT, WHEN THE HONBLE HIGH COURT HELD THAT BEFO RE REOPENING THE CASE, THE AO IS OBLIGED UNDER THE LAW TO RECORD THE REASONS COMPRISING OF BELIEF FORMED BY THE AO F OR ESCAPEMENT OF INCOME OF ASSESSEE. IN THAT CONTEXT, IT WAS HELD BY THE HONBLE HIGH COURT THAT THE BELIEF MADE BY T HE AO SHOULD BE INDEPENDENT AND ON THE BASIS OF APPLICATI ON OF OWN MIND OF THE AO, AND THAT IT SHOULD NOT BE ON THE BA SIS OF DIRECTIONS OF ANY SUPERIOR AUTHORITIES. THUS IN THI S SPECIFIC CONTEXT, IT WAS OBSERVED BY THE HONBLE HIGH COURT THAT BELIEF OF ESCAPEMENT OF INCOME MUST BE DETERMINED BY THE A O HIMSELF AND HE CANNOT BLINDLY FOLLOW INFORMATION OF AN AUDIT AUTHORITY FOR THE PURPOSE OF ARRIVING AT A BELIEF T HAT INCOME HAS ESCAPED ASSESSMENT. 5.4. IT IS NOTED BY US THAT THE FACTS OF THIS CASE, STA ND ON AN ALL TOGETHER DIFFERENT PEDESTAL. FIRST OF ALL, THE IMPUGNED ASSESSMENT PROCEEDINGS WERE NOT COMMENCED U/S 147. THESE PROCEEDINGS HAVE BEEN CARRIED OUT U/S 143(3) OF THE INCOME TAX ACT. THE PARAMETERS LAID DOWN UNDER THE LAW FOR ASSUMPTION OF JURISDICTION FOR INITIATING AND CARRY ING OUT THE J.P. MORGAN SERVICES 9 PROCEEDINGS U/S 143(3) AND U/S 147 ARE TOTALLY DIFF ERENT. THERE IS NO SUCH OBLIGATION OF FORMATION OF BELIEF AND RECORDING OF REASONS FOR INITIATION OF PROCEEDINGS U/S 143(3) , AS ARE REQUIRED IN THE PROCEEDINGS INITIATED U/S 147. IT I S WORTH NOTING THAT PROCEEDINGS INITIATED UNDER SECTION 147 FOR REOPENING OF AN ALREADY CONCLUDED ASSESSMENT, HAVE BEEN COUCHED BY THE LEGISLATURE IN A SPECIAL FRAMEWORK O F PROVISIONS CONTAINED IN SECTIONS 147 TO 151 OF THE INCOME TAX ACT, 1961. ALL THESE PROVISIONS PROVIDE SOME FETTERS ON THE PO WERS OF THE AO, AND THESE HAVE TO BE STRICTLY COMPLIED WITH BY THE AO FOR REOPENING OF THE CASE AND FRAMING OF THE REASSESSME NT ORDER. ON THE OTHER HAND, IN THE PROCEEDINGS U/S 143(3), T HE LEGISLATURE HAS GIVEN AMPLE POWERS TO THE AO TO MAK E REQUISITE INQUIRIES WITH THE ASSESSEE OR OTHER CONN ECTED PERSONS, FOR THE PURPOSE OF FINDING OUT THE AUTHENT ICITY OF THE CLAIMS MADE BY THE ASSESSEE IN THE RETURN OF INCOME FILED BY IT AND ALSO FOR THE PURPOSE OF DETERMINATION OF THE TA XABLE OF THE ASSESSEE AND TAXABLE PAYABLE THEREON, AS PER LAW. T HUS, IN OUR CONSIDERED VIEW, BOTH THE SITUATIONS ARE NOT COMPAR ABLE, ON THE ANGLE AS SUGGESTED BY LD COUNSEL, AND THEREFORE , HIS SUBMISSIONS ON THIS ISSUE ARE NOT ACCEPTABLE UNDER THE LAW. FURTHER, WITHOUT PREJUDICE, EVEN IF WE EXPUNGE THE DIRECTIONS OF THE TPO, WE FIND THAT AO HAS REQUISITE POWERS UN DER THE LAW, DE-HORSE THE IMPUGNED DIRECTIONS OF TPO, TO EX AMINE THE IMPUGNED ISSUES DURING THE COURSE OF ASSESSMENT PRO CEEDINGS AND MAKING ASSESSMENT OF THE SAME AS PER LAW, IN TH E ASSESSMENT ORDER PASSED BY HIM U/S 143(3). THUS, IN OUR CONSIDERED VIEW, THE SUBMISSION OF THE LD. COUNSEL, VIEWED J.P. MORGAN SERVICES 10 FROM ANY ANGLE, HAS NO LEGS TO STAND AND THEREFORE, PRIMARY OBJECTION RAISED BY THE ASSESSEE BY WAY OF ADDITION AL GROUNDS IS DISMISSED. NOW, WE SHALL DEAL WITH THE MAIN GROUND RAISED BY T HE ASSESSEE IN THE APPEAL MEMO. 6. THE ASSESSEE HAS CHALLENGED THE ACTION OF LD CIT(A) IN CONFIRMING THE ACTION OF THE AO IN MAKING OF RS 4,2 1,00,000/, IN RESPECT OF FEE PAID FOR PROJECT MANAGEMENT STUDY , BY TREATING THE SAME AS CAPITAL EXPENDITURE. 6.1. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTED BY THE AO THAT THE ASSESSEE HAS CLAIMED AN AM OUNT OF RS. 4.21 CRORES BEING CONSULTANCY CHARGES PAID TO M /S. MCKINSAY & CO. FOR PROJECT MANAGEMENT STUDY. IT WAS NOTED BY THE AO THAT THE STUDY WAS UNDERTAKEN FOR ADDRESS ING THE MATTERS RELATING TO PROGRAMME MANAGEMENT METHODOLOG Y AND DEFINING A PRELIMINARY ROADMAP COVERING ISSUES SUCH AS SITE CONTINGENCY AND POTENTIAL OF INCREASING OFF SHORING SERVICES TO JPM SERVICES. IT WAS HELD BY THE AO THAT THE AFORES AID STUDY WAS INTENDED TO PROVIDE OPERATIONAL ADVANTAGE WHICH WAS AN ENDURING BENEFIT TO THE ASSESSEE COMPANY OVER A PER IOD OF TIME AND THEREFORE, SUCH PAYMENT WAS CAPITAL IN NAT URE. THE CLAIM WAS THEREFORE, DISALLOWED BY THE AO. 6.2. THE ASSESSEE CONTESTED THE MATTER