TAKE Solutions Limited, CHENNAI V. ACIT, CHENNAI

ITA 814/CHNY/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8857 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2016
• Appeal Filed By: Assessee
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 01-04-2016
• Court: TRIBUNAL
• Department Lawyers: P RADHAKRISHNAN
• Assessee Lawyers: R SIVARAMAN
• Keywords: Capital asset; Depreciation; Earning of tax free income; Revenue expenditure; Capital expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI , ! ' . #$ , % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ ITA NOS. 814 & 815/MDS/2016 / ASSESSMENT YEAR : 2009-10 & 2010-11 TAKE SOLUTIONS LIMITED, OLD NO.18B, NEW NO.8B, ADYAR CLUB GATE ROAD, CHENNAI 600 028. PAN AABCT3684M APPELLANT) V. THE ASSISTANT COMMISSIONER OF INCOME-TAX , CORPORATE CIRCLE-3(1), CHENNAI. RESPONDENT) / APPELLANT BY : SHRI R. SIVARAMAN, ADVOCATE / RESPONDENT BY : SHRI P. RADHAKRISHNAN, JCIT ! / DATE OF HEARING : 07.06.2016 '# ! / DATE OF PRONOUNCEMENT: 15.07.2016 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGAIN ST DIFFERENT ORDERS OF THE COMMISSIONER OF INCOME-TAX( APPEALS) - - ITA 814 & 815/1 6 2 DATED 21.01.2016 FOR THE ASSESSMENT YEARS 2009-10 A ND 2010- 11. 2. THE FIRST COMMON GROUND IN THESE APPEALS IS WITH REGARD TO CONFIRMING THE DISALLOWANCE OF PRODUCT DEVELOPME NT EXPENDITURE AS CAPITAL EXPENDITURE. 3. SIMILAR ISSUE CAME FOR CONSIDERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NOS. 457, 458 AND 459 /MDS/2013 FOR THE ASSESSMENT YEARS 2006-07, 2007-08 AND 2008- 09. THE TRIBUNAL AFTER ELABORATE DISCUSSION VIDE ORDER DATE D 30.09.2013 HELD AS UNDER : 14. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIA LS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES B ELOW. THE ISSUE INVOLVED IN THIS APPEAL IS WHETHER THE EXPENDITURE I.E. PRODUCT DEVELOPMENT EXPENSES INCUR RED BY THE ASSESSEE IS A CAPITAL EXPENDITURE OR REVENUE EXPENDITURE. THE ASSESSING OFFICER, AFTER EXAMINING THE ENTIRE FACTS OF THE CASE AND BY CONSIDERING THE DEC ISION OF THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF ARA VALI CONSTRUCTION CO. PVT. LTD. (SUPRA) AND ALSO BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF TATA CONSULTANCY SERVICES V. STATE OF ANDHRA PRADESH (SU PRA), HELD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IS CAPITAL EXPENDITURE AND ALLOWED 15% DEPRECIATION. I N THE ASSESSMENT ORDER, HE HAS ALSO OBSERVED THAT THE ASS ESSEE IS GAINING ENDURING BENEFIT. ON APPEAL, THE LD. CIT(APPEALS), BY FOLLOWING THE DECISION OF THE TRIB UNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003-04 SUSTAINED THE ORDER OF THE ASSESSING OFFICER. BEFOR E US, THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE FACTS ARE ENTIRELY DIFFERENT IN THIS ASSESSMENT YEAR, BUT HE HAS - - ITA 814 & 815/1 6 3 NOT POINTED ANY FACT, WHICH IS DIFFERENT FROM EARLI ER ASSESSMENT YEAR. IN THE ASSESSMENT YEAR 2003-04 VID E ORDER DATED 23.05.2008, THE TRIBUNAL HAS CONSIDERED THE ISSUE ELABORATELY AND HELD AS UNDER: 6. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND ALSO CAREFULLY PERUSED THE MATERIAL ON RECORD. WE N OTE THAT THE ASSESSING OFFICER HAS REJECTED THE CLAIM O F THE ASSESSEE AS REVENUE EXPENDITURE ON PRODUCT DEVELOPMENT EXPENDITURE RELYING ON HON'BLE RAJASTHA N HIGH COURT JUDGEMENT IN THE CASE OF CIT VS. ARAWALI CONSTRUCTIONS CO. (P.) LTD. (259 ITR 30) IN WHICH T HE HON'BLE HIGH COURT HAS OBSERVED THAT THE PAYMENT WA S MADE FOR OUTRIGHT SALE OF COMPUTER SOFTWARE WHICH I S USED AS TECHNIQUE IN MINING OPERATIONS. IN THE LORDSHIPS ' VIEW THE ACQUIRING OF TECHNICAL KNOW-HOW IS OF CAPITAL N ATURE AND THEREFORE THE ASSESSING OFFICER HAS RIGHTLY TRE ATED THE EXPENDITURE ON ACQUIRING THE COMPUTER SOFTWARE AS C APITAL EXPENDITURE AND RIGHTLY ALLOWED DEPRECIATION AS PER RULES. THE SPECIAL BENCH OF' THIS TRIBUNAL (DELHI BENCH) I N THE CASE OF AMWAY INDIA ENTERPRISES VS. DCIT (SUPRA) HA S HELD ON THE ISSUE OF CAPITAL OR REVENUE EXPENDITURE IN PARA 44 AS UNDER: IN OTHER SITUATION, THE EXPENDITURE CAN BE TREATED AS CAPITAL EXPENDITURE ONLY WHEN IT RESULTS IN ACCRUAL OF ADVANTAGE O ENDURING NATURE TO THE ASSESSEE IN THE CAPITAL FIELD. THE RELEVANT TESTS APPLIED TO DETERM INE THE NATURE OF EXPENDITURE IN SUCH A SITUATION ARE THE FUNCTIONAL TESTS AND THE TEST OF ENDURING BENEFIT. AN ADVANTAGE IS TO BE CONSIDERED AS OF ENDURING BENEFI T IF THE BENEFIT ACCRUING IS NOT OF A TRANSIENT NATURE B UT IS OF SUCH DURABILITY AS TO JUSTIFY IT BEING TREATED AS A CAPITAL ASSET. THE EXPRESSION ENDURING BENEFIT HAS BEEN EXPLAINED BY THE HONBLE SUPREME COURT IN THE CASE OF ASSAM BENGAL CEMENT CO. LTD. (SUPRA) TO MEAN ENDURING IN THE WAY THAT FIXED CAPITAL ENDURES. AS HELD BY HON'BLE SUPREME COURT IN THE CASE OF EMPIRE JUTE CO. LTD. (SUPRA) THERE MAY BE CASES WHERE EXPENSES, EVEN IF RESULTING IN THE ADVANTAGE OF AN ENDURING BENEFIT, MAY BE PROPERLY CHARGEABLE TO REVENUE ACCOUNT IF THE ADVANTAGE CONSISTS MERELY IN FACILIT ATING THE ASSESSEE'S TRADING OPERATIONS OR ENABLING HIM T O - - ITA 814 & 815/1 6 4 MANAGE AND CONDUCT HIS BUSINESS MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED. IT IS THUS NECESSARY THAT IN ORDER TO TR EAT ANY EXPENDITURE AS CAPITAL EXPENDITURE, THE SAME SHOULD RESULT IN ACCRUAL OF ADVANTAGE OF ENDURING BENEFIT AND SUCH BENEFIT SHOULD ACCRUE TO THE ASSES SEE IN THE CAPITAL FIELD. WHAT EXACTLY IS MEANT BY ACCR UAL OF BENEFIT IN THE CAPITAL FIELD IS THAT THE SAID BENEF IT SHOULD FORM PART OF THE PROFIT MAKING APPARATUS OF THE ASSESSEES BUSINESS. 