M/s. Fruition Morgensoft (India) Pvt. Ltd., CHENNAI V. DCIT, CHENNAI

ITA 1810/CHNY/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2397 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-04-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 25-03-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 05-10-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MRS VIDESH KALARA
• Assessee Lawyers: VENKATESH KUMAR

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH CHENN AI BEFORE SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER AND SHRI V.DURGA RAO, JUDICIAL MEMBER .. ITA NO.1810/MDS./2012 ASSESSMENT YEAR:2008-09 M/S.FRUITION MORGENSOFT (INDIA) PVT. LTD., SUBASHREE, 164, FIFTH AVENU, THIRD MAIN ROAD, SEASHORE TOWN, PANAYUR, CHENNAI 600 119. VS. DCIT, COMPANY CIRCLE 11(1), CHENNAI. PAN AAACF 8030 G (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI VENKATESH KUMAR, C.A. RESPONDENT BY : MRS.VIDESH KALARA, CIT D.R. DATE OF HEARING : 25 .03.13 DATE OF PRONOUNCEMENT : 11.04 .13 O R D E R PER ABRAHAM P GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY ASSESSEE AGAINST AN ORD ER DATED 23.07.2012 OF COMMISSIONER OF INCOME TAX (A) -III, CHENNAI, IT HAS RAISED TWO EFFECTIVE GRIEVANCES. FIRST ONE IS THAT AN ADDITION MADE BY THE ASSESSING OFFICER FOR SALE OF INTELLECT UAL PROPERTY ITA. 1810/MDS/12 2 RIGHTS (IN SHORT IPR) WAS SUSTAINED TO THE EXTEN T OF ` 50 LAKHS BY THE CIT(A). 2. FACTS APROPOS ARE THAT ASSESSEE ENGAGED IN SOFT WARE DEVELOPMENT BUSINESS HAD DEVELOPED AN ERP ( ENTERP RISE RESOURCE PLANNING) SOFTWARE. ASSESSEE HAD ENTERED I NTO AGREEMENT WITH ONE M/S.3I INFOTECH LTD., FOR TRANSF ERRING THE INTELLECTUAL PROPERTY RIGHTS RELATING TO SUCH SOFTW ARE. THE CONSIDERATION AGREED WAS ` 3 CRORES WITH FURTHER ROYALTY OF ` 1 CRORE PAYABLE BEFORE 31.03.2010. OUT OF THE SUM OF ` 3 CRORES, ` 2.5 CRORES WAS TO BE PAID BY M/S.3I INFOTECH LTD. WITHIN 25 DAYS OF DELIVERY OF INTELLECTUAL PROPERTY RIGHTS (IPR) I N THE ERP SOFTWARE, AND BALANCE SUM OF ` 50 LAKHS WAS TO BE PAID AFTER 12 MONTHS FROM THE DATE OF DELIVERY OF IPR, BUT BEFORE THE END OF 15 MONTHS. THE DATE OF AGREEMENT WAS MENTIONED AS 01.0 6.07 AND THE DATE ON WHICH ASSESSEE WAS TO DELIVER THE IPR TO M/S.3I INFOTECH LTD. WAS MENTIONED AS 11.06.07. SUM OF ` 2.5 CRORES WAS PAID ON 09.06.07 PURSUANT TO THE AGREEMENT. TWO CRORES OUT OF SUCH ` 2.5 CRORES WAS SHOWN AS IPR SALES BY THE ASSESSEE WHEREAS THE BALANCE OF ` 50 LAKHS WAS SHOWN AS DEFERRED INCOME. THUS, WHILE COMPUTING THE INCOME OF THE IM PUGNED ASSESSMENT YEAR, ASSESSEE TOOK THE SALE CONSIDERATI ON OF ` 2 ITA. 1810/MDS/12 3 CRORES ONLY, AND WHAT WAS SHOWN AS