Nag Information Software (I) Pvt. Ltd., V. DCIT, Circle-13(1),

ITA 1206/DEL/2006

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9922 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Assessment Year: 2002-2003
• Appeal Filed On: 12-04-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANISH GUPTA
• Assessee Lawyers: V K AGGARWAL
• Keywords: Depreciation
• Section: 143(3); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : H : NEW DELHI BEFORE SHRI RAJPAL YADAV, JM AND SHRI R.C. SHARMA, AM ITA NO.1206/DEL/2006 ASSESSMENT YEAR : 2002-03 M/S NAG INFORMATION SOFTWARE (I) PVT.LTD., (ERSTWHILE M/S NAVISION SOFTWARE INDIA PVT.LTD.), C-37, CONNAUGHT PLACE, NEW DELHI. PAN NO.AABCN2556N. DCIT, CIRCLE 13(1), NEW DELHI {APPELLANT} VS. {RESPONDENT} APPELLANT BY : SHRI V.K.AGGARWAL, CA. RESPONDENT BY : SHRI MANISH GUPTA, SR. DR O R D E R PER R.C. SHARMA, AM : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(APPEALS) DATED 30.1.2006 FOR THE AY 2002-03, IN THE MATTER O F ORDER PASSED U/S 143(3) OF THE IT ACT. 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PER USED. FACTS IN BRIEF ARE THAT DURING THE RELEVANT ASSESSMENT YEAR UNDER CONS IDERATION, THE ASSESSEE STARTED ITS NEW BUSINESS IN THE FIELD OF SOFTWARE INDUSTRY. DURING THE COURSE OF SCRUTINY ASSESSMENT, THE AO FOUND THAT RS.69,89,322/- DEBITE D UNDER THE HEAD ADVERTISEMENT AND BUSINESS PROMOTION, WERE IN THE NATURE OF ARRANGING STAGE SHOWS AND FEES PAID FOR EVENT MANAGEMENT. IN REPLY TO AOS QUERY WITH REGARD TO REASON FOR SUCH EXPENSES, IT WAS EXPLAINED THAT THE SE WERE IN CONNECTION WITH ITA-1206/D/2006 2 LAUNCH OF NAVISION AND HAS BEEN INCURRED TO CREAT E THE BRAND IMAGE OF THE COMPANY WITH THE PURPOSE OF PROMOTING ITS SALES. T HE AO OBSERVED THAT ASSESSEE WAS NOT ABLE TO JUSTIFY AS TO HOW THE AMOUNT SPENT ON SUCH SHOWS COULD HAVE A DIRECT NEXUS WITH THE BUSINESS OF THE ASSESSEE, ACC ORDINGLY, HE MADE AN ADHOC DISALLOWANCE OF 20% OF SUCH EXPENSES. BY THE IMPUG NED ORDER, CIT(A) CONFIRMED THE ACTION OF THE AO. 3. IT WAS ARGUED BY THE LEARNED AR SHRI V.K.AGGARWA L THAT IT WAS THE FIRST YEAR OF THE ASSESSEES BUSINESS, ALL THESE ADVERTIS EMENT AND BUSINESS PROMOTION EXPENSES HAVE BEEN INCURRED FOR CREATING BRAND IMAG E IN THE SOFTWARE INDUSTRY. HE CONTENDED THAT NAVISION WAS NOT A KNOWN BRAND NAM E IN INDIA THOUGH IT WAS A VERY WELL KNOWN NAME IN EUROPE. TO ESTABLISH THE B RAND NAME OF NAVISION, THE ASSESSEE COMPANY HAD INVITED TOP OFFICIALS AT A MAS SIVE SCALE AT PREMIUM LOCATIONS OF FIVE-STAR HOTELS ACROSS THE COUNTRY, WHEREIN ALL THE LEADING INDUSTRIES, BUSINESS HOUSES AND COMPANIES WERE INVITED. HE FURTHER CONT ENDED THAT FOR ORGANIZING THESE EVENTS ACROSS THE COUNTRY, THE ASSESSEE COMPA NY HAD TOOK HELP FROM EVENT MANAGEMENT COMPANIES, PR AGENCIES AND DATA MANAGEME NT COMPANY AS WELL. OUR ATTENTION WAS DRAWN TO THE BREAK UP OF EXPENDIT URE INCURRED ON SUCH ADVERTISEMENT WHICH COMPRISED OF ADVERTISEMENT, PUB LIC RELATION, MARKETING EXPENSES AND OTHER ENTERTAINMENT EXPENSES. HE ALSO INVITED OUR ATTENTION TO THE INCREASE IN SALES VOLUMES OF THE BUSINESS AFTER SUC H ADVERTISEMENT WHICH INCREASED FROM RS.20.56 LAKHS DURING THE RELEVANT ASSESSMENT YEAR UNDER CONSIDERATION I.E. ITA-1206/D/2006 3 2002-03, TO RS.926.72 LAKHS DURING THE ASSESSMENT Y EAR 2005-06. THUS, THE RESULTS ACHIEVED THROUGH MASSIVE ADVERTISEMENTS WERE ALSO D EMONSTRATED. 