BEFORE LD. CIT(A ), WHEREIN THE ASSESSEE MADE DETAILED SUBMISSION SUPPO RTED WITH DOCUMENTARY EVIDENCES, SHOWING THAT THE IMPUGN ED J.P. MORGAN SERVICES 11 PAYMENT WAS ON ACCOUNT OF REVENUE EXPENSES AND AO H AS WRONGLY TREATED THE SAME AS CAPITAL EXPENDITURE. RE LIANCE WAS PLACED BY THE ASSESSEE ON VARIOUS JUDGMENTS IN SUPP ORT OF ITS CLAIM. HOWEVER, LD. CIT(A) WAS NOT CONVINCED WITH T HE ARGUMENTS OF THE ASSESSEE. IT WAS HELD BY HIM THAT PROJECT MANAGEMENT STUDY WAS INTENDED TO ENHANCE THE LEVEL OF ACTIVITY OF THE ASSESSEE COMPANY IN INDIA, WITH VIE W TO TAKE ADVANTAGE OF BUSINESS OPPORTUNITY AVAILABLE IN INDI A, THIS WOULD IN TURN MEAN THAT THE NATURE OF ADVANTAGE WHI CH THE ASSESSEE COMPANY WOULD DERIVE, WOULD BE ENDURING IN NATURE, AND THEREFORE LD. CIT(A) UPHELD THE ACTION OF AO IN TREATING THE SAME AS CAPITAL IN NATURE, AND ACCORDINGLY DISA LLOWANCE MADE BY THE AO WAS CONFIRMED. 6.3. BEFORE US, LD. COUNSEL HAS MADE DETAILED SUBMISSIO NS. IT WAS SUBMITTED THAT THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF RENDERING IT ENABLED SERVICES AND SOFTW ARE DEVELOPMENT SERVICES TO JP MORAN CHASE GROUP ENTITI ES WORLDWIDE. THE PROJECT MANAGEMENT STUDY WAS UNDERTA KEN BY MCKINSEY FOR PREPARING A PROGRAMME MANAGEMENT METHODOLOGY AND PRELIMINARY STRATEGIC ROAD MAP SHOW ING THE POTENTIAL RISKS AND REWARDS OF SIGNIFICANTLY IN CREASING OPERATIONAL VOLUMES OVER THE SUBSEQUENT YEARS. IT W AS SUBMITTED THAT THE TERMS OF SPECIFIC CONSIDERATION FOR JPM SERVICES, THE REPORT BROADLY HIGHLIGHTED THE FOLLOW ING ASPECTS: A. POTENTIAL OPPORTUNITIES TO INCREASE BUSINESS BY DEVELOPING ADDITIONAL RESOURCES AND RAMPING UP THE J.P. MORGAN SERVICES 12 EXISTING OPERATIONS. B. A BROAD OVERVIEW OF COSTS THAT MAY BE INVOLVED IN ENHANCING CAPABILITIES. C. RATIONALIZING THE ORGANIZATION STRUCTURE IN ANTI CIPATION OF ENHANCED OPERATIONS. D. POTENTIAL BUSINESS DEVELOPMENT PROCESS TO BE UNDERTAKEN TO MAXIMIZE THE BENEFITS. IT WAS ARGUED THAT, IN NUTSHELL, THE REPORT ENABLE D THE ASSESSEE COMPANY TO UNDERSTAND WHETHER IT WOULD BE BENEFICIAL TO STEP UP THE OPERATIONS OR CONTINUE AT THE EXISTING LEVEL, AND THAT THERE WERE NUMBER OF JUDIC IAL DECISIONS THAT HAVE HELD THAT PREPARATION OF A PROJ ECT MANAGEMENT OR FEASIBILITY REPORT, ESPECIALLY WHERE IT IS INCURRED IN CONNECTION WITH AN EXISTING BUSINESS, CONSTITUTES REVENUE EXPENDITURE. LD. COUNSEL, PLA CING RELIANCE ON VARIOUS DECISIONS IN HIS FAVOUR, DREW O UR ATTENTION ON THE PROPOSITIONS HELD IN THE DECISIONS OF DCIT VS ASSAM ASBESTOS LTD 263 ITR 357, ITO VS JACOB PACADI YIL 43 ITD 459, USHA ALLOYS AND STEELS LTD VS DCLT 55 ITD 418 AND KESORAM LNDSUTREIS AND COTTON MILLS LTD VS CIT 196 ITR 845. IT WAS SUBMITTED THAT IN EMPIRE JUTE CO. LTD. VS CI T, 124 ITR 1, THE SUPREME COURT HELD THAT THERE MIGHT BE C ASES WHERE EXPENDITURE EVEN IF INCURRED FOR OBTAINING AN ADVANTAGE OF ENDURING BENEFIT, WOULD BE ON REVENUE ACCOUNT, AND THAT WHAT IS MATERIAL IS TO CONSIDER THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE. IF THE ADVANTAGE C ONSISTS, IN MERELY FACILITATING THE ASESSEE'S TRADING OPERAT IONS WHILE KEEPING THE ASSESSEE'S CAPITAL UNTOUCHED, THE EXPEN DITURE J.P. MORGAN SERVICES 13 WOULD BE ON REVENUE ACCOUNT. 6.4. LD. COUNSEL, ADVERTING TO THE FACTS OF THIS CASE, SUBMITTED THAT THE EXPENDITURE INCURRED BY THE ASSE SSEE COMPANY ON PROJECT MANAGEMENT REPORT DID NOT BRING INTO EXISTENCE ANY ASSET OR ADVANTAGE OF AN ENDURING NAT URE AND MERELY SOUGHT TO PROVIDE THE MANAGEMENT WITH AN INS IGHT INTO INDIAN OUTSOURCING INDUSTRY SO AS TO ENABLE TH E MANAGEMENT TO CONCLUDE WHETHER IT WOULD BE ADVISABL E TO EXPAND THE BUSINESS WHILE STILL ACHIEVING THE SAME OR BETTER LEVELS OF EFFICIENCY AND PROFITABILITY, AND HENCE T HE EXPENDITURE SHOULD BE REGARDED AS REVENUE IN NATURE . OUR ATTENTION WAS DRAWN BY HIM ON PAGES 25 TO 26 OF THE PAPER BOOK, BEING THE WRITTEN SUBMISSIONS OF THE ASSESSEE COMPANY, FILED BEFORE THE LD. CIT(A). IT WAS FINALLY SUBMITT ED THAT THE IMPUGNED EXPENSES WERE INCURRED FOR THE PURPOSE OF SAME BUSINESS, HAVING SAME MANAGEMENT AND INTERLACING OF FUNDS, AND THEREFORE, VIEWED FROM THIS ANGLE ALSO THE IMPU GNED EXPENSES WERE REVENUE IN NATURE AND WERE ALLOWABLE TO THE ASSESSEE COMPANY. 