TaxTMI 
TaxTMI 
2014 (2) TMI 1027
X X X X Extracts X X X X
X X X X Extracts X X X X
....ovide for repairing, servicing, engine overhauling, and create necessary infrastructure such as hangers, and maintenance bays, etc., e) To promote, operate, maintain, develope, design, construct, renovate, expand all infrastructure facilities, within and outside the Airport. f) To determine appropriate rate of charges, fees & levies and collect the same from users of the Airport and Infrastructure facilities thereof." 2.1 On 4.4.2006, the assessee company entered into an Operations, Management and Development Agreement (hereinafter to be referred to as OMDA) with "AAI" with respect to aforesaid objectives of the assessee company which was created as a joint venture company (JVC) for the purpose of operating, managing, developing, designing, construction, up gradation, modernization, finance and management of the Mumbai Airport. The OMDA has an initial term of 30 years, which is extendable at the assessee's option for a further period of 30 years. 2.2 The assessee company has to perform certain aeronautical and non-aeronautical services. The payment of Annual Fees, Passenger Service Charges and various other payments are to be made to "AAI", in terms of various provisions of OMD....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the Act. Therefore, the assessee is entitled to claim depreciation. 6.1 However, the AO stated that "AAI" , in terms of "OMDA" has parted with some of its functions and entrusted to the assessee company with those functions under "OMDA" which has a life term of 30 years and at the expiry of the term; the "AAI" has all the rights to take over all rights, title and interest in all the assets of the Airport. AO has stated that the assessee company does not have an exclusive ownership over the Airport and it has been entrusted with the work of operating, maintenance and development of Airport just as a contractor for the period of 30 years and the contract terms shall be governed by the provisions of "OMDA" signed by the assessee with "AAI". "OMDA" is liable to be terminated midway if there are violations of its provisions by the assessee. "OMDA", in effect, grants rights similar to leasehold rights to the assessee for a period of 30 years. Hence, payment of upfront fee by the assessee to "AAI" is just a part of the total package of consideration to be paid and the remaining considerations are to be paid in the form of Annual Fee from year to year on the basis of revenue earned by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he decision of the Hon'ble Apex Court in the case of Sohan Lal Naraindas v. Laxmidas Raghunath Gadit (1971) 1 SCC 276, 279-280 wherein the difference between the 'lease' and 'license' was considered by their Lordships as under : "The crucial test in each case is whether the instrument is intended to create or not to create an instrument in the property the subject- matter of the agreement. If it is in fact intended to create an interest in the property it is a lease, if it does not, it is a license. In determining whether the agreement creates a lease or a license the test of exclusive possession, though not decisive, is of significance." 7.1 On behalf of assessee, it was contended that as per Article 11.1.1 in Chapter - XI, the amount of Rs.150 crores paid by assessee is one time payment and nonrefundable. Once amount is non-refundable, it implies that the same is for acquisition of rights of license to perform certain functions and not in the nature of advance lease payment as perceived by the AO. In case of advance lease payment, in the event of pre-mature termination of lease, normally the lease premium pertaining to the unexpired period of lease is to be refunded. However, i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....SC 1813, 1816) where in it was held: "....it is the creation of an interest in immovable property or right to possess it that distinguishes a lease from license. A license does not create an interest in the property to which it relates while a lease does. There is in other words transfer of a right to enjoy the property in case a lease ..." 7.2 On behalf of assessee it was further stated that the grant of right for a period of 30 years cannot act against the eligibility for depreciation and ld. CIT(A) has stated at page 19 of the impugned order that it was submitted before him as under : "......Attention was drawn to other specified intangible assets provided in clause (ii), of section 32 which are patent, trademark and copyrights. As per section 22 of the Copyright Act, 1957, copyright is registered for 60 years. Section 53 of the Patents Act, 1970, the life of patents is 20 years and as per section 25 of Trademark Act, 1999, the trademark is available for a period 10 years. Inspite of all these limitations of period, the depreciation is admittedly admissible on these intangible assets. Therefore, there is no reason to hold that the depreciation is available as the intangible a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... nature as those specified in section 32(1)(ii). The Tribunal, after considering the facts, held that the right acquired by the assessee was similar in nature to a 'license', and was therefore eligible for depreciation u/s. 32(1)(ii). 