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 Tribunal found the lease premium payment qualified as business expenditure, similar to a previous year's ruling. In regards to the transfer pricing adjustment on reimbursement of expenses from Associated Enterprises, the Tribunal remitted the issue back to the AO for verification, based on a previous ruling that such reimbursements should not attract a mark-up if routed through the books.

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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 Expenditure

The 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 AEs

The 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.

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