4. ON THE OTHER HAND, LEARNED DR CONTENDED THAT EXP ENDITURE WAS INCURRED TO PROMOTE SALES, ADVERTISEMENT DEVELOP A NICHE FROM T HE COMPANY WITHIN THE MARKET, HOWEVER THERE IS NO DIRECT LINK BETWEEN THE EXPENSES INCURRED UNDER THIS HEAD AND THE BUSINESS BENEFITS ACCRUED TO THE SAME. HE FURTHER RELIED ON THE OBSERVATION MADE BY THE LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS FOR DISALLOWING 20% OF SUCH EXPENSES. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, GONE T HROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND FROM THE RECORD THAT TH E ASSESSEE COMPANY FOR THE FIRST TIME STARTED ITS BUSINESS IN INDIA FOR DEALING IN S OFTWARE ITEMS UNDER THE BRAND NAME OF NAVISION. THE BRAND LAUNCH WAS UNDERTAKE N BY THE COMPANY ON MASSIVE SCALE IN VARIOUS CITIES ALL OVER THE COUNTR Y IN WHICH LEADING INDUSTRIES, BUSINESS HOUSES AND COMPANIES WERE INVITED TO MAKE THEM AWARE OF THE PRODUCT AND SOFTWARE SOLUTION BEING OFFERED BY THE ASSESSEE COMPANY. EXPENSES WERE ALSO INCURRED FOR HOLDING ROAD SHOWS, MEETINGS IN HOTELS AND DIGNITARIES FROM INDUSTRY AND BUSINESS WERE INVITED. THROUGH THIS LAUNCH, TH E INVITEES WERE MADE AWARE ABOUT THE COMPANYS PRODUCT AND SOFTWARE SOLUTION. THE EXPENSES SO INCURRED ALSO DIRECTLY RESULTED INTO INCREASE IN VOLUME OF S ALES FROM RS.20.56 LAKHS TO RS.926.72 LAKHS. THUS, THE INCURRING OF THE EXPENS ES FOR THE PURPOSE OF BUSINESS IS ITA-1206/D/2006 4 DIRECTLY EVIDENCED BY THE INCREASE IN VOLUME OF SAL ES NUMBER OF TIMES. THE EXPENSES SO INCURRED WERE NOT DOUBTED NOR ANY INSTA NCE WAS POINTED OUT BY THE AO TO SHOW THAT TO GIVE PERSONAL BENEFIT TO THE PRO MOTERS, THE EXPENSES WERE INCURRED BY THE COMPANY. FULL DETAILS OF THE MONTH- WISE EXPENSES INCURRED ON VARIOUS ACCOUNTS WERE FURNISHED BEFORE THE LOWER AU THORITIES DULY CORROBORATED BY THE RELEVANT BILLS/VOUCHERS. THE EXPENSES SO INCURR ED WERE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ESTABLISHING BRAND IMAGE OF THE PRODUCTS SO LAUNCHED BY THE COMPANY, WHICH RESULTED INTO INCREASE IN SALES BY A NUMBER OF TIMES IN THE SUBSEQUENT YEARS. ACCORDINGLY, THERE WAS NO JUSTIF ICATION FOR MAKING ANY ADHOC DISALLOWANCE OUT OF THE EXPENSES SO INCURRED FOR TH E PURPOSE OF BUSINESS WITHOUT POINTING OUT ANY EXPENSES REMAINED UNVERIFIABLE OR INCURRED NOT FOR THE PURPOSE OF BUSINESS. ACCORDINGLY, WE DELETE THE ADHOC DISALLO WANCE OF 20% MADE BY THE AO. 6. IN RESPECT OF PREMISES TAKEN ON LEASEHOLD BASIS, THE ASSESSEE INCURRED EXPENDITURE ON FALSE CEILING, FLOORING AND CIVIL WO RK, ELECTRICAL WORK OF ITS CABLES, CABLE BASE AND ACCESSORIES ETC. THE ASSESSEE CLAIM ED DEPRECIATION AT THE RATE OF 10% IN RESPECT OF EXPENDITURE INCURRED ON LEASEHOLD IMPROVEMENTS AMOUNTING TO RS.7,02,917/-, WHICH WAS DISALLOWED BY THE AO BY OB SERVING THAT IT WAS RESPONSIBILITY OF THE LESSOR TO CARRY OUT THIS WORK , THEREFORE IT IS THE OWNER WHICH CAN CLAIM DEPRECIATION