DEFERRED INCOME WAS NOT RECKONED. REMAINING AMOUNT OF ` 50 LAKHS WAS PAID BY M/S.3I INFOTECH LTD. DURING FINANCIAL YEAR ENDING 31.03.09 . ROYALTY IS YET TO BE PAID. 3. ASSESSING OFFICER PUT THE ASSESSEE ON NOTICE WH Y THE WHOLE SUM OF ` 4 CRORES SHOULD NOT BE CONSIDERED AS THE INCOME OF PREVIOUS YEAR RELEVANT TO IMPUGNED ASSESSMENT YEAR. REPLY OF ASSESSEE WAS THAT OUT OF THE SUM OF ` 4 CORES, A SUM OF ` 1 CRORE WAS ROYALTY, WHICH WAS NOT RECEIVABLE DURING THE RE LEVANT PREVIOUS YEAR. ACCORDING TO ASSESSEE, SUCH ROYALTY BECAME PAYABLE ONLY AFTER THE ERP SOFTWARE WAS MADE READY FOR MARKETING BY THE ASSESSEE, AFTER EFFECTING NECESSAR Y CHANGES THEREIN AS REQUIRED BY M/S.3I INFOTECH LTD. ASSESS EE ALSO POINTED OUT TO THE ASSESSING OFFICER THAT IT HAD NO RIGHT TO RECEIVE ANY ROYALTY IN THE RELEVANT PREVIOUS YEAR. HOWEVER, AS SESSING OFFICER WAS NOT IMPRESSED. ACCORDING TO HIM, WHEN ASSESSE E ENTERED INTO THE AGREEMENT WITH M/S.3I INFOTECH LTD., IT HA D OBTAINED A RIGHT TO RECEIVE THE AMOUNT MENTIONED THEREIN FROM THEM AND THE SAID PARTY WAS ALSO LEGALLY OBLIGED TO PAY. FURTHE R, ACCORDING TO HIM, THE DATE OF ACCRUAL OF SALE CONSIDERATION WAS THE DATE OF SIGNING OF THE AGREEMENT VIZ. FIRST JUNE, 2007, AND DIFFERENCE ITA. 1810/MDS/12 4 BETWEEN ROYALTY AND THE SALE CONSIDERATION WAS NOT RELEVANT. ROYALTY WAS LINKED TO THE LICENSE AND NOT THE ERP SOFTWARE. IN THIS VIEW OF THE MATTER, HE MADE AN ADDITION OF ` 2 CRORES. IN OTHER WORDS, THE WHOLE SUM OF ` 4 CRORES WAS CONSIDERED RECEIPTS OF THE IMPUGNED ASSESSMENT YEAR. 4. IN ITS APPEAL BEFORE THE CIT(A), ARGUMENT OF AS SESSEE WAS THAT IT WAS OBLIGED TO PROVIDE ENHANCEMENTS TO THE ERP SOFTWARE DURING THE SUBSEQUENT ACCOUNTING YEARS. THOUGH ASS ESSEE HAD RECEIVED ` 2.5 CRORES ON THE TRANSFER OF THE IPR IN THE ERP SOFTWARE, DURING THE RELEVANT PREVIOUS YEAR, WHAT C OULD BE RELATED TO THE SOFTWARE WAS ONLY ` 2 CRORES. THE AGREEMENT MENTIONED TOTAL PURCHASE PRICE OF ` 3 CRORES, BUT NO BREAK UP MENTIONED. AS PER ASSESSEE, THE VALUE OF IPR WAS ` 2 CRORES, FOR WHICH AMOUNT THE INVOICE RAISED. FURTHER, AS PER ASSESSEE, IT H AD CAPITALISED AN EXPENSE OF ` 45 LAKHS TOWARDS IMPROVEMENTS DONE FOR THE ERP SOFTWARE, AND THIS SUM WAS CONSIDERED AS A PAR T OF ITS WORK- IN-PROGRESS. IF THE SUM OF ` 2.5 CRORES RECEIVED DURING THE RELEVANT PREVIOUS YEAR WAS CONSIDERED AS INCOME, TH EN THE SUM OF ` 45 LAKHS SHOWN IN THE WORK-IN-PROGRESS, REPRESENT ING THE RELATED EXPENSES HAD TO BE EXCLUDED. AS FOR THE RO YALTY PAYMENT OF ` 1 CRORE, ASSESSEE REITERATED THE SAME CONTENTIONS TAKEN ITA. 1810/MDS/12 5 BEFORE THE A.O. CONSIDERATION THAT WAS RECEIVED, WAS RELATABLE ONLY TO THE