ADDL CIT RG10(1), MUMBAI V. RENTWORKS INDIA P.LTD, MUMBAI

ITA 2215/MUM/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 3552 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-12-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2006-2007
• Appeal Filed On: 19-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: K M KAPADIA
• Keywords: Depreciation; Business expenditure; Wholly owned subsidiary; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES D, MUMBAI BEFORE SHRI R. K. PANDA, A. M. AND SHRI VIJAY PAL R AO, J.M. I.T.A. NO.2215/MUM/2010 ASSESSMENT YEAR: 2006-07 DEPUTY COMMISSIONER OF INCOME TAX 10 (1) ROOM NO.455 AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400 020 M/S. RENTWORKS INDIA PVT LTD, LAXMI TOWERS, 5-C, 5 TH FLOOR, C-WING, PLOT NO.C-25, BANDRA KURLA COMPLEX MUMBAI-400 051. PAN NO: AACCM8889C (APPELLANT) VS. (RESPONDENT) ORDER PER R. K. PANDA (AM) : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAI NST THE ORDER DATED 07.01.2010 OF COMMISSIONER OF INCOME TAX (APPEALS)- 21, MUMBAI AND RELATES TO THE ASSESSMENT YEAR 2006-07. 2. SINCE NO LETTER OF AUTHORITY HAS BEEN FILED THE ADJOURNMENT PETITION FILED BY M/S. K.M. KAPADIA & ASSOCIATES, CHARTERED ACCOUNTANTS, SEEKING ADJOURNMENT OF THE CASE IS REJECTED AND THE APPEAL IS TAKEN UP FOR HEARING ON THE BASIS OF MATERIAL AVAILABLE ON RECORD AND AFTER HEA RING THE LEARNED DR. APPELLANT BY : SHRI D. SONGATE RESPONDENT BY : NONE 2 3. THE GROUNDS OF APPEAL NO. 1 & 2 BY THE REVENUE READ AS UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT THE SOFTWARE E XPENSES WERE NOT CAPITAL EXPENDITURE BUT ALLOWABLE BUSINESS EXPENDIT URE DESPITE HOLDING THAT THE EXPENSES WERE INCURRED TO CUSTOMIZ E THE ACQUIRED SOFTWARE AS PER ASSESSEES REQUIREMENT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT THE SOFTWARE EXPEN SES WERE NOT CAPITAL EXPENDITURE BUT ALLOWABLE BUSINESS EXPENDIT URE WITHOUT APPRECIATING THAT THE DOCUMENTARY EVIDENCES, AS WER E CALLED FOR, WERE NEITHER FURNISHED BY THE ASSESSES IN THE ASSES SMENT PROCEEDINGS. 4. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE COMPANY HAS DEBITED RS.1,00,000/- ON 03.03.2006 AND RS.2,00,000 /- ON 31.03.2010 BOTH TOTALLING TO RS.3,00,000/- AS SOFTWARE DEVELOPMENT FEES. ON BEING QUESTIONED BY THE AO IT WAS SUBMITTED THAT EXPENSES INCURRED WERE FOR APPLICATION SOFTWARE AND NOT FOR SYSTEM SOFTWARE. THE AO ASKED THE ASSES SEE TO PRODUCE DOCUMENTARY EVIDENCE TO SHOW THAT THE SOFTWARE LICE NSE WAS FOR A PERIOD LESS THAN ONE YEAR AND DID NOT GIVE ANY ENDURING BENEFIT TO THE ASSESSEE. IN ABSENCE OF PRODUCTION OF SUCH DOCUMENTARY EVIDENCE, THE AO TREATED THE SAME AS CAPITAL EXPENDITURE IN NATURE. FURTHER SINCE THE ASSESSEE H AD USED IT FOR LESS THAN 182 DAYS HE RESTRICTED THE DEPRECIATION TO 30% ON RS.3, 00,000/- AS AGAINST 60% FOR THE WHOLE YEAR. 5. BEFORE CIT (APPEALS) IT WAS SUBMITTED THAT THE COMPANY HAD PAID RS.3,00,000/- TO