ON THIS AMOUNT. BY THE IMPU GNED ORDER, THE CIT(A) CONFIRMED THE DISALLOWANCE OF DEPRECIATION. AGGRIE VED BY THE SAME, THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. ITA-1206/D/2006 5 7. IT WAS CONTENDED BY THE LEARNED AR THAT AO HAS M ISINTERPRETED THESE AGREEMENTS ENTERED BY THE ASSESSEE. HE DRAWN OUR A TTENTION TO CLAUSE 19 OF THE LEASE DEED ACCORDING TO WHICH THE ASSESSEE AS A LES SEE WAS TO CARRY OUT INTERNAL ALTERATIONS AND ADDITIONS FOR THE BUSINESS PURPOSE OF LESSEE. OUR ATTENTION WAS ALSO DRAWN TO THE DETAILS OF SUCH EXPENDITURE INCURRED O N SUCH OFFICE INTERIOR AND THE ALTERATIONS MADE IN THE LEASEHOLD PREMISES. ACCORD INGLY, IT WAS PLEADED THAT AO HAS WRONGLY DISALLOWED CLAIM OF DEPRECIATION BY ALL EGING THAT EXPENSES SO INCURRED WERE THE RESPONSIBILITY OF THE LESSOR, THE REFORE ONLY LESSOR WAS ENTITLED TO CLAIM DEPRECIATION THEREON. 8. ON THE OTHER HAND, LEARNED DR RELIED ON THE ORDE R OF THE LOWER AUTHORITIES. 9. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREFU LLY GONE THROUGH THE DETAILS OF THE EXPENSES SO INCURRED AND THE VARIOUS CLAUSES OF THE LEASE DEED DATED 25.7.2001 EXECUTED BETWEEN THE ASSESSEE COMPANY AND M/S DELHI BRASS & METAL WORKS LTD. AS PER CLAUSE 19 OF THE LEASE DEED, THE LESSOR PERMITTED THE LESSEE TO CARRY OUT AT ITS COST, WITHOUT ANY DAMAGE TO THE MA IN STRUCTURE OF THE SAID PREMISES OR THE SAID COMPLEX, INTERNAL ALTERATIONS AND ADDIT ION WORK AS MAY BE NECESSARY FOR THE PURPOSE OF BUSINESS OF THE LESSEE. IT IS CRYST AL CLEAR FROM CLAUSE 19 THAT EXPENSES WERE TO BE INCURRED BY THE LESSEE. SINCE THE EXPENSES WERE TREATED BY THE LESSEE AS CAPITAL, IT WAS ENTITLED TO CLAIM DEPRECI ATION THEREON. ACCORDINGLY, THE ITA-1206/D/2006 6 CONCLUSION OF THE AO TO DECLINE THE CLAIM OF DEPREC IATION BY OBSERVING THAT EXPENSES WAS TO BE INCURRED BY THE LANDLORD IS DEVO ID OF ANY MERIT. WE ARE THEREFORE INCLINED TO AGREE WITH THE LEARNED AR THA T ASSESSEE WAS ENTITLED TO CLAIM DEPRECIATION ON THE EXPENDITURE INCURRED FOR RENOVA TION OF THE LEASEHOLD PREMISES AS PER PROVISIONS OF SECTION 32 OF THE IT ACT. DIS ALLOWANCE OF DEPRECIATION CLAIM IS ACCORDINGLY DIRECTED TO BE DELETED. 10. LAST GRIEVANCE OF THE ASSESSEE RELATES TO DISAL LOWANCE OF RS.9,37,500/- INCURRED TOWARDS PURCHASE OF SOFTWARE. FACTS IN BR IEF ARE THAT ASSESSEE PURCHASED A SOFTWARE FROM ITS PARENT COMPANY IN DENMARK AND SOL D IT IN THE LOCAL MARKET. THE AO HELD THAT PAYMENT SO MADE WAS IN THE FORM OF ROY ALTY, SINCE PAYMENT WAS MADE WITHOUT DEDUCTING ANY TAX AT SOURCE, THE SAME WAS TO BE DISALLOWED U/S 40(A)(I) OF THE IT ACT. BY THE IMPUGNED ORDER, THE CIT(A) CONFIRMED THE ACTION OF THE AO. 11. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREF ULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND THAT THE ASSESSE E IS IN THE BUSINESS OF OFFERING INTEGRATED BUSINESS SOLUTIONS FOR SMALL AND MID MAR KET ENTERPRISES. NAVISION IS A REPRESENTATIVE OF MICROSOFT BUSINESS SOLUTIONS IN I NDIA AND IT UNDERTAKES THE TASK OF PRODUCT LOCALIZATION IN RELATION TO INDIAN STATU TORY REQUIREMENT, NEW VERSION LOCALIZATION AND RELEASES, CHANNEL PARTNER RECRUITM ENT AND