DCIT, CHENNAI V. Apex Laboratories P Limited, CHENNAI

ITA 1342/CHNY/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8805 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2016
• Appeal Filed By: Department
• Bench Allotted: D
• Next Hearing Date: 13-06-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 15-05-2014
• Court: TRIBUNAL
• Department Lawyers: N MADHAVANJCIT
• Assessee Lawyers: V S MANOJ
• Keywords: Depreciation; Business expenditure; Permanent establishment; Revenue expenditure; Capital expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , ! ' ! # . $ % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO.1367/MDS./2014 / ASSESSMENT YEAR :2004-05 M/S.APEX LABORATORIES LTD., (NOW APEX LABORATORIES PVT LTD.) 38,CP RAMASWAMY ROAD, ALWARPET, CHENNA 600 018. VS. ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLEI(1), CHENNAI. [PAN AAACA 5174 G ] ( () / APPELLANT) ( *+() /RESPONDENT) ./ I.T.A.NO.1235 & 1367/MDS./2014 / ASSESSMENT YEARS :2004-05 & 2007-08 ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLEI(1), CHENNAI. VS. M/S.APEX LABORATORIES LTD., (NOW APEX LABORATORIES PVT LTD.) 38,CP RAMASWAMY ROAD, ALWARPET, CHENNA 600 018. [PAN AAACA 5174 G ] ( () / APPELLANT) ( * +() /RESPONDENT) ASSESSEE BY : MR.V.S.MANOJ,ADVOCATE REVENUE BY : MR.N.MADHAVAN,JCIT, DR / DATE OF HEARING : 13 - 06 - 201 6 / DATE OF PRONOUNCEMENT : 15 - 07 - 2016 M/S.APEX LABORATORIES LTD. ITA NOS.1367,1235,1342/MDS./14 :- 2 -: , / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS CROSS APPEAL IS FILED BY THE ASSESSEE IN IT A NO.1367/MDS./14 & THE REVENUE IN ITA NO.1235/MDS/1 4 ARE DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF IN COME TAX(A),LARGE TAXPAYER UNIT, CHENNAI DATED 29.01.201 4 PERTAINING TO THE ASSESSMENT YEAR 2004-05. ANOTHER APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF I NCOME-TAX (APPEALS),LARGE TAXPAYER UNIT DATED 29.01.14 PERTAI NING TO ASSESSMENT YEAR 2007-08. SINCE ISSUES INVOLVED IN A LL THESE REVENUES APPEALS AS WELL AS ASSESSEES APPEAL ARE COMMON IN NATURE, THESE APPEALS ARE CLUBBED TOGETHER, HEARD TOGETHER, DISPO SED OFF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. ITA NO.1367/MDS./12(ASSESSEES APPEAL: 2004-05) 2. IN THIS APPEAL, ONLY ONE GROUND FOR OUR CONSIDE RATION IS WITH REGARD TO NOT GRANTING 100% DEPRECIATION ON SOFTWAR E PURCHASE. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE MANUFACTURE OF PHARMACEUTICAL FORMULATIONS, FILED R ETURN OF INCOME ON 31.01.2004 ADMITTING TOTAL INCOME OF ` 2,70,97,390/-. SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY AND ASSESSMENT U /S.143(3) OF THE ACT WAS COMPLETED ON 13.11.2006 WITH CERTAIN ADDITI ONS. M/S.APEX LABORATORIES LTD. ITA NOS.1367,1235,1342/MDS./14 :- 3 -: 3.1 THE ISSUE RELATES TO THE ABOVE GROUND RAISED P ERTAINING TO DISALLOWANCE OF ` 4,65,861/- TOWARDS SOFTWARE EXPENSES TREATING IT AS CAPITAL EXPENDITURE. THE AO TREATED THE EXPENDITURE OF ` 6,65,516/- INCURRED TOWARDS PURCHASE OF