AKER POWERGAS P. LTD, MUMBAI V. ADDL CIT RG 10(1), MUMBAI

ITA 1766/MUM/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 4222 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 06-01-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 13-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MAHESH SHAH
• Keywords: Capital asset; Depreciation; Transfer pricing; Double taxation relief; International transaction; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A; 90

Judgement Text

I.T.A. NO. 1355 AND 1766/MUM/2014 ASSESSMENT YEAR: 2009 - 10 PAGE 1 OF 11 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI K BENCH, MUMBAI [CORAM: PRAMOD KUMAR AM AND PAWAN SINGH JM ] I.T.A. NO. 1766/MUM/2014 ASSESSMENT YEAR: 2009 - 10 AKER POWERGAS PVT LTD . .APPELLANT POWERGAS HOUSE, 83 I THINK TECHNO CAMPUS KANJUR MA RG (E), MUMBAI 400 042 [PAN: AACD1981E] VS. ADDITIONAL COMMISSIONER OF INCOME TAX RANGE 10(1), MUMBAI .. . RESPONDENT I.T.A. NO. 1355/MUM/2014 ASSESSMENT YEAR: 2009 - 10 ADDITIONAL COMMISSIONER OF INCOME TAX RANGE 10(1), MUMBAI . . APPELLANT VS. AKER POWERGAS PVT LTD .. . RESPONDENT POWERGAS HOUSE, 83 I THINK TECHNO CAMPUS KANJUR MARG (E), MUMBAI 400 042 [PAN: AACD1981E] APPEARANCES BY: GIRISH DAVE FOR THE A SSESSEE MAHESH SHAH FOR THE RE VENUE DATE OF CONCLUDING THE HEARING : JANUARY 7 , 2016 DATE OF PRONOUNCING THE ORDER : APRIL 6 TH , 201 6 O R D E R PER PRAMOD KUMAR , AM : 1. THESE CROSS APPEALS, IN SUBSTANCE, CALL INTO QUESTION CORRECTNESS OF THE DIRECTIONS DATED 26 TH NOVEMBER, 2013, ISSUED BY THE DISPUTE RESOLUTION P ANEL - I, MUMBAI, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2009 - 10. I.T.A. NO. 1355 AND 1766/MUM/2014 ASSESSMENT YEAR: 2009 - 10 PAGE 2 OF 11 2. WE WILL FIRST TAKE UP THE APP EAL FILED BY THE ASSESSEE. 3. GROUND NO. 1 IS NOT PRESSED BY THE ASSESSEE, AND IS , AS SUCH, DISMISSED FOR WANT OF PROSECUTION. 4. IN THE SECOND GROUND OF APPEAL, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE TRANSFER PRICING ADJUSTMENT UNDER SECTION 92CA(3) 2.1 THE LEARNED ADDL. CIT/DISPUTE RESOLUTION PANEL ('DRP') ERRED IN MAKING AN ADJUSTMENT OF RS.1,36,27,169 BY DETERMINING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION PERTAINING TO MANAGEMENT CHARGES (AREA MANAGEMENT COST/CORPORATE MANAGEMENT COST) AT NIL. 2.2 THE LEARNED ADDL. CIT/DRP ERRED IN IGNORING THE EVIDENCES SUBMITTED BEFORE THEM. 2.3 THE LEARNED ADDL. CIT/DRP ERRED IN UPHOLDING THE TRANSFER PRICING ADJUSTMENT, IN LAW AND ON FACTS, IN RESPECT THE APPELLANT'S TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISE IN RELATION TO MANAGEMENT CHARGES. 2.4 THE LEARNED ADDL. CIT/DRP ERRED IN DISREGARDING THE COST ALLOCATION ON THE BASIS THAT NO SERVICES WERE PROVIDED TO THE APPELLANT. 2.5 THE LEARNED ADDL. CIT/DRP ERRED IN NOT TAKING COGNIZANCE OF THE VARIOUS EVIDENCES SUBMITTED BY THE APPELLANT TO PROVE THE RENDI TION OF SERVICES AND THE BENEFIT RECEIVED IN THE RIGHT PERSPECTIVE. 