6.5. ON THE OTHER HAND, LD DR READ BEFORE US PAGE NO. 2 5 OF THE PAPER BOOK, TO ARGUE THAT PRIMA FACIE IT APPEAR S THAT EXPENSES WERE INCURRED FOR STARTING A NEW PROJECT, AND THEREFORE, THESE EXPENSES WERE CAPITAL IN NATURE AN D NOT ALLOWABLE AGAINST THE INCOME OF THE CURRENT YEAR. R ELIANCE WAS PLACED ON THE DETAILED OBSERVATIONS OF THE AO AND F INDINGS OF J.P. MORGAN SERVICES 14 THE LD. CIT(A), AND IT WAS SUBMITTED THAT THE ORDER S OF THE LOWER AUTHORITIES SHOULD BE UPHELD ON THIS ISSUE. 6.6. WE HAVE GONE THROUGH THE ARGUMENTS MADE BY BOTH TH E SIDES, ORDER OF THE LOWER AUTHORITIES, MATERIAL PLA CED BEFORE US FOR OUR CONSIDERATION AND ALSO THE JUDGMENTS RELIED BY BOTH THE PARTIES ON THIS ISSUE. FIRST OF ALL, TO REDUCE THE CONTROVERSY, WE HAVE EXAMINED WEIGHT IN THE ARGUMEN T OF LD DR THAT PRIMA FACIE IT APPEARS THAT IMPUGNED EXPENS ES HAVE BEEN INCURRED FOR STARTING NEW PROJECT, AND THIS WA S THE MAIN REASON TO TREAT THE IMPUGNED EXPENSES AS CAPITAL IN NATURE. IN THIS REGARD, IT IS NOTED BY US THAT THE UNDISPUTED FACTS ARE THAT THERE WAS A COMPLETED INTERCONNECTION, INTERLACING AND INTERLOCKING OF THE FUNDS AND COMMON MANAGEMENT IN THE EXISTING BUSINESS AND THE PROPOSED NEW PROJECT OF T HE ASSESSEE COMPANY. ALTHOUGH, THE ASSESSEES STAND IS THAT THERE WAS NO NEW BUSINESS UNDER CONSIDERATION, BUT IT WAS EXPANSION OF THE EXISTING BUSINESS ONLY, THAT WAS U NDER CONSIDERATION. ON THIS ISSUE, UNDER THESE FACTS, TH E LAW LAID DOWN IN THE JUDGMENTS RELIED UPON BY THE LD. COUNSE L, AS MENTIONED IN THE ABOVE PARA, IS CLEAR. THE VIEW, EM ERGING FROM THE PERUSAL OF THESE JUDGMENTS, IS THAT UNDER THESE CIRCUMSTANCES, THIS KIND OF EXPENDITURE INCURRED BY THE ASSESSEE WOULD BE REVENUE IN NATURE BECAUSE THE ASS ESSEE IS ALREADY IN THE BUSINESS AND HAD ADDED NEW LINES TO THE BUSINESS. IF THE ASSESSEE OBTAINS A PROJECT REPORT FOR RUNNING BUSINESS MORE PROFITABLY, THEN THE EXPENSES WOULD F ALL IN REVENUE FIELD AND NOT IN THE CAPITAL FIELD, THOUGH BENEFIT MIGHT J.P. MORGAN SERVICES 15 BE ENDURING IN NATURE. IN VARIOUS CASES, IT HAS BEE N HELD BY THE COURTS THAT EXPENSES INCURRED IN CONNECTION WIT H PREPARATION OF SURVEY AND FEASIBILITY REPORT AND VA RIOUS TECHNICAL SERVICES FOR SETTING UP A PROJECT WOULD B E REVENUE IN NATURE, SO LONG AS THE ASSESSEE IS ALREADY IN BUSIN ESS. IN THE CASE OF ASSAM ASBESTOS LTD 263 ITR 357, EXPENSES IN CURRED BY THE ASSESSEE IN CONNECTION WITH SURVEY AND FEASI BILITY REPORT TO ESTABLISH A MINI CEMENT PLANT TO FEED ITS ASBESTOS UNIT WERE HELD AS REVENUE EXPENSES BY HON BLE GAUHATI HIGH COURT, AS IT DID NOT BRING INTO EXISTE NCE OF NEW FIXED CAPITAL. SIMILARLY, IN ITO VS. JACOB PACADIYI L 43 ITD 459, EXPENSE IN CONNECTION WITH PROJECT REPORT WAS HELD TO BE REVENUE AS IT WAS INTENDED TO BRING ABOUT EFFICIENC Y IN BUSINESS. IN USHA ALLOYS AND STEELS LTD VS DCLT 55 ITD 418, EXPENSES IN CONNECTION WITH FEASIBILITY REPORT REGA RDING INSTALLING A CAPTIVE POWER STATION WAS HELD REVENUE AS THE REPORT BY ITSELF DID NOT BRING INTO EXISTENCE THE P OWER PLANT. IN KESORAM INDUSTRIES AND COTTON MILLS LTD V. CIT 196 ITR 845, LEGAL AND OTHER EXPENSES INCURRED IN CONNECTION WIT H PROPOSED CEMENT FACTORY PROJECT, WERE FOUND TO BE E XPENSES PERTAINING TO EXPLORING THE FEASIBILITY OF EXPANDIN G OR EXTENDING THE EXISTING BUSINESS AND WERE THEREFORE HELD TO BE ALLOWABLE DEDUCTION. 