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TMI Blog2010 (10) TMI 1112X X X X Extracts X X X X X X X X Extracts X X X X ..... ention that the investment in shares were made in earlier year and there was no borrowed funds. The CIT(A) was of the view that the expenditure pertaining to exempt income is not disallowable in accordance with section 14A of the Act. The CIT(A)estimated 10% of the expenditure related to dividend income disallowable u/s.14A of which calculation comes to ₹ 2,41,598/-. Against the order of the CIT(A), the assessee and the revenue both are in appeal before us. In the revenue s appeal being ITA No. 652/M/08, ground No. 2 is related to this issue. 5. The learned counsel for the assessee submitted that in the assessment year 2003- 04 no such disallowance was made. He further submitted that in the assessment year 2004-05, the Assessing Officer himself accepted the order of the CIT (A) for the assessment year 2002-03 and 10% of the expenditure was disallowed u/s.14A. In the assessment year 2004-05 the Assessing Officer himself held that 10% of disallowance is fair and justifiable. 6. The learned Departmental Representative, on the other hand, relied upon the order of the Assessing Officer. 7. We have heard the learned representatives of the parties and records perused. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) considered the following break up of the expenditure : Sr.No. Nature of expenditure Amount (Rs.) 1 License to use software List Price 74,15,133 2 Maintenance Fees @17% of the list price 12,60,572 3 Consultancy Fees 30,00,000 4 Pther expenses (out of pocket expenses of consultants, personnel cost) 20,94,180 Total 1,37,69,885 The CIT(A) allowed maintenance fee of ₹ 12,60,572/-and for the balance amount he confirmed the order of the Assessing Officer observing that the assessee has incurred substantial amount on the installation of new soft ware. The assessee obtained enduring benefits for a number of years. 11. The assessee is in appeal against the order of the learned CIT(A). Though the revenue has filed appeal but no ground of appeal is taken in respect of this issue decided by the CIT(A). 12. The learned counsel for the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ways Ltd 304 ITR 84(Mad). 14. The learned Departmental Representative relied upon the order of the CIT(A) and submitted that the agreement was for 25 years therefore expenditures have been rightly taken as capital in nature. 15. We have heard the learned representatives of the parties, records perused and gone through the decisions cited. The assessee purchases the software called as SAP. The assessee claimed the expenditure incurred on the said software as revenue expenditure, but the same disallowed by the revenue, treating it as capital expenditure. The question to be examined in this ground of appeal is whether the expenditure incurred on SAP/ERP/software by the assessee is a revenue expenditure or capital expenditure. There is no embracing formula, which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure incurred. To know the nature of activities for which expenditures incurred we would like to refer written submissions of the assessee filed before CIT (A) of which copy placed in paper book at page numbers 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Whereas, SAP desires to grant to Licensee and Licensee desires to accept from SAP, a license to use (as defined herein) SAP s proprietary R/3 Software (as defined herein) upon the terms and conditions hereinafter set forth: 6.1 SAP Proprietary information Licensee acknowledges that ownership of an title in and to all intellectual property rights, including patent, trademark, service mark, copyright and trade secret rights, in the SAP Proprietary information are and shall remain in SAP and its Licensors. Licensee acquires only the right to use the Software under the terms and conditions of this Agreement and does not acquire any ownership rights or title in or to the SAP Proprietary information and that of SAP s licensors. (a) Licensee shall not copy, translate, disassemble, or decompile, nor create or attempt to create, by reverse engineering or otherwise, the source code from the object code of the Software. In the event source code is provided to Licensee, SAP, in its sole discretion, reserves the right to delete, or to require the deletion of, such source code and all copies thereof in Licensee s possession or control whenever a future Release, Version, or Correction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ario of style of business, it cannot be held as a capital asset. 19 One of the aspects of the AO for disallowance of assessee s claim is that the expenditures were technical know - how. We find that payments for implementation of ERP system squarely falls outside the purview of the definition of the term technical know-how provided under Explanation 4 in clause (ii) of sub-section 1 of Section 32 of the Act. The said section provides that know-how means any industrial information or technique likely to assist in the manufacturer or processing of goods or in the working of mines, oil-well or other sources of mineral deposits. In the case under consideration, the assessee neither purchased any software nor the expenditure is incurred related to manufacturing operation, therefore, we do not agree with this reason of the A.O. for disallowing the assessee s case. 20 In the light of discussions, we allow the claim of the assessee as revenue expenditures and the AO is directed accordingly .The AO further directed that if depreciation if any has been allowed same be withdrawn. 