M/S. COMSOFT INFOTECH PVT. LTD. TO WARDS CUSTOMIZATION OF RIMS. IT WAS FURTHER SUBMITTED THAT DURING THE COUR SE OF ASSESSMENT PROCEEDINGS THE COMPANY HAD SUBMITTED THE COPY OF I NVOICE RAISED BY M/S. 3 COMSOFT INFOTECH PVT. LTD. AND IT WAS SUBMITTED BE FORE THE AO THAT THE SAID EXPENDITURE WAS FOR THE PURPOSE OF UPGRADATION OF E XISTING SOFTWARE AND NO NEW ASSET HAS RESULTED BECAUSE OF THE UPGRADATION. IT W AS ALSO SUBMITTED THAT RIMS HAS AN IN-HOUSE MANAGEMENT INFORMATION SYSTEM WHICH GENERATES MANAGEMENT ON PERIODICAL BASIS, MAINTAINS COMPLETE RECORDS OF ALL THE TRANSACTION ENTERED INTO BY THE COMPANY WITH ITS PLANTS SINCE INCEPTION . IT IS USED BY THE COMPANY FOR THE PURPOSE OF DAY TO DAY FUNCTIONING OF THE IN -HOUSE ERP SYSTEM. THIS SOFTWARE WAS DEVELOPED IN AUSTRALIA AND DUE TO THE DIFFERENT BUSINESS ENVIRONMENT IN INDIA, CERTAIN UTILITIES IN RIMS WER E REQUIRED TO BE DEBUGGED TO HAVE OPTIMUM UTILITIES OF THE SYSTEM IN INDIA. THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF AMWAY INDIA ENTERPRI SES VS. DCIT REPORTED IN 301 ITR (A.T.) 1 WAS RELIED UPON. 6. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE , THE CIT (APPEAL) TREATED THE EXPENDITURE AS REVENUE IN NATU RE AS AGAINST CAPITAL IN NATURE HELD BY THE AO BY HOLDING AS UNDER: 3.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE. THE COMPANY PURCHASED THE SOFTWARE WHICH WAS DEVELOPED IN AUSTRALIA. HOWEVER, DUE TO DIFFERENT BUSINESS ENVI RONMENT IN INDIA, CERTAIN UTILITITES OF SOFTWARE REQUIRED WERE TO BE DEBUGGED TO HAVE OPTIMUM UTILITIES OF THE SYSTEM IN INDIA. THER EFORE, THE COMPANY INCURRED ADDITIONAL EXPENDITURE OF RS.3,00, 000/- FOR CUSTOMIZATION OF THE SOFTWARE AS PER APPELLANTS IN TERNAL SYSTEM/MANAGEMENT REQUIREMENTS. THE EXPENDITURE WAS INCURRED FOR UPGRAFDATION OF EXISTING SOFTWARE. HENCE, NO NE W ASSET GIVING BENEFIT OF ENDURING NATURE CAME INTO EXISTENCE BY I NCURRING SUCH EXPENSES. SUCH EXPENSES WERE REQUIRED FOR THE PURPO SE OF UPGRADATION OF SOFTWARE FOR DAY-TO-DAY FUNCTIONING OF THE APPELLANTS BUSINESS. IN MY CONSIDERED VIEW, SUCH E XPENDITURE WAS REVENUE EXPENDITURE FOR THE REASON THAN NO BENEFIT OF ENDURING 4 NATURE WAS OBTAINED BY THE APPELLANT BY INCURRING S UCH EXPENSES. MOREOVER, EXPENDITURE WAS INCURRED ON EXISTING ASSE TS AND THEREFORE, WAS ALLOWABLE AS BUSINESS EXPENDITURE. T HE ADDITION MADE BY AO IS THEREFORE, DELETED. THIS GROUND OF AP PEAL IS ALLOWED. 7. AGGRIEVED WITH SUCH ORDER OF THE CIT(APPEALS), THE REVENUE IS IN APPEAL BEFORE US. 8. AFTER HEARING THE LEARNED DR AND ON PERUSAL OF THE ORDERS OF THE AO AND THE LEARNED CIT (APPEALS), WE DO NOT FIND AN Y INFIRMITY IN THE ORDER OF THE LEARNED CIT (APPEALS). WE FIND THE ASSESSEE DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS HAD CATEGORICALLY STATED BEF ORE THE AO THAT THE EXPENSES INCURRED WERE FOR APPLICATION SOFTWARE AND NOT FOR A SYSTEM SOFTWARE. WE FIND THE AO HAD DISALLOWED THE