6.7. NOW, WE SHALL DEAL WITH REASONING OF LD CIT(A) TO TREAT THESE EXPENSES AS CAPITAL IN NATURE AND HIS OBJECTI ONS IN ACCEPTING THE CLAIM OF THE ASSESSEE FOR TREATING TH EM AS REVENUE IN NATURE. FOR THIS PURPOSE, WE HAVE FURTHE R ANALYSED, J.P. MORGAN SERVICES 16 SOME MORE FATCS WITH RESPECT TO NATURE OF THE EXPEN SES INCURRED, SO AS TO DETERMINE PRECISELY THEIR TRUE N ATURE, BEFORE WE CAN HOLD THAT WHETHER THESE WOULD FALL IN REVENU E FIELD OR IN CAPITAL FIELD. IT IS SEEN THAT THE ASSESSEE COMP ANY IS IN THE BUSINESS OF RENDERING IT ENABLED SERVICES AND SOFTW ARE DEVELOPMENT SERVICES TO THE JP MARGAN CHASE GROUP E NTITIES WORLDWIDE IN RESPECT OF VARIOUS LINES OF BUSINESS O F JP MARGAN SHORES GROUP. THE PROJECT MANAGEMENT STUDY WAS UNDE RTAKEN BY THE CONSULTANTS MCKINSAY WHO WERE ENGAGED BY THE ASSESSEE COMPANY, FOR PREPARATION OF PROGRAMME MANA GEMENT METHODOLOGY AND PRIMARY STRATEGIC ROAD MAP, HIGHLIG HTING THE POTENTIAL RISKS AND REWARDS OF SIGNIFICANTLY INCREA SING OPERATION VOLUMES OF THE ASSESSEE IN SUBSEQUENT YEA RS. IT WAS SUBMITTED TO US THAT, IN NUTSHELL, THE OBJECT OF OB TAINING THE AFORESAID STUDY REPORT WAS TO ENABLE THE ASSESSEE C OMPANY TO UNDERSTAND WHETHER IT WOULD BE BENEFICIAL TO STEP U P THE OPERATIONS OR TO CONTINUE OPERATING AT THE SAME LEV ELS. IN OUR CONSIDERED VIEW, UNDOUBTEDLY, OBJECTIVE OF THE STUD Y REPORT WAS TO PROVIDE EFFICIENT AND OPERATIONAL ADVANTAGE TO THE ASSESSEE IN CARRYING OUT ITS BUSINESS ACTIVITIES. W ITH THE HELP OF THIS REPORT THE ASSESSEE COMPANY AIMED TO INCREA SE ITS EFFICIENCY IN DAY TO DAY RUNNING OF THE BUSINESS. T HUS, ON THESE FACTS, LD. CIT(A) IS ALSO AT CONCURRENCE WITH US. BUT LD. CIT(A) HAS TREATED THE IMPUGNED EXPENSES AS CAPITAL EXPENSES ON THE GROUND THAT THE PROJECT MANAGEMENT STUDY WAS INTENDED TO DRASTICALLY ALTER ASSESSEES LEVEL OF A CTIVITY IN INDIA WITH A VIEW OF TAKING ADVANTAGE OF BUSINESS OPPORTU NITY AVAILABLE IN INDIA, WHICH WOULD IN TURN MEAN THAT T HE NATURE J.P. MORGAN SERVICES 17 OF ADVANTAGES WHICH ASSESSEE WOULD DERIVE, WOULD BE ENDURING IN NATURE, AND THEREFORE, EXPENSES OF PROJECT MANAG EMENT STUDY SHOULD BE TREATED AS CAPITAL EXPENDITURE. IN OUR VIEW, HERE AT THIS STAGE, WHILE DRAWING CONCLUSION, LD. C IT(A) HAS GONE WRONG, IN APPRECIATING THE CORRECT LEGAL POSIT ION. THE FACTS WERE ANALYSED BY THE LD. CIT(A) IN THE RIGHT CONTEXT. BUT, WHAT IS TO BE SEEN IS THAT UNDER THE INCOME TAX LAW , WHETHER SIMPLY BECAUSE IF AN EXPENSE WOULD PROVIDE BENEFITS OF ENDURING NATURE TO THE ASSESSEE, SHALL MAKE THE EXP ENSE AS CAPITAL IN NATURE. IN OUR VIEW, CORRECT POSITION OF LAW IS NOT LIKE THAT. IF AN EXPENSE CAN BE TREATED AS CAPITAL EXPEN SE MERELY ON THE BASIS OF GETTING THE BENEFITS OF ENDURING NA TURE FROM THE SAID EXPENSE, THEN VIRTUALLY EACH AND EVERY EXP ENSE CAN BE PLACED IN THE CATEGORY OF CAPITAL EXPENSES. LET US TAKE EXAMPLE OF EXPENSES INCURRED IN THE FORM OF PAYMENT S MADE ON THE ACCOUNT OF SALARY TO THE EMPLOYEES OR EXPENS ES INCURRED ON TRAINING OF THE EMPLOYEES. IN SUCH A SI TUATION, AFTER GETTING THE TRAINING, THE EMPLOYEES MAY PROVI DE USEFUL CONTRIBUTION TO ITS EMPLOYER-ORGANIZATION IN THE LO NGER PERIOD, THEREBY PROVIDING BENEFITS OF ENDURING NATURE. WE C AN TAKE ANOTHER EXAMPLE OF EXPENSES INCURRED ON ADVERTISEME NT; THESE ALSO PROVIDE BENEFITS OF ENDURING NATURE IN THE LON GER TERM. THERE CAN BE NUMEROUS OTHER EXAMPLES OF SUCH EXPENS ES. BUT, NONE OF THESE EXPENSES ARE CAGEGORISED AS CAPI TAL IN NATURE, AND THESE ARE ALLOWED AS REVENUE NATURE EXP ENSES BY THE DEPARTMENT. THEREFORE, MERELY BECAUSE THE EXPEN DITURE PROVIDES BENEFITS OF ENDURING NATURE, SHOULD NOT, I PSO FACTO, MAKE THAT EXPENDITURE AS CAPITAL IN NATURE. IN OTHE R WORDS, J.P. MORGAN SERVICES 18 BENEFITS OF ENDURING NATURE IS NOT THE SOLE FACTO R TO CATEGORISE AN EXPENSE AS CAPITAL EXPENSE. IN SUPPORT OF THE VI EW TAKEN BY US, WE CAN TAKE SUPPORT FROM THE JUDGMENT OF HONBL E SUPREME COURT IN THE CASE OF EMPIRE JUTE CO. LTD. V S CIT 124 ITR 1. IN OUR CONSIDERED OPINION, BEFORE THE EXPEND ITURE CAN BE PUT INTO CAPITAL FIELD, IT HAS TO PASS THE TWIN TESTS I.E. ONE - THE EXPENSE SHOULD PROVIDE BENEFIT OF ENDURING NATU RE, AND TWO- THE EXPENSE SHOULD GIVE RISE TO CREATION OF A CAPI TAL ASSET. UNLESS BOTH THE INGREDIENTS ARE PRESENT, CUMULATIVELY , THE EXPENSE CANNOT BE PUT INTO THE CAPITAL FIELD. 