TaxTMI 
TaxTMI 
2026 (8) TMI 1334
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....the Act. The assessee has also challenged the transfer pricing adjustment relating to Management Fees of Rs. 6.23 crores paid on behalf of the assessee by EM Sporting Holdings Limited, Mauritius which is the Associated Enterprise ('AE' for short) by determining the Arm's Length Price ('ALP', for short) at Rs. Nil and, without prejudice, claims the same to be a legitimate business expenditure allowable under Section 37(1) of the Act. 3. The brief facts are that the assessee M/s Jaipur IPL Cricket Pvt. Ltd., is engaged in the business of sports and media and owns the Rajasthan Royals franchise in the Indian Premier League ('IPL', in short). The assessee was incorporated in February, 2008, after acquiring franchise rights from the Board of Control for Cricket in India (BCCI). The assessee filed its return of income dated 22.09.2009 declaring total income at Rs. Nil and the same was processed under Section 143(1) of the Act. The assessee's case was selected for scrutiny and notices under Section 143(2) and 142(1) of the Act dated 14.09.2010 and 11.01.2011 respectively were duly issued and served upon the assessee. It is observed that pursuant to a survey action under Section 133A of....
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....on and Dmitri Mascerenhas which, according to the ld. AO, was over and above their contractual remuneration. On seeking details from the assessee, it was observed that the payments were made for undertaking additional promotional activities which are required by sponsors which, according to the assessee, constituted business expenditure incurred towards commercial expediency. The Ld. AO disallowed the said expenditure on the ground that these payments were not contemplated as per the players' contracts as there was no contractual obligation to incur such expenditure. 7. The ld. AO then passed the assessment order under Section 143(3) of the Act dated 29.12.2011 determining the total income at Rs. 31,76,12,340/- after making the above-mentioned addition/disallowances. Aggrieved, the assessee was in appeal before the first appellate authority, who, vide order dated 14.03.2014, allowed the expenditure towards payment made to foreign players as promotional payments and the claim of depreciation and the transfer pricing adjustment made by the Ld. AO was upheld by the ld. CIT(A). Against the order of the ld. CIT(A), the assessee is in appeal before us on the above mentioned grounds. ....
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....o Rs. 67 Crore. The assessee submitted before the ld. AO that the acquisition of franchise rights was complete on the date of execution of the agreement and the deferred payment schedule merely represented the mode of discharging the purchase consideration and, further, contended that the expression 'actual cost' under Section 43(1) of the Act refers to the total consideration incurred for acquiring the asset and not merely the amount actually paid during a particular previous year. The assessee further reiterated that the assessee became the beneficial owner of the franchise rights from the inception where it enjoyed complete commercial exploitation of the franchise, earned all income arising therefrom and was, therefore, entitled to entire claim of depreciation on the total contractual cost. 10. Though the ld. AO agreed upon the fact that the franchise rights constituted intangible asset in the nature of 'franchise' or 'business' or 'commercial rights' eligible for depreciation under Section 32(1)(ii), but, rejected the assessee computation of the actual cost where the consideration payable under the franchise agreement was said to be not absolute, but, a contingent one upon f....
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....at the deferred instalments merely represented the agreed mode of payment. The assessee further argued that no part of the asset was acquired progressively over ten years and that there was no concept of deferred acquisition as per the agreement where the entire consideration of Rs. 268 crore had crystalised upon execution of the contract and future contingencies related to the payment could not alter the actual cost of the asset which was already acquired. 12. The ld. CIT(A) rejected the assessee's contention and upheld the disallowance made by the ld. AO by distinguishing the facts of the cases relied upon by the assessee and held that the assessee is entitled to claim depreciation only for the payment made by it during the year under consideration which amounted to Rs. 26.80 crore and not for the entire consideration of Rs. 268 crore. The ld. CIT(A) further rejected the assessee's alternative ground to treat the same as revenue expenditure since the nature of payment in respect of franchise fees is already held to be capital in nature. 13. The ld. AR for the assessee submitted that the ld. AO has erred in restricting the depreciation merely to the amount of franchise fee a....
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....d business right constituted a 'franchise' or in any event held to be an intangible asset falling within the expression 'any other business or commercial rights of similar nature' under Section 32(1)(ii) of the Act, thereby qualifying for depreciation. The Tribunal further observed that the franchise agreement conferred upon the assessee to be a bundle of enforceable and exclusive commercial rights, including the right to own and operate an IPL team, exploit the franchise commercially, participate in the league, enter into the sponsorship and media arrangements and derive income from various commercial avenues. It further held that the rights were enduring in nature and constituted as a capital asset rendering mere contractual privilege. 15. The tribunal on the issue of quantification of depreciation, which is the issue in hand before us, rejected the Revenue's contention that the depreciation should be allowed only on the annual instalments of franchise fee which was actually paid during the relevant previous year and held that the expression 'actual cost' in Section 43(1) of the Act refers to the entire consideration agreed to be paid for acquiring the asset which is not depen....