SALE OF IPR, AND THE MENTIONED AMOUNT F OR SUCH SALE WAS ` 3 CORES. OUT OF THIS, ` 50 LAKHS WAS RECEIVED ONLY IN THE NEXT PREVIOUS YEAR. THEREFORE, ACCORDING TO ASSESSE E, IT WAS NOT FAIR TO CONSIDER THE WHOLE SUM OF ` 4 CRORES AS ITS INCOME IN THE RELEVANT PREVIOUS YEAR. 5. LD. CIT(A) TO A CERTAIN EXTENT AGREED WITH THE SUBMISSIONS OF ASSESSEE. ACCORDING TO HIM, ROYALTY AMOUNT OF ` 1 CRORE DID NOT ACCRUE TO THE ASSESSEE ON SIGNING OF THE AGREEM ENT. ACCRUAL OF SUCH ROYALTY WOULD HAPPEN ONLY WHEN THE IMPROVEM ENTS IN THE ERP SUGGESTED BY THE CUSTOMER WERE CARRIED OUT. A SSESSEE WAS TO PROVIDE FURTHER DOCUMENTS AND SERVICES FOR S UCH IMPROVEMENTS. IN SO FAR AS CONSIDERATION OF ` 3 CRORES WAS CONCERNED, LD. CIT(A) NOTED THAT THERE WAS NO BREAK UP AS SUCH GIVEN IN THE AGREEMENT FOR THIS AMOUNT. OUT OF SUCH ` 3 CORRES, WHAT WAS DEFERRED FOR PAYMENTS WAS ONLY ` 50 LAKHS. THIS WAS PAYABLE AFTER 12 MONTHS. THUS, ACCORDING TO HIM, A SSESSEE WAS BOUND TO SHOW ` 2.5 CRORES AS RECEIPTS FROM SALE OF IPR DURING THE IMPUGNED ASSESSMENT YEAR. LD. CIT(A) OBSERVED THAT THE CLAIM OF RELATED EXPENDITURE OF ` 45 LAKHS, HAD NO NEXUS WITH THE SALE OF SOFTWARE. HE ,THUS, DELETED THE ADDITION OF ROYALTY AMOUNT ITA. 1810/MDS/12 6 OF ` 1 CRORE, AS WELL AS THE ADDITION OF ` 50 LAKHS, WHICH WAS REALIZABLE ONLY IN THE SUBSEQUENT YEAR. IN OTHER W ORDS, AGAINST ` 2 CRORES SHOWN BY THE ASSESSEE AS CONSIDERATION, LD . CIT(A) HELD THAT THE AMOUNT THAT WAS REQUIRED TO BE SHOWN AS ` 2.5 CRORES. THUS, THERE WAS AN EFFECTIVE ADDITION OF ` 50 LAKHS. 6. NOW BEFORE US, LD. AUTHORISED REPRESENTATIVE OF ASSESSEE ASSAILING THE ORDER OF CIT(A), SUBMITTED THAT BY VI RTUE OF THE AGREEMENT, ASSESSEE DID NOT GET A LEGAL RIGHT TO TH E SUM OF ` 2.5 CRORES RECEIVED DURING THE RELEVANT PREVIOUS YEAR. IT WAS TRUE THAT ASSESSEE HAD RECEIVED THE SUM, BUT NEVERTHELESS THE ACTUAL INCOME RELATABLE TO ERP SOFTWARE WAS ONLY ` 2 CRORES. BALANCE ` 50 LAKHS WAS REPRESENTED BY WORK-IN-PROGRESS, WHIC H WAS NOTHING BUT AN ADVANCE RECEIVED FROM M/S.3I INFOTE CH LTD. ASSESSEE HAD ERRONEOUSLY TREATED IT AS DEFERRED IN COME, BUT THE FACT OF THE MATTER WAS THAT IT WAS ONLY AN ADVANCE OF ` 45 LAKHS. SUCH SUM WAS SHOWN AS PART OF THE WORK-IN-PROGRESS SINCE DEVELOPMENT WORK ON THE ERP SOFTWARE BASED ON THE REQUIREMENTS OF M/S.3I INFOTECH LTD. WAS IN PROGRES S. ACCORDING TO HIM, SUCH EXPENSE HAD TO BE ALLOWED AS A DEDUCTI ON. RELIANCE WAS PLACED ON THE DECISION OF SPECIAL BENCH OF THIS TRIBUNAL IN ITA. 1810/MDS/12 7 THE CASE OF M/S.MAHINDRA HOLIDAYS & RESORTS (INDIA) LTD. (39 SOT 438). 7. PER CONTRA LD. D.R., STRONGLY SUPPORTED THE ORD ER OF LOWER AUTHORITIES. 