Heidelberg India Private Limited, CHENNAI V. DCIT, Mumbai

ITA 293/CHNY/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61041 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-05-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2007-2008
• Appeal Filed On: 10-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S P CHIDAMBARAM SHRI K E
• Keywords: Depreciation; Business expenditure; Non-deduction of tax; Revenue expenditure; Capital expenditure
• Section: 37(1); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER I.T.A. NO. 293/MDS/2012 (ASSESSMENT YEAR : 2007-08) M/S HEIDELBERG INDIA PRIVATE LIMITED, 333, GST ROAD, CHROMPET, CHENNAI - 600 044. PAN : (APPELLANT) V. THE DEPUTY COMMISSIONER OF INCOME TAX 8(2), MUMBAI (NOW ASSESSED BY ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II(2), CHENNAI) (RESPONDENT) APPELLANT BY : SHRI S.P. CHIDAMBARAM, ADVOCATE RESPONDENT BY : SHRI K.E.B. RENGARAJAN, JUNIOR STANDING COUNSEL DATE OF HEARING : 03.05.2012 DATE OF PRONOUNCEMENT : 03.05.2012 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE, ITS GRIEVAN CE IS THAT THE CIT(APPEALS) CONFIRMED THE DISALLOWANCE OF EXPENDIT URE OF ` 2,09,11,571/- RELATING TO ENTERPRISE RESOURCE PLANN ING (ERP) IMPLEMENTATION AND ALSO CONFIRMED DISALLOWANCE OF E XPENDITURE OF ` 6,53,524/- ON PURCHASE OF CABINETS AND LIGHTS. I.T.A. NO. 293/MDS/12 2 2. SHORT FACTS RELATING TO FIRST ISSUE IS THAT ASSE SSEE HAD DEBITED IN ITS PROFIT & LOSS ACCOUNT A SUM OF ` 2,09,11,571/- AS ERP IMPLEMENTATION COST. DURING THE COURSE OF ASSESSME NT PROCEEDINGS, ASSESSEE WAS REQUIRED TO EXPLAIN WHY IT SHOULD NOT BE TREATED AS CAPITAL OUTGO. FROM THE DETAILS SUBMITTED BY THE A SSESSEE, IT WAS NOTED BY THE A.O. THAT THE EXPENSES WERE ON ACCOUNT OF STAFF TRAINING, REIMBURSEMENT OF COST IN RELATION TO INSTALLATION A ND IMPLEMENTATION OF SAP SOFTWARE AND THESE WERE DONE THROUGH ITS ASSOCI ATED CONCERN IN SINGAPORE. THE A.O. OBSERVED THAT NOT ONLY IT WAS NOT ALLOWABLE BEING A CAPITAL OUTGO, BUT ASSESSEE HAD ALSO NOT MA DE DEDUCTION OF TAX ON THE PAYMENT MADE TO THE SINGAPORE CONCERN. THEREFORE, ACCORDING TO HIM, RIGOURS OF SECTION 40(A)(I) OF IN COME-TAX ACT, 1961 (IN SHORT 'THE ACT') WERE ALSO INVITED. AS PER THE A.O., IF THE PAYMENTS WERE TREATED AS FEES FOR TECHNICAL SERVICES, THEN A SSESSEE WAS BOUND TO DEDUCT TAX AT SOURCE AND FAILURE TO DEDUCT TAX A T SOURCE CALLED FOR A DISALLOWANCE UNDER SECTION 40(A)(I) OF THE ACT. 2. IN ITS APPEAL BEFORE CIT(APPEALS), ARGUMENT OF T HE ASSESSEE WAS THAT THE PAYMENTS MADE FOR MODIFICATION AND IMP LEMENTATION OF EXISTING SAP SOFTWARE HAD NOT RESULTED IN CREATION OF ANY ASSET OF ENDURING NATURE. ASSESSEE ALSO SUBMITTED THAT JUST BECAUSE THE I.T.A. NO. 293/MDS/12 3 PAYMENTS WERE MADE IN A LUMP SUM, IT COULD NOT BE C ONSIDERED AS A CAPITAL OUTGO. CIT(APPEALS) WAS NOT IN AGREEMENT W ITH SUCH CONTENTION AND HELD THAT IT WAS NOT A ROUTINE EXPEN DITURE, BUT AN EXPENDITURE INCURRED, WHICH GAVE THE ASSESSEE AN EN DURING BENEFIT. RELYING ON THE DECISION OF SPECIAL BENCH OF THIS TR IBUNAL IN THE CASE OF AMWAY ENTERPRISES V. DCIT (111 ITD 112) (DEL.)