ORDER

Ms. Kavitha Rajagopal, Judicial Member.- This appeal is filed by the assessee, challenging the order of the Learned Commissioner of Income Tax (Appeals) [‘Ld. CIT(A)’ for short], passed u/s. 250 of the Income Tax Act, 1961 (‘the Act’, for short), pertaining to the Assessment Year (‘A.Y.’ for short) 2009-10.

2. The assessee has challenged the order of the ld.CIT(A) on the ground of denial of depreciation amounting to Rs.67.01 crore claimed under Section 32 of the Act and without prejudice has sought for allowing the instalment of Rs.26.8 crores paid towards acquiring franchise rights as revenue expenditure under Section 37(1) of 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 the Act dated 23.04.2010 carried out in the office premises of the assessee, various incriminating material were found and seized which includes the computer back up related to the assessee company specified as Annexure A-1, A-2 and A-3 in the assessment order.

4. The Ld. AO observed that the assessee has claimed ‘management fees’ of Rs.6.23 crore, under the head ‘Operating and administrative expenses’ in the Profit & Loss Account, made to M/s EM Sporting Holdings Limited which is a foreign company holding 100% shares in the assessee company. The Ld. AO sought for details with regard to the ALP for the said transaction entered into by the assessee with its AE as per Section 92A(2)(a) of the Act. After duly considering the assessee’s Transfer Pricing Report and the audit report in Form 3CEB, the Ld. AO treated the transaction as an international transaction under Chapter-X and the assessee is said to have failed to substantiate the actual rendering of services with supporting documentary evidences as required under Section 92D of the Act and Rule 10D of the Income-tax Rules, 1962 (‘the Rules’, in short) and determined the ALP using CUP Methodology as nil under Section 92C(3) of the Act, thereby making an adjustment of Rs.6.23 crore without making a reference to the Ld. Transfer Pricing Officer (‘TPO’, for short).

5. The ld. AO observed that the assessee had claimed depreciation amounting to Rs.67 Crore towards capital expenditure with respect to the franchise fee during the year under consideration where the actual payment made to the tune of Rs.26,80,21,324/- by the assessee to BCCI-IPL as part of the first instalment of the bid amount of Rs.268 crore in respect of the franchise scheme for buying the right to play in IPL matches. The Ld. AO sought for details from the assessee as to how it can claim depreciation at 25% on the entire bid amount of Rs.268 crore when the assessee has only made payment of Rs.26.8 crore during the year under consideration. After duly considering the assessee’s submissions, the Ld. AO restricted the depreciation to Rs.6.70 crore being 25% of the first year’s payment of Rs.26.80 crore, thereby disallowing the balance amount of Rs.60.30 crore which was claimed as depreciation in its return of income.

6. The Ld. AO also observed that the assessee has paid Rs.72.92 lakhs to two overseas players, namely, Shane Watson 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.

8. We have heard the rival submissions and perused the material available on record. The first issue is relating to the claim of depreciation on IPL franchise rights. The facts of this issue is that the assessee had acquired the franchise rights of Rajasthan Royals pursuant to the successful bid submitted before the BCCI for participating in the IPL. It is observed that the franchise agreement conferred upon the exclusive right to own and operate the Rajasthan Royals’ franchise, participate in the IPL, commercially exploit the franchise, receive its share of central media revenues, sponsorship revenues, merchandising income and other commercial rights associated with the franchise. Further, the agreement contemplated the initial tenure of ten years with further continuation subject to the terms of the agreement and the total franchise consideration which was agreed between the parties amounted to approximately Rs.268 crores excluding variable payments linked to franchise income after the tenth year. The payment mechanism under the franchise agreement was structured as follows:-