2.6 THE LEARNED ADDL. CIT/DRP ERRED IN DISREGARDING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT AND ERRONEOUSLY SELECTING COMPARABLE UNCONTROLLED PRICE METHOD AS THE MOST APPROP RIATE METHOD FOR BENCHMARKING THE MANAGEMENT SERVICES RECEIVED BY THE APPELLANT WITHOUT PROVIDING ANY COMPARABLE UNCONTROLLED TRANSACTION FOR THE COMPUTATION OF ARM'S LENGTH PRICE. 2.7 THE LEARNED ADDL. CIT/DRP ERRED IN FAILING TO APPRECIATE THAT THE ALLOCATION OF MANAGEMENT CHARGES WAS NOT ADHOC AND WAS BASED ON SCIENTIFIC ALLOCATION KEYS. 2.8 THE LEARNED ADDL. CIT/DRP ERRED IN NOT CONSIDERING THE SERVICES AGREEMENTS ENTERED INTO BETWEEN THE APPELLANT AND ITS ASSOCIATED ENTERPRISE PERTAINING TO TH E ALLOCATION OF THE MANAGEMENT CHARGES IN A CORRECT PERSPECTIVE. I.T.A. NO. 1355 AND 1766/MUM/2014 ASSESSMENT YEAR: 2009 - 10 PAGE 3 OF 11 2.9 THE LEARNED ADDL. CIT/DRP ERRED IN CONCLUDING THAT THE APPELLANT WAS WORKING AS AN AKER SOLUTIONS GROUP ENTITY FROM 1973. 5. THE RELEVANT MATERIAL FACTS ARE LIKE THIS. DURING THE CO URSE O F PROCEEDINGS BEFORE THE TRANSFER PRICING OFFICER NOTICED THAT THE ASSESSEE HAS PAID MANAGEMENT FEES OF RS 1,36,27,169 TO ITS AE, AKER SOLUTIONS AS NORWAY (AKAS, IN SHORT) - THE ULTIMATE PARENT COMPANY OF THE ASSESSEE. IT WAS ALSO NOTED THAT THE ASSES SE IS CARRYING ON OPERATIONS IN INDIA SINCE 1959 AND HAS BEEN OPERATIONAL AS A FULL - FLEDGED COMPANY SINCE 1973 BUT NO SUCH MANAGEMENT FEES WAS PAID AT ANY POINT OF TIME IN PAST. IN RESPONSE TO TPO S REQUISITION FOR DETAILS, IT WAS SUBMITTED BY THE ASSESS EE THAT AKER SOLUTIONS AS HAS EXPERIENCE MANAGEMENT AND SERVICE PERSONNEL AND, THEREFORE ARE ENGAGED IN PROVIDING USEFUL AND BENEFICIAL MANAGEMENT SERVICES TO AKER THAT REQUIRES THESE SERVICES AND THAT AKER RECEIVES ASSISTANCE IN THE AREA OF BUSINESS SE RVICES, FINANCE FUNCTION, MARKETING AND MARKET RESEARCH, TECHNICAL SUPPORT AND HUMAN RESOURCES FROM PERSONNEL OF AKAS . IT WAS ALSO NOTED THAT, ACCORDING TO THE ASSESSEE, THE SERVICES ARE RENDERED BY THE OVERSEAS OFFICE PERSONNEL WHO HAVE RENDERED THE SAM E BY COMING DOWN TO INDIA, THROUGH VIDEO CONFERENCING AND TELECOM AND, IN MANY INSTANCES, PERSONNEL FROM INDIA HAD VISITED THE OVERSEAS OFFICE TO AVAIL THE SERVICES . THE TPO WAS OF THE VIEW THAT AS IT IS AN INDEPENDENT TRANSACTION, IT NEEDS TO BE BENCHMA RKED SEPARATELY. THE TPO TOOK NOTE OF THE AGREEMENT BETWEEN THE ASSESSEE AND THE AE BUT OBSERVED THAT IT HAS COME INTO EXISTENCE MUCH AFTER THE PERIOD DURING WHICH THE SERVICES ARE CLAIMED TO HAVE BEEN RENDERED. AS FOR THE ACTUAL RENDITION OF SERVICES, THE TPO WAS NOT IMPRESSED WITH THE EVIDENCES FURNISHED BEFORE HIM . HE WAS OF THE VIEW THAT THE ASSESSEE HAS FAILED TO FURNISH THE DOCUMENTARY EVIDENCE THAT IT HAS ACTUALLY RECEIVED THE SERVICES ENVISAGED UNDER THE AGREEMENT. HE WAS APPARENTLY OF THE VIEW THA T THOUGH THE VERY FACT THAT THE ASSESSEE IS DOING BUSINESS IN INDIA FOR LAST 38 YEARS AND NO SUCH SERVICES ARE REQUIRED SHOWS THAT THE CLAIM IS NOT BONAFIDE. IT WAS IN THIS BACKDROP AND HAVING HELD THAT NO SERVICES WERE RENDERED BY THE AE, THE TPO DETERMIN ED THE ARM S LENGTH PRICE OF THE SERVICES AS NIL. AGGRIEVED, ASSESSEE RAISED AN OBJECTION BEFORE THE DRP BUT WITHOUT ANY SUCCESS 6. THE ASSESSEE IS AGGRIEVED AND IS IN APPEAL BEFORE US. I.T.A. NO. 1355 AND 1766/MUM/2014 ASSESSMENT YEAR: 2009 - 10 PAGE 4 OF 11 7. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECO RD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION. 8. WE HAVE NOTED THAT LEARNED COUNSEL FOR THE ASSESSE HAS FAIRLY ACCEPTED THAT THE ASSESSEE COULD NOT LEAD THE NECESSARY EVIDENCE, IN SUPPORT OF RENDITION OF SERVICES, AT THE ASSESSMENT STAGE, AND IT WAS ONLY BEFORE THE DRP THAT THE ASSESSEE COULD PRODUCE THE EVIDENCE. HE SUBMITS THAT THIS WAS THE FIRST YEAR FOR PAYMENT OF MANAGEMENT SERVICES AND THAT THERE WERE GENUINE DIFFICULTIES PREVENTING THE ASSESSEE FROM SUBMISSI ON OF THESE DETAILS AT THE ASSESSMENT STAGE. HE HAS NOW SUBMITTED VOLUMINOUS EVIDENCES BEFORE US BUT, IN OUR CONSIDERED WITH YOU, THE RIGHT COURSE OF ACTION WILL BE THAT ALL THESE EVIDENCES ARE EXAMINED AT THE ASSESSMENT STAGE. THE EXAMINATION OF BASIC EVI DENCE AT THE APPELLATE STAGE OR EVEN AT THE STAGE OF THE DRP IS NEITHER APPROPRIATE NOR DESIRABLE, AND EVEN DOING SO, IN APPROPRIATE CASES, CALLS FOR THE COMMENTS FROM THE ASSESSMENT STAGE. WE DONOT WANT TO CONDUCT THIS EXERCISE OF APPRECIATING THE EVIDENC E, FOR THE FIRST TIME IN THE CASE OF THE ASSESSE, AT THIS LEVEL. LEARNED DEPARTMENTAL REPRESENTATIVE HAS ALSO NOT SERIOUSLY OPPOSED THIS SUGGESTION OF THE MATTER BEING REMITTED TO THE ASSESSMENT STAGE. IN THIS VIEW OF THE MATTER, AND WITH THE CONSENT OF TH E PARTIES, THE MATTER STANDS RESTORED. AS THE MATTER IS BEING REMITTED TO THE ASSESSMENT STAGE, IT WILL BE OPEN TO THE ASSESSEE TO TAKE ALL SUCH PLEAS, AS HE MAY BE ADVISED, AND THE TPO SHALL ADJUDICATE UPON THE SAME IN ACCORDANCE WITH THE LAW, BY WAY OF A SPEAKING ORDER AND AFTER GIVING YET ANOTHER FAIR OPPORTUNITY OF HEARING TO THE ASSESSEE. ORDERED ACCORDINGLY. 9. GROUND NO. 2 IS THUS ALLOWED FOR STATISTICAL PURPOSES. 10. IN GROUND NO. 3, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE: 3. DIS ALLOWANCE OF EXPENSES UNDER SECTION 14 A 3.1 THE LEARNED ADDL. CIT/DRP ERRED IN DISALLOWING RS.5,37,220 UNDER SECTION 14A AS EXPENSES INCURRED IN RESPECT OF TAX FREE INCOME. 3.2 THE LEARNED ADDL. CIT/DRP ERRED IN DISALLOWING AN AMOUNT OF RS.1,3 07 AS INTEREST UNDER RULE 8D(II) WITHOUT APPRECIATING THAT THE I.T.A. NO. 1355 AND 1766/MUM/2014 ASSESSMENT YEAR: 2009 - 10 PAGE 5 OF 11 INTEREST EXPENSE RELATES TO INTEREST ON CAR LOAN, LATE PAYMENT OF INCOME TAX AND SERVICE TAX. 3.3 THE LEARNED ADDL. CIT/DRP ERRED CONSIDERING 0.5% OF THE AVERAGE VALUE OF ENTIRE INVESTMENTS IN THE COMPUTATION OF RULE 8D, WITHOUT APPRECIATING THAT PART OF THE INVESTMENTS MADE IN MUTUAL FUNDS (WITH GROWTH SCHEME) WILL NOT GENERATE ANY TAX - FREE INCOME AND THEREFORE THE SAME OUGHT TO HAVE BEEN REDUCED IN THE COMPUTATION. 