(S B), CIT(APPEALS) CONFIRMED THE ORDER OF A.O. HOWEVER, HE DIRECTED THE A.O. TO GIVE DEPRECIATION ON THE EXPENDITURE AMOUNT . 3. NOW BEFORE US, A.R., STRONGLY ASSAILING THE ORDE R OF CIT(APPEALS), SUBMITTED THAT THE EXPENDITURE HAD NO T CREATED ANY ASSET NOR HAD GIVEN IT ANY ENDURING BENEFIT. FURTH ER, THE A.R. SUBMITTED THAT THE EXPENDITURE WAS IN THE NATURE OF SALARY, TRAVEL, ACCOMMODATION, FOOD, ETC. AND THESE WERE EVEN OTHER WISE ALLOWABLE AS REVENUE EXPENDITURE. RELIANCE WAS PLACED ON THE DECISION OF CHANDIGARH BENCH OF THIS TRIBUNAL IN THE CASE OF GL AXO SMITH KLINE CONSUMER HEALTHCARE LTD. V. ACIT (2007) 112 TTJ (CH D) 94. ACCORDING TO HIM, TAXES AS REQUIRED UNDER LAW WERE WITHHELD FROM THE PAYMENTS MADE TO THE SINGAPORE CONCERN. 4. PER CONTRA, D.R. STRONGLY SUPPORTED THE ORDERS O F THE AUTHORITIES BELOW. I.T.A. NO. 293/MDS/12 4 5. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL S UBMISSIONS. THERE IS NO DISPUTE THAT THE EXPENDITURE INCURRED W AS IN THE NATURE OF SALARY, TRAVEL, ACCOMMODATION, FOOD, ETC. THOUGH IT RELATED TO IMPLEMENTATION OF SAP SOFTWARE WHICH WAS A PART OF ERP. WE FIND THAT SIMILAR ISSUE HAD ALREADY COME BEFORE CHANDIGA RH BENCH OF THIS TRIBUNAL IN THE CASE OF GLAXO SMITH KLINE CONSUMER HEALTHCARE LTD. (SUPRA). IT WAS HELD AT PARAGRAPHS 43.1 TO 45 AS U NDER:- 43.1 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CARE FULLY. INSOFAR AS FACTUAL ASPECT OF THE MATTER IS CONCERNE D, DETAILS OF THE EXPENDITURE IN QUESTION AMOUNTING TO RS. 3,77,6 5,412 HAVE BEEN PLACED IN THE PAPER BOOK AT PP. 60 TO 62. THE ASSESSEE HAS IMPLEMENTED A NEW ERP PACKAGE FOR RECORDING OF MANUFACTURING AND ACCOUNTING TRANSACTIONS, I.E. IN THE FIELD OF F INANCIAL AND COMMERCIAL ACTIVITIES. AT P.62 OF THE PAPER BOOK A ND ALSO AS NOTED BY THE LOWER AUTHORITIES, THE NEW PACKAGE IS WITH REGARD TO THE RECORDING OF TRANSACTIONS IN THE FIELD OF ACCOU NTING AND FINANCE, COMMERCIAL TRANSACTIONS (I.E. SALE AND PUR CHASE ORDER MANAGEMENT, INVENTORY MANAGEMENT ETC.). IN ORDER T O IMPLEMENT, THE NEW ERP SYSTEM, THE ASSESSEE CLAIMS TO HAVE INC URRED THE IMPUGNED EXPENDITURE. THE DETAILS OF THE EXPENDITU RE REVEAL THAT THE MAJORITY OF HEADS OF EXPENSES ARE RELATING TO SALARIES, EMPLOYEES TRAVELLING COST, OTHER ROUTINE BUSINESS EXPENDITURE LIKE POSTAGE, STATIONERY, EMPLOYEES TRAINING SEMIN ARS, CONSULTANCY EXPENSES ETC. THE FIRST ASPECT IS THAT THE EXPENDI TURES IN QUESTION BY ITSELF DO NOT RESULT IN ACQUISITION OF ANY ASSET IN THE