Telsima Communications Pvt Ltd , Bangalore V. Deputy Commissioner of Income tAx Circle-12(4), Bangalore

ITA 1726/BANG/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 2879 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-08-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 28-08-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Question of law; Revenue expenditure; Capital expenditure
• Section: 37

Judgement Text

IT(TP)A 1726/BANG/2017 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU BENCH 'C', BENGALURU BEFORE SHRI. A. K. GARODIA, ACCOUNTANT MEMBER AND SHRI. LALIET KUMAR, JUDICIAL MEMBER I.T(TP).A NO.1726/BANG/2017 (ASSESSMENT YEAR : 2010-11) TELSIMA COMMUNICATIONS P. LTD, SALARPURIA TOUCH STONE, MARATHAHALLI, SARJAPUR OUTER RING ROAD, BENGALURU 560 087 .. APPELLANT PAN : AABCT9826D V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 12(4), BENGALURU .. RESPONDENT ASSESSEE BY : SHRI. SHARATH RAO, CA REVENUE BY : SHRI. S. T. SESHADRI, JCIT HEARD ON : 21.08.2018 PRONOUNCED ON : 29.08.2018 O R D E R PER LALIET KUMAR, JUDICIAL MEMBER : THE PRESENT APPEAL IS FILED BY THE ASSESSEE AGAINS T THE ORDER OF THE CIT (A) -7, BENGALURU, DT.31.05.2017, FOR THE A SSESSMENT YEAR 2010-11, ON THE FOLLOWING GROUNDS : IT(TP)A 1726/BANG/2017 PAGE - 2 02. IT IS THE CASE OF THE ASSESSEE THAT ITS CASE IS COVERED BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT P ASSED IN THE CASE OF DCIT V. TEJAS NETWORKS LTD [55 TAXMANN.COM 55], WHEREIN ON IDENTICAL FACTS THE HONBLE JURISDICTIONAL HIGH /CO URT ALLOWED THE CASE OF TEJAS NETWORKS LTD. IT WAS THE CASE OF THE ASSESSEE THAT THE FACTS OF THE CASE ARE SIMILAR TO THAT OF TEJAS NETW ORKS LTD, AND IN FACT THE ASSESSEE HAS TABULATED THE FACTS OF TEJAS NETWORKS LTD, WITH THE APPEAL BEFORE US AND DESPITE THAT, THE CIT (A) IN A CRYPTIC AND STEREOTYPED MANNER HAS DISALLOWED THE CLAIM OF THE ASSESSEE. FOR THAT PURPOSES OUR ATTENTION WAS DRAWN TO PARAS 5.5. AND 5.6 OF THE IMPUGNED ORDER, TO THE FOLLOWING EFFECT : IT(TP)A 1726/BANG/2017 PAGE - 3 5.5 RESEARCH IS ORIGINAL AND PLANNED INVESTIGATION UNDERTAKEN WITH THE HOPE IN GAINING NEW SCIENTIFIC OR TECHNICAL KNOWLEDGE AND UNDERSTANDING AND THE WORD DEVELOPMENT CONFLATES THE TRANSLATION OF RESEARCH F INDINGS OR OTHER KNOWLEDGE INTO A PLAN OR DESIGN FOR THE PRODU CTION OF NEW OR SUBSTANTIALLY IMPROVED MATERIALS, DEVICES, P RODUCTS, PROCESSES, SYSTEMS OR SERVICES PRIOR TO THE COMMENC EMENT OF COMMERCIAL PRODUCTION. COSTS INCURRED TO MAINTAIN PRODUCTION OR TO PROMOTE SALES OF EXISTING PRODUCTS ARE EXCLUDED FROM THE COSTS OF RESEARCH AND DEVELOPMENT , THUS, THE COSTS OF ROUTINE OR PERIODIC MINOR MODIFICATION S TO EXISTING PRODUCTS, PRODUCTION LINES, MANUFACTURING PROCESSES AND OTHER ONGOING OPERATIONS AS WELL AS ROUTINE OR PROMOTIONAL COSTS OF MARKET RESEARCH ARE EXCLUDED. THE HONBLE HIGH COURT HAS ALLOWED SUCH EXCLUDED EXPENSE S AS ALLOWABLE EXPENSES. THESE EXPENSES DEBITED UNDER RE -SEARCH AND DEVELOPMENT, ALSO DUES NUT FALL UNDER THE DEFIN ITION OF SCIENTIFIC . RESEARCH ' AS GIVEN IN SECTION 43(4)(II) OF THE ACT AND THE APPELLANT HAS ALSO NOT CLAIMED FOR THE SAME . 