9. The assessee contends that though the consideration was payable in instalments, the entire deposit of franchise rights stood transferred upon execution of the franchise agreement itself. It is observed that during the relevant previous year, the assessee paid only the first annual instalment aggregating to Rs.26.80 crore though while preparing its financial statements and return of income the assessee capitalised the entire contractual liability of approximately Rs.268 crore as the actual cost of an intangible asset. The assessee relied upon Accounting Standard-10 relating to fixed assets and Accounting Standard-26 relating to intangible assets and treated the franchise rights as intangible assets within the meaning of Section 32(1)(ii) of the Act. The assessee calculated depreciation at the prescribed rate of 25% on the entire cost of Rs.268 crore resulting in a claim of depreciation amounting to 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 future events. The Ld. AO observed that the annual league deposit was liable to be refunded if the IPL league was not conducted in a particular year and the annual franchise payment itself became payable only upon commencement of the league matches that year and, therefore, the liability for future instalments had not crystalised on the date of acquisition. The Ld. AO further noticed that after the tenth year, the assessee was required to pay 20% of the franchise income which itself was uncertain and incapable of determination, thereby holding that the total cost of acquisition could not be regarded as fixed or ascertainable at Rs.268 crore. It was further held that BCCI retained extensive control over the franchise throughout the tenure of the agreement where it reserved various commercial rights, including media rights, title sponsorship rights, umpire sponsorship rights, stadium advertisement rights and merchandising rights in favour of the BCCI. There was further restriction upon transfer of franchise, prohibited assignment without prior approval of BCCI, empower BCCI to terminate the agreement under specified circumstances and provided that on termination the franchise would revert to BCCI. The ld. AO held that these clauses indicated that the assessee did not enjoy absolute ownership over the entire franchised assets and held that the actual cost of the intangible asset increased only year after year as the annual franchise payments became due and were actually made. The ld. AO further held that every annual instalment paid would be added to the opening written down value of the intangible asset block and depreciation would thereafter be computed on the enhanced written down value. The ld. AO determined the depreciation as being allowable only on the first year’s payment of Rs.26.80 crores resulting in allowable depreciation of Rs.6.70 crore as against the assessee’s claim of Rs.67 crore, thereby making a disallowance of Rs.60.30 crore. The ld. AO also initiated penalty proceedings under Section 271(1)(c) of the Act.

11. In appeal before the first appellate authority, the assessee challenged the disallowance by contending that the ld. AO had fundamentally misconstrued the franchise agreement where it was stated that the assessee had acquired the franchise rights for the entire contractual period immediately upon execution of the agreement and that 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 actually paid during the relevant previous year instead of allowing depreciation on the entire cost of acquisition of the franchise right. The ld. AR further argued that as the ld. AO himself has accepted that the franchise constituted an intangible asset covered under Section 32(1)(ii) of the Act, there was no justification for artificially bifurcating its cost over a period of ten years where once the ownership of the franchise stood transferred under the agreement, depreciation necessarily had to be computed on the entire actual cost of the asset. The ld. AR contended that the ownership requirement under Section 32 of the Act stood fully satisfied since it exercised complete dominion over the franchise, commercially exploited the rights, earned all revenues generated from the franchise and bore all business risks. The ld. AR further reiterated that the BCCI retained only regulatory control over the conduct of the league or rather to say that it imposed restrictions on transfer which does not, in any manner, dilute the assessee’s ownership over the franchise rights. The ld. AR submitted that the issue in dispute stands covered by the decision of the Special Bench of the ITAT Mumbai Benches dated 31.10.2025 in the assessee’s own case in ITA No.3602/Mum/2014 and Royal Multisports (P.) Ltd. v. ACIT, Central [IT Appeal Nos.1113 to 1114 (Mum.) of 2016, dated 22-6-2026], where it was held that depreciation shall be allowed on the entire franchise fee of Rs.268 crores which is the actual cost of the intangible assets so acquired during the financial year and not at Rs.26.80 crore as per the actual payment made by the assessee during the year under consideration. The ld. AR relied on the order of the Special Bench on this issue. The ld. DR, on the other hand, had nothing to controvert except for the fact that the same has already been dealt with by the Special Bench of the Tribunal in assessee’s own case.