8.1. Ld. CIT(A) has stated that the definition of "intangible asset" has to be given wider meaning to include "business and commercial rights of similar nature". He has stated that the agreement between "AAI" and JVC (OMDA) opens with the preamble that AAI is desirous of granting some of its functions to the JVC. "AAI" has granted exclusive right and authority for operating , maintenance, development, design, construction, up gradation etc of Mumbai Air Port for a period of 30 years extendable by another 30 years and JVC has complete and uninterrupted control of the Airport site and the existing assets. JVC has right to sub-contract with third parties sub-lease or license the demise premises in accordance with Article 8.5.7. Upfront fee of Rs.150 crores is non-refundable. Ld. CIT(A) has further stated that the assessee has the right to create mortgage on the "Transfer Assets" for the purposes of arranging finance. The ld. CIT(A) has stated that in fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted that the payment of Rs.150 crores as upfront fee to "AAI" could not be said to acquire a license by the assessee. Therefore, AO has rightly disallowed the claim of depreciation of Rs.37.50 crores and allowed the proportionate deduction considering the total contract period of 30 years because the assessee has got right under "OMDA" to collect revenue on account of lease hold rights given to the assessee. 9.2 It is relevant to state that the AO allowed the deduction of Rs.15 crores by considering that the assessee is entitled to use the lease right for a period of 30 years on account of payment of upfront fee of Rs.150 crores and therefore the assessee is entitled to proportionate deduction. It may be stated that the said deduction as per AO should come to Rs.5 crores but the AO has mentioned in the assessment order the deduction of Rs.15 crores and made the net addition of Rs.22.50 crores out of the claim of the assessee of depreciation of Rs.37.50 corers. As per above findings of AO, the total addition should have been Rs.32.50 crores after allowing deduction of Rs.5 crores (Rs.150 crores/ 30 years). The assessee also disputed the said addition of Rs.22.50 crores before the F....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., plant or furniture. The Tribunal held that the assessee company acquired the right to claim rebate on the wharfage charges payable or to guard against the possible increase in the wharfage charges that might be necessitated by efflux of time or economic inflation considering all points together. It was held that the said expenditure gave rise to acquisition of license or other business or commercial rights which are really in the nature of "intangible assets" and are fully covered within the meaning of section 32(1)(ii) of the Act. Therefore, assessee is entitled for appropriate depreciation by treating the said expenditure as part of the block of "intangible assets". Ld AR submitted that the case of assessee is fully covered in its favour by the decision of Tribunal (supra) and accordingly the order of ld. CIT(A) may be confirmed. 10. We have carefully considers the orders of authorities below and submissions of ld. Representatives of the parties. We have also considered the relevant Articles of "OMDA" and the cases relied upon by the parties before the authorities below (supra) as well as the cases referred before us. 10.1 The assessee is a Joint Venture Company. It has enter....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... license or right to do something at the Airport premises. The Hon'ble Apex Court has held in the case of B. M. Lal (supra) that the transaction is a lease, if it grants the interest in the land and whereas it is a license if it gives a personal privilege with no interest in the land. We are of the considered view that the assessee has got the economic /commercial right under the said agreement to collect charges from the users of the Airport premises which is similar to grant of a license to the assessee. This case is similar to the case of Technoshares and Stocks Ltd and others (supra), wherein the Hon'ble Apex Court has held that a right given to member of Stock-Exchange to carry on the business at the premises of the Stock-Exchange is a business or commercial right which is akin to license in terms of section 32(1)(ii) of the Act, therefore, eligible for depreciation. Their Lordships have held that right to participate in the market is an economic and money value, itself satisfies the test of being a license. There is no dispute to the fact that the said payment of Rs.150 crores paid to "AAI" has not resulted to the assessee in the acquisition of any "tangible assets" like buil....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ating it as a capital expenditure and allowing depreciation at the rate of 10%, without considering the fact that this being the first year of operation, a major portion of the expenditure would be for modernization and expansion of the Airport, constituting capital expenditure." 