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.... actual cost of the asset would also stand modified correspondingly for which the written down value of the asset would also be adjusted in accordance with the provisions of the Act and the depreciation for such subsequent years would have to be computed on the revised written down value. The Special Bench, hence, had also given a finding as to how the depreciation should be computed in the event of any subsequent reduction in the cost of acquisition thereby determining the depreciation from the acquisition of asset and its actual contractual cost for which the timing of payment is not be considered. The Special Bench reiterated that as per the franchise agreement, the assessee acquired the franchise rights coupled with the liability to pay the consideration agreed upon by the parties which constituted the actual cost of the intangible assets for the purpose of the provisions of Section 32 and 43(1) of the Act irrespective of the fact that the payment was deferred or payable in instalments. It held that the Revenue's approach of restricting the depreciation only to the instlaments which was actually paid during the year under consideration was contrary to the provisions of the Act ....
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....ltants in relation to strategy planning, financial management, business development, commercial negotiations and operational support and had recovered the corresponding costs from the assessee on a reimbursement basis for which the invoices raised by the EMSHL were supported by third party invoices pertaining to the expenditure incurred. The ld. AO held that the assessee had filed inadequate documentary evidences to demonstrate the nature of service, the actual receipt of service, the necessity of such service for the assessee's business or the economic benefit derived therefrom, thereby proceeded to reject the assessee's benchmarking analysis and determined the ALP of the international transaction at 'nil' by applying Comparable Uncontrolled Price (CUP) Methodology. The ld. AO disallowed the entire payment of Rs. 6,23,48,680/- as not being at arm's length thereby making an adjustment without making a reference to the Transfer Pricing Officer (TPO) as per Section 92CA of the Act. The assessee challenged the said adjustment before the first appellate authority on both the jurisdictional grounds as well as on the merits. The Ld. CIT(A) upheld the adjustment made by the Ld. AO. 18.....
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....ire amount of Rs. 6.23 crore and the invoices were only available for part of the expenditure for which the assessee had alternatively claimed deduction to be allowed at least to that extent which demonstrates that the claim of the entire reimbursement at cost was unsubstantiated. The ld.CIT(A) further observed that the expenditure pertained to preparation of IPL bid where the ld.CIT(A) pointed out that the bid for the franchise has been submitted on 24.01.2008 whereas the assessee company was incorporated only on 8th March, 2008 and that the expenditure incurred prior to the incorporation of the assessee should not be regarded as a revenue expenditure for the relevant assessment year which is AY 2009-10. The ld.CIT(A) upheld the transfer pricing adjustment made by the ld. AO on the merits of the case. 21. We have heard the rival submissions and perused the material available on record. The controversy relates to the determination of ALP of the management fees of Rs. 6,23,48,680/- paid by the assessee to its AE, EMSHL, Mauritius for which the ld. AO had determined the ALP of the transaction at 'nil' on the ground that the assessee has failed to establish the actual rendering of ....
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....ional circumstances where economic substance differs from the legal form or the arrangement is so artificial that it practically prevents determination of an ALP. It further held that when the assessee has established that the international transaction had taken place where services were rendered by the AE and for which payments were made to those services, the ld. AO/TPO has to consider whether the said transaction satisfies the arm's length standard. The relevant extract of the said decision is cited hereinunder for ease of reference:- "18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. 19. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has ....
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....tation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. 20. In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessarily" was omitted from the section. 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also inc....
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....hence, the international transaction which are less than Rs. 15 crore was not required for making reference to the TPO and that the action of the ld. AO in determining the ALP was very much within his jurisdiction. The ld. DR relied on the decision of the coordinate Bench in the case of M/s Schlumberger India Technical Centre Pvt. Ltd., in ITA No. 640/Pune/2014 relevant to assessment year 2010-11. 27. We have heard the rival submissions and perused the material available on record. It is observed that the CBDT Instruction dated 20.05.2003 has provided that where the aggregate value of the international transaction exceeds Rs. 5 crores and in case where multiple international transactions with one or more associate enterprises are entered into, then, the aggregate value was to be considered for the purpose of making reference under Section 92CA of the Act to the TPO. Whether the same is mandatory or not has been dealt with by the Hon'ble Apex Court in the case of PCIT vs. S.G. Asia Holding (India) Pvt. Ltd., AIR ONLINE 2019 SC 1091 which confirmed that the CBDT Instruction was mandatory and the action of the AO making a transfer pricing adjustment himself without referring to the....