ADIT (Intl. Taxn.) v. Dalma Energy LLC

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The Tax Publishers2012 TaxPub(DT) 2139 (Ahd-Trib) : (2012) 136 ITD 0208 : (2012) 150 TTJ 0070 : (2012) 078 DTR 0219 INCOME TAX ACT, 1961 --Capital or revenue expenditure--Repairs and maintenance expenses No enduring benefit--The assessee was a foreign company. Vide order under section 143(3) it was noted by the assessing officer that the return of income was filed declaring a loss of Rs. (-) 9,20,84,676, however, the assessment was finalized on loss of Rs. 8,40,16,102. The assessee-company has acquired the Energy Division of E Oil Ltd. The assessee-company is in business in Oman, Qatar, Saudi Arabia and also in India. The company had acquired the said Division on 13-5-2003 and having its Project Office in India for providing rigs for oil drilling. However, the assessee, is registered as a limited liability company having its registered office at Abu Dhabi, United Arab Emirates. With this factual background, it was noted by the assessing officer that a sum of Rs. 44,75,485 was incurred towards repairs and maintenance. It is worth to mention that the figure of disallowance as mentioned by the revenue in the ground of appeal for assessment year 2004-05 is incorrect. The expenditure was stated to be incurred on upkeep, servicing and maintenance of drilling rigs and its auxiliary equipments. The assessee has claimed the said expenditure as revenue in nature. The assessing officer was of the view that a substantial repair had undertaken for rig through which the earning capacity of the rig had increased. According to assessing officer, considering the quantum of the repair expenses, the same will not fall in the category of recurring expenses and that the assessee had obtained the benefit of enduring nature. The assessing officer has thereafter discussed the legal position in respect of the capital expenditure and the revenue expenditure. He has finally held that the expenditure was incurred as a part of plant & machinery and, therefore, not a revenue expenditure but capital expenditure. The same was capitalized but depreciation was granted consequently the balance amount was taxed. In all the three years, the matter was carried before the first appellate authority. The Commissioner (Appeals) has considered the legal as well as factual aspect of the case and thereafter on receiving the comments of the assessing officer in the form of Remand Report, he has finally held that expenditure was not capital in nature. Held: The assessing officer has not correctly appreciated the nature of the expenditure incurred. It is a long list of repairs and maintenance having several items of pecuniary in nature and some of the items, although substantial in quantum, but do not reflect that an asset had come into existence. It has been informed that the equipments had already been installed earlier and thereafter the expenditure in question was purely towards repairs and maintenance of the same. The expenditure was towards procurement of stores, spares, consumables, etc. The small items were stated to be drilling consumables, electrical consumables and mechanical consumables. Those consumable items otherwise also did not have substantial life and to be replaced frequently. Therefore, the expenditure was purely towards upkeep and maintenance of drilling rig and auxiliary equipments. Further, it was incorrect on the part of the revenue to allege that the impugned expenditure was incurred prior to the commencement of the business due to the reason that acquisition was performed on 13-5-2003 and as per the details of expenditure, placed in the compilation, the same was incurred subsequently, i.e., after the date of acquisition. The issue of set up of business has duly been decided by a Third Member decision in the case of Styler India (P) Ltd. 113 ITD 55 (Pune-Trib)(TM) No capital asset had come into existenced through which the assessee has obtained enduring benefit. Tribunal hereby endorses the view taken by the Commissioner (Appeals) that the expenditure in question were, in fact, revenue in nature. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 2139 (Ahd-Trib) : (2012) 136 ITD 0208 : (2012) 150 TTJ 0070 : (2012) 078 DTR 0219

INCOME TAX ACT, 1961

--Capital or revenue expenditure--Repairs and maintenance expenses No enduring benefit--The assessee was a foreign company. Vide order under section 143(3) it was noted by the assessing officer that the return of income was filed declaring a loss of Rs. (-) 9,20,84,676, however, the assessment was finalized on loss of Rs. 8,40,16,102. The assessee-company has acquired the Energy Division of E Oil Ltd. The assessee-company is in business in Oman, Qatar, Saudi Arabia and also in India. The company had acquired the said Division on 13-5-2003 and having its Project Office in India for providing rigs for oil drilling. However, the assessee, is registered as a limited liability company having its registered office at Abu Dhabi, United Arab Emirates. With this factual background, it was noted by the assessing officer that a sum of Rs. 44,75,485 was incurred towards repairs and maintenance. It is worth to mention that the figure of disallowance as mentioned by the revenue in the ground of appeal for assessment year 2004-05 is incorrect. The expenditure was stated to be incurred on upkeep, servicing and maintenance of drilling rigs and its auxiliary equipments. The assessee has claimed the said expenditure as revenue in nature. The assessing officer was of the view that a substantial repair had undertaken for rig through which the earning capacity of the rig had increased. According to assessing officer, considering the quantum of the repair expenses, the same will not fall in the category of recurring expenses and that the assessee had obtained the benefit of enduring nature. The assessing officer has thereafter discussed the legal position in respect of the capital expenditure and the revenue expenditure. He has finally held that the expenditure was incurred as a part of plant & machinery and, therefore, not a revenue expenditure but capital expenditure. The same was capitalized but depreciation was granted consequently the balance amount was taxed. In all the three years, the matter was carried before the first appellate authority. The Commissioner (Appeals) has considered the legal as well as factual aspect of the case and thereafter on receiving the comments of the assessing officer in the form of Remand Report, he has finally held that expenditure was not capital in nature. Held: The assessing officer has not correctly appreciated the nature of the expenditure incurred. It is a long list of repairs and maintenance having several items of pecuniary in nature and some of the items, although substantial in quantum, but do not reflect that an asset had come into existence. It has been informed that the equipments had already been installed earlier and thereafter the expenditure in question was purely towards repairs and maintenance of the same. The expenditure was towards procurement of stores, spares, consumables, etc. The small items were stated to be drilling consumables, electrical consumables and mechanical consumables. Those consumable items otherwise also did not have substantial life and to be replaced frequently. Therefore, the expenditure was purely towards upkeep and maintenance of drilling rig and auxiliary equipments. Further, it was incorrect on the part of the revenue to allege that the impugned expenditure was incurred prior to the commencement of the business due to the reason that acquisition was performed on 13-5-2003 and as per the details of expenditure, placed in the compilation, the same was incurred subsequently, i.e., after the date of acquisition. The issue of set up of business has duly been decided by a Third Member decision in the case of Styler India (P) Ltd. 113 ITD 55 (Pune-Trib)(TM) No capital asset had come into existenced through which the assessee has obtained enduring benefit. Tribunal hereby endorses the view taken by the Commissioner (Appeals) that the expenditure in question were, in fact, revenue in nature.