6.8. COMING BACK TO THE FACTS OF THE CASE; THE EXPENDIT URE UNDER CONSIDERATION, IN OUR CONSIDERED VIEW, DID NO T GIVE RISE TO CREATION OF A CAPITAL ASSET. IT WOULD, AT THE MO ST, GIVE OPERATIONAL EFFICIENCY TO THE ASSESSEE COMPANY. THE ASSESSEE COMPANY IS ALREADY IN BUSINESS. THE LD. CIT(A) HAS ALSO ACCEPTED THESE FACTS CORRECTLY. THE ONLY OBJECTION OF LD. CIT(A) THAT PROJECT MANAGEMENT STUDY IS INTENDED TO DRASTI CALLY ALTER THE ASSESSEE LEVEL OF ACTIVITIES IN INDIA AND THERE FORE, THESE EXPENSES SHOULD BE TREATED AS CAPITAL IN NATURE, IN OUR VIEW IS NOT ACCEPTABLE IN THE EYES OF LAW, ESPECIALLY IN TH E GIVEN FACTS AND CIRCUMSTANCES OF THIS CASE. THEREFORE, KEEPING IN VIEW THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE JUDICIA L PRONOUNCEMENTS, AS WERE RELIED UPON BY THE LD. COUN SEL IN THE SUBMISSIONS MADE BEFORE LD. CIT(A) AND BEFORE U S, WE HOLD THAT THE EXPENSES INCURRED BY THE ASSESSEE FOR AN AMOUNT OF RS.4.21 CRORES IN RESPECT OF PROJECT MANA GEMENT STUDY, ARE REVENUE IN NATURE. DISALLOWANCE MADE BY THE AO IN J.P. MORGAN SERVICES 19 THIS REGARD IS DELETED. THUS, THE GROUND RAISED BY THE ASSESSEE IS ALLOWED. NOW, WE TAKE UP ITA NO.5130/M/2011 FOR A.Y.2003-04: 7. IN THIS APPEAL, REVENUE HAS RAISED, EFFECTIVELY, F OLLOWING GROUNDS OF APPEAL: 1.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) ERRED IN HOLDING EXPENDITURE OF RS.1,79,00,000/- AS REVENUE IN NATURE, WITHOUT APPRECIATING THE FACT THAT THE EXPENDITURE WAS ADMITTEDLY INCURRED BY THE ASSESSEE FOR ENDURING BENEFIT AND HENCE THE A.O. RIGHTLY TREATED THE SAME AS CAPITAL IN NATURE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) ERRED IN HOLDING EXPENDITURE RELATI NG TO SETTING UP NEW SERVICE LINES AMOUNTING TO RS.75,99,000/- AS REVENUE IN NATURE, WITHOUT APPRECIATING THE FACT THAT THE EXPENDITURE WOULD GI VE THE ASSESSEE ENDURING BENEFIT AND HENCE THE A.O. RIGHTL Y TREATED THE SAME AS CAPITAL IN NATURE. 8. GROUND NO.1: IN THIS GROUND, REVENUE HAS CHALLENGED THE ACTION OF LD. CIT(A) IN TREATING EXPENSES OF RS .1.79 CRORES AS REVENUE IN NATURE. 8.1. IT WAS OBSERVED BY THE AO IN THE ASSESSMENT PROCEED INGS THAT ASSESSEE HAS DEBITED A SUM OF RS. 1.79 CRORES AS COST J.P. MORGAN SERVICES 20 INCURRED IN CONNECTION WITH IDLE CAPACITY. WITH REG ARD TO THE JUSTIFICATION OF THIS CLAIM, IT WAS EXPLAINED BY TH E ASSESSEE TO THE AO THAT IT HAS BEEN IN STAGE OF CONTINUOUS EXPA NSION SINCE THE COMMENCEMENT OF ITS OPERATIONS AND HAD PLANNED ITS OPERATIONS AND INFRASTRUCTURE IN A MANNER SO AS TO TAKE INTO ACCOUNT THE ANTICIPATED EXPANSION PLANS. IT WAS FURTHER SUBMITTED THAT IT INCURRED VARIOUS COSTS IN THE NATURE OF RENTAL EXPENSES, FACILITY MANAGEMENT, DEPRECIATION ON LEASEHOLD AND FURNITURE AND FIXTURE , UTILITIES COSTS AND REPAIRS & MAINTENANCE FOR THE PURPOSE OF ITS BUSINESS. THE ASSESSEE COMPANY ALSO SUBMITTED T HAT THESE BEING ROUTINE BUSINESS EXPENSES OF THE COMPAN Y, WERER ACCOUNTED UNDER THE RESPECTIVE HEADS VIZ. REN T, REPAIRS AND MAINTENANCE ETC. HOWEVER, AS PARTS OF THE PREMI SES WERE VACANT FOR A PERIOD OF TIME, THE ABOVE COSTS IN THI S REGARD COULD NOT BE RECOVERED BY THE ASSESSEE FROM ITS CLI ENTS. IT WAS FURTHER CLARIFIED THAT THESE COSTS WERE INCURRE D IN CONNECTION WITH ANTICIPATED EXPANSION PLANS. HOWEVE R, AS OBSERVED BY THE AO, THE ASSESSEE COMPANY COULD NOT PRODUCE ANY EVIDENCES IN SUPPORT OF THE FACT THAT THESE PREMISES WERE EMPTY AND NOT UTILIZED FOR THE PURPOS E CARRYING OUT ANY ACTIVITIES TOWARDS THE WORK PERTAI NING TO CLIENTS. IT WAS ALSO OBSERVED BY HIM THAT THE COMPA NY WAS AT THE EXPANSION STAGE, AND THAT IT HAD GOT SOM E ANTICIPATED EXPANSION PLAN. IN VIEW OF THESE FACTS, IT WAS HELD BY THE AO THAT FIRSTLY THE EXPENSES DO NOT PAR TAKE THE NATURE OF REVENUE EXPENSES SINCE IT COULD NOT B E ESTABLISHED THAT THE EXPENSES PERTAIN TO THE ASSESS EE'S J.P. MORGAN SERVICES 21 BUSINESS, AND THEREFORE THESE SHOULD HAVE BEEN CHAR GED TO THE CLIENTS. SECONDLY, WITHOUT PREJUDICE TO THE ABO VE, AS CONFIRMED BY THE ASSESSEE ALSO, THE ASSESSEE COMPAN Y WAS IN THE EXPANSION STAGE, AND THEREFORE, VIEWD FROM T HIS ANGLE ALSO, THESE WERE CAPITAL EXPENDITURE AND NOT REVENU E. AS PER AO, THE EXPENSES ON THE EXPANSION OF THE COMPANY WE RE GOING TO FETCH AN ENDURING BENEFIT TO THE ASSESSEE AND ACCORDINGLY BY NO STRETCH OF IMAGINATION, THESE EXP ENSES COULD FALL UNDER THE DEFINITION OF REVENUE EXPENSES . IT WAS ACCORDINGLY HELD THAT, THESE EXPENSES WERE NOT PERT AINING TO BUSINESS OF THE ASSESSEE AND THESE WERE CAPITAL IN NATURE, AND THEREFORE THESE WERE DISALLOWED AND ADDED TO TH E TOTAL INCOME OF THE ASSESSEE COMPANY. 