2006 (3) TMI 196 - AT - Income Tax

Liability to pay for warranty claims - Contingent liability Or accrued liability - Year In Which Deductible - Software purchase - capital or revenue expenditure - Payment received in respect of transfer of skilled personnel and sharing of customer database - chargeable to tax - claiming credit of taxes paid in USA - MAT - Charging of interest u/s 234B while computing the income under the provision of section 115JA. HELD THAT - The appellant has provided for liability on the basis of sales made during the year. Though the exact amount cannot be quantified however the sum is based on the scientific approach and based on past experience. Various High Courts relied by learned counsel for assessee has held that the liability in respect of such warranty claims is not a contingent liability but an accrued liability. The ITAT in the case of Wipro-GE Medical Systems Ltd. 2002 (7) TMI 220 - ITAT BANGALORE held that the liability towards warranty is inbuilt in the sale price itself and so the liability is not contingent but an ascertained one and to be allowed in the year of sales. We accordingly delete the disallowance. Software purchase - capital or revenue expenditure - The assessee in the course of its business acquired certain application software. It is made clear that the amount is paid for application software and not system software. The application software enables the assessee to carry out its business operation efficiently and smoothly. However such software itself does not work on stand alone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Thus for payment of such application software though there is an enduring benefit it does not result into acquisition of any capital asset. The same merely enhances the productivity or efficiency and hence to be treated as revenue expenditure. We accordingly hold that the amount paid is revenue expenditure and not capital expenditure. Payment received from IBM Global Services India Ltd. (IGSI) in respect of transfer of skilled personnel and sharing of customer database - All receipts by assessee would not necessarily be deemed to be the income for the purpose of Income- tax Act and the question whether any particular receipt is income or not will depend on the nature of the receipt and the true scope and effect of the relevant taxing provision. It is for the revenue to prove that the receipt is chargeable to tax under the provision of Income-tax Act. Once it is shown that the receipt is income under the Income-tax Act it is for the assessee to prove that the same is either exempt or the assessee is eligible for deduction of the same. The appellant received a sum being consideration for the value which inheres in the human resources by reason of training skill practical experience and work culture for transfer of the personnel. To facilitate such transfer the amount was paid. Undisputedly the training skills and experience as well as work culture was imparted by the assessee. Because of the employment of such personnel with the appellant company the personnel acquire such skills experience and work culture. Acquisition of such training skill experience and work culture was at the cost of appellant company. Thus the same can be connected with the office or occupation which the assessee carries on. The sum is referable to the source which is office or occupation of the appellant. The amount is therefore the income of appellant and not a capital receipt de hors such office or occupation. The amount received is not de hors the operation of appellant company or as a windfall but can be linked to the activities carried on by appellant company and hence chargeable to tax. As regards the sum the appellant agreed to share the database of its clients and customers. Though it is said to be for transfer of database there is no prohibition that such database becomes the absolute property of the transferee and assessee cannot utilize the database for its own purpose. The assessee has merely shared the database without transferring of such rights in the database. The sum therefore can be attributed to the activities carried on by the assessee and hence is to be considered as revenue receipt and not capital receipt. By sharing such database there is no impairment in the trading structure or there is no loss of source of income and hence the amount received is to be classified as revenue receipt chargeable to tax. The ground raised in ground Nos. 4 and 5 therefore fails. Claiming credit of taxes paid in USA - The Assessing Officer may allow the credit for the taxes paid in USA as per the provision of section 90 of the Act read with article 25(2)(a) of the DTAA between India and USA whether or not such claim is made in the return or during the assessment proceedings. There cannot be any embargo on entertaining the claim even if such claim is not made in the return or during assessment proceedings. MAT - The debts due to assessee are appearing as asset in the balance sheet. For certain debts which are doubtful the assessee can provide for such debts by writing off such sum in respect of doubtful debts. By such provision what is provided is reduction in the value of assets but not meeting any liability. The liability is on the debtors to pay and so far as assessee is concerned the same is an asset. If the amount is doubtful of recovery to that extent the value of asset is reduced but it cannot result into creating any liability on the assessee to pay. In making the provision the assessee merely restated the value of asset but there is no setting aside any amount to meet any liability. As rightly contended by Shri Pardiwala in the case of Dy. CIT v. Beardsell Ltd. 2000 (3) TMI 37 - MADRAS HIGH COURT proceeded on assumption that provision for doubtful debt was provision for liability and that was the only contention before the High Court. The High Court never answered the question whether the diminution in value of asset is provision for liability or not. As per the view taken above and the decision relied by learned counsel for assessee we hold that the amount being provision made for bad and doubtful debts cannot be considered as provision for meeting any liability which is not an ascertained liability and hence the book profit is not to be increased by such amount provided for. Charging of interest u/s 234B while computing the income under the provision of section 115JA - The operation of section 115J was discontinued with effect from 1-4-1991 and section 115JA was brought on the statute book from 1-4-1997. Though as per sub-section (4) of other provision of the Act shall apply there is no specific mention to the provision of section 208 or 234B of the Act. Since the assessee is not in a position to compute its book profit prior to closing of the financial year the assessee cannot foresee its liability to pay advance tax u/s 208. Consequently for failure to pay such advance tax interest u/s 234B cannot be levied. In view of the decision by the jurisdictional High Court in the case of Kwality Biscuits 1999 (11) TMI 48 - KARNATAKA HIGH COURT which is the binding decision upon this Tribunal interest u/s 234B cannot be levied when income is computed even under the provision of section 115JA of the Act. In the result the appeal is partly allowed.

