Timken Engineering and Research India Private Limited, Bangalore V. DCIT, Bangalore

ITA 656/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63778 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 4 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 11-10-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 10-06-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K AMBUSTHA
• Assessee Lawyers: K S PRASAD
• Keywords: Transfer pricing; Opportunity of being heard; Revenue expenditure; Capital expenditure
• Section: 143(3); 234B; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO.656/BANG/2011 (ASSESSMENT YEAR 2005-06) M/S. TIMKEN ENGINEERING AND RESEARCH INDIA PVT LTD., SY.NOS.39(P), 41(P) & 42(P), ELECTRONIC CITY, PHASE II, DODDATHOGUR VILLAGE, BEGUR HOBLI TALUK, BANGALORE SOUTH DISTRICT, BANGALORE. PAN AABCT 2265L VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 12(4), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI K.S. PRASAD. RESPONDENT BY : SHRI S.K. AMBUSTHA. DATE OF HEARING : 11.10.2012. DATE OF PRONOUNCEMENT : 31.10.2012. O R D E R PER SHRI JASON P. BOAZ : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-IV, BANGALORE DT.8.3.2011 FOR ASSESSMENT YEAR 2005-06. 2. THE FACTS OF THE CASE, IN BRIEF, ARE AS UNDER : 2.1 THE ASSESSEE-COMPANY (HEREINAFTER REFERRED TO A S THE ASSESSEE), ENGAGED IN THE BUSINESS OF ENGINEERING AND RESEARCH SERVICES, FIL ED ITS RETURN FOR ASSESSMENT YEAR 2005-06 ON 29.10.2005 DECLARING LOSS OF RS.82,28,850. THE ASSESSEE'S CASE WAS TAKEN UP FOR SCRUTINY BY ISSUE OF NOTICE UNDER SECTION 143(2) OF THE INCO ME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS 'THE ACT') ON 11.8.2006. THE ASSESSMENT WAS COM PLETED BY AN ORDER UNDER SECTION 143(3) OF 2 ITA NO.656/BANG/11 THE ACT ON 24.12.2008 DETERMINING THE INCOME OF THE ASSESSEE AT RS.9,08,48,203 WHICH INCLUDED THE FOLLOWING ADDITIONS / DISALLOWANCE : A) DONATION RS.5,61,576 B) SOFTWARE EXPENSES RS.52,49,862 C) FOREIGN EXCHANGE LOSS RS.26,02,245 D) LEGAL AND PROFESSIONAL CHARGES RS.3,94,061 E) TRANSFER PRICING ADJUSTMENT RS.9,06,67,366 2.2 AGGRIEVED BY THE ORDER OF ASSESSMENT FOR ASSES SMENT YEAR 2005-06 DT.24.12.2008, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS) . THE LEARNED CIT(APPEALS) DISPOSED THE APPEAL ALLOWING THE ASSESSEE PARTIAL RELIEF. 3. AGGRIEVED BY THE ORDER OF THE LEARNED CIT(APPEAL S) DT.8.3.2011, THE ASSESSEE IS NOW BEFORE THE TRIBUNAL. IN THE GROUNDS OF APPEAL RAIS ED, IT HAS BEEN CONTENDED AS UNDER : 1. THE ORDER PASSED BY THE CIT (APPEALS)-IV, BAN GALORE (HEREINAFTER REFERRED TO AS THE LEARNED CIT (A)) TO THE EXTENT AGAINST THE APPELLANT IS CONTRARY TO THE LAW AND IS LIABLE TO BE QUASHED. 2. THAT THE LEARNED CIT (APPEALS) ERRED IN CONFIRM ING THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING THE DONATIONOFRS.5,61,578. 3. THAT THE LEARNED CIT (APPEALS) ERRED IN CONFI RMING THE ACTION OF THE ASSESSING OFFICER IN TREATING SOFTWARE EXPENSES OF RS.52,49,8 62 AS CAPITAL IN NATURE. 