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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 ..... 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. - ITA No.735/2007 - - - Dated:- 30-4-2014 - Dilip B Bhosale and B Manohar, JJ. For the Appellant : Sri K V Aravind, Adv. For the Respondent : Sri Percy Pardhiwala, Sr. Adv. for Smt Vani H, Adv. JUDGEMENT Per: B Manohar: The Revenue has preferred this appeal under Section 260A of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,047/- in respect of the loss towards foreign exchange fluctuation. The Assessing Officer after examining the matter held that domestic customer database is a capital asset which provides an enduring advantage or benefit to the assessee since, by utilizing the same, the assessee can successfully run its business activities over a considerable period of time and treated the payment made towards acquisition of domestic customer database as the payment made towards acquisition of capital asset and not allowable as revenue expenditure. With regard to transfer of the human skill i.e. skilled and trained employees is concerned, the Assessing Officer held that the compensation paid by the assessee to TATA IBM is towards taking over of software segment of the erstwhile TATA IBM to the assessee-company. The expenditure incurred on recruitment and training of transferred personnel is an enduring benefit. It is the capital asset of the company and it cannot be treated as revenue expenditure. With regard to the loss towards foreign exchange fluctuation is concerned, the Assessing Officer held that the assessee has been importing various consumable items, the additional expenditure incurred on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the software development division from TATA IBM and establishment of assessee-Company, the software division was transferred to the assessee-Company along with various assets of the erstwhile TATA IBM. Virtually there was transfer of software business undertaken by the TATA IBM Limited. The domestic customer database gives the information about various customers who have purchased IBM computers in the past and who continued to have service maintenance contract. This enables the assessee to provide maintenance support service. The database helps the assessee to identify the customers and their needs. The Assessing Officer requested the assessee to furnish the valuation made by the independent Valuer to ascertain the valuation. However, the assessee informed that there is no such valuation of Database. The Database is utilized for the purpose of running the software business as well as providing maintenance support service. The said asset provides an enduring advantage or benefit to the assessee. Without the said database, the effective running of the software business is impossible. Hence, it is a capital asset and the expenditure incurred cannot be treated as revenue expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sferred to the assessee-Company. For that, the assessee-company had paid Rs.5.3 crores. The said data gives information about various customers who have purchased the IBM computers in the past and who continued to have a service maintenance contract. It enables the assessee to provide maintenance support service. The said data helps the assessee to identify the customers and their needs. Accordingly, the value was determined as Rs.5.3 crores. The expenditure incurred to obtain domestic customer data is a revenue expenditure and the assessee has not acquired any capital asset as a consequence of expenditure it has incurred. The order passed by the Assessing Authority as well as the First Appellate Authority declaring the transfer of domestic customer data is an enduring advantage and a capital asset was rightly set aside by the Appellate Tribunal. Further, some of the trained employees have been transferred to the newly incorporated company. The assessee valued the personnel transferred as Rs.18.4 crores both of STP and non-STP Units. The STP units have exemption of payment of income tax. Accordingly, non-STP personnel was valued at Rs.9,38,57,925/- and accordingly paid the said amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are business. For the transfer of domestic customer database and the man power, the assessee had paid Rs.5.3 crores and Rs.9.38 crores respectively towards the consideration as per the agreement entered into between the parties. The relevant clauses of the agreement dated 15th August 1997 reads as under: (A) Tata IBM Limited (Tata IBM), a company duly established under the laws of the Republic of India, having its registered office at Golden Enclave, Airport Road, Bangalore 560 017 (which expression shall unless it be repugnant to the context or meaning therefore be deemed to mean and include its successors and assigns) and (B) IBM Global Services India Private Limited (IBM Global), a company duly established under the laws of the Republic of India, having its principal office at Ground Floor, Golden Enclave, Airport Road, Bangalore 560 017 (which expression shall unless it be repugnant to the context or meaning thereof be deemed to mean and include its successors and assigns) (Tata IBM and IBM Global being sometimes referred to herein as the Parties ) RECEITALS: (1) IBM World Trade Corporation (IBM), Tata Industries Limited and Tata Engin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows : (1) Tata IBM agrees to do the following : a) Sell all maintenance spares and accessories comprising inventory of TATA IBM relating to IBM computers ; b) Facilitate transfer of its personnel of TATA IBM set out in Annexure I, and c) Share the database relating to TATA IBM's clients and customers, list whereof is set out in Annexure III hereto. 2) The Transfer aforesaid shall be effective from the twenty fifth day of August, 1997. 3) In consideration of the transfer aforesaid IBM Global shall pay to TATA IBM a sum of : a) Rs.28.6 crores for the transfer of the maintenance spares and accessories set out in Annexure I; b) Rs.18.4 crores, being consideration for the value which inheres in the human resources, by reason of training, skills practical experience and work culture of the transfer of the personnel listed in Annexure II hereto, to be remitted within ninety (90) days of the date of receipt of GOI approvals of the application as proposed; and c) Rs.5.3 crores for the transfer of the database relatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e employees who were transferred to the assessee-company. They are trained in the field of software. They have opted for employment with assessee-company and for their past services in TATA IBM, expenditure has been incurred. Such expenditure cannot be termed as expenditure laid for carrying on the business. The advantages obtained by TATA IBM can be treated as services rendered by those employees to TATA IBM. The concept of payment made once and for all and of the enduring benefit respond to the changing economic realities of business and hence the expenditure incurred on processing domestic customer database and transfer of human skill is a revenue, though the benefit may be of enduring in nature. Hence, the said expenditure has to be treated as revenue expenditure. The order passed by the Assessing Officer to disallow the expenditure as revenue expenditure is erroneous in law. 14. Sri.K.V.Aravind, learned counsel appearing for the Revenue relying upon the judgment reported in (1997) 224 ITR 342 (cited supra) contended that the question whether the particular payment made by the assessee under the terms of agreement forms part of the capital expenditure or revenue expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation. 15. On the other hand, Sri.Percy Pardhiwala, learned senior counsel appearing for the assessee relying upon in the judgment reported in (1998) 233 ITR 468 contended that though the amount has been paid for getting the domestic customer database and transfer of human skill, instead of appointing the employees and training them, they utilized the services of the employees recruited by TATA IBM which had given training to them after spending considerable amount. Those employees were transferred to the assessee-Company. Hence, the amount paid is a revenue and the same cannot be treated as capital expenditure. He relied upon the judgment reported in (1998) 233 ITR 468 (cited supra). The relevant paragraph reads thus: In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial poi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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