8. WE HAVE PERUSED THE ORDERS OF LOWER AUTHORITIES AND HEARD THE RIVAL CONTENTIONS. THE AGREEMENT BETWEEN A SSESSEE AND M/S.3I INFOTECH LTD. WAS ENTERED ON 01.06.2007 AND THE PREAMBLE TO THE AGREEMENT REPRODUCED HEREUNDER WILL CLEARLY REFLECT THE INTENTION OF THE PARTIES:- THE SELLER HAS DEVELOPED AND HOLDS ALL RIGHTS, IN CLUDING THE RIGHT TO SELL, IN AN ERP SOFTWARE APPLICATION W HICH, INCLUDING ITS SOURCE CODE, RELATED DOCUMENTATIONS, DATABASE DESIGN, ALL RELATED TOOLS AND ALL UPDATES AND THE MODIFICATIONS, ALL OF WHICH IS KNOWN AS ERP SOFTWA RE, ITS CURRENT SPECIFICATIONS ARE SET FORTH IN ATTACHMENT A HERETO (THE SPECIFICATIONS); THE SELLER HAS DECIDED TO SELL THE INTELLECTUAL PRO PERTY OF THE ERP SOFTWARE. THE BOARD OF DIRECTORS OF THE SE LLER HAVE PASSED A RESOLUTION ON 9 TH APRIL 2007 TO DISCONTINUE ITA. 1810/MDS/12 8 THE BUSINESS RELATED TO THE ERP SOFTWARE AND TO FIN D BUYERS FOR ABSOLUTE SALE OF THE INTELLECTUAL PROPERTY OF T HE ERP SOFTWARE, A TRUE COPY OF WHICH IS SET FORTH IN ATTA CHMENT B HERETO; THE BUYER IS IN THE BUSINESS OF PROVIDING SOFTWARE SOLUTIONS TO ITS CUSTOMERS AND THE SELLER HAS APPROACHED THE BUYER FOR THE PURCHASE OF THE INTELLECTUAL PROPERTY OF TH E ERP SOFTWARE. THE BUYER DESIRES TO ACQUIRE AND THE SELLER DESIRES TO SELL COMPLETE, EXCLUSIVE, PERPETUAL, WORLDWIDE INTELLECT UAL PROPERTY RIGHTS, TRADEMARKS AND OTHER INTANGIBLES R ELATING TO THE SAID ERP SOFTWARE; THE BOARD AND THE SHAREHOLDERS OF THE SELLER HAVE P ASSED A RESOLUTION APPROVING SUCH SALE/TRANSFER ON 11 TH MAY 2007 AND 31 ST MAY 2007 RESPECTIVELY, A TRUE COPY OF WHICH IS SET FOR THE IN ATTACHMENT C HERETO; THE SELLER AND PROMOTERS HAVE CONFIRMED THAT THE SE LLER AND PROMOTERS HAVE ALL REQUISITE POWER PROPERLY OBT AINED AS PER LAW AND THAT THE SALE TRANSACTION WOULD BE W ITHIN THEIR POWERS, WHICH IS SET FORTH IN ATTACHMENT C HE RETO. ITA. 1810/MDS/12 9 IT IS CLEAR FROM THE ABOVE THAT THE ASSESSEE, THE S ELLER, HAD ALREADY DEVELOPED THE ERP SOFTWARE. IT IS ALSO CLEAR THAT ASSESSEE HAD AGREED TO SELL SUCH SOFTWARE TO M/S.3I INFOTECH LTD, THE BUYER. NATURE OF THE TRANSACTIONS ENTERED BETWEEN THE ASSESSEE AND THE M/S.3I INFOTECH LTD. IS FURTHER EL UCIDATED IN CLAUSE-II OF THE AGREEMENT REPRODUCED HEREUNDER:- PURCHASE AND SALE OF SOFTWARE AND PENDING ORDERS; PURCHASE PRICE AND PAYMENT TERMS:- 2.1 BASIC TRANSACTION : ON AND SUBJECT TO, THE TERMS AND CONDITIONS OF THIS AGREEMENT AND PURSUANT TO ARRANGEMENTS MADE HE REIN FROM THE EFFECTIVE DATE, THE SELLER HEREBY SELLS, ASSIGNS AN D TRANSFERS ALL THE COMPLETE, EXCLUSIVE AND WORLDWIDE INTELLECTUAL PRO PERTY RIGHTS, TRADE MARKS AND COPYRIGHTS FOR THE ERP SOFTWARE HERETO TO THE BUYER. THE SELLER AND THE PROMOTERS AGREE TO EXECUTE ANY ADDIT IONAL DOCUMENTS THAT ARE NECESSARY TO COMPLETE THE TRANSACTIONS CON TEMPLATED UNDER THIS AGREEMENT. 