4. THAT THE LEARNED CIT (APPEALS) ERRED IN CONF IRMING THE ACTION OF THE ASSESSING OFFICER IN ADDING BACK RS.3,94,061 INCURR ED UNDER THE HEAD LEGAL & PROFESSIONAL CHARGES. 5. THAT THE LEARNED CIT (APPEALS) ERRED IN UPH OLDING INTEREST UNDER SECTIONS 234B AND 234D OF THE ACT. 6. THAT THE APPELLANT CRAVES LEAVE TO ADD TO AN D / OR ALTER, AMEND, RESCIND OR MODIFY THE GROUNDS HEREIN ABOVE BEFORE OR AT THE TI ME OF HEARING THE APPEAL. 4. THE GROUNDS RAISED AT S.NOS.1 AND 6 ARE GENERAL IN NATURE AND THEREFORE NO ADJUDICATIO N IS CALLED FOR THEREON. 3 ITA NO.656/BANG/11 5. AT THE OUTSET, THE LEARNED COUNSEL FOR THE ASSES SEE SUBMITTED THAT THE GROUNDS OF APPEAL AT S.NO.2 AND 4 IN RESPECT OF THE DISALLOWANCES OF (I) DONATION AM OUNTING TO RS.5,61,578 AND (II) LEGAL AND PROFESSIONAL CHARGES AMOUNTING T O RS.3,94,061 ARE NOT BEING PRESSED IN THIS APPEAL. IN THIS VIEW OF THE MATTER, THESE GROUNDS ARE ACCORDINGLY DISMISSED AS NOT PRESSED. 6.1 ONLY GROUND RAISED AT S.NO.3 SURVIVES FOR CONS IDERATION . IN THIS GROUND, THE ASSESSEE CHALLENGES THE ORDER OF THE LEARNED CIT(AP PEALS) CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN TREATING SOFTWARE EXPENSES OF RS.52,49,862 AS CAPITAL IN NATURE. THE LEARNED COUNSEL FOR THE ASSESSEE SUPPORTING THE GR OUNDS RAISED SUBMITTED THAT THE BREAK UP OF SOFTWARE EXPENSES WERE AT ANNEXURE 1 TO THE ASSE SSEE'S WRITTEN SUBMISSIONS DT.4.7.2012 AND CLEARLY WERE IN THE NATURE OF APPLICATION SOFTW ARE. IT WAS SUBMITTED THAT THE SOFTWARE EXPENSES INCLUDED ONLY APPLICATION SOFTWARE WHEN T HE OWNERSHIP IS EITHER IN THE FORM OF COPYRIGHT UNDER ASSIGNMENT OR A LICENSE AS A RI GHT TO BE A COPY RIGHT FOR THE PURPOSE OF OWN BUSINESS. IT IS SUBMITTED THAT THE SAID SOFTWARE E XPENDITURE WAS INCURRED FOR OBTAINING LICENSES FOR THE USE OF THE AFORESAID SOFTWARE AND SINCE ALL THIS SOFTWARE ARE ESSENTIALLY IN THE NATURE OF APPLICATION SOFTWARE, THE EXPENDITURE INCURRED IS REVENUE IN NATURE AS THE SAME ONLY FACILITATES THE DAY TO DAY OPERATIONS OF THE A SSESSEE. IT IS CONTENDED THAT SINCE THE SOFTWARE EXPENDITURE DOES NOT RESULT IN ENDURING BE NEFIT AS THE LIFE OF THE APPLICATION SOFTWARE IS INVARIABLY SHORT AND THE SAME IS BOUND TO BECOME TECHNICALLY OBSOLETE VERY FAST, IT SHOULD BE ALLOWED UNDER SECTION 37 OF THE ACT AS A REVENUE EXPENDITURE AND NOT TREATED AS CAPITAL EXPENDITURE AS HELD BY THE ASSESSING OFFICE R. IN SUPPORT OF THE ASSESSEE'S PROPOSITION THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON A N UMBER OF JUDICIAL DECISIONS OF THE TRIBUNAL 4 ITA NO.656/BANG/11 ACROSS INDIA INCLUDING THE FOLLOWING DECISION OF T HE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE FOLLOWING CASES : I) IBM INDIA LTD. VS. CIT REPORTED IN 105 ITD 1 (20 03) II) SOFTWARE & SILICON SYSTEMS INDIA P. LTD. VS. IT O IN ITA NO.44/BANG/2006 THE LEARNED COUNSEL FOR THE ASSESSEE ALSO RELIED ON THE DECISION OF THE SPECIAL BENCH OF THE DELHI TRIBUNAL IN THE CASE OF AMWAY INDIA ENTERPRIS ES VS. DCIT REPORTED IN 111 ITD 112 (SB) (DEL). 