14. On considering the rival contentions, it is observed that the issue in hand has been decided by the Special Bench of the Tribunal (supra) where the Tribunal undertook elaborate examination of the nature of the rights acquired by the assessee under the franchise agreement that the BCCI along with the concept of ‘actual cost’ under Section 32 and 43(1) of the Act. On perusal of the said decision, it was observed that the IPL franchise rights acquired by the assessee were held to be in the nature of a valuable commercial and 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 dependent upon the timing or mode of payment. It was further emphasised that the assessee had acquired the franchise right immediately upon the execution of the franchise agreement and simultaneously incurred a legally enforceable obligation to pay the entire franchise consideration nevertheless such payment was contractually spread over several years. From this, it can be ascertained that the asset in the nature of franchise rights stood acquired in its entirety at the very inception for which the actual cost was the whole contractual consideration agreed upon by the parties rather than merely the instalment which was due during a particular year. The Tribunal also held that under the mercantile system of accounting, when the liability to pay the purchase consideration is incurred consequent to which the asset is brought into existence for the purpose of business, then, for calculating the depreciation the full cost of acquisition is to be computed. The contention of the Revenue that the future instalments were contingent upon the continuation of the IPL Tournament and, therefore, did not constitute an accrued liability was rejected by the Tribunal where it proceeded to hold that the existence of contractual provisions permitting adjustment, waiver, or cessation of liability upon the happening of a specified future event did not anyway postpone the acquisition of the asset nor did it render the original liability of the assessee to be contingent. It was further reiterated that the clauses specifying this was merely for contemplating the possibility of any future deviation in the consideration and did not detract from the fact that the assessee was entitled to the franchise rights upon its undertaking the obligation to pay the agreed consideration on the date of acquisition. The Tribunal also considered the issue in subsequent modification of liability and held that the same cannot determine the actual cost at the time of acquisition. The Special bench decision also clarified that the allowance of depreciation on the entire contractual cost does not intent that any subsequent events are irrelevant rather it held that if in the subsequent years the consideration payable under the franchise agreement is reduced, remitted, waived, refunded or otherwise altered on account of any event such as cancellation of tournaments or any other contractual contingency, then, the 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 instalments which was actually paid during the year under consideration was contrary to the provisions of the Act and the settled principles governing the concept of ‘actual cost’ and ‘depreciation of capital assets.’ The Tribunal relied on the various decisions of the Hon’ble High Court and the Hon’ble Apex Court and had decided this issue at length in favour of the assessee. As this issue is no longer res integra, subsequent to the decision of the Special Bench, by respectfully following the same we deem it fit to allow ground No.1 raised by the assessee.

16. Ground No.2 requires no further adjudication which is a without prejudice ground to treat the same as revenue expenditure and is, hence, dismissed.

17. Ground No.3 pertains to arm’s length price (ALP) of reimbursement of management fees of Rs.6.23 crore paid on behalf of the assessee by EM Sporting Holdings Ltd., Mauritius (EMSHL) being an Associate Enterprise (AE) of the assessee which was taken at Rs. Nil by the ld. AO. The facts of this issue is that the assessee had debited an amount of Rs.6,23,48,680/- (USD 15,78,724/-) under the head ‘Management fees’ in its Profit & Loss Account which was made to EMSHL which was the assessee’s holding company, holding 100% of its share capital. The assessee contended that EMSHL had incurred expenditure on its behalf by engaging various third party consultants and professionals rendering management, strategic, financial and commercial services relating to establishment and operation of the Rajasthan Royals IPL franchise which, according to the assessee, EMSHL merely recovered the actual expenditure incurred without any mark up. The ld. AO during the assessment proceedings observed that the payment constituted an international transaction between the AEs within the meaning of Section 92A and 92B of the Act for which the assessee was asked to furnish its TP Study Report , Form 3 CEB, agreements, invoices along with documentary evidences of services rendered, correspondence, e-mails, details of third party service providers, evidence demonstrating benefits derived from such services, other relevant documentary evidences maintained under Section 92D r.w.r 10D of the IT Rules. The assessee, in response to the same, furnished the TP Study Report wherein it had adopted the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) along with other documentary evidences where the assessee had stated that the EMSHL had procured services from independent consultants 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. Before us, the Ld. AR contended that the aggregate value of the international transaction exceeded Rs.5 crore and, as per the CBDT Instruction No.03/2003, the AO was mandatorily required to refer the determination of ALP to the ld. TPO failing which the ld. AO had no jurisdiction to determine the ALP himself thereby rendering the adjustment legally unsustainable. On the merits, the Ld. AR contended that TNMM was the MAM which was the basis of its transfer pricing study report and that the assessee has furnished all documentary evidences to substantiate that the management services rendered by the independent third party consultants engaged through EMSHL through invoices, activity charges and documentary evidences established the nature of service rendered. The Ld. AR further contended that EMSHL had merely recovered the actual expenses incurred without earning any profit and that the AO was not justified in disregarding transfer pricing documentation and in substituting ALP at nil merely on the suspicion of commercial necessity on adequacy of services.

19. Without prejudice, it has also been submitted that in case where the entire claim was not accepted, the deduction ought to be allowed at least to the extent of USD 6,34,727 which represented the third party invoices that has been furnished before the ld. AO in support of the expenditure incurred.

20. The ld.CIT(A) rejected the assessee’s contention that the assessee had failed to furnish the audited financial statements of EMSHL for the purpose of verifying that it had actually undertaken any business activity and whether the alleged expenditure was made on a cost to cost basis to substantiate that it was pure reimbursement. The ld.CIT(A) further held that the assessee has failed to prove satisfactorily with evidences to demonstrate that the business necessity for obtaining such service, the nature and extent of service actually rendered, the actual cost incurred in rendering the service, the benefit derived by the assessee from such service and the payments were on reimbursement basis, though the assessee had produced invoices and relied upon its TP Study Report. The ld.CIT(A) held that the said invoices did not prove the need for the service or the value of services alleged to have been received by the assessee. The ld.CIT(A) further observed that EMSHL itself did not possess invoices for the entire 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 8^th 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 services and benefits derived therefrom which was affirmed by the CIT(A) on the reasoning that the assessee has failed to establish the necessity of services, the actual rendition of service, the benefit received and the actual cost incurred by the AE.

22. At the outset, it is now the settled proposition of law that the jurisdiction of the ld. TPO/AO as per Chapter X of the Act is confined to determining whether the consideration paid for an international transaction is as per the arm’s length standard where the Revenue cannot challenge the adequacy of the commercial benefit derived by the assessee. Further, the principle that commercial expediency or business necessity of an expenditure incurred by the assessee cannot be the subject matter of issue in a transfer pricing adjustment which is only intended to determine the correct ALP rather than questioning the commercial wisdom of the assessee. When the assessee has explained sufficiently through contemporaneous evidences that the services were actually rendered by the AE, the same ought to be taken into consideration by the ld. TPO. We draw support from the decision of the Hon’ble High Court of Delhi in the case of CIT v. EKL Appliances Ltd.  345 ITR 241 (Delhi), wherein it was held that the reasonableness of business expenditure must be viewed from the perspective of a prudent businessman and not from the perspective of the tax authorities when the assessee establishes the fact that the expenditure was incurred for business purposes. It further held that the ld. TPO cannot determine the ALP at nil merely because in his opinion the assesee did not derive sufficient benefit from the transaction and further observed that the business decision often involve commercial risks and merely because the assessee did not get the expected benefit does not mean that an independent enterprise would not have entered into such transaction. It further reiterated the distinction between determining the ALP under Chapter X and examining the allowability of expenditure under Section 37 of the Act stating that transfer pricing provisions do not permit disallowance based on commercial expediency. The said decision also extensively relied upon the OECD transfer pricing guidelines and held that the tax authorities cannot disregard the actual transaction entered into between the AEs and the same can be done only in exceptional 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 been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, (1951) 20 ITR 1, it was held by the Supreme Court that “there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act”. It was further held in this case that “it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned”. In CIT v. Walchand & Co. etc., (1967) 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand, (1938) 6 ITR 636 that “expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense”. The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody, (1978) 115 ITR 519, and it was observed as under: –