HANDS OF THE ASSESSEE. THE IMPUGNED EXPENDITURE AL SO IS NOT RELATED TO THE ACTUAL ACQUISITION OF THE ERP PACKAG E AND ON THIS COUNT, EVEN THE A.O. DOES NOT DISPUTE THE FACTUAL S ITUATION. THE STAND OF THE A.O. FOR TREATING THE EXPENDITURE, AS CAPITAL IS THAT THE SAID EXPENDITURE HAS BROUGHT ENDURING BENEFITS TO THE ASSESSEE. I.T.A. NO. 293/MDS/12 5 44. WE HAVE CONSIDERED THE NATURE OF THE EXPENDITUR E INCURRED AND THE RESULTANT BENEFITS TO THE ASSESSEE . EVIDENTLY THE BUSINESS OF THE ASSESSEE IS TO CARRY ON MANUFAC TURE AND SALE OF FOOD AND HEALTHCARE PRODUCTS. THE ACTIVITY PERT AINING TO ACCOUNTING, FINANCE, RECORDING OF TRANSACTIONS RELA TING TO SALES/PURCHASES, INVENTORIES ETC. ARE ALL SECONDARY AND ASSIST IN THE FURTHERANCE OF THE MAIN BUSINESS OBJECTIVE OF T HE ASSESSEE I.E. MANUFACTURING. THESE SECONDARY ACTIVITIES ARE NECESSARY AS AIDS OR TOOLS OF MANAGEMENT SO AS TO ENABLE THE ASSESSEE TO ACCURATELY AND CORRECTLY ASCERTAIN THE TRUE STATE O F AFFAIRS. AN EFFICIENT AND RELIABLE RECORDING OF ACTIVITIES OF A CCOUNTING, FINANCE, INVENTORY MANAGEMENT, PROCESSING OF PURCHA SES, SALES ETC. WOULD ENABLE THE ASSESSEE TO BE MORE EFFICIENT AND PROFITABLE IN CARRYING OUT ITS MAIN BUSINESS ACTIVI TY OF MANUFACTURING. WHAT WE ARE TRYING TO EMPHASIZE IS THAT WHERE THE ASSESSEE INCURS EXPENDITURE TO FURTHER IMPROVE AND UPGRADE ITS MANNER OF RECORDING OF ACCOUNTING, FINANCE AND OTHER RELATED TRANSACTIONS, IT DOES HAVE AN IMPACT ON GENERATION OF INCOME SINCE THE ASSESSEE ACQUIRES IMPROVED INPUTS TO TAKE BUSIN ESS DECISIONS. SO, HOWEVER, IT DOES NOT ADD TO THE CAPITAL APPARAT US OF THE ASSESSEE. IT MERELY ENABLES THE ASSESSEE TO TAKE M ANAGEMENT DECISIONS MORE EFFICIENTLY. THEREFORE, THE RESULTAN T BENEFITS, IN THE SHAPE OF CARRYING ON BUSINESS MORE EFFICIENTLY AND SMOOTHLY, CANNOT BE SAID TO BE AN ADVANTAGE ACCRUING IN THE C APITAL FIELD. WE HAVE ALREADY REFERRED IN OUR EARLIER PARAS TO TH E DECISION OF THE APEX COURT IN THE CASE OF EMPIRE JUTE CO. LTD. (SUPRA) IN THIS REGARD AND AGAIN REITERATE THAT THE TEST OF ENDURI NG BENEFIT MAY NOT BE APPLICABLE UNDER ALL CIRCUMSTANCES. FOR INS TANCE, AS WE HAVE SEEN IN THE INSTANT CASE, THERE DOES NOT FLOW ANY ADVANTAGE IN THE CAPITAL FIELD AND THUS THE EXPENDITURE CANNO T BE ATTRACTED AS A CAPITAL EXPENDITURE. IN FACT THE ADVANTAGE IS IN THE REVENUE FIELD AS IT FACILITATES THE ASSESSEE TO CARRY ON IT S BUSINESS EFFICIENTLY AND SMOOTHLY. AT THIS POINT IT IS ALSO PERTINENT TO MENTION THAT EVEN PRIOR TO THE IMPLEMENTATION OF TH E NEW ERP PACKAGE, THE ASSESSEE HAS BEEN CARRYING ON THE IMPU GNED ACTIVITIES. THE ONLY CHANGE IS THAT WITH THE IMPLE MENTATION OF THE NEW ERP PACKAGE, THE ASSESSEE SEEKS TO CARRY ON SUCH ACTIVITIES MORE SMOOTHLY, EFFICIENTLY AND MEANINGFU LLY SO AS TO ENABLE THE ASSESSEE TO TAKE BUSINESS DECISIONS. TH E EXPENDITURE IN QUESTION IS MERELY INCURRED ON IMPLEMENTATION OF THE NEW I.T.A. NO. 293/MDS/12 6 PACKAGE. THEREFORE, OUR INFERENCE THAT THE IMPUGNE D EXPENDITURE HAS ONLY ENABLED THE ASSESSEE TO CARRY ON ITS BUSINESS EFFICIENTLY AND SMOOTHLY. 