2.1.1 CONDITION PRECEDENT : THIS AGREEMENT SHALL BE SUBJECT TO (I) TRANSFER OF THE ERP SOFTWARE, DATABASE DESIGN AND A LL RELATED TOOLS AND ALL IPR DOCUMENTS (II) ASSIGNMENT, IN THE FORM AND SUBSTANCE SATISFACTORY TO THE BUYER, OF ALL OWNERSHIP RIGHTS AND INTELLECTUAL PROPERTY RIGHTS, IN THE SOFTWARE WITHOUT ANY CONDIT IONS OR RESTRICTIONS AND WAIVER OF ALL MORAL RIGHTS ASSOCIATED WITH SUCH PRODUCT (HI) EXECUTION OF CONSULTANCY AGREEMENTS BY PROMOTER, MR . SUBRAMANIYAM VISWANATHAN FOR (ONE) YEAR FROM THE EFFECTIVE DATE AND BY HIS SON MR. V. SUBRAMANIAN, CO-PROMOTER FOR A PERIOD OF 7 (SEVE N) MONTHS FROM THE EFFECTIVE DATE. THE CONSULTANCY AGREEMENTS WILL CONTAIN, AMONG OTHER TERMS, NON-COMPETE WITH TARGET AND THE BUYER DURING THE EMPLOYMENT TERM AND FOR A PERIOD OF ONE YEAR AFTER EMPLOYMENT. WHEREAS MR. SUBRAMANIYAM VISWANATHAN SHALL BE ENTIT LED TO GET A MONTHLY FEE OF RS. 3 LACS AND HIS SON AND OTHER PRO MOTER MR. V. SUBRAMANIAN SHALL BE ENTITLED TO GET A MONTHLY FEE OF RS. 1.75 LACS PER MONTH. THE PROMOTERS SHALL BE REQUIRED TO SEE INTER ALIAS THE SMOOTH TRANSFER OF TECHNOLOGY. THEY HEREBY AGREE TO GIVE B EST EFFORT TO ENSURE THAT THE COMMERCIAL LAUNCHING OF BOTH THE INDIAN AN D INTERNATIONAL VERSIONS TAKE PLACE AS SOON AS POSSIBLE AS PER THE ROADMAP ALREADY PROVIDED TO THE BUYER. (IV) APPROVAL OF THE BOARD A ND SHAREHOLDERS OF BUYER. ITA. 1810/MDS/12 10 2.2 ON PAYMENT OF SALE CONSIDERATION AS IN CLAUSE 2 .6.A AND EXECUTION OF THE CONSULTING AGREEMENTS BY THE PROMOTERS, THE BUYER WILL OWN ALL RIGHTS, TITLES, AND INTERESTS IN AND TO THE ERP SOF TWARE AND ITS RELATED INTELLECTUAL PROPERTY AND ALL TRADE SECRETS, INVENT IONS, CREATIONS, NOTES, CONCEPTS, IDEAS, SUGGESTIONS, APPROACHES, WORKS, PA TENTS, DATABASE AND RELATED TOOLS, IMPROVEMENTS AND DEVELOPMENTS, E ACH WHETHER OR NOT PATENTABLE OR COPYRIGHTABLE THAT SELLER OR PROM OTERS OR ANY THIRD PARTY HAS MADE OR ASSISTED IN MAKING IN CONNECTION WITH CREATION OF THE ERP SOFTWARE. THE BUYER WILL BE CONSIDERED THE AUTH OR OF THE ERP SOFTWARE FOR PURPOSES OF COPYRIGHT (DEFINED BELOW) AND WILL OWN ALL THE RIGHTS IN AND TO THE COPYRIGHT OF THE ERP SOFTWARE AND ONLY THE BUYER WILL HAVE THE RIGHT TO COPYRIGHT THE SAME, WHICH TH E BUYER WILL DO IN HIS NAME OR IN THE NAME OF HIS NOMINEE(S). 