5.6RESPECTFULLY CONSIDERING THE DECISION OF LIONBLE HIGH COURT OF KARNATAKA IN THE CASE OF TEJAS NETWORKS LTD. (S UPRA), OF THE CONSIDERED OPINION THAT THE FACTS OF THAT APPELLANT 'S CASE IS DISTINGUISHABLE AND THE EXPENSES DEBITED ARE NOT OF THE SAME NATURE ON WHICH THE HONBLE COURT HAS ALLOWED THE E XPENSES AS REVENUE EXPENDITURE. ACCORDINGLY, THE ADDITION MADE BY THE APPELLANT IS SUSTAINED / SUBJECT TO ALLOWABILITY OF DEPRECIATION TO THE EXTENT OF IPR OF SOFTWARE OWNED BY THE APPELLAN T. 03. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THA T THE ORDER PASSED BY THE AO AND THE CIT (A) ARE NOT SUSTAINABL E IN THE EYES OF LAW AND HE, MORE PARTICULARLY, RELIED ON PARAS 2.4 AND 2.5 OF THE ASSESSMENT ORDER, WHICH IS AS UNDER : IT(TP)A 1726/BANG/2017 PAGE - 4 2.4. THE CONTENTION OF THE ASSESSEE COMPANY IS NOT TENABLE AS THE AFORESAID EXPENDITURE BEING IN THE N ATURE OF CONTINUOUS PROCESS TO DEVELOP AND IMPROVE NEW PRODU CTS, CREATES VALUE ADDITION FOR THE PRODUCT THEREBY ACCR UING AN ENDURING BENEFIT TO THE ASSESSEE COMPANY AND THUS T HE EXPENDITURE IS CAPITAL IN NATURE. 2,5 FURTHER, THE ASSESSEE COMPANY HAS NOT BEEN ABLE TO SUBSTANTIATE THAT THE ABOVE EXPENDITURE IS NOT IN T HE NATURE OF CAPITAL EXPENDITURE U/S 35(1)(I) OR U/S 37 OF THE I NCOME TAX ACT, 1961 OR EXPENDITURE OF CAPITAL NATURE ON SCIEN TIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE COMPANY U/S.35(1)(IV) RWS 43(4)(II) OF THE INCOME T AX ACT, 1961 WHICH CREATES ACQUISITION OF RIGHTS IN OR ARIS ING OUT OF SCIENTIFIC RESEARCH. IT IS ALSO PERTINENT TO MENTIO N HERE THAT SIMILAR EXPENDITURES WERE DISALLOWED IN THE A.Y.200 8-09 ALSO. HENCE THIS AMOUNT IS FOUND TO BE NOT AN ALLOW ABLE EXPENDITURE. THEREFORE AN AMOUNT OF RS.12,76,575/- HAS BEEN ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE COMP ANY. ADDITION OF RS.12,76,575/-. 04. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ASSESSEE BEFORE THE LOWER AUTHORITIES HAS GIVEN THE TABULATED FACTS OF ITS CASE AND ALSO TEJAS NETWORK S LTD. FURTHER THE ASSESSEE MADE OUT A CASE THAT THE EXPENDITURE O F THIS NATURE WAS ALLOWABLE IN TERMS OF JUDGMENT BY THE HONBLE JURI SDICTIONAL HIGH COURT IN TEJAS NETWORKS LTD AND IS REQUIRED TO TRE ATED AS AN EXPENDITURE INCURRED FOR THE PURPOSE OF SCIENTIFIC RESEARCH WHICH IS ALLOWABLE U/S.35A . FOR READY REFERENCE WE HEREIN BELOW REPRODUCING THE RELEVANT PORTION OF THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN TEJAS NETWORKS LTD (SU PRA) : '11. IN THE