2014 (5) TMI 852 - HC - Income Tax

Disallowance of loss of foreign exchange fluctuation Held that - A part of the business being handled by the erstwhile TATA IBM has been handed over to the assessee-company in view of bifurcation of the software and hardware business - For the transfer of domestic customer database and the man power, the assessee had paid ₹ 5.3 crores and ₹ 9.38 crores respectively towards the consideration as per the agreement entered into between the parties - insofar as payment for getting domestic customer database - assessee has only got right to use that database, the company which has provided such database is not precluded from using such database - the expenditure incurred is for the use of database and not for acquisitions of such database - payment made towards access to information base and for transition of customer order filing is a business consideration there is no question of acquisition of any assets when the access is made and the payment is made for the same - The payment cannot be treated as revenue expenditure there is no infirmity or irregularity in the finding of the Tribunal. Payment made towards transfer of human skill Held that - Relying upon Jonas Woodhead And Sons (India) Limited Versus Commissioner of Income-Tax 1997 (2) TMI 4 - SUPREME Court - The idea of once for all payment and enduring benefit are not to be treated as something akin to statutory conditions, nor are the notions of capital or revenue a judicial fetish - What is capital expenditure and what is revenue are not eternal varieties but must needs be flexible so as to the respond to the changing economic realities of business - The expression asset or advantage of an enduring nature was evolved to emphasize the element of a sufficient degree of durability appropriate to the context the order of the Tribunal is upheld and as such no substantial question of law arises foe consideration - Decided against Revenue.

Summary

Issues Involved:
1. Treatment of expenditure on Domestic Customer Database as revenue or capital expenditure.
2. Treatment of expenditure on the transfer of human skills as revenue or capital expenditure.
3. Allowability of foreign exchange fluctuation loss as a deductible expense.

Detailed Analysis:

1. Treatment of Expenditure on Domestic Customer Database:
The Tribunal held that the payment of Rs.5,30,00,000/- towards the Domestic Customer Database should be treated as revenue expenditure. The Assessing Officer had originally classified this as a capital asset, arguing that it provided an enduring benefit to the assessee. However, the Tribunal found that the assessee merely acquired the right to use the database, and the company providing the database was not precluded from using it. This decision was supported by a precedent in the WIPRO GE MEDICAL SYSTEM case, where payments for access to an information base were deemed as business considerations rather than acquisitions of capital assets. The Tribunal's decision was upheld, confirming that the expenditure on the database is revenue in nature.

2. Treatment of Expenditure on Transfer of Human Skills:
The Tribunal also held that the expenditure of Rs.9,38,57,925/- for the transfer of skilled and trained employees should be treated as revenue expenditure. The Assessing Officer had considered this as a capital expenditure, arguing that the compensation paid for the transfer of employees provided an enduring benefit. However, the Tribunal noted that the payment was for the expenses incurred on training and recruitment, which fall under the revenue field. The Tribunal relied on the Supreme Court's decision in EMPIRE JUTE COMPANY LIMITED v/s CIT, which stated that even if an expenditure provides an enduring benefit, it can still be considered revenue if it facilitates the assessee's trading operations. The Tribunal's decision was upheld, confirming that the expenditure on the transfer of human skills is revenue in nature.

3. Allowability of Foreign Exchange Fluctuation Loss:
The Tribunal allowed the deduction of Rs.8,63,047/- for foreign exchange fluctuation loss. The Assessing Officer had added this loss to the value of the closing stock, arguing that it should be accounted for in the valuation of imports. However, the Tribunal found that the loss due to foreign exchange fluctuation after the date of purchase does not affect the stock valuation, considering the consistent accounting method followed by the assessee. This decision was supported by a precedent in the YOKOGAWA case, where it was held that foreign exchange fluctuation losses are deductible. The Tribunal's decision was upheld, confirming that the foreign exchange fluctuation loss is allowable as a deductible expense.

Conclusion:
The High Court dismissed the appeal, upholding the Tribunal's decisions on all three issues. The substantial questions of law were answered in favor of the assessee and against the Revenue, confirming that the expenditures on the Domestic Customer Database and the transfer of human skills are revenue in nature, and the foreign exchange fluctuation loss is a deductible expense.