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TMI Blog2009 (1) TMI 314X X X X Extracts X X X X X X X X Extracts X X X X ..... a period of 10 years but the licence fees is payable annually. Therefore, the benefit available by making the payment of annual licence fee will last for that year only. If the assessee wishes to carry on the business in terms of licence agreement, licence fee is payable for subsequent year also. Therefore, the benefit of licence fee paid during the year endures only till the end of the relevant financial year and does not extend to subsequent financial year. The licence fees paid during the year was not for the whole term of the licence period but only relevant to the assessment year under appeal. The only reason for treating the expenditure as capital was that the assessee received an enduring benefit. Since the benefit endures only for the year under appeal and could not have been extended to the subsequent years, the licence fee does not give the assessee any enduring benefit in the relevant assessment years. But for the payment of licence fee the assessee could not have carried on the business during the year. For non-payment of licence fees, the licence could have been revoked. Therefore, the expenditure being specific to the year under appeal only and not extending the bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed customs duty and freight expenses. These parts are supplied by vendors free as being within warranty period. The amount paid is for acquisition of replaced parts and is not for the machinery as such but only for some of the parts which fits into the larger machine. The Hon ble Supreme Court in the case of CIT vs. Saravana Spinning Mills (P) Ltd.[ 2007 (8) TMI 16 - SUPREME COURT] held that where each machine was an independent and separate machine capable of independent and specific function, the expenditure incurred for replacement thereof would not come within the meaning of current repairs . However, in the present case what is replaced is not the independent and separate machine but only parts of such machine. Therefore, the expenditures are allowable as revenue expenditure. Deletion of disallowance claimed towards repairs, maintenance (others) held by the AO as capital expenditure - The expenditures are for miscellaneous civil work at office complex, staircase work at office building, telephone cabling work, fixing of the weather shed, name plate in stainless steel, repairing and painting charges of sign board etc. The expenses also include painting work, miscellaneous and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time. using very small aperture terminals (VSAT) throughout India. The business of the assessee started in the previous year ended 31st March, 1996 relevant to the asst. yr. 1996-97. The Master Earth Station and Hub for the network is located at village Sherwanme, District Turbe, New Bombay. In terms of the above licence the assessee has been making payment to DOT. The amount paid during financial years relevant to asst. yrs. 1996-97, 1997-98, 1998-99 and 1999-2000 were considered as revenue expenditure and allowed as such. For the years under appeal, the AO held that with effect from asst. yr. 1999-2000 and onwards depreciation is allowable on intangible assets also like know-how, copyrights, trade mark, licences, franchises or any other business or commercial right of similar nature. Under s. 35ABB the capital expenditure incurred for acquiring any right to operate telecommunication services is to be amortized. Since the licence was granted in the year 1994, the claim is not allowable under s. 35ABB of the Act. Since the licence is not granted in the year under appeal also, depreciation is not allowable. Accordingly the whole sum was treated as capital expenditure on which no d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icence granted is a non-exclusive licence i.e., other vendor may also be granted a licence for the same services at the discretion of licensor. These services can be taken over at any time by the Government of India. The licence fee payable to the Government of India is based on number of connections which the assessee provides. The licence fee is Rs. 50,000 per VSAT subject to a minimum licence fee for the first three years. Thus the licence fee is for use of service in connection with Satellite Transponder Space Segment and not once for all. More the number of subscribers using VSAT more is the revenue to the assessee and correspondingly higher the licence fee. The logic behind is that the more the number of VSAT user more the user of satellite owned by Government and hence higher fee. The payments of licence fees are to be made in the beginning of each quarter of the financial year. Thus the payment lasts only for subsequent three months. For default of payment of licence fees, the licence can be revoked. Thus quarterly payment does not create benefit of enduring nature and hence cannot be considered as capital expenditure. 6. Shri Bhalla also submitted that just as licence is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use of any facilities owned by the Government but for allowing the assessee to carry on such business. The use of facility is only incidental in carrying on such business. Therefore, the licence fee which enables the assessee to carry on the business is a tool of business and hence to be considered as capital expenditure. Reliance was placed on the decision of Hon'ble Delhi High Court in the case of Triveni Engineering Works Ltd. vs. CIT (1982) 29 CTR (Del) 234 : (1982) 136 ITR 340 (Del). 8. We have considered relevant facts, arguments advanced and the case laws cited. It is relevant to consider the terms of licence granted to the assessee. The relevant clauses are extracted herein: "Whereas pursuant to the request of the licensee the authority agreed to grant licence to the licensee on the terms and conditions appearing hereinafter to establish, maintain and operate closed users group domestic 64 Kbps data network via satellite system using VSAT (hereinafter called the service throughout India as mentioned in Sch. 