45. WITH THIS BACKGROUND WE MAY NOW LOOK AT THE BRE AK UP OF THE EXPENDITURE AS PER THE DETAILS PLACED AT PP. 60 TO 61 OF THE PAPER BOOK. WE HAVE PERUSED THE SAME AND FIND THAT AS PER THE DETAILS ON RECORD, THE ENTIRE EXPENDITURE FITS THE BILL EXCEPT IN RELATION TO THE EXPENDITURE VOICE TELECOM CIRCUIT R S. 19,86,581 AND DATA/ TELECOM CIRCUIT USAGE RS. 69,16,888. WIT H RESPECT TO THE AFORESAID TWO EXPENSES THERE IS NO SPECIFIC DIS CUSSION EITHER IN THE ORDERS OF THE LOWER AUTHORITIES OR EVEN BEFO RE US; TO GAUGE ITS NATURE. THEREFORE, WHILE IN PRINCIPLE, WE UPHO LD THE STAND OF THE ASSESSEE THAT THE EXPENDITURES OF THE NATURE WH ICH HAVE BEEN INCURRED IN THE IMPLEMENTATION OF THE NEW ERP PACKAGE, ARE REVENUE EXPENDITURES, INSOFAR AS IT RELATES TO THE AFORESAID TWO EXPENDITURES, WE DEEM IT FIT AND PROPER TO DIRECT T HE A.O. TO ASCERTAIN THEIR NATURE AND THEREAFTER DECIDE THE IS SUE. FOR THIS LIMITED PURPOSE, WE HEREBY SET ASIDE THE ORDER OF T HE CIT(A) AND RESTORE THE MATTER TO THE A.O. TO CARRY OUT THE AFO RESAID EXERCISE. THE ASSESSEE SHALL PROVIDE THE NECESSARY DETAILS TO THE A.O. AND ALSO JUSTIFY THAT THE SAME WAS OF REVENUE NATURE IN CONSONANCE WITH OUR DISCUSSION IN THE AFORESAID PAR AS. THE TRIBUNAL IN THE ABOVE CASE HAD SET ASIDE THE MA TTER TO THE FILE OF A.O. ONLY FOR THE LIMITED EXERCISE OF VERIFYING THE EXPENDITURE IN RELATION TO VOICE TELECOM CIRCUIT AND DATA TELECOM CIRCUIT USAGE. BUT, FOR THIS, IT WAS HELD BY THE TRIBUNAL THAT EXPENDIT URE INCURRED ONLY ENABLED THE ASSESSEE TO CARRY ON ITS BUSINESS EFFIC IENTLY AND SMOOTHLY AND WAS THEREFORE ALLOWABLE AS REVENUE OUT GO. HERE, IN THE CASE BEFORE US, THE A.O. HIMSELF HAD GIVEN A FINDIN G THAT THE EXPENDITURE WAS IN THE NATURE OF SALARY, TRAVEL, AC COMMODATION, FOOD, ETC. HENCE, IN OUR OPINION, BY APPLYING THE DECISI ON OF CHANDIGARH I.T.A. NO. 293/MDS/12 7 BENCH IN GLAXO SMITH KLINE CONSUMER HEALTHCARE LTD. S CASE (SUPRA), THE CLAIM HAS TO BE ALLOWED AS REVENUE EXP ENDITURE. BEFORE THE CIT(APPEALS), ASSESSEE HAD ALSO STATED THAT IT HAD DEDUCTED APPROPRIATE TAX ON THE PAYMENTS MADE TO SINGAPORE C OMPANY AND REMITTED IT WITHIN THE PRESCRIBED TIME LIMIT. THIS WAS NOT DISPUTED BEFORE US BY THE D.R. WE ARE, THEREFORE, OF THE OP INION THAT THE CLAIM WAS ALLOWABLE AND COULD NOT BE TREATED AS CAPITAL O UTGO. WE, THEREFORE, SET ASIDE THE ORDERS OF AUTHORITIES BELO W IN THIS REGARD AND DIRECT THE A.O. TO ALLOW THE CLAIM. 