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2007 (5) TMI 554 - AT - Income TaxDeferred revenue expenditure - Expenditure made for use of domestic customer base and transfer of human skills - benefit accrued is of enduring nature - receipt on transfer of employees - Nature Of receipts - ''Capital Or Revenue'' - HELD THAT - If the Revenue wanted to treat that the consideration paid as per the agreement was for the transfer of the business being undertaken by Tata IBM Ltd. then such receipts should have been held as capital in the hands of the recipient. In the case of Syndicate Bank Ltd. v. Addl. CIT 1985 (3) TMI 48 - KARNATAKA HIGH COURT has held that the transfer of undertaking is a transfer of capital asset and is liable to capital gain. However, in the case of the recipient, the Revenue has treated the receipts as revenue receipts and included in the income. The matter has travelled up to the Tribunal and the Tribunal has held that the receipts are revenue in nature. The Revenue cannot blow hot and cold once it has taken the stand that the receipts in the hands of the recipient are revenue in nature then such payments cannot be held as capital in the hands of the payer representing the consideration paid for the transfer of business. In the instant case, the recipient has not been taxed under the head Capital gain on the transfer of the business. Hence, the action of the Assessing Officer in holding that the receipts represented the receipts on account of transfer of business cannot be upheld. It is also not the case of the Revenue that the payments have been made before the commencement of business. In the instant case, the business was being already carried out by Tata IBM. As per the agreement, it is clear that IBM and Tata have agreed to carry out the activities as mentioned in clause 5 of the agreement through the assessee-company. The issue of commencement of business in respect of purchase of an existing undertaking by an assessee in the case of Vidarbha Irrigation Development Corporation v. Joint CIT 2005 (7) TMI 539 - ITAT MUMBAI . In that case, the corporation was formed for completion of already existing projects or for further entrusted projects. The business was already in existence and, therefore, the commencement of business is not in dispute. Hence, the expenditure under reference in the instant case cannot be termed as an expenditure incurred before the commencement of the business. Payment which frees an assessee from the liability to make recurring revenue payments is revenue expenditure. This has been held by the apex court in the case of CIT v. Associated Cement Companies Ltd. 1965 (12) TMI 22 - SUPREME COURT . But such test will fail in case an asset is acquired. If a labour saving machinery is purchased then revenue expenditure is reduced in respect of newly labour bill but the cost of machine cannot be treated as revenue expenditure as it bring into existence of an asset. So far as payment made for getting the domestic customer data base is concerned, it is clear that the assessee has only got right to use that data base. The company which is provided such data base is not precluded from using such data base. Hence, the expenditure incurred is for the use of the data base and not for the acquisition of such data base. This issue has been considered by this Bench in the case of Wipro GE Medical Systems Ltd. 2002 (7) TMI 220 - ITAT BANGALORE . Keeping in view the decision of this Bench on this issue, it is held that the ld CIT (A) was not justified in not allowing the loss - In the result, the appeal is partly allowed. Depreciation in respect of expended for the use of domestic customer data base - HELD THAT - While deciding the appeal for the assessment year 1998-99, which has been held that expenditure incurred for acquiring the use of data base and for getting the human skill is revenue in nature and, therefore, there is no question of depreciation to be allowed in that year. In respect of expenditure, which has been considered as not allowable for the assessment year 1998-99, it has already been held that depreciation on such sum will not be allowed. Accordingly, this appeal is disposed of.
Issues Involved:
1. Nature of expenditure on transfer of customer database and human skills. 2. Allowability of loss on account of exchange fluctuation. Issue-wise Detailed Analysis: 1. Nature of Expenditure on Transfer of Customer Database and Human Skills: The primary grievance of the assessee was that the Commissioner of Income-tax (Appeals) erred in confirming the Assessing Officer's decision to treat the expenditure on the transfer of a domestic customer database (Rs. 5.3 crore) and human skills (Rs. 93,857,925) as capital expenditure. The assessee argued that these should be considered revenue expenditures. The assessee-company was incorporated during the financial year 1997-98 following a mutual agreement between Tatas and IBM to bifurcate their joint venture, Tata IBM, into separate entities. The assessee paid Rs. 9,38,57,925 and Rs. 5.3 crore for the transfer of certain employees and the domestic business database, respectively. The Assessing Officer concluded that these payments were for acquiring capital assets, providing enduring benefits, and thus disallowed them as revenue expenditures. The Commissioner of Income-tax (Appeals) supported the Assessing Officer's view, stating that the expenditure provided enduring benefits, facilitating the assessee's business operations and profitability, and thus should be treated as capital expenditure. The Commissioner emphasized that the assessee's business commenced with these expenditures, which were one-time payments aimed at establishing the business, not merely facilitating ongoing operations. However, the Tribunal noted that the Revenue had treated the corresponding receipts in the hands of the recipient (IBM India Ltd.) as revenue receipts. The Tribunal held that the Revenue could not treat the payments as capital in the hands of the payer while treating the receipts as revenue in the hands of the recipient. The Tribunal relied on precedents, including the case of Wipro GE Medical Systems Ltd., where similar payments were considered revenue expenditures. The Tribunal concluded that the payment for using the customer database was for business facilitation, not asset acquisition, and thus was revenue in nature. Similarly, the expenditure on transferring human skills was to save recruitment and training costs, which are revenue expenses. However, any portion of the payment representing credit for past services rendered to Tata IBM by the transferred employees was not allowable as it would result in double deduction. 2. Allowability of Loss on Account of Exchange Fluctuation: The second issue was the disallowance of a loss of Rs. 8,63,047 on account of exchange fluctuation by the Commissioner of Income-tax (Appeals), who held that the increased liability should increase the value of the closing stock. The Tribunal referred to its decision in the case of Yokogawa India Ltd., where it was held that foreign exchange fluctuations should not be included in the valuation of closing stock. The Tribunal emphasized that the cost of inventory should reflect the original cost of purchase, not subsequent liabilities due to exchange fluctuations. The Tribunal also highlighted the importance of consistency in accounting methods, as established by the Delhi High Court in the case of CIT v. Neo Poly Pack P. Ltd. and the jurisdictional High Court in CIT v. Sridev Enterprises. Based on these principles, the Tribunal concluded that the loss on account of exchange fluctuation should be allowed as a revenue expenditure, reversing the Commissioner of Income-tax (Appeals)'s decision. Conclusion: The Tribunal partly allowed the appeal, treating the expenditure on the customer database and human skills as revenue in nature, except for the portion related to past services credit. It also allowed the loss on account of exchange fluctuation.
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