EXPENDITURE ON TH E GROUND THAT THE ASSESSEE DID NOT PRODUCE ANY SUCH DOCUMENTARY EVIDENCE TO SH OW THAT THE SOFTWARE LICENSE WAS FOR A PERIOD OF LESS THAN ONE YEAR AND DID NOT GIVE ANY ENDURING BENEFIT TO THE ASSESSEE. WE FIND THE ASSESSEE BEFOR E THE LEARNED CIT (APPEALS) HAD STATED THAT COPY OF INVOICE RAISED BY M/S. COMS OFT INFOTECH PVT. LTD. WAS FURNISHED BEFORE THE AO AND IT WAS EXPLAINED THAT T HE EXPENDITURE WAS FOR THE PURPOSE OF UPGRADATION OF EXISTING SOFTWARE AND NO NEW ASSETS HAS RESULTED BECAUSE OF UPGRADATION. THE ABOVE SUBMISSION OF THE ASSESSEE BEFORE THE LEARNED CIT (APPEALS) REMAINS UNCONTROVERTED BY THE LEARNED DR. FURTHER THE LEARNED CIT (APPEALS) HAD GIVEN A CATEGORICAL FINDI NG THAT THE SOFTWARE PURCHASED BY THE COMPANY WAS DEVELOPED IN AUSTRALIA AND THE COMPANY INCURRED ADDITIONAL EXPENDITURE OF RS.3,00,000/- FO R CUSTOMIZATION OF THE SOFTWARE AS PER THE ASSESSEES INTERNAL SYSTEM/ MAN AGEMENT REQUIREMENTS. THE EXPENDITURE WAS INCURRED FOR UPGRADATION OF EXISTIN G SOFTWARE. THEREFORE, IN OUR 5 CONSIDERED OPINION NO NEW ASSET GIVING BENEFIT OF E NDURING NATURE CAME INTO EXISTENCE BY INCURRING SUCH EXPENSES. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE DETAILED REASONS GIVEN BY THE LEARNED CIT (APPE ALS), WE UPHOLD THE SAME. THE GROUNDS RAISED BY THE REVENUE ARE ACCORDINGLY D ISMISSED. 9. THE GROUND APPEAL NO.3 BY THE REVENUE READS AS UNDER : 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE O F INTERNATIONAL TRAVEL AND ACCOMMODATION EXPENSES WITHOUT APPRECIAT ING THAT THE ASSESSEE HAD FAILED TO PRODUCE ANY EVIDENCES IN SUP PORT OF ITS CLAIM OF CONDUCTING THE MEETINGS ABROAD. 10. FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO D URING THE COURSE OF ASSESSMENT PROCEEDINGS ASKED THE ASSESSEE THE REASO N FOR INTERNATIONAL TOUR AND ACCOMMODATION EXPENSES CLAIMED WHEN THE ENTIRE OPER ATION OF THE ASSESSEE ARE IN INDIA. IT WAS EXPLAINED THAT THE EXPENDITURE INC URRED ON FOREIGN TRAVEL AND ACCOMMODATION WAS FOR CHECKING OF THE BUSINESS PROS PECTS OF SETTING A BUSINESS IN MALAYSIA AND TO DISCUSS THE SAME WITH THE BOARD OF DIRECTORS IN AUSTRALIA. THE OTHER REASON FOR THE INTERNATIONAL TRAVEL EXPEN DITURE WAS QUARTERLY REVIEW MEETING HELD AT ABROAD. THE AO ASKED THE ASSESSEE T O PRODUCE THE EVIDENCES OF THE MEETINGS ABROAD AND TO PROVE THAT THE EXPENDITU RE INCURRED WAS FOR THE PURPOSE OF BUSINESS. HE ALSO ASKED TO EXPLAIN THE R EASON WHY THE QUARTERLY MEETING OF THE BOARD OF DIRECTORS WAS HELD ABROAD A ND THE BUSINESS NEEDS OF HOLDING SUCH MEETINGS ABROAD. IN ABSENCE OF PRODUCT ION OF ANY DOCUMENTARY EVIDENCE IN SUPPORT OF THE BUSINESS MEETING ABROAD AND IN ABSENCE OF ANY SATISFACTORY REASON FOR HOLDING THE QUARTERLY MEETI NG OF THE BOARD ABROAD THE AO DISALLOWED THE ENTIRE EXPENDITURE OF INTERNATION AL TRAVEL AMOUNTING TO RS.3,12,468/- AND ACCOMMODATION EXPENSES OF RS. 87, 665/-. 