TRAINING ON PRODUCTS AND METHODOLOGIES (SALES, MARKETING AND IMPLEMENTATION) , NATIONAL BRANDING AND ITA-1206/D/2006 7 MARKETING. DURING THE COURSE OF ITS BUSINESS, THE ASSESSEE ACQUIRED SOFTWARE FROM ITS PARENT COMPANY FOR FURTHER SALE. HOWEVER, THE AO OBSERVED THAT PAYMENT WAS MADE IN LIEU OF LICENSE TO FURTHER LOCALIZE AND SEL L THE SOFTWARE, THE SOFTWARE SO PURCHASED WAS TREATED AS PROGRAMME OR SERIES OF PRO GRAMMES CONTAINING INSTRUCTIONS FOR A COMPUTER, REQUIRED EITHER FOR TH E OPERATIONAL PROCESS OF THE COMPUTER ITSELF OR FOR THE ACCOMPLISHMENT OF OTHER TASKS. AS PER AO, THE RIGHTS IN COMPUTER SOFTWARE ARE A FORM OF INTELLECTUAL RIGHTS AND THE TRANSFER OF RIGHTS OCCUR IN MANY DIFFERENT WAYS. THE PAYMENT SO MADE WAS AC CORDINGLY TREATED AS PAYMENT FOR ROYALTY. ACCORDINGLY, THE AO HELD THAT SINCE NO TAX WAS DEDUCTED AT SOURCE ON SUCH PAYMENTS, THE SAME WAS ADDED BACK U/ S 40(A)(I) OF THE ACT. FROM THE RECORD, WE FOUND THAT IN ITS BUSINESS OF SOFTWA RE DEALING, THE ASSESSEE HAS PURCHASED SOFTWARE FROM ITS PARENT COMPANY FOR FURT HER SALES. THE PAYMENT SO MADE WAS FOR SOFTWARE PURCHASED IN THE NORMAL COURS E OF BUSINESS, NOT FOR ITS INTERNAL USE BUT FOR FURTHER SALE, THE AMOUNT SO PA ID WAS CONSIDERATION OF THE PURCHASE AND WAS NOT IN THE NATURE OF ROYALTY PAYME NT. AS PER THE TERMS AND CONDITIONS OF THE AGREEMENT DATED 7.6.2001 ENTERED INTO BY THE ASSESSEE COMPANY WITH M/S NAVISION, DENMARK, THE ASSESSEE COMPANY WA S AUTHORIZED TO DO LOCALIZATION AND MARKETING OF SOFTWARE PRODUCTS OF NAVISION A/S, DENMARK. THE ASSESSEE ALSO BUYS AND SELLS SOFTWARE (ERP) PRODUCT S OF NAVISION A/S, DENMARK USING C/CAPS (CONFIGURATION AND PRICING SERVER) TO TRANSFER THE PRODUCT ELECTRONICALLY. FURTHER THESE SOFTWARE PRODUCTS HA VE BEEN DOWNLOADED BY ASSESSEE THROUGH THE INTERNET CONNECTION/C/CAPS AS IT IS AND NO CHANGES WERE MADE AT ITS END ITA-1206/D/2006 8 IN THE SOFTWARE SO PURCHASED/DOWNLOADED. DURING TH E YEAR 2001-02, THE ASSESSEE PURCHASED SOFTWARE OF RS.9,37,500/- FROM NAVISION A/S, DENMARK THE DETAILS OF THE SAME ARE AS UNDER:- S.NO. INVOICE NO. DATE AMOUNT (INR) 1. 124596 31-12-2001 4,68,750.00 2. 124806 28-01-2002 4,68,750.00 12. FURTHER, AT THE TIME OF PAYMENT/REMITTANCE OF A BOVE INVOICES TO M/S NAVISION A/S, DENMARK, NO TAX HAS BEEN DEDUCTED AS THE PAYMENT WAS FOR SOFTWARE PURCHASE (NON-PHYSICAL IMPORT) ON WHICH NO TAX WAS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII-B. THE PAYMENT FOR THE ABOVE TWO INVO ICES HAS BEEN MADE THROUGH THE AUTHORIZED DEALER (THE HONGKONG & SHANGHAI BANK ING CORPORATION LTD., NEW DELHI). ACCORDINGLY, WE DO NOT FIND ANY MERIT IN T HE ACTION OF THE LOWER AUTHORITIES FOR DECLINING THE DEDUCTION OF SUCH EXP ENSES BY INVOKING THE PROVISIONS OF SECTION 40(A)(I). 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED IN TERMS INDICATED HEREINABOVE. DECISION PRONOUNCED IN THE OPEN COURT ON 31 ST AUGUST, 2009. SD/- SD/- (RAJPAL YADAV) (R.C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 31.08.2009 VK. ITA-1206/D/2006 9 COPY FORWARDED TO : - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT TRUE COPY DY. REGISTRAR ITA-1206/D/2006 10