7. FROM THE ABOVE, IT IS CLEAR THAT IN ORDER TO TR EAT ANY EXPENDITURE AS CAPITAL EXPENDITURE IT SHOULD RESULT IN ACQUISITION OF ADVANTAGE OF ENDURING BENEFIT AND SU CH BENEFIT SHOULD ACCRUE TO THE ASSESSEE IN THE CAPITA L FIELD AND THE SAID BENEFIT SHOULD FORM PART OF PROFIT MAK ING APPARATUS OF THE ASSESSEES BUSINESS. IN THE CASE I N HAND THE ASSESSEE GOT DEVELOPED THE SOFTWARE WITH TAKE H UB WHICH IS A WAREHOUSE MANAGEMENT SOFTWARE AGAINST PAYMENT OF RS.1 CORE. BY DOING SO THE ASSESSEE HAS ACQUIRED THE ABSOLUTE OWNERSHIP AND OTHER RIGHTS REGARDING SOFTWARE. APART FROM THIS THE ASSESSEE AL SO PURCHASED A DIVISION THAT DEVELOPED PRODUCT BLUE YA NTRA, A SOFTWARE FROM ISTARTWEB LIMITED CO. AND ALSO PURC HASED A DIVISION THAT DEVELOPED PRODUCT I-POINT FROM META LOGICS SYSTEMS INDIA PVT. LTD. IN ALL THREE ACQUISITIONS O F SOFTWARE THE ASSESSEE HAS BECOME ABSOLUTE OWNER OF THE PRODUCT AS WELL AS ALSO ACQUIRED THE INTELLECTUAL P ROPERTY RIGHTS OTHER PROPERTY RIGHTS RELATING TO THE PRODUC T AND DIVISIONS SO PURCHASED. SINCE THE ASSESSEE IS ENGAG ED IN THE BUSINESS OF SOFTWARE DEVELOPMENT, THE ACQUISITI ON OF THESE SOFTWARES BY THE ASSESSEE IS EITHER FOR USING THE SOFTWARE AND THE FACILITIES PURCHASED FOR DEVELOPIN G OTHER SOFTWARES AS PER SPECIFIC DEMAND AND REQUIREMENT OF THE ASSESSEE'S CLIENTS OR TO SELL COPIES OF THESE SOFTW ARE TO THE CLIENTS WITH LIMITED RIGHT OF USE BY RETAINING THE MASTER COPY AND AL1 OTHER RIGHTS. IN BOTH THE CASES THE AC QUIRED SOFTWARE HAS ENDURING BUSINESS BENEFIT ACCRUED TO T HE ASSESSEE. SINCE THE ASSESSEE HAS ACQUIRED ALL THE R IGHTS AND OWNERSHIP AS REGARDS THESE SOFTWARE IN THE FORM OF A DISC (MASTER COPY) OR OTHER MAGNETIC MEDIUM CONTAIN ING COMPUTER SOFTWARES, THE ASSESSEE HAS ACQUIRED A TANGIBLE ASSET IN THE FORM OF SOFTWARE AND THE EXPE NDITURE - - ITA 814 & 815/1 6 5 INCURRED ON DEVELOPMENT AND ACQUISITION OF THESE SOFTWARES ALONG WITH THE DIVISION WHICH IS A FACILI TY FOR DEVELOPING THE SOFTWARE IS A CAPITAL EXPENDITURE. O UR VIEW IS ALSO SUPPORTED BY THE DECISION OF THE HON'BLE SU PREME COURT IN THE CASE OF TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADESH (271 ITR 401) WHEREIN IT WAS HELD THAT SOFTWARE CONTAINED A DISTINCT TANGIBLE PROPERTY BY ITSELF. THE USE BY THE ASSESSEE OF SUCH SOFTWARE IN ITS BUS INESS IS ENOUGH TO ALLOW THE CLAIM OF DEPRECIATION. THE R IGHT WHICH AN ASSESSEE ACQUIRES BY PURCHASING THE DISC O R MAGNETIC MEDIUM CONTAINING THE COMPUTER SOFTWARE WI TH LIMITED OR ABSOLUTE RIGHT TO USE THE SAME BY ITSELF WOULD SATISFY THE REQUIREMENT OF PLANT. THE ASSESSEE'S OWNERSHIP OF LIMITED RIGHT OVER THE TANGIBLE ASSET IS SUFFICIENT TO CONCLUDE THAT THE ASSESSEE IS A OWNER OF THE PLANT. APART FROM THIS THE SPECIAL BENCH OF THIS TR IBUNAL, DELHI BENCHES IN THE CASE OF AMWAY INDIA ENTERPRISE S VS. DCIT (SUPRA) WHILE DECIDING AN APPEAL IN THE CASE O F M/S SQL STAR INTERNATIONAL LTD., IT WAS HELD THAT THE A SSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AS WELL AS RUNNING A TRAINING CENTRE TO IMPART SPECIALIZED TRAINING TO THE STUDENTS IN SOFTWARE TECHNOLOGY. IF THE SOFTWARE WERE USED IN SUCH BUSIN ESS TO IMPART TRAINING TO THE STUDENTS, THEN THE SAME WOUL D BE PART OF THE PROFIT MAKING, APPARATUS OF THE ASSESSE E AND CONSEQUENTLY EXPENDITURE ON SOFTWARE IS CAPITAL IN EXPENDITURE. IN VIEW OF THE ABOVE DISCUSSION, WE