2018 (6) TMI 506 - AT - Income Tax

Tribunal upholds lease premium as business expenditure, remits transfer pricing issue for verification

The Tribunal dismissed the revenue's appeal regarding the disallowance of lease premium as revenue expenditure, upholding the CIT(A)'s decision. The ... Lease rent payment - nature of expenditure - revenue expenditure or capital expenditure - Held that:- Following the judgement in assessee’s own case for AY 2011-12 [2017 (11) TMI 54 - ITAT HYDERABAD] wherein as held that the assessee acquired the land on lease for 33 years, the capital structure did not undergo any change. The assessee has merely acquired the facility to carry on business profitably by paying nominal lease rent. The lease rent paid by the assessee was allowable as revenue expenditure we dismissed the grounds raised by the revenue. Transfer pricing adjustment on account of reimbursement of expenses received from Associated Enterprises - Held that:- The cross objections raised by the assessee in this AY are materially identical to that of AY 2011-12 wherein as held the concept of utilizing the expertise with other independent companies are not heard of in the market nor encouraged in the normal business. Since there are no comparable cases in the market, and also it is the business decision of the assessee to share the employee cost with other sister concerns on cost to cost basis. Accordingly, the addition of markup should be deleted. For the limited purpose of verification of transaction whether the transactions are routed through books, it is remitted to the AO. - Decided in favour of assessee for statistical purposes. Issues Involved:1. Disallowance of lease premium as revenue expenditure.2. Transfer pricing adjustment on account of reimbursement of expenses received from Associated Enterprises (AEs).Issue 1: Disallowance of Lease Premium as Revenue ExpenditureThe revenue appealed against the CIT(A)'s decision to allow the lease premium of Rs. 1,77,15,937/- as revenue expenditure. The AO had disallowed this amount, treating it as capital expenditure. The CIT(A) deleted the disallowance, referencing the decision in the assessee's own case for AY 2010-11, upheld by the ITAT.The revenue argued that the CIT(A) erred in ignoring the Supreme Court decisions in Panbari Tea Ltd. and Durga Das Khanna, which held that lease rent paid is capital expenditure. The revenue also contended that the ITAT decision for AY 2010-11 was not final as it was pending before the High Court.Upon review, the Tribunal found that the issue was similar to AY 2011-12, where the lease premium paid was allowed as revenue expenditure. The Tribunal observed that the payment was for acquiring lease rights for 33 years and was non-refundable, thus qualifying as business expenditure. The Tribunal upheld the CIT(A)'s order, dismissing the revenue's grounds.Issue 2: Transfer Pricing Adjustment on Account of Reimbursement of Expenses Received from AEsThe assessee contested the CIT(A)'s confirmation of a Rs. 7,00,457/- transfer pricing adjustment. The adjustment was based on a 10% mark-up on salary recharged to AEs, which the AO/TPO included in operating revenue and cost.The assessee argued that the reimbursements were cost-to-cost and should not attract a mark-up. The CIT(A) upheld the TPO's view, stating that no independent party would render such services without a mark-up, and the reimbursements should be included in operating revenue and costs.The Tribunal referred to its decision in the assessee's case for AY 2011-12, where it held that such reimbursements, if routed through the books, should not attract a mark-up. The Tribunal remitted the issue back to the AO for verification of whether the transactions were routed through the books. If not, the TPO's adjustment would be sustained; otherwise, the mark-up should be deleted.Conclusion:The Tribunal dismissed the revenue's appeal regarding the lease premium and allowed the assessee's cross-objection for statistical purposes, remitting the transfer pricing issue back to the AO for verification.Pronounced in the open court on 8th June, 2018.