2.3 THE SELLER/PROMOTERS SHALL DO ANY AND ALL ACTS, AND SHALL EXECUTE ANY AND ALL INSTRUMENTS THAT THE BUYER MAY REQUIRE TO SECURE THE OWNERSHIP RIGHTS OBTAINED IN THE ERP SOFTWARE INCLU DING ALL RIGHTS RELATING TO INVENTIONS, CREATIONS, WORKS, PATENTS, IMPROVEMENTS, DEVELOPMENTS AND COPYRIGHTS DESCRIBED IN THE ASSIGN MENT IN ALL JURISDICTIONS. THE SELLER/PROMOTER WILL COOPERATE T O THE EXTENT NECESSARY IN THE INSTITUTION AND MAINTENANCE BY THE BUYER OF ANY ACTION FOR INFRINGEMENT OF THE INTELLECTUAL PROPERT Y RIGHTS DESCRIBED ABOVE. 2.4 THE SELLER AND PROMOTERS SHALL ENSURE CLOSURE O F THE BUSINESS WITH RESPECT TO THE ERP SOFTWARE AND ITS RELATED INTELLE CTUAL PROPERTY AND CERTIFY TO THE BUYER THAT BUSINESS IN THE ERP SOFTW ARE AND ITS RELATED INTELLECTUAL PROPERTY HAVE BEEN EFFECTIVELY DISCONT INUED AND CLOSED FOR GOOD. THE SELLER/PROMOTERS SHALL NOT BE ENTITLED TO SALE OR LICENSE THE ERP SOFTWARE TO ANYBODY IN ANY TERRITORY THROUGH OU T THE WORLD AT ANY TIME. 2.5 THE BUYER AGREES TO PAY A CONSIDERATION ('PURCH ASE PRICE') OF A SUM OF RS.30 MILLION TO THE SELLER FOR THE TRANSACT ION. THE BUYER AGREES TO BEAR ANY ADDITIONAL TAX LIABILITY (OTHER THAN IN COME TAX LIABILITY TO THE SELLER) THAT MAY ARISE OUT OF THIS TRANSACTION. 2.6 THE SAID CONSIDERATION SHALL BE PAID TO THE SEL LER AS BELOW: A. RS.25 MILLION WITHIN 25 DAYS FROM THE DATE OF D ELIVERY OF THE ERP SOFTWARE AND OBTAINING AN ACKNOWLEDGEMENT FROM THE BUYER. B. RS.5 MILLION PAYABLE AFTER 12 MONTHS FROM THE D ATE OF PAYMENT UNDER 2.6(A) AND BEFORE 15 MONTHS THEREOF. 2.7 BESIDE THE PAYMENT AS MENTIONED ABOVE, THE SELL ER SHALL BE PAID BY WAY OF ROYALTY, 10% OF THE LICENSE FEE EARNED FR OM THE ERP SOFTWARE PRODUCT, UP TO THE YEAR ENDED MARCH 31, 20 I O. THE AGGREGATE OF ROYALTY PAYABLE TO SELLER UNDER THIS S ECTION 2.7 OVER A PERIOD UNTIL MARCH 31, 2010 SHALL NOT EXCEED RS. 10 MILLION. 2.8 ANY COST FOR WORLDWIDE RIGHTS AS APPLICABLE TO SPECIFIED COUNTRY SHALL BE THE RESPONSIBILITY OF THE BUYER. ITA. 1810/MDS/12 11 9. A READING OF THE ABOVE CLEARLY SHOW THAT IT WAS A CLEAR SALE OF INTELLECTUAL PROPERTY IN THE ERP SOFTWARE. NO D OUBT, ASSESSEE HAD AGREED TO ENTER INTO A CONSULTANCY AGR EEMENT WHEREBY THE PROMOTER OF THE ASSESSEE COMPANY WAS RE QUIRED TO PUT IN HIS BEST EFFORTS FOR ENSURING A COMMERCIAL L AUNCH OF THE ERP, BOTH IN INDIAN AND INTERNATIONAL MARKET. A RO ADMAP WAS ALSO MENTIONED. HOWEVER, NOTHING OF THIS WILL CHAN GE THE COMPLEXION OF THE AGREEMENT, WHICH REMAINS BUT AN A GREEMENT FOR SALE. CONSIDERATION WAS CLEARLY AGREED AT ` 3 CRORES. OUT OF THIS, 2.5 CRORES WAS ADMITTEDLY PAID DURING THE REL EVANT PREVIOUS YEAR. BALANCE OF 0.5 CRORE WAS PAYABLE AFTER 12 MO NTHS VIZ. A DATE WHICH FELL IN THE SUCCEEDING PREVIOUS YEAR. IN THE FACE OF THE ABOVE TO SAY THAT INCOME THAT HAD ACCRUED TO T HE ASSESSEE WAS ONLY ` 