6.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTA TIVE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 6.3 WE HAVE HEARD BOTH PARTIES AND CAREFULL Y PERUSED THE MATERIAL ON RECORD. ON PERUSAL OF THE ORDERS OF THE AUTHORITIES BELOW, W E FIND THAT NO PROPER EXAMINATION OF THE ISSUE HAS BEEN CARRIED OUT TO ESTABLISH WHETHER THE SOFTWARE EXPENSES CLAIMED WERE REVENUE IN NATURE AS CLAIMED BY THE ASSESSEE OR CAPITAL EXP ENDITURE AS HELD BY THE ASSESSING OFFICER AND CONFIRMED BY THE LEARNED CIT(APPEALS). AT PARA 7.3 OF THE ORDER OF ASSESSMENT THE ASSESSING OFFICER NOTED THAT THE ASSESSEE COMPANY COULD NOT SUBSTANTIATE ITS CLAIM FOR THE SAME BEING REVENUE EXPENDITURE IN NATURE BY PRODUC ING SUPPORTING DOCUMENTS OR EVIDENCE AND THEN PROCEEDS TO TREAT THE SAME AS CAPITAL EXPENDIT URE. THIS IS A CLEAR INDICATION THAT THE ISSUE HAS NOT BEEN EXAMINED AND ADDRESSED AT THE AS SESSMENT STAGE ITSELF. THE LEARNED CIT(APPEALS) HAS DEALT WITH THIS ISSUE IN PARA 6 A T PAGE 4 OF HIS ORDER AND WE FIND THAT OTHER THAN MECHANICALLY CONFIRMING THE ASSESSING OFFICER S ACTION OF HOLDING SOFTWARE EXPENSES TO BE CAPITAL IN NATURE, HE HAS ALSO NOT CALLED FOR SU PPORTING DOCUMENTS OR EVIDENCES WHICH THE 5 ITA NO.656/BANG/11 ASSESSING OFFICER NOTED WERE NOT FILED DURING ASSES SMENT PROCEEDINGS. WE ARE, THEREFORE, OF THE VIEW THAT THE ISSUE OF SOFTWARE EXPENDITURE OF RS.52,49,862 INCURRED BY THE ASSESSEE IN THE RELEVANT PERIOD REQUIRES RE-EXAMINATION. 6.4 IN THIS REGARD FOR THE METHOD / TEST TO BE APPL IED FOR ASCERTAINING WHETHER THE SAID EXPENDITURE IS CAPITAL OR REVENUE IN NATURE, WE DRA W SUPPORT FROM THE PRINCIPLES LAID DOWN IN THE DECISION OF THE HON'BLE SPECIAL BENCH OF THE IT AT, DELHI IN THE CASE OF AMWAY INDIA ENTERPRISES VS. DCIT REPORTED IN 111 ITD 112, THE A UTHOR OF WHICH ORDER, IS PART OF THIS BENCH. IN THIS ORDER, THE TRIBUNAL HAS OBSERVED THAT THERE CANNOT BE ANY SPECIFIC OR PRECISE TEST WHICH CAN BE APPLIED CONCLUSIVELY OR UNIVERSALLY FO R DISTINGUISHING BETWEEN CAPITAL AND REVENUE EXPENDITURE AND THAT DIFFERENT MINDS COME TO DIFFE RENT CONCLUSIONS WITH EQUAL PROPRIETY. THE CARDINAL RULE IS THAT THE QUESTION WHETHER A CE RTAIN EXPENDITURE IS ON CAPITAL OR REVENUE ACCOUNT SHOULD BE DECIDED FROM THE PRACTICAL AND BU SINESS VIEW POINT AND IN ACCORDANCE WITH SOUND ACCOUNTANCY PRINCIPLES. THE TRIBUNAL FURTHER OBSERVED THAT WHILE DEALING WITH THIS COMPLEX ISSUE, THESE TESTS GENERALLY APPLIED TO DEC IDE THE NATURE OF EXPENDITURE AS TO WHETHER IT IS CAPITAL OR REVENUE, ARE THE FACT OF ENDURING BENEFIT, OWNERSHIP TEST AND FUNCTIONAL TEST. THESE TESTS WHEN APPLIED WOULD DECIDE WHETHER THE E XPENDITURE INCURRED ON SOFTWARE IS OF CAPITAL OR REVENUE IN NATURE. THESE OBSERVATIONS ON THE TESTS TO BE APPLIED HAVE BEEN DEALT WITH IN DETAIL AT PARAS 43 TO 58 THEREOF. THE CONC LUSIONS IN THE TRIBUNAL ORDER AT PARAS 59 AND 60 ARE SUMMARIZED AS UNDER : I) WHEN THE ASSESSEE ACQUIRES A COMPUTER SOFTWARE O R FOR THAT MATTER THE LICENSE TO USE SUCH SOFTWARE, HE ACQUIRES A TANGIBLE ASSET AND BECOMES OWNER THEREOF. 