9911796707
TMI Blog2014 (9) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... nd had commenced operations from 1.4.2004. The Assessing Officer as well as the Tribunal have held that the appellant assessee had commenced its operations only from 1.6.2004, i.e. the date on which the appellant assessee entered into "service agreement" with its parent company and, therefore, the expenditure incurred between 1.4.2004 to 31.5.2004 should be capitalised. Tribunal, in its impugned order had also observed that the appellant assessee had entered into a lease agreement and had hired premises as its office, only on 15.6.2005. Commissioner of Income Tax (Appeals), however, had decided the issue/question in favour of the respondent assessee. 3. In order to determine and decide the controversy, we must examine the nature of the business activity undertaken by the appellant-assessee and the operation/activities between 1.4.2004 to 31.5.2004, when the expenditure of Rs. 59,02,448/- was incurred. 4. The appellant-assessee, as recorded above, was in the business of voice activation and local number portability, i.e. Business Process Outsourcing (BPO) services, which were made available to M/s Omniglobe International, USA. The Activities fall in the category of 'service in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to recruitment and housekeeping expenses. Payments were also made towards generator running maintenance, water, electricity, sewerage and transportation charges and, importantly, the lease line charges, which were in respect of the internet connection. The agreement between the appellant-assessee and M/s Agilis was taken on record by the Commissioner of Income Tax (Appeals) under Rule 46A of the Income Tax Rules, 1962. The Tribunal has not given any adverse finding or held that the said evidence should not have been admitted and taken on record under the said Rules. Revenue had thereafter, filed an appeal before the Tribunal and it was their duty to place the said agreement on record in case they wanted to challenge the findings/observations of the Commissioner of Income Tax (Appeals). It appears that the Revenue did not file the said agreement and the Tribunal has recorded that they did not have the benefit of reading the agreement. Thus, finding of the Tribunal are without examining a vital and an important document. It is obvious that between 1.4.2004 and 31.4.2004 the appellant assessee was operating from some premises and therefore, they had incurred expenditure, like electri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stant Commissioner and having scrutinised those expenses the Tribunal has come to the conclusion even on an interpretation more favourable to the assessee than the one we are giving to the expression "setting up" that these expenses do not show that the business was set up prior to the 1st of September, 1946. In our opinion, it would be difficult to say that the decision of the Tribunal is based upon a total absence of any evidence. As we have often said, we are not concerned with the sufficiency of evidence on a reference. It is only if there is no evidence which would justify the decision of the Tribunal that a question of law would arise which would invoke our advisory jurisdiction which after all is a very limited jurisdiction." The said case, related to an assessee, who was engaged in the business of manufacturing of edible oils and was in the process of setting up of a groundnut oil mill. In that case, the moment the ground nuts, a raw material, was purchased, it was held that business had been setup and accordingly the expenditure incurred should be allowed as a revenue expenditure. 8. It would be appropriate in this regard to refer to the proviso to Section 3 of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Wealth Tax [1978] 112 ITR 497(Bom), it has been observed:- "This interpretation put by this court upon the expression "set up" has been followed by the Madras High Court in the case of Ramaraju Surgical Cotton Mills Ltd. v. Commissioner of Wealth-tax [1962] 46 ITR 820. This is a case under the Wealth-tax Act and the expression " set up " came to be interpreted in the context of section 5(1)(xxi) as exemption was claimed as a new and separate unit set up after the commencement of the Act. The Madras High Court at page 824 observes: "Unless a factory is erected and the plant and machinery installed therein, it cannot be said to have been set up. The resolutions of the board of directors, the orders placed for purchasing the machinery, the licence obtained from the Government for constructing the factory, are merely initial stages toward, setting up, however necessary and essential they may be to further the achievement of the end. It is not, however, the actual functioning of the factory or its going into production that can alone be called setting up of the factory. The setting up is perhaps a stage anterior to the commencement of the factory." 12. This brings us to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive of the fact that business operations had been setup. In the BPO industry, training of employees is an important, essential and integral element of the business activities and when the assessee has the infrastructure in place, the business can be treated as set-up. As a service industry, the first step is to recruit right kind of employees, then to interact, train or check their performance. Unlike the manufacturing activity, where requisite plant and machinery has to be procured, installed and then business operations start, in the BPO industry, the process starts with the recruitment of employees, who are to work in the said industry. Training or introduction after recruitment would be akin to the trial production or the first step in production undertaken by a manufacturer of goods. Of course it has to be seen, whether the infrastructure to utilize their services was in place or not. One may postpone actual rendering of services to be a zero error company. In CIT Vs. E-Funds International India, (2007) 162 Taxman 1 (Del), the assessee was engaged in the business of information technology like software development/consultancy, business process management and electronic banking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eedings, it is seen that appellant has submitted a note on the training imparted to the employees during the month of April and May, 2004 in the premises taken from M/s Agilis Information Technologies International Private Limited. The appellant also filed copies of the ledger accounts of pantry expenses, professional expenses, recruitment expenses, computer hire charges, transportation charges, lease line charges. Copies of the audited balance sheet of M/s Agilis Information Technologies International Private Limited and addresses of the employees who are still working with the appellant company to whom the salaries were paid in the months of April and May, 2004. The appellant has also filed the name and address of the parties to whom the expenses of pantry, professional charges, recruitment expenses, computer hire charges were paid and TDS deducted. The appellant has also filed copy of the ESI/PF paid for the month of April and May, 2004. All these comments prove that the appellant had started its business during this period and the employees and staffs were being trained to handle the business of call centre which cannot be done by a novice. The BPO business requires trained and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese were used for training the personnel and paying salaries and incidental charges, necessary for setting up the business. Thus, in a nutshell, it is held that a business is set up when it reaches a stage where it is in a position to procure business and not before. However, the expenditure becomes deductible from such stage irrespective of the date of actual receipt of the business. Therefore, it is held that the business had not been set up till the end of May, 2004. Accordingly, the assessee is not entitled to deduction of these expenses. It is held accordingly." 18. In view of the aforesaid discussion, we do not think that the reasoning given by the Tribunal and the Assessing Officer shows that the business of the appellant-assessee had not been setup. The business of the appellant had been setup as the appellant-assessee had acquired the necessary infrastructure from their sister concern, M/s Agilis, and had also started making payment of salary and wages. This training was given by professional experts under the supervision and control of the appellant-assessee. The moment the said operations were commenced, the business had been setup and the subsequent rendering of servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty, all activities which go to make up the business need not be started simultaneously. As soon as the activity which is essential in the course of carrying on business is started, business is said to be set up, if not commenced. 20. Upon recruitment of employees, the factum that expenditure under the different heads, as noticed above, was incurred is indicative that business was set up. Training to the employees was given to ensure that when the work was undertaken and performed, there were no glitches, trouble or problems. It is not indicative of the fact that necessary infrastructure was not there and actual business could not have commenced or was not set up. Training was post set up as the employees were recruited. In case of service industry, training and up gradation of skills of employees is a part and parcel of the business activity, a continuous process. The business as a service provider, cannot exist without the said activity being undertaken both at the very initial stage and after business has commenced. Training is done to ensure proper performance and to provide services of acceptable quality or ensure zero or minimal errors. It is to ensure proper standards and op ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