12. AO has stated that the assessee incurred indirect expenses to the tune of Rs.225.22 crores. Out of the said expenditures, the assessee capitalized expenditures of Rs.21.43 crores to the project account and remaining amount of Rs.203.71 crores claimed as revenue expenditures. During the course of assessment proceedings, the AO sought details and the working of this expenditures and the basis of its apportionment between the project and operation. AO has stated that the assessee filed the details of item-wise expenditure. That the assessee also filed a copy of chart showing allocation of indirect expenses between the projects and operations. AO, taking into account the details filed by the assessee, held that the basis of apportionment of indirect expenses between revenue and capital is neither transparent nor substantiated by verifiable evidence. AO, therefore, apportioned the expenditure in the ratio ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....efore AO in relation to apportionment of expenditure between project and operations but could not give some details due to paucity of time, during the assessment proceedings. That the additional evidence now furnished is required to be taken into consideration so that no prejudice is caused. The assessee also submitted that the ratio of decisions relied upon by the AO in the remand report are not applicable and they are distinguishable, which were stated by assessee in the rejoinder. 13.2 Ld. CIT(A) after considering the submissions of the assessee stated that the assessee has rectified the mistakes by filing revised chart of the apportionment of the expenditures. Besides this, no other fault has been noticed. He has further stated that non production of evidence in the nature of invoices /vouchers, the AO never asked for invoices/vouchers during the assessment proceedings. He has further stated that the assessee submitted various details of expenditures during the assessment proceedings, vide letters dated 16.6.2009, 4.9.2009, 14.9.2009, 22.9.2009, 4.11.2009, 16.11.2009, 20.11.2009, 25.11.2009 and 30.11.2009. It is further stated that had the AO specifically asked the assessee to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on towards projects. It is difficult to understand why PF and other funds are not allocated towards projects when salary is being allocated. Hence, the AO is directed to allocate this expenditure in the ratio in which salary and bonus has been allocated by the assessee supra. Operation support cost 77,91,02,786 - 77,91,02,786 This is the same as the original chart. These are direct cost with regard to operations and hence, nothing is allocable towards projects. Even the AO has not made any disallowance in this regard. Staff welfare expenses 12,58,729 - 12,58,729 This is the same as the original chart. These are direct cost with regard to operations and hence nothing is allocable towards projects. Even the AO has not made any disallowance in this regard. Rent 1,05,87,961 45,18,000 60,69,961 This is the same as the original chart. These are direct cost with regard to operations and hence nothing is allocable towards projects. Even the AO has not made any disallowance in this regard. Rates and taxes 10,33,33,544 - 10,33,33,544 This is the same as the original chart. These are direct cost with regard to operations and hence nothing is allocable towards projects. Eve....
X X X X Extracts X X X X
X X X X Extracts X X X X
....These are direct cost with regard to operations and hence nothing is allocable towards projects. Even the AO has not made any disallowance in this regard. Hotel boarding & lodging charges 1,61,21,955 38,34,190 1,22,87,765 The AO is directed to allocate these expenses in the same ratio as traveling expenses, supra. Hospitality expenses 50,09,651 12,57,768 37,51,883 The AO is directed to allocate these expenses in the same ratio as traveling expenses, supra. Printing and stationary 74,72,284 12,24,562 62,47,722 This is the same as the original chart. These are direct cost with regard to operations and hence nothing is allocable towards projects. Even the AO has not made any disallowance in this regard. Repairs and maintenance -Buildings -Machinery -Others 13,34,74,575 5,09,25,307 79,00,855 - - - 13,34,74,575 5,09,25,307 79,00,855 The Appellant has submitted that these are repairs to the existing buildings and Plant & machinery. Details of these expenses were provided vide letter dated 16.6.2009. The AO has not pointed out any discrepancies to these details. Hence, no disallowance is called for. The addition of Rs.7,45,20,688/- is, therefore, deleted. Legal and pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs of authorities below and the submissions of ld. Representatives of the parties. We observe that the AO did not accept bifurcation/apportionment of the expenses between the revenue and capital on the ground that the assessee could not file requisite details and the same were made on adhoc basis. On the other hand, we also observe that AO has also not disputed the fact that some of the items of expenses were in the nature of capital and allocated also on adhoc basis in the ratio of 75:25 between the projects and revenue operations. We observe that the assessee filed revised chart before the First Appellate Authority for allocation of expenses. Ld CIT(A) sought remand report from the AO and also obtained reply from assessee thereon. Ld CIT(A) has mentioned specifically that assessee furnished various details of expenses during the course of assessment proceedings vide letters dated 16.6.2009, 4.9.2009, 14.9.2009, 22.9.2009, 4.11.2009, 16.11.2009, 20.11.2009, 25.11.2009 and 30.11.2009. He has further stated that AO did not ask the assessee to produce invoices/vouchers and if the same had been asked for, they could have been produced before him. We observe that the ld. CIT(A) examine....