AR E OF THE CONSIDERED OPINION THAT IN THE CASE IN HAND THE EXPENDITURE INCURRED ON COMPUTER SOFTWARE SATISFIES THE TEST OF OWNERSHIP ENDURING BENEFIT OF UTILITY TO TH E BUSINESS OF THE ASSESSEE. THUS, IN OUR VIEW THE EXPENDITURE INCURRED BY THE ASSESSEE IN THE PRESENT CASE FOR AC QUIRING DIFFERENT SOFTWARES AND DIVISIONS HAVING FACILITY T O DEVELOP THE SOFTWARE IS A CAPITAL EXPENDITURE. ACCORDINGLY THE ORDER OF THE COMMISSIONER (A) IS SET ASIDE AND ORDE R OF THE ASSESSING OFFICER IS RESTORED. 15. RESPECTFULLY FOLLOWING THE ABOVE DECISION OF T HE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003 -04, WE DISMISS THE APPEAL FILED BY THE ASSESSEE. - - ITA 814 & 815/1 6 6 16. IN SO FAR AS THE ALTERNATIVE GROUND RAISED BY THE ASSESSEE IS CONCERNED, IN THE ASSESSMENT YEAR 2003-04, THE D EPRECIATION ALLOWED WAS ONLY 15% AND THEREFORE, BY FOLLOWING TH E SAME, THE ALTERNATIVELY GROUND RAISED BY THE ASSESSEE IS REJE CTED. IN VIEW OF THE ABOVE, WE ARE INCLINED TO HOLD THAT THE PRODUCT DEVELOPMENT EXPENDITURE IS TO BE CONSIDERED AS CAPI TAL EXPENDITURE AND THE ASSESSEE IS ENTITLED FOR DEPREC IATION AT 15% ON ITS CAPITAL ASSET AS HELD FOR THE ASSESSMENT YEA R 2006-07. 4. THE NEXT COMMON GROUND IN THESE APPEALS IS WITH REGARD TO CONFIRMING THE DISALLOWANCE OF 1,58,407/- AND 1,58,655/- MADE U/S.14A R.W.RULE 8D(2)(III) OF THE ACT FOR THE ASSESSMENT YEARS 2009-10 AND 2010-11 RESPECTIVELY. 5. IN THIS CASE, THE CIT(APPEALS) OBSERVED THAT THE AO HAS CORRECTLY APPLIED RULE 8D(2)(II) OF THE ACT, AS NO PART OF INTEREST EXPENDITURE WAS DIRECTLY ATTRIBUTABLE TO THE EXEMPT INCOME. FURTHER, HE OBSERVED THAT AS THE INTEREST PAYMENT M ADE DURING THE YEAR IS NOT RELATING TO ANY INTEREST BEARING LO ANS UTILIZED FOR INVESTMENT, FROM WHICH EXEMPT INCOME IS EARNED, WHI CH WAS MADE OUT OF PROFIT EARNED DURING THE YEAR. FROM TH E FOREIGN SUBSIDIARY COMPANIES, THE ASSESSEE HAS RECEIVED DIV IDENDS WHICH ARE TAXABLE IN INDIA. HOWEVER, HE CONFIRMED THE APPLICABILITY OF RULE 8D(2)(II) ON THAT AMOUNT EQUA L TO 1 % OF - - ITA 814 & 815/1 6 7 THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WH ICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPE ARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEA R. 6. IN OUR OPINION, AS PER SEC.14A R.W. RULE 8D(2)(I II) IS APPLICABLE AND THE ASSESSEE IS NOT ABLE TO SHOW AS TO HOW, IT IS NOT APPLICABLE TO THE ASSESSEES CASE. HENCE, WE ARE OF THE OPINION THAT THE CIT(APPEALS) HAS TAKEN A CORRECT V IEW AND WE CONFIRM THE ORDER OF THE CIT(APPEALS). 7. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE D ISMISSED. ORDER PRONOUNCED ON FRIDAY, THE 15 TH OF JULY, 2016 AT CHENNAI. SD/- SD/- ( $ % . & '( ) ( ) * + , ) DUVVURU RL REDDY - ./012304556037- 8 9: /JUDICIAL MEMBER ! 9:;<<5=1>01>?@AB@3 )8 /CHENNAI, C9 /DATED, THE 15 TH JULY, 2016. MPO* - - ITA 814 & 815/1 6 8 9D EFGF /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. H- /CIT(A) 4. H /CIT 5. FIJ K /DR 6. J(L /GF.