2016 (5) TMI 426 - AT - Income Tax

ITAT Mumbai allows appeal on leasehold improvement & transfer pricing, citing revenue expenditure nature & business activity relevance.

The ITAT Mumbai partially allowed the appeal, overturning the disallowance of leasehold improvement expenditure and the addition on account of transfer ... Leasehold improvements - revenue v. capital expenditure - deductibility of repairs by tenant under section 30(a)(i) - Explanation 1 to section 32 - application to expenditure on leased premises - transfer pricing adjustment - determination of ALP and requirement of evidence of non avail/necessityLeasehold improvements - revenue v. capital expenditure - deductibility of repairs by tenant under section 30(a)(i) - Explanation 1 to section 32 - application to expenditure on leased premises - Whether expenditure described as leasehold improvements is capital in nature and correctly disallowed, or is revenue expenditure deductible as repairs when the assessee, a tenant, bore the cost. - HELD THAT: - The Tribunal examined the nature of the expenditures (interior designing, mockup materials, replacing of tiles and allied items) and found that, on the facts, they had limited useful life and were not properly characterised as capital. Reliance on Explanation 1 to section 32 was held to be inapt because that provision applies where capital expenditure is in fact incurred on a leased building; mere fact that an expense relates to a leased premises does not automatically render it capital. Section 30(a)(i) expressly allows deduction where a premises used for business is occupied by the assessee as a tenant and the assessee undertakes to bear the cost of repairs; the restriction to only 'current repairs' in section 30(a)(ii) applies to occupiers other than tenants and is not applicable here. On the material produced, the Tribunal was satisfied the expenditures were revenue in nature and allowed the claim, setting aside the Assessing Officer's disallowance and the CIT(A)'s confirmation. [Paras 5]Disallowance of leasehold improvement amounting to Rs. 8,55,485/- deleted and expenditure allowed as revenue (ground no.1 allowed).Transfer pricing adjustment - determination of ALP and requirement of evidence of non avail/necessity - Whether the transfer pricing addition made by the TPO/Assessing Officer was sustainable where the assessee produced invoices, records of technical services, site drawings and evidence of need and actual availment of services from the associated enterprise. - HELD THAT: - The Tribunal noted the matter was squarely covered by the co ordinate bench's decision in the assessee's own case for the preceding year, which had held that when the assessee's business involves highly technical services and the assessee lacked in house capability, procuring such services from the associated enterprise is an inevitable part of the business. The TPO had proceeded on the premise that the services were not needed or not actually availed, despite the assessee furnishing invoices based on hours spent by engineers, site records and comparative charges; absent contrary material, the ALP determination at nil was contrary to the evidence. Respectfully following the co ordinate bench, the Tribunal set aside the addition. [Paras 9]Transfer pricing addition of Rs. 13,49,009/- deleted (ground no.3 allowed).Final Conclusion: Appeal partly allowed: disallowance of leasehold improvement deleted and transfer pricing addition deleted; other ground (ground no.2) not pressed and dismissed as such. Issues:1. Disallowance of leasehold improvement expenditure2. Addition on account of transfer pricing adjustmentIssue 1: Disallowance of Leasehold Improvement Expenditure:The appellant challenged the disallowance of leasehold improvement expenditure of Rs. 8,55,485 by the CIT(A) under section 143(3) of the Income Tax Act, 1961 for the assessment year 2009-10. The Assessing Officer disallowed the claimed expenditure as capital expenditure under section 32, citing that the expenditure was incurred on construction, renovation, or improvement of the leased premises. The appellant argued that the expenditure was for repairs to make the premises conducive to business activity and should be allowed as a deduction under section 30(a)(i). The CIT(A) upheld the disallowance, stating that the expenditure was substantial and not akin to current repairs. However, the ITAT Mumbai, comprising Pramod Kumar AM and Pawan Singh JM, disagreed. They noted that the expenses were for interior designing, mockup materials, and repairs with limited useful life, hence qualifying as revenue expenditure. The tribunal held that the repairs were not capital in nature as per section 30(a) and deleted the disallowed amount of Rs. 8,55,485, providing relief to the assessee.Issue 2: Addition on Account of Transfer Pricing Adjustment:The appellant contested the addition of Rs. 13,49,009 on account of transfer pricing adjustment. The ITAT referred to a previous decision in the appellant's own case for the assessment year 2008-09, where technical services were availed from an associated enterprise (AE) due to the appellant's initial stage of business and lack of in-house expertise. The tribunal found that the services were essential for the business activity, and the TPO's denial of the claim was unjustified. Relying on the precedent, the ITAT allowed the appellant's claim, deleting the addition of Rs. 13,49,009. The tribunal upheld the appellant's grievance, providing relief accordingly.In conclusion, the ITAT Mumbai allowed the appeal partly, overturning the disallowance of leasehold improvement expenditure and the addition on account of transfer pricing adjustment. The judgment provided detailed reasoning for each issue, emphasizing the distinction between capital and revenue expenditure and the necessity of services for business expediency.