'A' annexed hereto. The licensee has agreed to accept the same on the terms and conditions appearing hereinafter. For the purpose of this licence closed users group is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serves the right to take over the entire services and networks of the licensee or revoke/terminate/suspend the licence in the interest of national security or in the event of national emergency/war or low intensity conflict type of situations. Schedule B To establish, maintain and operate closed user group domestic 64 Kbps data network via INSAT Satellite System using VSAT, a licence fee of Rs. 50,000 per annum per VSAT subject to a minimum of Rs. 1 crore is to be paid per year for the first two years and Rs. 1.5 crores in the third year. Minimum licence fee will be reviewed thereafter. The licence fee shall be payable in advance and can be paid in equal quarterly instalments ten days prior to the beginning of the quarter. 1.0 The licence fee in excess of the minimum licence fee will be paid at the end of the year. The licensee will provide quarterly statements to the authority indicating the number of subscriber working along with the VSAT locations at the end of each month during the quarter. The authority will have the right to verify this figure from the records of the licensee. Definitions, interpretations and transitional provisions relating to the conditions In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business and was granted for a period of 10 years is an enduring benefit and hence capital expenditure. No doubt the licence was granted for a period of 10 years but the licence fees is payable annually. Therefore, the benefit available by making the payment of annual licence fee will last for that year only. If the assessee wishes to carry on the business in terms of licence agreement, licence fee is payable for subsequent year also. Therefore, the benefit of licence fee paid during the year endures only till the end of the relevant financial year and does not extend to subsequent financial year. The licence fees paid during the year was not for the whole term of the licence period but only relevant to the assessment year under appeal. The only reason for treating the expenditure as capital was that the assessee received an enduring benefit. Since the benefit endures only for the year under appeal and could not have been extended to the subsequent years, the licence fee does not give the assessee any enduring benefit in the relevant assessment years. But for the payment of licence fee the assessee could not have carried on the business during the year. For non-payment of licen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and exclusively for the purposes of business. The learned CIT(A) agreed with the said contention and hence this ground by the Revenue. 13. After considering rival submissions, we hold that the assessee having employed the engineering graduates and utilized their services in the course of carrying on business having incurred business expenditure being expenditure allowable under s. 37(1) of the Act. The payments are not to apprentices under the scheme of Government but as per the practice adopted by the assessee to employ fresh graduates with professional qualifications. Till these graduates are confirmed, the assessee is under obligation to pay remuneration which though may be classified as stipend nonetheless is expenditure incurred in the course of carrying on business. Therefore, the expenditures are allowable as such. 14. Next ground of appeal is against deletion of disallowance of Rs. 17,61,671 claimed towards repairs and maintenance held by the AO as capital expenditure. 15. The assessee claimed a sum of Rs. 22.04 lakhs under the head "Repairs and maintenance (plant and machinery)". The AO held that the expenses on some of items like import of repaired demodulator and re- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odyear India Ltd. vs. ITO (2000) 66 TTJ (Del) 164 wherein it was held that the expenditure on installation of electric works in new office would be capital expenditure. 20. Before the learned CIT(A) it was contended that the details of expenditure along with bills were submitted. The expenditure incurred is for repair and maintenance of already existing building and cables etc. The assumption that the expenditure is with regard to new office is factually incorrect. The expenditure was on the repair of the existing office premises and electrical and telephone installation etc. Therefore, the decision of Tribunal, Delhi in the case of Goodyear India Ltd. does not apply. The expenditure being revenue is allowable as such. 21. After considering rival submissions and on perusal of the details of such expenditure which are at p. 175 of the paper book, the expenditures are for miscellaneous civil work at office complex, staircase work at office building, telephone cabling work, fixing of the weather shed, name plate in stainless steel, repairing and painting charges of sign board etc. The expenses also include painting work, miscellaneous and electric and cable work towards modification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n had specialized set up for such services in this field. The expenses being incurred in the course of carrying on business are allowable as such. The learned CIT(A) held that no reasons are assigned for treating the expenses as excess or unreasonable. Since the expenses are incurred in the course of carrying on business, the expenses are allowable as such. 28. After considering rival submissions, we find that the AO has not made out any case how the payment to Max India Ltd. is covered under s. 40A(2) of the Act. Disallowance under s. 40A(2) can be made only where the AO is of the opinion that the expenditure is excessive or unreasonable having regard to the fair market value of the services or facilities for which the payment is made. The AO has not arrived at the fair market value of such services. Under the scheme of the Act, no ad hoc disallowance can be made. Since the disallowance was made invoking the provisions of s. 40A(2) and since there is no material on record to suggest that the payment was made to person referred in s. 40A(2)(b) and is excessive or unreasonable having regard to the fair market value of the services or facilities, no disallowance is called for. 29. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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