LIGHT OF THE AFORESAID FACTS AND THE RI VAL CONTENTIONS, IT IS CLEAR THAT THE ASSESSEE IS IN THE BUSINESS OF DEVEL OPING AND SELLING IT(TP)A 1726/BANG/2017 PAGE - 5 LEADING EDGE OPTICAL NETWORKING PRODUCTS FOR WORLDW IDE CUSTOMERS. IT HAS DEVELOPED SOFTWARE DIFFERENTIATED, NEXT GENE RATION PRODUCTS THAT ENABLE TELECOMMUNICATION CARRIERS TO BUILD CON VERGED NETWORKS. THE LIFE SPAN OF THIS PRODUCT IS HARDLY A YEAR. BEC AUSE OF COMPETITION IN THE MARKET, THE ASSESSEE HAS TO COME OUT WITH NE W FEATURES EVERY YEAR IF THEY WANT TO BE IN THE FIELD. THEREFORE, TH ERE IS A CONSTANT UPGRADATION OF THE ORIGINAL PRODUCT. IT IS IN THAT CONTEXT SUBSTANTIAL AMOUNT IS SPENT TOWARDS EMPLOYEES COST AND THE UPGR ADATION ALSO INCLUDES USE OF COMPONENTS PURCHASED EVERY YEAR. IN FACT, THOSE COMPONENTS ARE USED FOR MANUFACTURING PRINTED CIRCU IT BOARDS. EVERY YEAR THESE CIRCUIT BOARDS UNDERGO MODIFICATIO N, CHANGES. THEREFORE, THE EXPENSES INCURRED IN THIS REGARD IS IN THE NATURE OF REVENUE EXPENDITURE. 12. THE APEX COURT IN THE CASE OF EMPIRE JUTE COMPA NY LIMITED V. CIT (1980 VOL. 124 PAGE 1) HAS HELD THAT , THE DECIDED CASES HAVE, FROM TIME TO TIME, EVOLVED VARIOUS TEST S FOR DISTINGUISHING BETWEEN CAPITAL AND REVENUE EXPENDIT URE BUT NO TEST IS PARAMOUNT OR CONCLUSIVE. THERE IS NO ALL EMBRACING FORMULA WHICH CAN PROVIDE A READY SOLUTION TO THE PROBLEM; NO TOU CHSTONE HAS BEEN DEVISED. EVERY CASE HAS TO BE DECIDED ON ITS OWN FA CTS, KEEPING IN MIND THE BROAD PICTURE OF THE WHOLE OPERATION IN RE SPECT OF WHICH THE EXPENDITURE HAS BEEN INCURRED. FURTHER THEY HEL D THAT, THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OB TAINING ADVANTAGE OF ENDURING BENEFIT, MAY, NONE THE LESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN A SSESSEE THAT MAKES IT A CAPITAL EXPENDITURE. WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE. IF T HE ADVANTAGE CONSISTS MERELY IN FACILITATING THE ASSESSEE'S TRAD ING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE 'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY W HILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE O N REVENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR A N INDEFINITE FUTURE. THE TEST OF ENDURING BENEFITS IS, THEREFORE , NOT A CERTAIN OR CONCLUSIVE TEST AND IT CANNOT BE APPLIED BLINDLY AN D MECHANICALLY WITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMST ANCES OF A GIVEN CASE. 13. IN FACT, THE APEX COURT IN THE CASE OF ALEMBIC CHEMICAL WORKS CO. LTD. V. CIT, GUJARAT (1989 VOL. 177 PAGE 377) H ELD THAT, IT WOULD BE UNREALISTIC TO IGNORE THE RAPID ADVANCES IN RESE ARCH IN ANTIBIOTIC MEDICAL MICROBIOLOGY AND TO ATTRIBUTE A DEGREE OF E NDURABILITY AND PERMANENCE TO THE TECHNICAL KNOW-HOW AT ANY PARTICU LAR STAGE IN IT(TP)A 1726/BANG/2017 PAGE - 6 THIS FAST CHANGING AREA OF