6 11. BEFORE THE LEARNED CIT (APPEALS) IT WAS SUBMIT TED THAT THE COMPANY IS A 100% SUBSIDIARY OF RENT WORKS MAURITIU S, DUE TO WHICH THE DIRECTORS HAVE TO VISIT MAURITIUS TO DEAL WITH VARI OUS STATUTORY MATTERS PERTAINING TO THE COMPANY INCLUDING REPORTING OF PR OGRESS OF THE COMPANY. ROBERT MEDWAY AND GLENN KEITH ARE DIRECTORS OF THE COMPANY BASED IN AUSTRALIA. IT WOULD BE ECONOMICAL FOR ONLY ONE DIRE CTOR I/E. ALAN VAN NIEKERK TO TRAVEL TO AUSTRALIA RATHER THAN THE OTHER TWO DI RECTORS TRAVELLING TO INDIA TO CONDUCT THE MEETING OF THE BOARD OF DIRECTORS. THE EXPENSES INCLUDE THE COST OF TRAVELLING AND STAYING OF ALAN VAN NIEKERK IN AUSTR ALIA. IT WAS, FURTHER SUBMITTED THAT THE COMPANY IS ALSO REGULARLY PURCHA SING MATERIAL FROM DELL ASIA PACIFIC PTE. LTD. WHICH HAS ITS HEAD OFFICE AT SING APORE. REGULAR TRAVEL TO SINGAPORE IS ALSO REQUIRED TO NEGOTIATE WITH THEM O N THE PRICING FACTOR, PAYMENT TERMS, QUALITY FACTOR ETC. THE EXPENSES INCURRED ON SUCH TRIP ARE DEBITED TO THE TRAVEL ACCOUNT. IT WAS SUBMITTED THAT THE COMPANY H AS BRANCH OFFICES AT DELHI & BANGALORE FOR WHICH REGULAR TRAVELLING IS REQUIRED TO MANAGE THE AFFAIRS OF THE BRANCH THERE. IT WAS SUBMITTED THAT THE COMPANY IS PLANNING TO EXPAND ITS BUSINESS IN MALAYSIA. THE DIRECTORS OF THE COMPANY HAVE TO MAKE REGULAR FIELD TRIPS TO MALAYSIA TO STUDY THE BUSINESS PROSPECTS, ARRANGE FOR THE FOUNDERS ETC. FOR WHICH THE EXPENSES WERE INCURRED FOR THE TRIP T O MALAYSIA. DURING THE YEAR UNDER CONSIDERATION. MR. PRAVEEN WHO IS A SALES MAN AGER HAD ALSO VISITED MALAYSIA FOR THE ABOVE PURPOSES. IT WAS SUBMITTED T HAT THE PROOF OF EXPENDITURE INCURRED ALONG WITH NECESSARY EXPLANATIONS WERE DUL Y FURNISHED BY THE COMPANY VIDE ITS LETTER DATED 15 DECEMBER, 2008 BEF ORE THE ADDL. CIT. THE ADD. CIT DURING THE COURSE OF ASSESSMENT PROCEEDING S HAD NOT ASKED FOR ANY FURTHER EVIDENCE OF THE EXPENDITURE AFTER SUBMISSIO N OF THE SAID LETTER. THE COMPANY COULD HAVE EASILY EXPLAINED THE ABOVE REASO NS IN MORE DETAIL, IF FURTHER DETAILS WERE REQUESTED FOR. IT WAS SUBMITTE D THAT IN ADDITION TO THE ABOVE, 7 THE PROOF OF EXPENDITURE SUBMITTED ALONG WITH LETTE R DATED 15 DECEMBER, 2008 WERE ITSELF SUFFICIENT EVIDENCE TO ALLOW DEDUCTION TOWARDS TRAVEL COST. THESE ARE THE REGULAR EXPENDITURE INCURRED BY THE COMPANY EVE RY YEAR DURING THE COURSE OF ITS BUSINESS AND ACCORDINGLY, THE SAME OUGHT TO BE ALLOWED. 12. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSE E THE LEARNED CIT (APPEALS) DELETED THE ADDITIONS BY HOLDING AS UNDER :- 4.