8.2. BEING AGGRIEVED, THE ASSESSEE CONTESTED THE MATTER BEFORE LD. CIT(A). IT WAS SUBMITTED THAT THE ASSESSEE WHIL E SETTING UP UNIT-II, HAD PLANNED ITS OPERATION AND INFRASTRU CTURE IN A MANNER TAKING INTO ACCOUNT THE GROWTH OF THE BUSI NESS AND ANTICIPATED EXPANSION PLANS. HOWEVER, BEING THE INITIAL YEARS OF OPERATION, SOME OF THE FACILITIES REMAINED UNUTILIZED FOR VARIOUS REASONS. ALL THE FACILITIES, ALTHOUGH NOT FULLY UTILIZED, WERE NEVERTHELESS UTILIZED FOR THE PURPOSE OF BUSINESS. THE ASSESSEE, FOR SERVICES RENDERED TO ITS OVERSEAS ENTITIES, RECOVERS ITS FEES ON THE BASIS O F COST INCURRED IN RENDERING SERVICES PLUS AN APPROPRIATE MARK UP, AND KEEPING IN VIEW THE FACT THAT THE ASSESSEE WAS IN ITS INITIAL PHASE OF BUSINESS, IT COULD NOT NATURALLY A CHIEVE FULL CAPACITY OF ITS OPERATIONS. THE OPERATING COST S IN J.P. MORGAN SERVICES 22 RESPECT OF THE ENTIRE PREMISES WERE REQUIRED TO BE INCURRED. THESE WERE LEGITIMATE BUSINESS EXPENDITUR E, AND THEREFORE ALLOWABLE AS DEDUCTION U/S 30 OR SECTION 37(1). RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS:- I)VIJAY INTERNATIONAL VS. ACIT 253 ITR 26 II)CIT VS. WESTERN INDIA SEA FOOD (F) LTD. 199 ITR 77 III) JUDERCHAND HARISAM VS.CIT 23 ITR 437 IV) CIT VS. MALAYALAM PLANTATIONS 53 ITR 140 8.3. IN VIEW OF THE SUBMISSIONS OF THE ASSESSEE AND CAS E LAWS RELIED UPON THEREIN, LD. CIT(A) HELD THAT THESE EXP ENSES WERE REVENUE IN THE NATURE AND WERE INCURRED FOR THE PUR POSE OF BUSINESS, AND ACCORDINGLY, ADDITION MADE BY THE AO WAS DELETED BY HIM. 8.4. WE HAVE GONE THROUGH SUBMISSIONS MADE BY BOTH THE SIDES VERY CAREFULLY AND THE ORDERS OF LOWER AUTHOR ITIES AND MATERIAL PLACES BEFORE US. IT IS NOTED BY US THAT LD CIT(A) HAS RIGHTLY OBSERVED THAT THE AO HAS NOT QUESTIONED THE REVENUE NATURE OF THESE EXPENDITURE BUT HELD THAT AS PART O F EXPENDITURE HAS BEEN INCURRED FOR UNUTILIZED SPACE, IT HAD TO BE DISALLOWED AS CAPITAL IN NATURE. THE ISSUE CROPP ED UP ONLY BECAUSE THE ASSESSEE HAD FURNISHED THE DETAILS OF E XPENDITURE TO TPO TO DETERMINE THE APPROPRIATE TRANSFER PRICE IN ITS TRANSACTION WITH FOREIGN ASSOCIATES AND THE TPO HAD REQUIRED THE AO TO DETERMINE THE NATURE OF SOME OF THE EXPENSES. THE ASSESSEE BEING IN INITIAL YEARS OF OP ERATIONS, J.P. MORGAN SERVICES 23 WAS IN EXPANSION MODE AND NECESSARILY HAD TO TAKE O N LEASE EXTRA SPACE ANTICIPATING BUSINESS IN FUTURE. IT APP EARS THAT ANTICIPATED BUSINESS TOOK TIME WHILE THE ASSES SEE HAD TO INCUR THE EXPENDITURE WHICH IT HAD COMMITTED . IN OUR VIEW, LD CIT(A) IS LEGALLY AND FACTUALLY CORREC T IN HOLDING THAT THE FACT THAT SOME SPACE, WHICH THE ASSESSEE HAD TAKEN ON LEASE, REMAINED UNUTILIZED, D OES NOT ALTER THE NATURE OF EXPENSES IT HAD INCURRED. W E AGREE WITH THE FINDINGS OF LD CIT(A) THAT THE NATURE OF E XPENSES IS REVENUE AND HAVE BEEN INCURRED FOR THE PURPOSE O F BUSINESS, AND THEREFORE, THE CONCLUSION OF THE AO T HAT EXPENSES PERTAINING TO UNUTILIZED SPACE WAS CAPITAL IN NATURE, IS NOT CORRECT. 8.5. IT IS FURTHER NOTED BY US THAT IF WE GO BY THE PRI NCIPLE OF TWIN-TESTS, AS WAS DISCUSSED BY US IN PARA 6.7. OF THIS ORDER WHILE DECIDING APPEAL OF THE ASSESSEE, WE FIND THAT THESE EXPENSES CANNOT BE TREATED AS CAPITAL IN NATURE, AT ALL. THEREFORE, IN VIEW OF THE DETAILED REASONING AS GIV EN BY US IN PARA 6.7. OF THIS ORDER, FINDINGS OF LD. CIT(A), THE FACTS A ND CIRCUMSTANCES OF THIS CASE AND WELL SETTLED POSITIO N OF LAW, IT IS HELD THAT THE AMOUNT OF RS.1.79 CRORE BEING THE EXP ENSES INCURRED BY THE ASSESSEE IS REVENUE IN NATURE AND L D. CIT(A) HAS RIGHTLY DELETED THE DISALLOWANCE MADE BY THE AO . NO INTERFERENCE IS CALLED FOR IN THE ORDER OF LD. CIT( A) AND THE SAME IS UPHELD, AND THEREFORE GROUND NO.1 OF REVENU ES APPEAL IS DISMISSED. J.P. MORGAN SERVICES 24 9. GROUND NO.2: IN THIS GROUND, THE REVENUE HAS CHALLENGED THE ACTION OF LD. CIT(A) IN TREATING THE EXPENSES R ELATING TO SETTING UP OF NEW