11. AS REGARDS THIS GROUND OF APPEAL, THE SHORT ISSUE THAT IS REQUIRED TO BE ADJUDICATED IS WHETHER THE INVESTMENT OF RS 8,00,00,000 IN MUTUAL FUNDS (GROWTH SCHEME) WILL BE INCLUDED IN THE ASSETS YIELDING TAX EXEMPT INCOME, FOR THE PURPOSE OF COMPUTING DISALLOWANCE UNDER SECTION 14 A R.W.R. 8D, WHEN THIS INVESTMENT DOES NOT ACTUALLY YIELD ANY TAX EXEMPT INCOME. THERE IS NO DISPUTE THAT GAINS ON REDEMPTION OF THIS INVESTMENT HAS BEEN OFFERED TO TAX, AND THAT NO TAX EXEMPT INCOME WAS EARNED BY THIS INVESTMENT. ON THESE FACTS, AND BEARI NG IN MIND THE FACT THAT THE ISSUE IS COVERED, IN FAVOUR OF THE ASSESSEE, BY DECISION OF THE COORDINATE BENCH IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2008 - 09, WE UPHOLD THE GRIEVANCE OF THE ASSESSE AND DIRECT THE ASSESSING OFFICER TO MODIFY THE DISA LLOWANCE ACCORDINGLY. AS FOR THE SMALL AMOUNT OF RS 1,307, NO ARGUMENTS WERE ADVANCED IN RESPECT OF THE SAME. IT IS TREATED AS ABANDONED IN VIEW OF THE SMALLNESS OF THE AMOUNT. 12. GROUND NO. 3 IS THUS ALLOWED IN THE ABOVE TERMS. 13. IN GROUND NO. 4, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE: 4. TAXING FOREIGN RECEIPTS ON GROSS BASIS 4.1 THE LEARNED ADDL. CIT/DRP ERRED IN MAKING ADDITION OF TAX WITHHELD OF RS.85,22,657 BY KONKOLA COPPER MINES PLC IN ZAMBIA. 4.2 THE LEARNED ADDL. CIT/DR P ERRED IN NOT APPRECIATING THAT ONLY THE NET INCOME OF RS.4,33,07,781 (I.E. AFTER WITHHOLDING TAX) IS LIABLE TO TAX IN THE HANDS OF THE APPELLANT IN INDIA. 4.3 WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED ADDL. CIT ERRED IN RESTRICTING THE CREDIT UND ER SECTION 90 TO RS.77,74,566 INSTEAD OF THE ACTUAL WITHHOLDING TAX OF RS.85,22,657 THAT WAS ADDED TO THE INCOME I.T.A. NO. 1355 AND 1766/MUM/2014 ASSESSMENT YEAR: 2009 - 10 PAGE 6 OF 11 1 4 . SO FAR AS THIS GROUND OF APPEAL IS CONCERNED, ONLY A FEW MATERIAL FACTS NEED TO BE TAKEN NOTE OF. THE ASSESSEE HAD RECEIVED A NET AMOUNT OF RS 4,33,07,781 FROM KONKOLKA COPPER MINES PLC ZAMBIA, WHILE THE TOTAL INCOME IN RESPECT OF THE SAME WAS RS 5,09,50,332 ON WHICH THE LOCAL INCOME TAX, AMOUNTING TO RS 76,42,550 WAS LEVIED IN ZAMBIA. THE CONTENTION OF THE ASSESSEE WAS THAT THE REAL INCOME O F THE ASSESSEE, FROM KONKOLKA COOPER MINES PLC ZAMBIA, WAS ONLY RS 4,33,07,781 AND ITS ONLY ON THIS INCOME THAT HE HAS CLAIMED DOUBLE TAXATION RELIEF UNDER SECTION 90 WAS CLAIMED BY THE ASSESSEE. NONE OF THESE CONTENTIONS, HOWEVER, IMPRESSED THE ASSESSING OFFICER. HE WAS OF THE VIEW THAT WHAT IS TAXABLE IS THE INCOME WHICH HAS ACCRUED, WHETHER IN INDIA OR OUTSIDE, AND NOT THE RECEIPTS. ACCORDINGLY, AN AMOUNT OF RS 5,09,50,332, AS AGAINST RS 4,33,07,781, WAS BROUGHT TO TAX. THE ASSESSEE DID RAISE AN OBJECTIO N BEFORE THE DRP BUT WITHOUT ANY SUCCESS. THE ASSESSEE IS NOT SATISFIED AND IS IN APPEAL BEFORE US. 1 5 . WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION . 1 6 . WE ARE OF THE CONSIDERED VIEW THAT THERE IS NO AMBIGUITY ON THE ASPECT WHETHER IT IS THE GROSS AMOUNT OF FOREIGN INCOME, OR THE AMOUNT NET OF TAX IN RESPECT OF FOREIGN INCOME, WHICH IS TO BE BROUGHT TO TAX. THE TAX IS ON THE INCOME, AND, AS FOR THE TAX IMPOSED IN THE SOURCE COUNTRY I.E. ZAMBIA IN THIS CASE, DOUBLE TAXATION RELIEF IS VERY WELL ADMISSIBLE UNDER SECTION 90 READ WITH ARTICLE 24 OF INDIA ZAMBIA DOUBLE TAXATION AVOIDANCE AGREEMENT [(1984) 146 ITR STAT 233]. JUST BECAUSE AN ASSESSEE DOES NO T CLAIM DOUBLE TAXATION RELIEF IN RESPECT OF AN INCOME, IT DOES NOT ENTITLE THE ASSESSEE TO EXCLUDE THAT INCOME FROM TAXABLE INCOME. NOTHING, THEREFORE, TURNS ON NOT CLAIMING DOUBLE TAXATION RELIEF ON AN INCOME, SO FAR AS TAXABILITY OF THAT INCOME IS CONCE RNED. AS FOR THE RELIEF UNDER SECTION 90, THE ASSESSEE IS ENTITLED TO RELIEF FOR THE ENTIRE INCOME. WHEN ENTIRE INCOME IS BROUGHT TO TAX, AS A COROLLARY TO THE SAME, DOUBLE TAXATION RELIEF IS TO BE GIVEN IN RESPECT OF THE SAME. TO THAT EXTENT, GRIEVANCE O F THE ASSESSEE IS JUSTIFIED. 1 7 . WITH THE OBSERVATIONS AS ABOVE, GROUND NO. 4 IS DISMISSED. I.T.A. NO. 1355 AND 1766/MUM/2014 ASSESSMENT YEAR: 2009 - 10 PAGE 7 OF 11 1 8 . IN GROUND NO. 5, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE: 5. DISALLOWANCE OF SOFTWARE EXPENSES 5.1 THE LEARNED ADDL. CIT/DRP ERRED IN DISA LLOWING COMPUTER SOFTWARE EXPENSES OF RS.5,82,62,091, WHICH ARE REVENUE EXPENSES, BY TREATING THE SAME AS CAPITAL IN NATURE. 5.2 THE LEARNED ADDL. CIT ERRED IN OBSERVING THAT SINCE THE USAGE OF SOFTWARE IS FOR MORE THAN TWO YEARS THE SOFTWARE EXPENSE S ARE TO BE REGARDED AS AN INTANGIBLE CAPITAL ASSET, WITHOUT APPRECIATING THE FACT THAT THE SOFTWARE PAYMENTS WERE FOR ACTUAL USAGE FOR A PERIOD OF LESS THAN ONE YEAR. 5.3 WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED ADDL. CIT ERRED IN ALLOWING DEPRECI ATION AT AN INCORRECT RATE OF 25%, INSTEAD OF 60% FOR COMPUTER SOFTWARE ALLOWABLE AS PER THE INCOME - TAX RULES, 1962 . 19 . SO FAR AS THIS GROUND OF APPEAL IS CONCERNED, THE RELEVANT MATERIAL FACTS ARE AS FOLLOWS. DURING THE COURSE OF ASSESSMENT PROCEEDIN GS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED A DEDUCTION OF RS 5,82,62,091 AS EXPENDITURE ON THE SOFTWARE. THE ASSESSING OFFICER WAS OF THE VIEW THAT THIS SOFTWARE WAS USED IN CERTAIN PROJECTS, RUNNING FOR A PERIOD OF 1 - 3 YEARS, IT SHOU LD BE TREATED AS A CAPITAL EXPENDITURE. THE ASSESSING OFFICER EXTENSIVELY QUOTED FROM THE SPECIAL BENCH DECISION IN THE CASE OF AMWAY INDIA ENTERPRISES VS DCIT [(2008) 11ITD SB 112 (DEL)] TO JUSTIFY THIS CONCLUSION. THE ASSESSEE DID RAISE AN OBJECTION BEF ORE THE DRP BUT WITHOUT ANY SUCCESS. IN A VERY BRIEF ORDER, AND BASED ON RATHER VAGUE AND SWEEPING GENERALIZATIONS, LEARNED DRP CONFIRMED THE DISALLOWANCE . WHILE DOING SO, THE DRP OBSERVED AS FOLLOWS: WE FIND THAT ON THE FACTS OF THE CASE AS STATED IN TH E ASSESSMENT ORDER, THE AO HAS CORRECTLY HELD THIS AMOUNT TO BE CAPITAL IN NATURE AND HAS ALLOWED DEPRECIATION THEREON. WE ARE OF THE VIEW THAT THE AO HAS CORRECTLY TREATED THE SOFTWARE EXPENDITURE AS CAPITAL IN NATURE, AS IT GAVE ENDURING BENEFIT. IT MA Y BE NOTED THAT FROM ASSESSMENT YEAR 2003 - 04, COMPUTER SOFTWARE HAS BEEN SPECIALLY INCLUDED IN THE DEPRECIATION TABLE, ON WHICH DEPRECIATION IS TO BE ALLOWED. HENCE, THIS OBJECTI ON OF THE ASSESSEE IS REJECTED. 2 0 . THE ASSESSEE IS NOT SATISFIED AND IS IN APPEAL BEFORE US. I.T.A. NO. 1355 AND 1766/MUM/2014 ASSESSMENT YEAR: 2009 - 10 PAGE 8 OF 11 2 1 . WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION 2 2 . THERE IS NO DISPUTE ABOUT GENUINENESS OF THE EXPENSES AND THE DISPUTE BE FORE US IS CONFINED TO THE QUESTION WHETHER IT SHOULD BE TREATED AS REVENUE EXPENDITURE OR AS CAPITAL EXPENDITURE. WE HAVE NOTED THAT OUT OF A TOTAL EXPENSE OF RS 5,88,62,091, AN AMOUNT OF RS 5,29,32,320 IS AID TO THE AKER NORWAY FOR ACTUAL USE OF SOFTWARE . SINCE THE AMOUNT IS PAID ON THE BASIS OF ACTUAL USE OF SOFTWARE, AND NOT FOR ACQUISITION OF SOFTWARE, THERE CANNOT BE ANY OCCASION FOR TREATING THE SAME AS CAPITAL EXPENDITURE. AS REGARDS THE REMAINING AMOUNT ALSO, AS EVIDENT FROM THE COPIES OF INVOICES BEFORE US, THE PAYMENT IS FOR THE LICENCE FEES ON ANNUAL BASIS, AND NOT FOR THE ENTIRE PROJECT PERIOD. THE FACT THAT THE LICENCE IS USED IN A PROJECT WHICH HAS A LIFE SPAN OF OVER ONE YEAR DOES NOT MEAN THAT THE BENEFIT FROM THE LICENCE FEES WAS MORE THAN ONE YEAR. IN OUR CONSIDERED VIEW, IN THE LIGHT OF THESE FACTS EVIDENT FROM MATERIAL ON RECORD, IT IS UNAMBIGUOUS THAT THE AUTHORITIES BELOW HAVE WRONGLY HELD THE SOFTWARE PAYMENT TO BE CAPITAL EXPENDITURE IN NATURE. WE, THEREFORE, UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO TREAT THE SOFTWARE EXPENSES AS REVENUE EXPENDITURE IN NATURE. 2 3 . GROUND NO. 5 IS THUS ALLOWED. 2 4 . IN GROUND NO. 6, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE: 6. EXPENSES ON SALE OF CAPITAL ASSET 6.1 THE LEARNED ADDL. CIT/DRP ERRED IN DISALLOWING A SUM OF RS.8,30,000 AS EXPENSES INCURRED IN CONNECTION WITH SALE OF CAPITAL ASSET. 6.2 WITHOUT PREJUDICE TO THE ABOVE, IN CASE THE EXPENSES ARE HELD TO BE CAPITAL IN NATURE AND DISALLOWED IN THE CURRENT YEAR, THE SAME OUGHT TO BE (A) REDUCED FROM THE CAPITAL GAIN ARISING TO THE ASSESSEE IN THE SUBSEQUENT YEAR ON SALE OF OFFICE BUILDING; (B) AND/OR ADDED TO THE BLOCK OF ASSETS OF BUILDING . I.T.A. NO. 1355 AND 1766/MUM/2014 ASSESSMENT YEAR: 2009 - 10 PAGE 9 OF 11 2 5 . SO FAR AS THIS GRIEVANCE OF THE ASSESSEE IS CONCERNE D, IT IS SUFFICIENT TO TAKE NOTE OF THE FACT THAT THE SAID AMOUNT OF RS 8,30,000 HAS BEEN DISALLOWED ON THE GROUND THAT IT PERTAINS TO SALE OF A CAPITAL ASSET. THE ASSESSEE S OBJECTION BEFORE THE DRP DID NOT YIELD ANY SUCCESS EITHER. THE ASSESSEE IS NOT S ATISFIED AND IS IN APPEAL BEFORE US. 2 6 . WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION. 2 7 . ON A PERUSAL OF DETAILS OF EXPENSES, AS PLACED ON PAGE 7 43 OF THE PAPERBOOK, WE FIND THAT THE EXPENSES PERTAINS TO LEGAL EXPENSES IN CONNECTION WITH STRUCTURING OF THE TRANSACTION AND RELATED ASPECTS. THESE EXPENSES WERE INCURRED IN THE COURSE OF THE BUSINESS AND FOR ITS OPERATIONS, THOUGH THE SPECIFIC ISSUE ON WHICH ADVICE WAS SOUGHT PERTAINED TO THE SALE TRANSACTION. MERELY BECAUSE THE TRANSACTION IN QUESTION IS A CAPITAL ASSET, THE LEGAL EXPENSES WILL NOT ALSO BECOME CAPITAL EXPENDITURE. AS WE DEAL WITH THIS ASPECT OF THE MATTER, WE ARE REMINDED OF VERY WELL ARTICULATED VIEWS OF HON BLE MADRAS HIGH COURT, IN THE CASE OF CIT VS BUSH BOAKE ALLEN INDIA LTD [(1982) 135 ITR 306 (MAD)] , WHEREIN THEIR LORDSHIPS HAD OBSERVED AS FOLLOWS: WE THINK THAT THE ONLY MERIT OF THIS ARGUMENT IS THE APPARENT LOGICAL SIMPLICITY OF IT. BUT ABSTRACT LOGIC HAS SELDOM CONDITIONED THE EVOLUTION OF PRINCIPLES IN TAX LAW, AS IN OTHER LAWS. RECENT JUDGMENTS OF COURTS HAVE TENDED TO REGARD THE NATURE AND ALLOWABILITY OF LEGAL EXPENSES NOT AS DERIVATIVE EXPENSE TAKING THE COLOUR FROM THE T RANSACTIONS TO WHICH THEY RELATE, BUT AS ITEMS WHICH ARE ENTITLED TO BE JUDGED IN THEIR OWN CHARACTER. THIS LINE OF APPROACH MAY BE SAID TO HAVE BEEN FIRMLY ESTABLISHED AS PART OF THE LAW RELATING TO ALLOWANCE OF EXPENDITURE, BY THE DECISION WHICH THE SUPR EME COURT RENDERED IN INDIA CEMENTS LTD. VS. CIT (1966) 60 ITR 52 (SC). IN THAT CASE, A COMPANY WENT IN FOR A SUBSTANTIAL LOAN OF RS. 40 LAKHS FROM A FINANCIAL HOUSE FOR A MAJOR EXPANSION OF ITS UNDERTAKING. THE LOAN WAS SECURED BY A CHARGE ON THE COMPANY' S FIXED ASSETS. THE AMOUNT WAS ADVANCED BY THE FINANCIAL HOUSE ON CERTAIN TERMS AS TO INTEREST. FOR PUTTING THROUGH THIS TRANSACTION THE COMPANY HAD TO INCUR VAKIL'S FEES FOR DRAFTING THE MORTGAGE BOND, OTHER LEGAL EXPENSES, CHARGES FOR STAMPS, REGISTRATIO N CHARGES, FOR OBTAINING THE CERTIFIED COPY OF THE MORTGAGE DEED, CHARGES FOR PREPARING AN INDEMNITY BOND AND THE LIKE. THE EXPENSES INCURRED FOR LEGAL CHARGES AMOUNTED TO RS. 84,633. THE QUESTION IN THE RELEVANT ASSESSMENT OF THE COMPANY WAS WHETHER THE E XPENSES CAN BE ALLOWED I.T.A. NO. 1355 AND 1766/MUM/2014 ASSESSMENT YEAR: 2009 - 10 PAGE 10 OF 11 AS REVENUE ITEMS. THE STAND TAKEN BY THE IT DEPARTMENT. WAS THAT SINCE THE SUM OF RS. 40 LAKHS WAS OBTAINED AS A LOAN FOR THE EXPANSION OF THE COMPANY'S BUSINESS, THE EXPENSE BY WAY OF LEGAL FEES, STAMPS AND THE LIKE MUST ALSO BE SIM ILARLY REGARDED AS ON THE CAPITAL ACCOUNT, NOT ALLOWABLE IN THE COMPUTATION OF THE COMPANY'S BUSINESS PROFITS. THIS CONTENTION, HOWEVER, WAS NEGATIVED BY THE SUPREME COURT. THEY REFERRED TO AN EXPRESS PROVISION IN THE IT ACT UNDER WHICH INTEREST ON CAPITAL BORROWED FOR, THE PURPOSE OF THE ASSESSEE'S BUSINESS WAS ALLOWABLE AS AN ITEM OF DEDUCTION IN THE COMPUTATION OF PROFITS UNDER THE HEAD 'BUSINESS'. ON THE SAME ANALOGY THEY HELD THAT ANY LEGAL EXPENSES INCURRED BY THE ASSESSEE FOR BORROWING MONEY, IRRESPE CTIVE OF WHETHER THE BORROWING WENT IN FOR A REVENUE PURPOSE OR FOR A CAPITAL PURPOSE, MUST BE NECESSARILY REGARDED AS AN ITEM OF REVENUE OUTGOING. IN COMING TO THAT CONCLUSION THE SUPREME COURT STATED THE PRINCIPLE THUS : 'ON THE FACTS OF THIS CASE, THE MONEY SECURED BY THE LOAN WAS THE THINGS FOR THE USE OF WHICH THIS EXPENDITURE WAS MADE. IN PRINCIPLE, APART FROM ANY STATUTORY PROVISIONS, WE SEE NO DISTINCTION BETWEEN INTEREST IN RESPECT OF A LOAN AND AN EXPENDITURE INCURRED FOR OBTAINING THE LOAN.' 7. THIS DECISION OF THE SUPREME COURT HAS BEEN