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der. He has stated that out of above expenditures of Rs.26,43,59,202/-, Rs.13 crores were paid to GVK Industries Ltd, towards Bank Guarantee Commission. It has been considered for capitalization as the same was incurred in connection with obtaining term loan for financing the capital projects of the assessee. However, in respect of rest of the expenditures, AO has stated that there is no justification. He has stated that the provisions of section 40A(2)(b) applies. Large sum of money paid towards professional fees, legal fees to GVK Airport Holding Private Limited, GVK Industries Ltd, and Novapan Inds. Ltd. have not been substantiated by assessee. He has stated that nature of professional services rendered by these parties to the assessee are not known. That the assessee has not discharged its onus to prove that it has really received any service and whether the said companies had capabilities or technical expertise to render such legal/professional assistance to the assessee during the year. AO stated that the assessee has capitalized only a sum of Rs.19,25,47,024/ under the head "Capital Work -in-Progress" (CWIP)- indirect expenses from the reimbursement made to GVK group of comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0,728/- was the amount of reimbursement of expenses incurred by GVK Power and Infrastructure Ltd for and on behalf of the assessee and the information was also given in the chart annexed to the assessee's letter dated 20.11.2009 . During the course of assessment proceedings, AO had not called for any details. Therefore, there was no occasion for the assessee to meet any such demand. Further, in respect of Rs.1,28,22,298/-, it was submitted that this amount represent professional fee paid to Novapan Industries Ltd and the complete details of the expenditure by way of a chart, bills and service tax return of assessee showing set off of service tax were duly filed before AO vide letter dated 25.11.2009. A copy of which was also furnished before ld. CIT(A). It was submitted that no additional details were called for by AO. Therefore, assessee had no occasion to furnish any additional details. 19.2 It was also contended that the AO was not justified in reducing CWIP by Rs.6,25,47,024/-. In case, AO was not satisfied with the submissions made before him and/or the details filed before him, AO ought to have at-least again exposed his mind to enable the assessee to meet with additional re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ments made to its sister concerns. This contention of the A.O. is again devoid of merit as the A.O. has not brought out any material on record to prove that the payments to sister concerns are not reasonable and excessive. This remark of the A.O. has thus no merit. I, therefore, feel that the A.O.'s action in disallowing a sum of Rs.6,25,47,024/-, from capital work in progress, and also disallowing Rs.7,18,12,178/-, claimed as revenue, can not be upheld. Accordingly, the A.O. is directed to enhance work in progress by Rs.6,25,47,024/-. The disallowance of Rs.7,18,12,178/- is also deleted. " Hence, the department is in appeal before us. 21. During the course of hearing, ld. DR submitted that he relies on the order of AO as the ld. CIT(A) deleted the aforesaid disallowance by accepting the assessee's contention. However, ld. AR supported the orders of authorities below and submitted that assessee filed relevant details before AO and same were also furnished before the ld. CIT(A). He submitted that AO did not ask for further details, hence, the same were filed before the ld. CIT(A) which he considered after seeking remand report from AO. He submitted that the order of ld. CIT(A) is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....habad High Court in the case of Himalaya Drugs Company reported in 149 CTR 260 (All), and Delhi High Court in the case of Volga Restaurant 170 CTR 206 (2006) (Del) to claim aforesaid expenditure as revenue expenditure. AO stated that in the audit report, the auditors have clearly mentioned that the above amount of Rs.10.38 have been incurred towards resurfacing and replacement of certain projects assets, which are capitalized in the books of account, but in the return filed the assessee has claimed as revenue expenditure for tax purpose. AO did not accept the contention of the assessee on the ground that the said expenditure has been incurred as integral part of overall capital expenditure for renovation, expansion and modernization of the Airport. That the assessee has already recognized these expenditures to be capital in nature and capitalized in the books of account prepared under the provisions of Companies Act. Hence, the AO did not accept the claim of the assessee that it was a revenue expenditure. AO after allowing depreciation at the rate of 10% as applicable to building, made the net addition of Rs.9,34,35,881/-. Being aggrieved, assessee filed appeal before the First App....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ayment in respect of such CWIP to the parties. He has stated that the said expenditure has been incurred towards CWIP and thus, cannot be claimed as revenue expenditure. It is in the nature of capital expenditure. Accordingly, the ld. CIT(A) has confirmed the action of AO. Hence, assessee is in further appeal before the Tribunal. 27. On behalf of assessee it was contended that the assessee capitalized the expenditure of Rs.10,38,17,646/- in its books of accounts to claim it as revenue expenditure. He submitted that details of the said expenditures are stated by ld. CIT(A) in para 3.2 (also mentioned herein above in para 26) and it could be revealed from the said details that the said expenditure was incurred not on construction of runway but to maintain already existing runway. He submitted that the said expenditure also included a part of the expenditure incurred for replacement of tiles of terminal building which was already in existence. He submitted that the ld. CIT(A) has considered it as a capital expenditure on the ground that the assessee is going to get benefit for 30 years and the assessee has also capitalized the said expenditure in its books of account. Ld. AR submitte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....effectively, while leaving capital untouched. The similar view is taken by the Hon'ble Apex Court in the case of CIT V/s Associated Cement Companies Ltd. (1988) 172 ITR 257 (SC). If the expenditure incurred does not bring into existence any new assets but only facilitate operation to ensure that the existing runway is maintained properly ensuring safety of the Aircraft or passenger and also Airport premises and no new asset has come into existence the expenditure is revenue in nature. We are of the considered view that it cannot be said that by incurring the expenditure details given hereinabove, a new asset has come into existence giving rise to the assessee of enduring benefits. There is no dispute to the fact that the said runway /Airport premises does not belong to assessee but belong to "AAI" and the assessee is required to maintain the same under "OMDA". We are of the considered view that the said expenditure has been incurred by assessee only for the purpose of carrying out its one of the object to renovate and/or repair existing runway. The Hon'ble Bombay High Court in the case of New Shorrock Spg. & Mfg. Co. Ltd. V/s CIT (1956) 30 ITR 338 (BOM.) has held that the "the expr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt and machinery and not at the rate of 10%. The ld. CIT(A) did not accept the contention of the assessee and has stated that assessee, in its computation of income has itself considered the said asset to be a building and it has only by way of note an alternative claim has been made stating that taxiways, aprons, hangar, parking bays and bridges are part of plant on which assessee is entitle for depreciation at the rate of 15%. 32. The ld. CIT(A) has held that the impugned assets which are basically structures and are in the nature of places which are used by Aircrafts for taxing, parking. Accordingly that they are not in the nature of plant. Hence, assessee is in appeal before the Tribunal. 33. During the course of hearing, ld. AR reiterated the submissions as made before the First Appellate Authority and stated that aprons, taxiways and runway are not only the structures but they are structures for specific purposes which can be considered as tools for the purpose of business of the assessee. Ld AR referred the decision of the Mumbai Bench of Tribunal in the case of National Airports Authority of India V/s CIT [2011] 134 ITD 34 (Delhi), wherein it was held that the terminal pl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....irport. Hence, the same are to be considered as part of plant and machinery. Therefore, we hold that assessee is entitled for depreciation at the rate as applicable on plant and machinery in respect of taxiways, aprons, parking bays etc. Hence, Ground No.2 of the appeal taken by assessee is allowed. 36. Ground No.3 of the appeal taken by assessee is as under : "3. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in reducing the amount debited to capital work in progress by 3,195,765 based on the argument that the appellant is unable to furnish confirmation from the vendor". 37. AO stated that the assessee made an addition of CWIP in the account of Rs.164.22 crores. The assessee has furnished party-wise details of such expenditure under different heads. AO has stated that assessee was asked to furnish confirmation in respect of some of the major contracting parties interalia in respect of L and T to verify the bonafide of the expenses booked in its name. The assessee expressed his inability to furnish the same during the hearing on 26.11.2009. AO stated that the expenditure incurred by way of payment to L&T remained unverifiable. Hence, AO did not allow....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mation with regard to L&T. Accordingly, the ld. CIT(A) has confirmed the addition made by AO. Hence, the assessee is in further appeal before the Tribunal. 41. It is relevant to state that in the assessment order, the AO has mentioned the amount in respect of L&T of Rs.31,98,450/- but in the grounds of appeal, the amount mentioned is Rs.31,95,765/-. 42. At the time of hearing, ld.AR submitted that the finding of the ld. CIT(A) is contradictory as the ld. CIT(A) itself has mentioned at pages 64-65 of the impugned order that the assessee filed additional documents before him including the confirmation of accounts for the period 1.4.2006 to 31.3.2007 relating to M/s L&T. The ld. CIT(A) has also again stated that the assessee filed confirmation of account in respect of M/s L&T for the period 1.4.2006 to 31.3.2007 at page 67 (para 7.3) of the order. He submitted that M/s L&T being Multinational Company would not meet any compromises to the benefit of the assessee. He submitted that ld. CIT(A) has confirmed the action of the AO to reduce the CWIP relating L&T merely because no reply was given to the AO in respect of notice u/s 133(6) of the Act. Ld AR submitted that the order of ld. CI....