2 CRORES, DOES NOT STAND TO REASON. ASSESSEE HAD ADMITTEDLY RECEIVED ` 2.5 CRORES AS PER THE AGREEMENT AND THE AMOUNT WAS NOTHING, BUT PAYMENT RECEIVED ON DELIVE RY OF ERP SOFTWARE. IN OUR OPINION, EVEN THE FURTHER SUM OF ` 50 LAKH, DUE TO THE ASSESSEE, AFTER 12 MONTHS WAS ALSO A PAR T OF ITS INCOME OF THE IMPUGNED ASSESSMENT YEAR, SINCE ASSES SEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. HOWEV ER, LD. CIT(A) IN ALL FAIRNESS HELD THAT ASSESSEE WAS REQUI RED TO SHOW ITA. 1810/MDS/12 12 ONLY ` 2.5 CRORES. IN OTHER WORDS, ` 2 CRORES SHOWN BY THE ASSESSEE AS RECEIPTS OF THE IMPUGNED ASSESSMENT YEA R ARISING OUT OF THE ABOVE TRANSACTION, WHICH WAS INCREASED T O ` 4 CRORES BY THE ASSESSING OFFICER, WAS SCALED DOWN BY ` 1.5 CRORES BY LD. CIT(A). IN OTHER WORDS, THE ADDITION MADE WAS ONLY ` 50 LAKHS, WHICH WAS UNDENIABLY A PART OF THE SUM OF ` 2.5 CRORES RECEIVED BY THE ASSESSEE. AS FOR THE DECISION OF SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF M/S.MAHINDRA HOLID AYS & RESORTS (INDIA) LTD.(SUPRA), THERE WAS A CLEAR FINDING THAT THE AMOUNT RECEIVED AGAINST SALE OF TIME- SHARES IN THE RESORT S WAS PARTLY IN THE NATURE OF ADVANCE. IN OUR OPINION, THERE IS NO SIMILARITY BETWEEN TRANSACTIONS OF SELLING TIME-SHARES AND THE TRANSACTIONS OF SELLING IPR IN AN ERP SOFTWARE. THIS CASE WILL NOT HELP THE ASSESSEE IN ANY MANNER. WE ARE OF THE OPINION THAT LD. CIT(A) WAS JUSTIFIED IN SUSTAINING AN ADDITION TO THE EXTE NT OF ` 50 LAKHS. NO INTERFERENCE IS REQUIRED. 10. SECOND GRIEVANCE RAISED BY THE ASSESSEE IS REG ARDING A DISALLOWANCE OF RENTAL EXPENDITURE OF ` 1,08,000/-. THE ABOVE AMOUNT WAS CHARGED BY ASSESSEE IN ITS PROFIT AND LO SS ACCOUNT UNDER THE HEAD ADMINISTRATIVE EXPENSES. A LEASE AGREEMENT WAS PRODUCED IN SUPPORT, WHEN CALLED FOR BY THE ASS ESSING ITA. 1810/MDS/12 13 OFFICER. FROM THE LEASE AGREEMENT, ASSESSING OFFIC ER CAME TO A CONCLUSION THAT THE LEASE WAS BETWEEN ONE SHRI SUBR AMANIYAM VISWANATHAN, WHO WAS A CHAIRMAN OF THE ASSESSEE-COM PANY, AND THE OWNER OF A FLAT. AS PER ASSESSING OFFICER , THE AGREEMENT WAS ENTERED INTO BY CHAIRMAN OF ASSESSEE- COMPANY, IN HIS INDIVIDUAL CAPACITY FOR HIS RESIDENTIAL AC COMMODATION. EXPLANATION OF ASSESSEE WAS THAT THE SAID PREMISES WAS PARTLY USED FOR COMMERCIAL OPERATION OF ASSESSEE. THE TO TAL SUM PAYABLE WAS ` 16,000/- PER MONTH AS RENT. OUT OF WHICH ` 9,000/- WAS DUE FROM THE COMPANY, SINCE PART OF THE PREMISES WAS USED BY THE COMPANY. ONLY A SMALL PART WAS USE D BY SHRI SUBRAMANIYAM VISWANATHAN FOR HIS PERSONAL PURPOSE. HOWEVER, ASSESSING OFFICER WAS NOT IMPRESSED. ACCORDING TO HIM, THE ONLY DOCUMENT PRODUCED WAS A BOARD RESOLUTION IN SU PPORT OF ITS CLAIM OF HAVING PAID MONTHLY RENT OF ` 9,000/- BY THE COMPANY. A.O. MADE DISALLOWANCE OF ` 1,08,000/-. ASSESSEES APPEAL BEFORE LD. CIT(A), WAS NOT SUCCESSFUL. 