SERVICE LINES, AMOUNTING TO RS.75 .99 LACS AS REVENUE IN NATURE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTED BY THE AO THAT ASSESSEE H AD DEBITED AN AMOUNT OF RS.75.99 LACS ON ACCOUNT OF NEW SERVIC ES LINES COSTS. IN RESPONSE TO THE QUERY RAISED BY THE AO, T HE ASSESSEE COMPANY EXPLAINED THAT THE ASSSSEE COMPANY HAS BEEN IN A STAGE OF CONTINUOUS EXPANSION SINCE ITS INCORPORATI ON. IT HAS BEEN ADDING VARIOUS SERVICES LINES TO ITS BUSIN ESS FROM TIME TO TIME. DURING THE PREVIOUS YEAR RELEVAN T TO THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESS EE COMPANY ADDED FOLLOWING THREE NEW SERVICE LINES IN ADDITION TO ITS EXISTING SERVICE LINES VIZ: 1. COMMERCIAL LOAN SERVICES 2. PROVISION OF SERVICES IN RELATION TO BROKERAGE 3. CALL CENTRE SERVICES THE COMPANY HAD INCURRED VARIOUS COSTS IN RENDERING SERVICES TO ITS CLIENTS IN RELATION TO THE ABOVE TH REE SERVICE LINES. AS PER THE BILLING CYCLE OF THE COMPANY, TYP ICALLY THE COST INCURRED BY IT IN RENDERING SERVICES FOR A NEW SERVICE LINE IS RECOVERED FROM ITS CLIENTS TWO TO THREE MONTHS L ATER AND THE EXPENSES WERE BOOKED DURING THE CURRENT YEAR. THE F EES IN THIS REGARD WERE DUE TO COMPANY IN THE SUBSEQUENT F.Y. I .E. DURING THE YEAR ENDED MARCH 31, 2004. IN VIEW OF THESE FAC TS, IT WAS OBSERVED BY THE AO THAT THE ASSESSEE COMPANY HAS AD DED THREE NEW DIFFERENT SERVICE LINES IN ITS OWN BUSINE SS, AND SINCE ANY NEW SERVICES INTRODUCED BY THE COMPANY IS A J.P. MORGAN SERVICES 25 NEW VENTURE IN ITSELF, AND THEREFORE THE EXPENSES I NCURRED FOR SETTING-UP THE NEW VENTURE ARE NOTHING BUT CAPI TAL EXPENDITURE, AND ACCORDINGLY THIS AMOUNT WAS TREATE D AS CAPITAL EXPENDITURE AND ADDED BACK TO THE TOTAL INC OME OF THE ASSESSEE BY THE AO. 9.1 . BEING AGGRIEVED, THE ASSESSEE CONTESTED THIS MATT ER BEFORE LD. CIT(A), WHEREIN IT WAS SUBMITTED THAT THE ASSES SEE COMPANY WAS ENGAGED IN RENDERING THE IT ENABLED SER VICES TO JPMC GROUP. IT ASSIGNS A PARTICULAR TEAM TO REND ER PARTICULAR SUPPORT SERVICES. THE PROVISION OF A NEW TYPE OF IT ENABLED SERVICE TO A PARTICULAR CLIENT ENTAILS F ORMATION OF A GROUP CONSISTING OF STAFF WITH SKILL SETS COMMENSURATE WITH THE REQUIREMENT OF THE PARTICULAR CLIENT. THE TEAM ASSIGNED TO RENDER THE SERVICES WO ULD BE FORMED EITHER OUT OF THE EXISTING STAFF OR NEW EMPL OYEES BEING HIRED FOR THE PURPOSE. IN EITHER CASE, THE SE RVICES RENDERED BY THE CLIENT CONTINUE TO REMAIN A NEW VEN TURE. THE INHERENT NATURE OF THE IT ENABLED SERVICE CONSI STS OF RECEIPT OF DATA, PROCESSING THE SAME AND DELIVERING THE PROCESSED DATA TO THE CLIENT. THESE ACTIVITIES ARE CARRIED OUT USING THE COMPUTERS, LEASED LINES AND TECHNOLOG Y. IT WAS SUBMITTED THAT IN VIEW OF THESE FACTS, THE FORM ATION OF NEW TEAMS DOES NOT MEAN THAT THE ASSESSEE HAD ENTER ED INTO A NEW VENTURE. IN THE YEAR UNDER CONSIDERATION , THE ASSESSEE WAS ENGAGED IN RENDERING 17 TYPES OF IT EN ABLED SERVICES ( INCLUDING THE THREE NEW LINES DISCUSSED ABOVE), FROM THE COMMON LOCATION. ALL THE LINES OF BUSINESS WERE J.P. MORGAN SERVICES 26 UNDER COMMON CONTROL OF THE MANAGEMENT. THE ASSETS AND INFRASTRUCTURE EMPLOYED FOR THE SERVICE LINES WERE COMMON, AND ALL THESE DIFFERENT LINES OF BUSINESS CONSTITUT E ONE INTEGRATED BUSINESS OF RENDERING IT ENABLED SERVICE S. THE ASSESSEE PLACED RELIANCE ON VARIOUS DECISIONS, WHIC H WERE CITED IN ITS SUPPORT TO NARRATE THE PRINCIPLES ON W HICH THE DIFFERENT VENTURES UNDERTAKEN BY AN ASSESSEE MAY BE VIEWED AS SAME BUSINESS. TAKING HELP FROM THESE DECISIONS, I T WAS ARGUED THAT THE NEW LINES WERE NOT NEW VENTURE OR BUSINESS COMMENCED BY THE ASSESSEE, BUT MERELY A NEW LINE OF BUSINESS WITHIN THE REALM OF THE IT ENABLED SERVICES RENDERED BY IT TO ITS GROUP ENTITIES LOCATED WORLDWIDE, DUE TO THE FOLLOWING R EASONS: A) THE SUPPORT SERVICES RENDERED UNDER THE COMMERCI AL LOAN SEGMENT, BROKERAGE SEGMENT AND CALL CENTRE SERVICE LINE OF BUSINESS WERE ACTUALLY PART OF BSSINESS OF THE ASSE SSEE SINCE COMMENCEMENT OF ITS OPERATIONS, B) THE GENERAL MANAGEMENT AND CONTROL OVERLOOKING T HE FUNCTIONING OF THESE LINES OF BUSINESS REMAINS THE SAME FOR