6 ITA NO.656/BANG/11 II) HAVING REGARD TO THE FACT THAT SOFTWARE BECOMES OBSOLETE WITH TECHNOLOGICAL INNOVATION AND ADVANCEMENT WITHIN A SHORT SPAN OF TIME, IT CAN BE SAID THAT WHERE THE LIFE OF THE COMPUTER SOFTWARE IS SHORTER (SAY LESS THAN TWO YEARS), IT M AY BE TREATED AS REVENUE EXPENDITURE. ANY SOFTWARE HAVING ITS UTILITY TO THE ASSESSEE FOR A PERIOD BEYOND TWO YEARS CAN BE CONSIDERED AS ACCRUAL OF BENEFIT OF ENDURING NATURE. HOWEVER, TH AT BY ITSELF WILL NOT MAKE THE EXPENDITURE INCURRED ON SOFTWARE AS CAPITAL IN NATURE AND THE F UNCTIONAL TEST AS DISCUSSED ABOVE ALSO NEEDS TO BE SATISFIED. III) ONCE THE TEST OF OWNERSHIP AND ENDURING BENEF IT ARE SATISFIED, THE QUESTION WHETHER EXPENDITURE INCURRED ON COMPUTER SOFTWARE IS CAPITA L OR REVENUE HAS TO BE SEEN FROM THE POINT OF VIEW OF ITS UTILITY TO A BUSINESSMAN AND HOW IMP ORTANT AN ECONOMIC OR FUNCTIONAL ROLE IT PLAYS IN HIS BUSINESS. IN OTHER WORDS, THE FUNCTIONAL TE ST BECOMES MORE IMPORTANT AND RELEVANT BECAUSE OF THE PECULIAR NATURE OF THE COMPUTER SOFT WARE AND ITS POSSIBLE USE INDIFFERENT AREAS OF BUSINESS TOUCHING EITHER CAPITAL OR REVENUE HELD OR ITS UTILITY TO A BUSINESSMAN WHICH MAY TOUCH EITHER CAPITAL OR REVENUE FIELD. 6.5 THE FACT SITUATION IN RESPECT OF THE NECESSITY FOR HAVING THE ISSUE OF SOFTWARE EXPENDITURE EXAMINED TO ASCERTAIN WHETHER IT IS CAP ITAL OR REVENUE IN NATURE IN THE CASE OF AMWAY INDIA ENTERPRISES (SUPRA) IS SIMILAR TO THAT OF THE PRESENT CASE OF THE ASSESSEE. WE, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION IN T HE CASE OF AMWAY INDIA ENTERPRISES (SUPRA), HOLD THAT SINCE THE EXAMINATION OF WHETHER SOFTWARE EXPENDITURE INCURRED IS CAPITAL OR REVENUE IN NATURE WOULD REQUIRE TO BE DONE IN RESPE CT OF EACH AND EVERY SOFTWARE INDEPENDENTLY HAVING REGARD TO THE CRITERIA / PRINC IPLES LAID DOWN IN THE CITED CASE, THE MATTER 7 ITA NO.656/BANG/11 REQUIRES TO BE RESTORED BACK TO THE FILE OF THE ASS ESSING OFFICER FOR CARRYING OUT THE SAME. THE ASSESSING OFFICER IS DIRECTED TO EXAMINE THE QU ESTION OF WHETHER EXPENDITURE ON COMPUTER SOFTWARE IS CAPITAL OR REVENUE IN THE LIGH T OF THE CRITERIA / FACTS LAID DOWN IN THE CASE OF AMWAY INDIA ENTERPRISES (SUPRA) AT PARAS 43 TO 60 THEREOF AFTER GIVING THE ASSESSEE ADEQUATE OPPORTUNITY OF BEING HEARD IN THE MATTER. IT IS ORDERED ACCORDINGLY. 7. IN THE RESULT, THE ASSESSEE'S APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST OCTOBER, 2012. SD/- SD/- (N.V. VASUDEVAN) (JASON P BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMB ER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, - B BENCH. 6. GUARD FILE. (TRUE COPY ) BY ORDE R SR. PRIVATE SECRETARY, ITAT, BANGALORE .