SOFTWARE AS CAPITAL IN NATURE AND ALLOWED DEPRECIATION ON IT @ 30% SINCE IT WAS ACQUI RED DURING THE SECOND HALF OF THE RELEVANT PREVIOUS YEAR AS UNDER: EXPENDITURE CLAIMED ON SOFTWARE 6,65,516 LESS: DEPRECIATION ALLOWABLE @ 30% 1,99,655 AMOUNT DISALLOWED 4,65,861 AGGRIEVED WITH THE ORDER OF AO, ASSESSEE CARRIED TH E APPEAL BEFORE THE LD.CIT(A). ON APPEAL, THE LD.CIT(A) OBSERVED THAT FROM ASSESSMENT YEAR 2003-04, SOFTWARE HAS ALSO BEEN INCLUDED ALONG WITH COMPUTER IN THE DEPRECIATION TABLE FOR THE PURPOSE OF CLAIM OF DEPRECIATION AND ALSO THE ACT ITSELF CLEARLY RECOGNIZES THAT EXPENDITURE ON SOFTWARE IS A CAPITAL EXPENDITURE BY INCLUDING THE SAME IN THE SC HEDULE SPECIFYING THE DEPRECIATION RATES. FURTHER, CIT(A) OBSERVED T HAT SINCE COMPUTER SOFTWARE HAS BEEN SPECIFICALLY INCLUDED IN THE DEP RECIATION TABLE FROM ASSESSMENT YEAR 2003-04, THERE IS NO NEED TO GIVE I T A DIFFERENT TREATMENT. HENCE, THE CIT(A) SUSTAINED THE ADDITION S MADE BY THE AO. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. M/S.APEX LABORATORIES LTD. ITA NOS.1367,1235,1342/MDS./14 :- 4 -: 4. THE LD.A.R SUBMITTED THAT THE SOFTWARE PURCHASE D BY THE ASSESSEE IS ACCOUNTING SOFTWARE NAMELY PHARMA PROTO COL, WHICH IS APPLICATION SOFTWARE AND ACCOUNTING SOFTWARE NAMELY TALLY, WHICH WAS REPLACED BY NEW APPLICATION SOFTWARE. FURTHER, LD.A.R SUBMITTED THAT APPLICATION OF SOFTWARE IS USED TO ENHANCE THE PRODUCTIVITY AND EFFICIENCY OF PRESENTING THE DATA AND IS NOT ASSET. LD.A.R SUBMITTED THAT SINCE SOFTWARE NEEDS REGULAR UP-GRADATIONS AND ALSO DOES NOT HAVE ENDURING BENEFITS, THEREFORE, IT IS IN THE NATURE O F REVENUE EXPENSES. THE LD.A.R PLACED RELIANCE IN THE FOLLOWING CASE LA WS IN SUPPORT OF HIS ARGUMENTS. A) IN THE CASE OF ACIT VS.TORRENT PHARMACEUTICALS L TD. REPORTED IN (2012) 137 ITD 301. B) IN THE CASE OF CIT VS.SUNDARAM CLAYTON LTD. REPO RTED IN (2010) 321 ITR 69(MDS.) C) IN THE CASE OF CIT VS. M/S.ASAHI INDIA SAFETY GL ASS LTD. REPORTED IN 2011 TIOL 705(DELHI) D) IN THE CASE OF CIT VS.VARINDER AGRO CHEMICALS LT D. REPORTED IN (2009) 309 ITR 272(P&H) E) IN THE CASE OF DCIT VS. EXPRESS AIROTONICS PVT. LTD. IN ITA NO.7105/MUM./2002 F) IN THE CASE OF FAG BEARING INDIA LTD. VS. DCIT R EPORTED IN (2011) 12 ITR (TRI) 395. M/S.APEX LABORATORIES LTD. ITA NOS.1367,1235,1342/MDS./14 :- 5 -: G) IN THE CASE OF ACIT VS. MOTOROLA INDIA P LTD REP ORTED IN 2013 TIOL 684. H) IN THE CASE OF AMWAY INDIA ENTERPRISES VS. DCIT REPORTED IN 2008 TIOL 97 ITAT DELHI SPECIAL BENCH I) IN THE CASE OF ITO VS. SPICE COMMUNICATIONS LTD. REPORTED IN (2010) TIOL 41 (DEL.) J) IN THE CASE OF ACIT VS.VOITH PAPER FABRICS INDIA LTD. REPORTED IN 2010 TIOL 427 DEL. K) IN THE CASE OF QUEST SCREENING SERVICES P LTD. V S. ACIT REPORTED IN 2011 TIOL 36 MUM. 5. ON THE OTHER HAND, LD.D.R SUBMITTED THAT THE AS SESSEE IS ENGAGED IN THE MANUFACTURE OF PHARMACEUTICAL FORMUL ATION AND NOT SOFTWARE DEVELOPMENT OR ANY SUCH RELATED ACTIVITIES . FURTHER, LD.D.R SUBMITTED THAT THE ASSESSEE HAS SHOWN SOFTWARE ALON G WITH COMPUTER IN THE DEPRECIATION TABLE FOR THE PURPOSE OF CLAIM OF DEPRECIATION. HENCE, LD.D.R ENDORSED THE VIEW OF THE LOWER AUTHOR ITIES. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, THE ASSESSEE ACQUIRED THE SOF TWARE FOR THE PURPOSE OF ITS BUSINESS AND IT IS A INTANGIBLE ASSE T UNDER CLAUSE (IIA) TO SEC.32(I) OF THE ACT. THUS, OUTRIGHT ACQUISITION O F COMPUTER SOFTWARE IS M/S.APEX LABORATORIES LTD. ITA NOS.1367,1235,1342/MDS./14 :- 6 -: NOTHING BUT ACQUISITION OF KNOW-HOW AND RELEVANT EX PENDITURE IS A CAPITAL EXPENDITURE. THIS SOFTWARE FALLS IN THE NEW ENTRY WAS INTRODUCED AS SL. NO.III(5) IN PART-A OF THE TABLE OF RATES FOR THE DEPRECIATION IN APPENDIX-I IN RESPECT OF COMPUTER I NCLUDING COMPUTER SOFTWARE. IN VIEW OF THE ABOVE, WE HAVE NO DOUBT IN OUR MIND THAT SOFTWARE ACQUIRED BY THE ASSESSEE IS INTANGIBLE W ITHIN MEANING OF CLAUSE (II) TO SEC.32(I) OF THE ACT AND THE CIT(A) CONSIDERING THE ABOVE OBSERVED THAT IT IS AN INTANGIBLE ASSET ENTITLED FO R DEPRECIATION @ 60% AND BEING THE SOFTWARE USED BY THE ASSESSEE DURING THE SECOND HALF OF THE RELEVANT PREVIOUS YEAR AND GRANTED DEDUCTION AT 30% AND THE SAME IS CONFIRMED. THIS GROUND IS DISMISSED. 7. IN THE RESULT, THE APPEAL OF ASSESSEE IN ITA NO .1367/MDS./14 STANDS DISMISSED. ITA NO.1235/MDS./14 (REVENUES APPEAL:A.Y 2004-05) 8. IN THIS APPEAL, ONLY ONE GROUND FOR OUR CONSIDE RATION IS WITH REGARD TO DELETION OF DISALLOWANCE OF DEFERRED REVE NUE EXPENDITURE WRITTEN OFF TO THE TUNE OF ` 28,12,769/-. 9. THE FACTS OF THE ISSUE RELATE TO DISALLOWANCE O F DEFERRED REVENUE EXPENDITURE WRITTEN OFF. THE AO FOUND FROM THE PROF IT AND LOSS ACCOUNT THAT THE ASSESSEE HAS DEBITED UNDER THE HEAD OTHER EXPENSES AS M/S.APEX LABORATORIES LTD. ITA NOS.1367,1235,1342/MDS./14 :- 7 -: DEFERRED REVENUE EXPENDITURE WRITTEN OFF. WHEN THE AO ASKED THE BREAK-UP OF THE EXPENDITURE OF ` 28,12,769/-, THE ASSESSEE FURNISHED THE DETAILS AS UNDER:- DETAILS F.Y INCURRED AMOUNT (R S.) FACTORY INAUGURATION EXPENSES 2001-02 16,82,597 CLINICAL TRIALS 2001 - 02 4,12,614 NEW PRODUCT DEVELOPMENT 2001 - 02 6,63,724 NEW PRODUCT DEVELOPMENT 2002-03 53,833 TOTAL 28,12,769 THE AO HAD DISALLOWED THE ABOVE EXPENSES SINCE THEY RELATE TO PRIOR PERIOD AND HAVE NO RELEVANCE FOR COMPUTING THE INCO ME DURING THIS YEAR. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE CA RRIED THE APPEAL BEFORE THE LD.CIT(A). ON APPEAL, THE LD.CIT(A) RELI ED ON THE JUDGEMENT OF M/S.MADRAS INDUSTRIAL INVESTMENT CORPO RATION LTD. VS. CIT (1997) 225 ITR 802 AND ALLOWED THE CLAIM OF ASS ESSEE OBSERVING THAT IT IS TO BE CONSIDERED AS DEFERRED REVENUE EXP ENDITURE. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE HAVE GONE THROUGH THE ABOVE EXPENDITURE. THE EXPENDITURE IS NOT RELATING TO THE ASSESSMENT YEAR UNDER CONSIDERATION AND IT WAS INCURRED PRIOR TO THE COMMENCEMENT OF TH E ASSESSEES BUSINESS AND IT IS PRIOR PERIOD EXPENDITURE AND THE ASSESSEE PLACED M/S.APEX LABORATORIES LTD. ITA NOS.1367,1235,1342/MDS./14 :- 8 -: RELIANCE IN THE JUDGEMENT OF M/S.MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. CIT (SUPRA) HAVE NO RELEVANCE. SINCE THE EXPENDITURE IS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF MARKETING OF THE BUSINESS OF THE ASSESSEE IN EARLIE R ASSESSMENT YEAR, IT CANNOT BE ALLOWED AS REVENUE EXPENDITURE DURING THE ASSESSMENT YEAR UNDER CONSIDERATION AS THIS EXPENDITURE IS NOT RELA TED TO THE ASSESSMENT YEAR 2004-05. ACCORDINGLY, THIS GROUND O F REVENUE IS ALLOWED. 11. IN THE RESULT, THE APPEAL OF REVENUE IN ITA NO .1235/MDS./14 STANDS ALLOWED. ITA NO.1342/MDS./14 (REVENUES APPEAL:A.Y 2007-08) 12. IN THIS APPEAL, THE FIRST GROUND FOR OUR CONSI DERATION IS WITH REGARD TO DELETION OF DISALLOWANCE U/S.40(A)(IA) IN RESPECT OF AMOUNTS PAID BY THE ASSESSEE TO IN FOREIGN CURRENCY TOWARDS ADVANCE FOR PURCHASE OF SOFTWARE, WITHOUT DEDUCTION OF TAX AT S OURCE AND OBTAINING CERTIFICATE U/S.195(2), WHICH WOULD CLEARLY FALL UN DER EXPLANATION 2 TO U/S.9(1)(VI) OF THE ACT. 13. THE FACTS OF THE ISSUE ARE THAT THE PAYMENT WA S MADE IN FOREIGN CURRENCY AS ADVANCE FOR PURCHASE OF SOFTWARE. THIS PAYMENT OF ` 44,19,188/- WAS DISALLOWED BY THE AO ON THE GROUND THAT THE ASSESSEE FAILED TO COMPLY WITH SECTION 195 R.W.S.9( 1)(VI) OF THE ACT. AGGRIEVED, THE ASSESSEE CARRIED THE APPEAL BEFORE T HE LD.CIT(A). ON M/S.APEX LABORATORIES LTD. ITA NOS.1367,1235,1342/MDS./14 :- 9 -: APPEAL, THE CIT(A) OBSERVED THAT THE ASSESSEE MADE PAYMENT IN FOREIGN CURRENCY BY WAY OF ADVANCE PAYMENTS TOWARDS PURCHASE OF SOFTWARE WAS CLEARLY STATED IN THE ASSESSMENT ORDER . FURTHER, HE OBSERVED THAT IF THE PAYMENT IS TOWARDS PURCHASE, T HEN IT WILL NOT FALL UNDER THE SUBJECT OF TDS, THEREFORE, DISALLOWANCE M ADE BY THE AO IS EXCESSIVE AND ALSO OBSERVED THAT AS SUBMITTED BY LD .A.R, THE OTHER CONDITIONS LIKE PE, PROVISIONS OF THE SECTION 9 ETC . ARE ALSO IN FAVOUR OF THE ASSESSEE. HENCE, LD.CIT(A) DELETED THE ADDITION MADE U/S.40(A)(IA) BY THE AO. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 14. BEFORE US, LD.D.R SUBMITTED THAT THE PAYMENT W AS MADE IN FOREIGN CURRENCY AS ADVANCE FOR PURCHASE OF SOFTWAR E, WITHOUT DEDUCTION OF TAX AT SOURCE AND OBTAINING CERTIFICAT E U/S.195(2), WOULD CLEARLY FALL UNDER EXPLANATION 2 TO U/S.9(1)(VI) OF THE ACT. FURTHER, LD.D.R PLACED RELIANCE IN THE CASE OF GRACEMAC CORP N. VS. ACIT REPORTED IN 134 TTJ 257 WHEREIN IT WAS HELD THAT CO NSIDERATION RECEIVED WILL BE IN THE NATURE OF ROYALTY IF IT IS IN RESPECT OF TRANSFER OF ALL OR ANY RIGHT (INCLUDING GRANT OF LICENCE) IN RE SPECT OF SAME, UNDER CLAUSE (V) OF EXPLANATION 2 OF SEC.9(1)(VI). FURTHE R, LD.D.R SUBMITTED THAT THE PURPOSE BEHIND MAKING SUCH PAYMENT IS FOR THE PURPOSE OF UTILIZING THE SAME IN INDIA AND SHALL BE CONSIDERED ONLY AS THE PAYMENT M/S.APEX LABORATORIES LTD. ITA NOS.1367,1235,1342/MDS./14 :- 10 - : MADE TOWARDS ROYALTY, WHICH WOULD CLEARLY FALL UNDE R EXPLANATION 2 TO U/S.9(1)(VI) OF THE ACT. LD.D.R