ALL LINES OF BUSINESS. C) NO FRESH CAPITAL HAS BEEN BROUGHT INTO THE BUSIN ESS FOR COMMENCEMENT OF THESE NEW LINES OF BUSINESS. D) THE PROFITS FROM THESE LINES OF BUSINESS ARE CON SOLIDATED ALONG WITH OTHER LINES OF BUSINESS AND REPORTED IN THE FI NANCIAL STATEMENTS WITHOUT BIFURCATION INTO VARIOUS LINES O F ACTIVITIES. E) THE BASIC FACILITIES PROVIDED FOR THESE NEW LINE S OF BUSINESS ARE COSTS SIMILAR TO THE COSTS REQUIRED FOR RUNNING OTH ER LINES OF BUSINESS UNDER THE IT ENABLES SERVICES F) FURTHER, THE EXPENDITURE INCURRED BY THE ASSESSE E ON THESE J.P. MORGAN SERVICES 27 NEW LINES OF BUSINESS HAVE NOT BROUGHT INTO EXISTEN CE ANY CAPITAL ASSET. IN VIEW OF THE AFORESAID FACTS, IT WAS SUBMITTED TH AT THE EXPENSES INCURRED BY THE ASSESSEE WERE EXPENSES INC URRED IN RENDERING SERVICES UNDER NEW LINES OF BUSINESS A S AGAINST EXPENSE FOR SETTING UP NEW VENTURES AS STATED BY TH E AO. THE COSTS INCURRED IN CONNECTION WITH NEW LINES OF BUSINESS WERE NOT DIFFERENT FROM COSTS INCURRED ON EXISTING LINES OF BUSINESS AND HAVE SIMILARLY BEEN RECOVERED BY THE ASSESSEE AND SHOULD QUALIFY AS DEDUCTIBLE REVENUE EXPENDITURE. IT WAS ALSO SUBMITTED THAT THE EXPENDI TURE INCURRED BY THE ASSESSEE HAVE ACTUALLY BEEN BILLED OUT IN THE SUBSEQUENT YEAR ( I.E. YEAR ENDED 31 ST MARCH, 2004) ON THE BASIS OF BILLING CYCLE OF THE ASSESSEE WITH AN APPROPRIATE MARKUP ON THE COSTS INCURRED. IN VIEW OF THE ABOVE, IT WAS ARGUED THAT THE EXPENSES IN THE NATUR E OF SALARY AND FACILITIES COSTS COULD BY NO STRETCH OF IMAGINATION BE REGARDED AS CAPITAL EXPENDITURE . 9.2. AFTER CONSIDERING DETAILED SUBMISSIONS OF THE ASSE SSEE, IT WAS FOUND BY THE LD. CIT(A) THAT THESE EXPENSES WER E REVENUE IN NATURE AND THEREFORE, DISALLOWANCE MADE BY THE A O WAS DELETED BY HIM, AFTER RECORDING DETAILED FINDINGS A ND PASSING A WELL REASONED ORDER CONSIDERING AFORESAID FACTS, AN D ENDORSING THE SUBMISSIONS OF THE ASSESSEE, ON FACTS AS WELL A S ON LAW. 9.3. BEING AGGRIEVED, THE REVENUE HAS FILED AN APPEAL B EFORE THE TRIBUNAL. J.P. MORGAN SERVICES 28 9.4 . WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE ORDERS OF LOWER AUTHORITIES AND FACTS AND CIRCUMSTA NCES OF THE CASE. IT IS NOTED BY US THAT LD. CIT(A) HAS RIGHTLY HELD THAT THE AO HAS DEALT WITH THE ISSUE PERFUNCTORILY, AND FACT UAL AND PROPER ANALYSIS OF THESE EXPENSES HAS NOT BEEN MADE BY HIM TO INQUIRE WHETHER THESE WERE INCURRED TO AC QUIRE FIXED ASSETS OR ONLY TO MEET ROUTINE EXPENSES. MORE OVER, AS PER THE DECISION OF HONBLE SUPREME COURT CITED BY T HE ASSESSEE, OTHER RELEVANT FACTORS HAVE TO BE TAKEN I NTO ACCOUNT. THE ASSESSEE HAS STATED THAT THE THREE NEW LINES ARE IN THE NATURE OF IT ENABLED SERVICES, WHICH IS REG ULAR BUSINESS RUN BY IT. THE CONTROL AND MANAGEMENT IS S AME FOR ALL THE 17 LINES, WHICH CONSTITUTES THE BUSINES S ACTIVITIES. NO FRESH CAPITAL HAS BEEN SOURCED TO CO MMENCE THESE NEW ACTIVITIES AND THE PROFITS FROM ALL THE A CTIVITIES ARE CONSOLIDATED AND REPORTED TOGETHER. IT IS WORTH NOTING THAT, AS WAS SUBMITTED BY THE ASSESSEE COMPANY, ALL THESE EXPENSES HAVE BEEN RECOVERED SUBSEQUENTLY IN THE NO RMAL BILLING CYCLE OF THE ASSESSEE. THE AO HAS NOT BROUG HT ANYTHING ON RECORD TO CONTROVERT THESE SUBMISSIONS. IN OUR CONSIDERED VIEW, THE FINDINGS OF LD. CIT(A) ARE ALS O WELL REASONED AND IN ACCORDANCE WITH LAW AND FACTS, NO INTERFERENCE IS CALLED FOR THEREIN, AND THEREFORE, SAME ARE UPHELD. THUS, GROUND NO.2 OF REVENUES APPEAL IS DI SMISSED. J.P. MORGAN SERVICES 29 10. IN THE RESULT, CROSS OBJECTION FILED BY THE ASSESS EE IS DISMISSED AND ASSESSEES APPEAL IS PARTLY ALLOWED A ND REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH OCTOBER, 2015. SD/- (AMIT SHUKLA ) SD/- (ASHWANI TANEJA) ! / JUDICIAL MEMBER ' ! / ACCOUNTANT MEMBER MUMBAI; # DATED : 30/10/2015 CTX? P.S/. .. #$%&'(')% / COPY OF THE ORDER FORWARDED TO : 1. % &' / THE APPELLANT 2. ()&' / THE RESPONDENT. 3. * * ( % ) / THE CIT, MUMBAI. 4. * * / CIT(A)- , MUMBAI 5. -./ (01 , * % 012 , / DR, ITAT, MUMBAI 6. /34 5 / GUARD FILE. / BY ORDER, )-% ( //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI