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TMI Blog2014 (5) TMI 852X X X X Extracts X X X X X X X X Extracts X X X X ..... . Originally, there was a company jointly promoted by TATAs and IBM which were known as TATA IBM. During the financial year 1997-98, it was mutually agreed between the two promoters to bifurcate the software development activities and the hardware business into two separate entities namely M/s. IBM Global Service India (P) Limited and TATA IBM where hardware business is taken care. As per the agreement entered into between the two promoters, various assets of the erstwhile TATA IBM were transferred to the newly established assessee-company for a certain consideration. The assessee-Company filed the return of income on 30-11-1998 declaring loss of Rs.21,51,30,926/- on various heads. The returns was processed under Section 143(1)(a) of the Act. Subsequently, it was selected for scrutiny. Accordingly, a notice under Section 143(2) of the Act was issued. 3. In pursuance of the notice, the authorized representatives of the assessee-company appeared before the Assessing Authority and furnished the details called for. Among other things, the Assessing Officer noticed that the assessee-company has claimed revenue expenditure of Rs.5,30,00,000/- towards domestic customer database, and Rs.9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed the appeal and upheld the order passed by the Assessing Authority by its order dated 15-6-2005. Being aggrieved by the order passed by the First Appellate Authority, the assessee preferred an appeal before the Appellate Tribunal. The Tribunal relying upon the various judgments of the Hon'ble Supreme Court by its order dated 4-5-2007 partly allowed the appeal holding that the payment made for using domestic customer database is revenue in nature. In respect of payment made towards transfer of human skill is concerned, it should be treated as revenue expenditure further the assessee is entitled for deduction with regard to fluctuation of foreign exchange. Being aggrieved by the order dated 4-5-2007 passed by the Tribunal, the Revenue has preferred this appeal. 5. The above appeal is admitted to consider the following substantial questions of law. 1. Whether the Tribunal was correct in holding that a sum of Rs.5,30,00,000/- 'Domestic Customer Database' should be treated as a revenue expenditure? 2. Whether the Tribunal was correct in holding that a sum of Rs.9,38,57,925/- 'transfer of human ski ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for acquiring the business itself that includes all capital assets. The finding of the Tribunal that the expenditure incurred is revenue expenditure is totally erroneous in law. 7. With regard to the fluctuation of the foreign exchange rate is concerned, the amount payable by the assessee as on the closing date for the purchase of item has been increased and the increased value has to be taken as the cost of item for the purpose of closing stock valuation. The increased amount has also been debited to the profit and loss account. Hence, deduction of Rs.8,63,047/- as ordered by the Tribunal is contrary to law. In support of his contention, he relied upon the following judgments: 1. (1997) 224 ITR 342 JONAS WOODHEAD & SONS LTD. vs. COMMISSIONER OF INCOME TAX 2. (2009) 312 ITR 254 COMMISSIONER OF INCOME-TAX vs. WOODWARD GOVERNOR INDIA P. LTD. 8. On the other hand, Sri.Percy Pardhiwala, learned Senior counsel appearing for the respondent-assessee argued in support of the order passed by the Tribunal and contended that the assessee-Company is the joint venture of TATA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e may be enduring for an indefinite future. 9. With regard to disallowing the loss on account of foreign exchange fluctuation is concerned, the learned senior counsel submits that the law declared by this Court in ITA Nos.3443-3444/2004 disposed of on 8th September 2006 in YOKOGOWA covers the entire issue. The foreign exchange fluctuation after the date of purchase will not affect the valuation of stock considering the consistent method followed by the assessee. Hence, the assessee is entitled for deduction of loss suffered due to foreign exchange fluctuation. Learned senior advocate further contended that the appellant cannot approbate and reprobate. In case of recipient of the said amount i.e. TATA IBM, the Revenue has contended that the receipt is revenue in nature and assessed for Tax. In respect of the assessee is concerned, they have contended that it is a capital expenditure. In fact, TATA IBM has taken up the matter in appeal in ITA No.755/2003. The Appellate Tribunal held that the amount received from M/S.IBM Global service is a capital gain and the said order became final. The Revenue cannot take a different stand. He also relied upon the following judgments: &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticularly in view of increasing recognition of the importance of information technology to the overall economic development of India: 3) IBM and Tata recognize that Tata IBM's existing highly skilled human resource base needs fuller utilization for meeting the emerging demands for services in India and abroad: 4) The emerging trends in the international information technology market have underlined the need to set up an independent entity to undertake services activity and in line with IBM's world-wide practices, IBM and Tata have jointly agreed to set up, along with Tata IBM, the IBM Global as to separate organizational base for services subject to the requisite permissions, consents and approvals of the competent authorities in India. 5) IBM, Tata IBM and Tata have arrived at an understanding with respect to the formation and management of IBM Global, the transferability of their respective interest therein, and other matters. 6) IBM and Tata have agreed to carry out the following activities throug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustomers, including installation and warranty date, the list of which is maintained in the files of TATA IBM, to be remitted within ninety (90) days of the date of receipt of GOI approvals of the application as proposed." 12. As per the agreement entered into between the parties, the assessee had paid consideration to the transferor company. While filing the returns, the said transaction has been disclosed by the assessee and claimed it as revenue expenditure. However, the Revenue found fault with the same and held that the expenditure incurred for getting the enduring advantage is the capital gain. Hence, the expenditure incurred cannot be treated as Revenue expenditure since there is a transfer of business and the amounts paid are capital in nature. The said order was confirmed by the First Appellate Authority. The Appellate Tribunal after re-examining the matter in detail, relying upon the various judgments of the various High Courts as well as the Supreme Court held that the expenditure incurred is revenue in nature. In the instant case, insofar as payment for getting domestic customer database is concerned, it is clear that, assessee has only got right to use that database, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is enduring in nature. The payment made once for all cannot be termed as revenue expenditure. He placed reliance upon the following paragraph of the judgment: "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 emphasise the element of a sufficient degree of durability appropriate to the context. There is no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The "once for all" payment test is also inconclusive. What is relevant is the purpose of the outlay an its intended object and effect, considering in a commonsense way having regard to the business realities. In a given case, the test of "enduring benefit" might break down." He further contended that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such construction ? The assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rent. The expenditure, therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial saving in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was a saving in revenue expenditure in the form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, the assessee in the present case did not get any capital asset by spending the said amounts. The assessee, therefore, could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, the expenditure appears to be revenue expenditure. In similar lines, he also relied upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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