SUBMITTED THAT THE ASSESSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE ON THE PAYMENTS TO THE NON RESIDENTS AND IN ANY CASE, IT WAS NOT OPEN FOR THE ASSESSEE TO CO NCLUDE SUO-MOTO THAT THE PAYMENTS MADE TO NON-RESIDENTS ARE NOT CHA RGEABLE TO TAX AS THE PROPER COURSE FOR THE ASSESSEE WOULD BE TO MAKE AN APPLICATION U/S.195(2) TO THE CONCERNED AO, IN THE ABSENCE OF W HICH THE ASSESSEE OUGHT TO HAVE DEDUCTED TAX AT APPLICABLE RATES. 15. ON THE OTHER HAND, LD.A.R SUBMITTED THAT WHEN THE GOODS ARE PURCHASED, THERE IS NO INCOME ARISING WHICH IS CHAR GEABLE UNDER THE PROVISIONS OF THE ACT AND NONE OF THE INGREDIENTS S ET OUT IN SECTION 9 OF THE ACT HAS BEEN MET AND THEREFORE, THERE IS NO INC OME ACCRUING OR ARISING IN INDIA IN THE CASE OF PURCHASE OF GOODS. FURTHER, FOREIGN COMPANY DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA AND IN THE ABSENCE OF INCOME ACCRUING IN INDIA, S.195 HAS NO A PPLICATION AND HENCE DISALLOWANCE IS NOT WARRANTED. LD.A.R PLACED RELIANCE IN THE JUDGEMENT OF SUPREME COURT CASES IN ASSOCIATED CEME NT COMPANY VS. CIT REPORTED IN (2001) 128 ELT 21(SC) AND TATA CONS ULTANCY SERVICES V. STATE OF ANDHRA PRADESH REPORTED IN (2004) 178 E LT 22(SC). M/S.APEX LABORATORIES LTD. ITA NOS.1367,1235,1342/MDS./14 :- 11 - : 16. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. SINCE WE HAVE ALREADY HELD THE PURCHASE OF SOFTWARE IS AN INTANGIBLE ASSET AND THE ASSESSEE IS ENTITLED FOR D EPRECIATION IN THE ASSESSMENT YEAR 2004-05, APPLYING THE SAME RATIO WE ARE OF THE OPINION THAT BEING THE PURCHASE OF SOFTWARE, IT CAN NOT BE LIABLE FOR TDS IN VIEW OF THE JUDGEMENT OF SUPREME COURT IN THE CA SE OF G.E.INDIA TECHNOLOGY CENTRE P LTD VS. CIT REPORTED IN [2010] 327 ITR 456 (SC). ACCORDINGLY, THIS GROUND OF REVENUE IS DISMISSED. 17. THE NEXT GROUND IN THIS APPEAL FOR OUR CONSIDER ATION IS WITH REGARD TO DELETION OF DISALLOWANCE OF DEFERRED REVENUE EXP ENDITURE WRITTEN OFF TO THE TUNE OF ` 23,20,678/-. 18. THIS ISSUE IS ALREADY CONSIDERED IN THE REVENU ES APPEAL IN ITA NO.1235/MDS./2014 WHEREIN HELD THAT THE EXPENDITURE IS NOT RELATED TO THE ASSESSMENT YEAR UNDER CONSIDERATION. IT IS A P RIOR PERIOD EXPENDITURE AND CANNOT BE CLAIMED IN THE ASSESSMENT YEAR UNDER CONSIDERATION AS BUSINESS EXPENDITURE. HENCE, THIS GROUND OF REVENUE IS ALLOWED. 18. IN THE RESULT, THE APPEAL OF REVENUE IN ITA NO. 1342/MDS./14 STANDS PARTLY ALLOWED. M/S.APEX LABORATORIES LTD. ITA NOS.1367,1235,1342/MDS./14 :- 12 - : 19. IN THE RESULT, THE APPEAL OF ASSESSEE IN ITA NO.1367/MDS./14 IS DISMISSED AND THE APPEAL OF REVENUE IN ITA NO.1235/ MDS./14 IS ALLOWED & THE APPEAL OF THE REVENUE IN ITA NO.134 2/MDS./14 IS PARTLY ALLOWED ORDER PRONOUNCED ON 15 TH JULY, 2016, AT CHENNAI. SD/ - SD/ - ( . ! ) ( DUVVURU RL REDDY ) ) % / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 15 TH JULY, 2016 K S SUNDARAM &' ) *+ ,+ / COPY TO: 1 . -. / APPELLANT 4. / / CIT 2. )0-. / RESPONDENT 5. +12 ) 3 / DR 3. / () / CIT(A) 6. 2! 4 / GF