10. NOW BEFORE US, LD. A.R STRONGLY ASSAILING THE ORDER OF CIT(A), SUBMITTED THAT THE BOARD RESOLUTION WAS SUF FICIENT TO PROVE THE USE OF THE PREMISES BY THE ASSESSEE-COMPA NY. JUST BECAUSE AGREEMENT WAS ENTERED BY THE CHAIRMAN OF TH E ITA. 1810/MDS/12 14 ASSESSEE COMPANY WOULD NOT BY ITSELF A REASON FOR M AKING A DISALLOWANCE. 12. PER CONTRA, LD. D.R. STRONGLY SUPPORTED THE O RDER OF LOWER AUTHORITIES. ACCORDING TO HIM, THE FLAT SIZE WAS ONLY 2,500 SQ.FT.. ASSESSEE-COMPANY HAD A DIFFERENT ADDRESSES , NAMELY SUBASHREE, 164,FIFTH AVENUE, THIRD MAIN ROAD, SEASH ORE TOWN, PANAYUR, CHENAI-119 WHEREAS ADDRESS OF THE FL AT DOOR NO.2, 2 ND STREET, BAY SIDE, KARPAGAMBAL NAGAR, KOTTIVAKKAM, CHENNAI-41. THEREFORE, ACCORDING TO HIM, THE ARGUM ENT OF ASSESSEE COULD NOT BE ACCEPTED. 13. WE HAVE PERUSED THE ORDERS OF LOWER AUTHORITI ES AND HEARD THE RIVAL CONTENTIONS. ASSESSEE HAD PROD UCED BOARD RESOLUTION, WHICH AUTHORIZED THE ASSESSEE-COMPANY T O PAY RENT TO THE EXTENT OF ` 9,000/- PER MONTH FOR THE FLAT AT DOOR NO.2, 2 ND STREET, BAY SIDE, KARPAGAMBAL NAGAR, KOTTIVAKKAM, C HENNAI-41, TO THE OWNER OF THE SAID FLAT. MAY BE THE ASSESSEE WAS HAVING A DIFFERENT OFFICE ADDRESS. HOWEVER, IN OUR OPINION, THIS DID NOT STOP THE ASSESSEE FROM USING A PART OF THE FLAT AL SO FOR ITS COMMERCIAL USE. JUST BECAUSE THE LEASE AGREEMENT P ROHIBITED COMMERCIAL USE WOULD NOT MEAN THAT NO PART OF THE F LAT WAS USED ITA. 1810/MDS/12 15 FOR THE PURPOSE OF THE ASSESSEE COMPANY. ADMITTEDL Y, THE FLAT WAS BEING USED BY THE CHAIRMAN OF THE ASSESSEE-COMP ANY. IF THE ASSESSEE COMPANY SOUGHT IT FIT TO TAKE ON LEASE A FLAT AND GIVE IT FOR THE USE OF ITS CHAIRMAN AS PART OF HIS REMUNERATION, OR PERQUISITE, WE CANNOT SAY THAT IT IS NOT A COMMERCI AL DECISION. THERE IS NOTHING WRONG WITH A SOFTWARE COMPANY RENT ING OUT RESIDENCE AND GIVING IT FOR OCCUPATION OF ITS EMPLO YEE. PROVIDING A RESIDENTIAL ACCOMMODATION TO PERSONS DISCHARGING PIVOTAL FUNCTIONS OF THE MANAGEMENT CANNOT BE TREATED AS PE RSONAL EXPENSE OF THE COMPANY. WE ARE, THEREFORE, OF THE OPINION THAT DISALLOWANCE WAS NOT WARRANTED. SUCH DISALLOWANCE STANDS DELETED. 14. IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY AL LOWED. ORDER PRONOUNCED ON THURSDAY, THE 11 TH APRIL, 2013 AT CHENNAI. SD/- SD/- (V.DURGA RAO) (ABRAHAM P GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED 11 TH APRIL, 2013. K S SUNDARAM COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE ITA. 1810/MDS/12 16