Issues Involved:

1. Disallowance of provision for warranty liability.
2. Treatment of purchase of software as capital expenditure.
3. Treatment of sum received for transfer of skilled personnel and sharing of customer database.
4. Claiming credit of taxes paid in the USA.
5. Computation of income under Section 115JA of the Income Tax Act.
6. Charging of interest under Section 234B for short payment of advance tax.

Issue-wise Analysis:

1. Disallowance of Provision for Warranty Liability:

The appellant, a Limited Company engaged in the sale of computer hardware and software, made a provision for warranty liability based on past experience. The Assessing Officer and CIT(A) treated it as a contingent liability, not an accrued liability. The appellant argued that the liability arises as soon as sales are made, supported by various High Court decisions. The Tribunal agreed, stating that the liability is based on a scientific approach and past experience, and thus, it is an accrued liability. The disallowance of Rs. 4,92,69,808 was deleted.

2. Treatment of Purchase of Software as Capital Expenditure:

The appellant acquired application software for Rs. 33,14,298 and claimed it as revenue expenditure. The Assessing Officer and CIT(A) treated it as capital expenditure, citing enduring benefits. The appellant argued that application software has a limited life and enhances efficiency without creating a capital asset. The Tribunal held that the software enhances productivity and efficiency, thus it should be treated as revenue expenditure, distinguishing it from the Rajasthan High Court decision in Arawali Constructions Co. (P.) Ltd.

3. Treatment of Sum Received for Transfer of Skilled Personnel and Sharing of Customer Database:

The appellant received Rs. 18.4 crores for transferring skilled personnel and Rs. 5.3 crores for sharing a customer database with IBM Global Services India Ltd. The Assessing Officer and CIT(A) treated these as revenue receipts. The appellant contended these were capital receipts or alternatively, capital gains with no ascertainable cost. The Tribunal held that the amounts received were linked to the appellant's business activities and thus were revenue receipts, not capital receipts.

4. Claiming Credit of Taxes Paid in the USA:

The appellant claimed a deduction for income-tax paid in the USA. Both counsels agreed that the claim for deduction as an expense is not allowable, but the Tribunal directed the Assessing Officer to allow the credit for taxes paid in the USA as per Section 90 of the Act and Article 25(2)(a) of the DTAA between India and the USA, irrespective of whether the claim was made in the return or during assessment proceedings.

5. Computation of Income under Section 115JA of the Income Tax Act:

The appellant contended that the provision for doubtful debts should not be added while computing "book profits" under Section 115JA. The Assessing Officer and CIT(A) treated it as an unascertained liability. The Tribunal held that the provision for doubtful debts is for diminution in the value of assets and not for meeting liabilities, thus it should not be added to the book profit.

6. Charging of Interest under Section 234B for Short Payment of Advance Tax:

The Assessing Officer levied interest under Section 234B for short payment of advance tax. The CIT(A) upheld this, differentiating between Sections 115J and 115JA. The appellant argued that the book profit can only be computed at the end of the financial year, making advance tax payment impractical. The Tribunal, following the Karnataka High Court's decision in Kwality Biscuits Ltd., held that interest under Section 234B cannot be levied when income is computed under Section 115JA, as the assessee cannot foresee its liability to pay advance tax.

Conclusion:

The appeal was partly allowed, with the Tribunal providing relief on the issues of warranty liability provision, software expenditure treatment, and interest under Section 234B, while upholding the revenue's stance on the treatment of sums received for personnel transfer and database sharing.

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