“We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation 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 incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred “wholly and exclusively” for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above.”

23. The above proposition has been reiterated in the subsequent decision of the Hon’ble High Court of Delhi in the case of CIT v. Benetton India (P.) Ltd.  476 ITR 404 (Delhi).

24. Considering the factual matrix and the proposition laid down in the above decisions, we find no justification in the action of the lower authorities in determining the ALP at ‘nil.’ As the assessee has itself conceded that it has not furnished the invoices for the entire amount from the entities which has provided the services to the assessee, we deem it fit to remand this issue to the ld. AO for determining the ALP afresh on the basis of relevant documentary evidences available with the assessee. Grounds No.3 and 4 are hereby allowed for statistical purpose.

25. Ground No.5 pertains to the issue of not making reference to the TPO on the basis of the CBDT Instruction No.03/2003 dated 20.05.2003. It was argued by the ld. AR that the aggregate value of the international transaction exceeds Rs.5 crore, the case should have been picked up for scrutiny and a reference under Section 92CA should have been made to the ld. TPO. As it is observed that the management fee was Rs.6.13 crore which exceeds the monetary threshold for mandatory administrative reference under the CBDT Instruction it was contended that the ld. AO ought to have referred the determination of ALP to the TPO. The ld. AR relied on the decision of the coordinate Bench in the case of Dy. CIT v. Meneta Automotive Components (P.) Ltd. [2023]   (Delhi – Trib.).

26. Per contra, the ld. DR for the Revenue contended that it was not mandatory for the ld. AO to make reference to the TPO to the TPO for the reason that, for the year under consideration the CBDT Instruction No.03/2023 was superseded by the Action Plan for financial year 2006-07 which had increased the threshold limit to Rs.15 crore and, 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 Schlumberger India Technology Centre (P.) Ltd. v. Dy. DIT (IT)  (Pune – Trib.)/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 Pr. CIT v. S.G. Asia Holdings (India) (P.) Ltd.   (SC)/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 TPO despite the Instruction requiring a reference, held the transfer pricing adjustment to be unsustainable thereby restoring the matter to the ld. AO for making reference to the TPO for determination of ALP. Pertinently, the Hon’ble Apex Court has set aside the issue of transfer pricing adjustment with direction to make a proper reference to the TPO without annulment of the assessment. The Revenue’s contention that the Central Action Plan increased the threshold limit cannot be accepted for the reason that the same is an internal administrative document which prescribes the manner in which the transfer pricing cases are to be selected and allocated and the same cannot be treated as modifying the monetary threshold for compulsory references. Though the Tribunal in Schlumberger (supra) has held that the action plan was subsequent to the CBDT Instruction, the Hon’ble Apex Court decision has not considered or rather decided the legal effect of the Central Action Plan enhancing the threshold to Rs.15 crores. In the absence of the same, we deem it fit to hold that the CBDT Instruction No.03/2003 shall be binding on the ld. AO as per which the AO ought to have referred the matter to the ld. TPO. As we have already remitted this issue back to the file of the ld. AO as per the finding given in grounds No.3 and 4, we deem it fit to direct the ld. AO to refer the matter to the TPO for the purpose of determining the ALP of the international transaction afresh on the basis of the submissions and documentary evidences filed by the assessee. Hence, ground No.5 is allowed for statistical purpose.

28. In the result, the appeal filed by the assessee is hereby partly allowed.