FOLLOWED IN INNUMERABLE DECISIONS OF THE COURTS SINCE THEN. AS AN EXAMPLE MAY BE CITED A DECISION OF A BENCH OF THIS COURT IN CIT VS. KISENCHAND CHELLARAM (INDIA) (P) LTD. (1980) 16 CTR (MAD) 248 : (1981) 130 IT R 385. THAT CASE TOO RELATED TO THE CLAIM OF AN ASSESSEE - COMPANY FOR THE ALLOWANCE OF LEGAL CHARGES REPRESENTING THE FEES PAID TO THE REGISTRAR OF COMPANIES FOR INCREASING THE COMPANY'S CAPITAL. THE ARGUMENT ADDRESSED BEFORE THE COURT ON BEHALF OF THE IT D EPARTMENT. IN THAT CASE WAS THAT THE LEGAL EXPENDITURE CONTRIBUTED TO THE INCREASE IN THE CAPITAL OF THE COMPANY AND, THEREFORE, IT COULD NOT BE ALLOWED AS A REVENUE ITEM. THIS COURT REJECTED THAT CONTENTION, FOLLOWING THE DECISION OF THE SUPREME COURT IN INDIA CEMENTS LTD. VS. CIT (1966) 60 ITR 52 (SC). THE COURT HELD THAT THE MONEY WAS SPENT ONLY FOR THE PURPOSE OF THE BUSINESS AND THERE WAS NO CAPITAL ELEMENT IN THE EXPENDITURE. THEY TOOK THE VIEW THAT MERELY BECAUSE THE FEES PAID TO THE REGISTRAR OF COM PANIES RELATED TO A RAISING OF THE COMPANY'S CAPITAL, THE AMOUNT COULD NOT BE CLASSIFIED AS CAPITAL EXPENDITURE 2 8 . IN VIEW OF THE ABOVE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE UPHOLD THIS GRIEVANCE OF THE ASSESSEE AS WELL. GROUND NO . 6 IS THUS ALLOWED. 29 . GROUND NO. 7 AND 8 ONLY SEEK CONSEQUENTIAL RELIEF UPON VERIFICATION. WE, THEREFORE, NEED NOT ADJUDICATE ON THESE GROUNDS OF APPEAL. I.T.A. NO. 1355 AND 1766/MUM/2014 ASSESSMENT YEAR: 2009 - 10 PAGE 11 OF 11 3 0 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED IN THE TERMS INDICATED ABO VE. 31 . AS FOR THE APPEAL FILED BY THE ASSESSING OFFICER, THE ONLY GRIEVANCE RAISED THEREIN IS AS FOLLOWS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE DISPUTE RESOLUTION PANEL ERRED IN DELETING THE ADDITION MADE BY THE A.O. OF RS.2, 30,71,801/ - AGAINST THE NEGATIVE CONTRACTS MARGIN AND PRIOR PERIOD EXPENSES. 3 2 . LEARNED REPRESENTATIVES FAIRLY AGREE THAT THIS ISSUE IS COVERED, BY THE ORDER DATED 19 TH DECEMBER 2014 PASSED BY THE COORDINATE BENCH IN ASSESSEE S OWN CASE FOR THE IMMEDIATE LY PRECEDING ASSESSMENT YEAR. A COPY OF THE COORDINATE BENCH DECISIONS DATED 19 TH DECEMBER 2014 IS DEEMED TO BE ATTACHED AND FORMING PART OF THIS ORDER AS WELL. WE SEE NO REASONS TO DISTURB THE FINDINGS OF THE LEARNED CIT(A) WHICH ARE IN CONFORMITY WITH TH E STAND OF THE COORDINATE BENCH. WE, THEREFORE, APPROVE THE CONCLUSIONS ARRIVED AT BY THE LEARNED CIT(A) ON THIS POINT, AND DECLINE TO INTERFERE IN THE MATTER. 3 3 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSING OFFICER IS DISMISSED. 3 4 . TO SUM UP, WHIL E THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED, THE APPEAL FILED BY THE ASSESSING OFFICER IS DISMISSED. PRONOUNCED IN THE OPEN COURT TODAY ON THE 6 TH DAY OF APRIL, 2016. SD/ - SD/ - PAWAN SINGH PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) DATED: 6 TH DAY OF APRIL , 2016. COPIES TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ETC ASSISTANT REGISTRAR INCOME TAX APPELL ATE TRIBUNAL MUMBAI BENCHES, MUMBAI