6. FACTS RELATING TO SECOND ISSUE ARE THAT ASSESSEE HAD CLAIMED EXPENDITURE OF ` 6,53,524/- ON PURCHASE OF CABINETS AND LIGHTS. A. O. WAS OF THE OPINION THAT THE ABOVE AMOUNT, INCLUDED IN REPAIRS AND MAINTENANCE, WAS NOTHING BUT ADDITION TO FURNITUR E AND FIXTURE, FORMING PART OF FIXED ASSETS. SINCE AMOUNTS INCURR ED WERE FOR ACQUIRING FIXED ASSETS, THESE WERE ALLOWED AS A DED UCTION UNDER SECTION 37(1) OF THE ACT. 7. IN ITS APPEAL BEFORE CIT(APPEALS), ASSESSEE REIT ERATED ITS CONTENTION THAT THE AMOUNTS WERE REVENUE OUTGO AND DID NOT BRING ANY ENDURING BENEFIT TO THE ASSESSEE. CIT(APPEALS) , HOWEVER, DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND HELD THAT IN VIEW OF I.T.A. NO. 293/MDS/12 8 EXPLANATION 1 TO SECTION 32 OF THE ACT, EVEN IF THE EXPENDITURE WAS INCURRED BY THE ASSESSEE ON A BUILDING LEASED BY IT , BY WAY OF RENOVATION, EXTENSION OR IMPROVEMENT, IT HAD TO BE TREATED ONLY AS CAPITAL OUTGO. CIT(APPEALS) THUS CONFIRMED THE TRE ATMENT OF THE ASSESSING OFFICER. 8. NOW BEFORE US, A.R., ASSAILING THE ORDERS OF AUT HORITIES BELOW, STATED THAT WHAT WAS PUT UP WAS ONLY PURELY TEMPORA RY STRUCTURE AND DID NOT RESORT IN ANY BENEFIT OF ENDURING NATURE. ACCORDING TO A.R., THE ITEMS WERE NOT SOMETHING WHICH COULD BE CONSIDE RED AS FURNITURE OR FIXED ASSETS AND HENCE, IRRESPECTIVE OF THE EXPL ANATION TO SECTION 32, IT WAS ALLOWABLE AS REVENUE OUTGO. 9. PER CONTRA, D.R. SUPPORTED THE ORDERS OF AUTHORI TIES BELOW. 10. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. IT IS NOT DISPUTED THAT WHAT THE ASSESSEE HAD DONE IN THE LEASED PREMISES WAS DIVIDING IT INTO CABINS. IN LEASED AR EA, DIFFERENT ENCLOSURES WERE MADE BY WAY OF CABINS. SUCH TEMPOR ARY SET-UP CANNOT BE CONSTRUED ON PAR WITH A PERMANENT CONSTRU CTION. TEMPORARY STRUCTURE PUT UP, WHETHER IN A LEASED PRE MISE OR OWN PREMISE WOULD NOT GIVE ENDURING BENEFIT BECAUSE IT IS SUSCEPTIBLE TO FREQUENT CHANGES AND MODIFICATION AND ALSO CAN BE E ASILY RE-LOCATED. I.T.A. NO. 293/MDS/12 9 AS FOR ELECTRIC LIGHTS, WE ARE OF THE OPINION THAT IT CAN NEVER BE CONSIDERED AS AN ASSET GIVING AN ENDURING BENEFIT, ITS LIFE BEING UNPREDICTABLE BY ITS VERY NATURE. THEREFORE, WE AR E OF THE OPINION THAT THE CLAIM WAS CLEARLY ALLOWABLE. IN TAKING THIS VI EW, WE ARE FORTIFIED BY THE DECISIONS OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. DASAPRAKASH (114 ITR 210), CIT V. SAKTHI FINANCE LT D. (291 ITR 83) AND CIT V. OOTY DASAPRAKASH (237 ITR 902). WE, THE REFORE, SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND DIRECT TH E A.O. TO ALLOW THE CLAIM OF THE ASSESSEE IN THIS REGARD. 11. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT AFTER CONCLUSION OF HEARING ON 3 RD MAY, 2012. SD/- SD/- (VIKAS AWASTHY) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 3 RD MAY, 2012. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-19, MUMBAI (4) CIT-8, MUMBAI (5) D.R. (6) GUARD FILE