MEDICAL SCIENCE. THE STA TE OF THE ART IN SOME OF THESE AREAS OF HIGH PRIORITY RESEARCH IS CO NSTANTLY UPDATED SO THAT THE KNOW-HOW CANNOT BE SAID TO BE THE ELEME NT OF THE REQUISITE DEGREE OF DURABILITY AND NONEPHEMERALITY TO SHARE THE REQUIREMENTS AND QUALIFICATIONS OF AN ENDURING CAPI TAL ASSET. THE RAPID STRIDES IN SCIENCE AND TECHNOLOGY IN THE FIEL D SHOULD MAKE US A LITTLE SLOW AND CIRCUMSPECT INTO READILY PIGEON-HOL ING ON OUTLAY SUCH AS THIS AS CAPITAL.... THE IMPROVISATION IN THE PRO CESS AND TECHNOLOGY IN SOME AREAS OF THE ENTERPRISE WAS SUPPLEMENTAL TO THE EXISTING BUSINESS AND THERE WAS NO MATERIAL TO HOLD THAT IT AMOUNTED TO A NEW OR FRESH VENTURE. THE FURTHER CIRCUMSTANCE THAT THE AGREEMENT PERTAINED TO A PRODUCT ALREADY IN THE LINE OF THE A SSESSEE'S ESTABLISHED BUSINESS AND NOT TO A NEW PRODUCT INDIC ATES THAT WHAT WAS STIPULATED WAS AN IMPROVEMENT IN THE OPERATIONS OF THE EXISTING BUSINESS AND ITS EFFICIENCY AND PROFITABILITY NOT R EMOVED FROM THE AREA OF THE DAY-TO-DAY BUSINESS OF THE ASSESSEE'S E STABLISHED ENTERPRISE. 14. WE ARE OF THE VIEW THE AFORESAID STATEMENT OF L AW EQUALLY HOLDS GOOD IN THE AREA OF TELECOMMUNICATION, MAY BE WITH MORE FORCE. HAVING REGARD TO THE FACTS OF THIS CASE, THE EXPENDITURE THAT IS CLAIMED IS FO R UPGRADING THE EXISTING PRODUCT. THEREFORE, THE PRODUCT SO UPGRADED GOES ON CHANGING AS TIME PROGRESSES, KEEPING IN MIND THE REQUIREMENT AND THE COMPETITION IN THE MARKET. THE TRIBUNAL RIGHTLY HELD THAT THE EXPENDITURE IS NOT I N THE NATURE OF CAPITAL EXPENDITURE BUT IS REVENUE EXPENDITURE. THEREFORE, THE FIRST SUBSTANTIAL QUESTION OF LAW IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AG AINST THE REVENUE.' IN OUR VIEW ONCE THE ASSESSEE HAS MADE UP A GROUND SHOWING A COMPARABILITY OF FACTS, VIS-A-VIS, TEJAS NETWORKS L TD (SUPRA) AND THAT OF THE ASSESSEE, IT IS THE BOUNDEN DUTY OF THE CIT (A) TO PASS A REASONED ORDER SHOWING AS TO WHY IN THE IDENTICAL F ACTS, THE ASSESSEE IS NOT TO ENTITLED TO RELIEF . THE NEEDF UL HAS NOT BEEN DONE BY THE CIT (A). ACCORDINGLY WE DEEM IT APPROPRIATE TO SET ASIDE THE MATTER TO THE FILE OF THE CIT (A), WITH A DIRECTIO N TO DECIDE THE ISSUE AFRESH AFTER GIVING OPPORTUNITY OF HEARING TO THE A SSESSEE IN TERMS OF THE SUBMISSIONS MADE BEFORE US AND MORE PARTICULARL Y IN THE LIGHT OF THE JUDGMENT OF THE HON;BLE JURISDICTIONAL HIGH COU RT IN THE MATTER OF TEJAS NETWORKS LTD, (SUPRA) IT(TP)A 1726/BANG/2017 PAGE - 7 05. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH DAY OF AUGUST, 2018. SD/- SD/- (A. K. GARODIA) (LALIET KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER BENGALURU DATED : 29.08.2018 MCN* COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME-TAX 4. COMMISSIONER OF INCOME-TAX(A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, BANGALORE.