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE. THE APPELLANT WAS 100% SUBSIDIARY OF PARENT COMPANY BAS ED IN MAURITIUS. APPELLANT WAS HAVING THREE FOREIGNER DIR ECTORS. TWO OF THE FOREIGNER DIRECTORS WERE BASED IN AUSTRALIA. TH EREFORE, THE APPELLANTS ARGUMENT HAVE FORCE THAT IT WAS ECONOMI CAL FOR THE COMPANY FOR THE THIRD DIRECTOR BASED IN INDIA TRAVE LLING TO AUSTRALIA FOR BOARD MEETINGS. THE APPELLANT HAS ALS O EXPLAINED THAT IT WAS PURCHASING MATERIALS FROM A FOREIGN COM PANY HAVING HEAD OFFICE AT SINGAPORE. THEREFORE, THE TRAVEL TO SINGAPORE WAS ALSO FOR THE PURPOSES OF BUSINESS NEEDS. THE APPELL ANT HAS ALSO EXPLAINED THAT THE FOREIGN TRIP TO MALAYSIA WERE CO NDUCTED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE FOR BUSINESS FOR EX TENDING ITS BUSINESS TO MALAYSIA. THE APPELLANT HAS ALSO EXPLAI NED THAT DURING ASSESSMENT PROCEEDINGS, THE AO DID NOT ASK FOR FURT HER EVIDENCE OF EXPENDITURE AND JUSTIFICATION OF THE SAME, OTHERWIS E THE SAME COULD HAVE BEEN FILED BEFORE THE AO. THEREFORE, CONSIDERI NG THE APPELLANTS SUBMISSIONS MADE ABOVE, IN MY CONSIDERE D VIEW THE EXPENDITURE INCURRED BY THE APPELLANT WERE FOR THE PURPOSES OF BUSINESS AND WERE ALLOWABLE AS REVENUE EXPENDITURE TO THE APPELLANT. THE DISALLOWANCE MADE BY AO IS THEREFORE DELETED. THIS GROUND OF APPEAL IS ALLOWED. 13. AGGRIEVED WITH SUCH ORDER OF THE LEARNED CIT ( APPEALS) THE REVENUE IS IN APPEAL BEFORE US. 8 13.1 AFTER HEARING THE LEARNED DR AND ON PERUSAL O F THE ORDERS OF THE AO AND THE LEARNED CIT(APPEAL) WE DO NOT FIND ANY I NFIRMITY IN THE ORDER OF THE LEARNED CIT (APPEALS). THE SUBMISSION OF THE AS SESSEE BEFORE THE LEARNED CIT (APPEALS) THAT THE ASSESSEE IS 100% SUBSIDIARY OF THE PARENT COMPANY BASED IN MAURITIUS AND THE ASSESSEE IS HAVING THREE FOREIGN DIRECTORS, OUT OF WHICH TWO ARE BASED IN AUSTRALIA REMAIN UNCONTROVER TED. THEREFORE, THE SUBMISSION OF THE ASSESSEE BEFORE THE CIT(APPEAL) T HAT IT IS ECONOMICAL TO HOLD THE BOARD MEETINGS ABROAD FINDS SOME FORCE IN IT. T HE SUBMISSION OF THE ASSESSEE THAT IT WAS REGULARLY PURCHASING MATERIAL FROM FOREIGN COMPANY HAVING HEAD OFFICE AT SINGAPORE AND, THEREFORE, THE TRAVEL TO SINGAPORE WAS FOR THE PURPOSE OF BUSINESS NEEDS ALSO REMAINS UNCONTROVERT ED. FURTHER THE SUBMISSION OF THE ASSESSEE BEFORE THE LEARNED CIT (APPEALS) TH AT PROOF OF EXPENDITURE ALONG WITH NECESSARY EXPLANATION WAS DULY FURNISHED TO AO VIDE LETTER DATED 15.12.2008 AND THEREAFTER, THE AO DID NOT ASK ANY F URTHER QUESTION BEFORE COMPLETING THE ASSESSMENT ON 19.12.2008 ALSO REMAIN S UNCONTROVERTED. 14. IN VIEW OF THE ABOVE, AND IN VIEW OF THE DET AILED ORDER PASSED BY THE LEARNED CIT (APPEALS) ON THIS ISSUE AND IN ABSE NCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICED BY THE LEARNED DR AGAINST TH E ABOVE FACTUAL FINDINGS GIVEN BY THE LEARNED CIT(APPEAL), WE DO NOT FIND AN Y INFIRMITY IN HIS ORDER. WE ACCORDINGLY, UPHOLD THE SAME AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. 9 15. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON THIS 22 ND DAY OF DECEMBER, 2010. SD/- SD/- (VIJAY PAL RAO) ( R.K. P ANDA ) JUDICIAL MEMBER ACCOUNTANT M EMBER MUMBAI, DATE: COPY FORWARDED TO : 1. THE APPELLANT, 2. THE RESPONDENT, 3. THE C.I.T. 4. CIT (A) 5. THE DR, D - BENCH, ITAT, MUMBAI //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI ROSHANI