21. Ground Nos. 4 to 8 read as under: 4. The learned CIT(A) has erred in law and in facts in restri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greeing with the contentions of the appellant that for the purpose of computing book profits u/s.115JB, 100% of the eligible profit so computed u/s.80HHC is to be reduced in pursuance with subclause (iv) of Explanation to section 115JB(2) of the Act. 24. The above grounds are in respect of the issue whether for the purpose of calculation of book profit u/s.115JB deduction u/s.80HHC is to be reduced or not. The learned counsel for the assessee submitted though in earlier years the ITAT has decided this issue in favour of the assessee but on account of fairness, the issue is covered against the assessee by the judgment of the jurisdiction High Court in the case of CIT v. Al-Kabeer Exports Ltd. ITA No. 2619 of 2010, judgment dated July 8/9, 2010. 25. After hearing learned representatives of both the sides, we find that the issue is covered against the assessee by the judgment of the jurisdictional High Court in the case of CIT v. Al-Kabeer Exports Ltd. ITA No. 2619 of 2010, judgment dated July 8/9, 2010 but subsequently it was noticed the finding of said judgment has been reversed by the Supreme court in the case of Ajanta Pharma Ltd V CIT Civil appeal NO 7518 of 2010 dated 9.9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, the net addition was ₹ 2,38,439/-. The learned CIT(A) allowed the claim of the assessee, after going through the details of expenses and the bills the expenditure is found to be revenue in nature. 33. We have heard the learned representatives of the parties and records perused. The AO has given details of such expenses at page 2 of his order. On perusal of the details of expenditure, we notice that the items, which mentioned by the AO in the details, are revenue in nature. The contention of the learned Departmental Representative that the items pertained to store items cannot be claimed as revenue unless the same is utilized for the purpose of business. We find that this was not the case of the AO. Therefore, we do not find any substance in this contention of the learned Departmental Representative, as contentions of the Learned DR are not relevant to the case make out by the AO. Even otherwise, when the assessee followed a particular method of accounting that the consumable store items as and when purchased is accounted for as expenditure. Such method is not an incorrect method of accounting. We, therefore, do not find any substance in this ground of the appeal of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,719 2 Royalty for the period from 1.4.2001 to 31.3.2002 90,79,472 3 Royalty for the period from 1.4.2002 to 31.12.2002 1,38,50,780 4 Royalty for the period from 1.1.2003 to 31.7.2003 1,01,81,143 Total 3,66,52,114 38. During the assessment proceedings, the A.O. noticed that the assessee incurred expenditure on royalty of ₹ 90,79,472/- and claimed depreciation of ₹ 68,72,271/-. However, in the application for a revision in computation of income, the assessee re-worked the depreciation claim on royalty payment for the financial year 2001-02 and withdrew the excess claim of ₹ 21,95,752/-, the balance depreciation amount is ₹ 46,76,519/- as claimed on actual payment of royalty for the year under consideration. The AO was of the view that the assessee is not entitled to depreciation, as royalty is not a depreciable asset. The AO followed the detailed discussion made in the assessment year 2001-02 and disallowed the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rks). Subsequently, the appellant company filed its revised return of income to claim the said payment as a Revenue Expenditure u/s.37(1) of the income-Tax Act(Act). However, the learned Assessing Officer treated the same as capital in nature and disallowed it, in his said assessment order, on the ground that the said expenses forms part of the same set of agreements entered into for acquiring brand/trade marks, so the expense incurred on the same should also be treated as capital in nature. Being aggrieved, the appellant company preferred an appeal against the said assessment order for the assessment year 2001-02. 2. On the said appeal, the learned CIT(A) vide his order (page No.74 of paper book (for assessment year 2002-03) page No. 22 of his said order) dated 22.07.2004, considered the same as capital in nature and allow the depreciation of ₹ 2.50 crores (i.e. @ 25% on said amount of ₹ 10 crores) thereon. The copy of the said first appellate order, dated 22.07.2004 for assessment year 2001-02 is enclosed at Serial No.5 of said Paper Book for the assessment year 2002-03. 3. Meantime, the Learned Assessing Officer passed the assessment order for assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure as revenue expenditure. The Assessing Officer treated the same as capital in nature. According to the Assessing Officer the expenditure incurred on marketing know-how forms part of the same set of agreements entered into for acquiring the brand/trade mark, so the expenditure incurred in this regard, according to him, was capital in nature. The assessing Officer further held that the marketing know-how acquired by the assessee offered an enduring benefit to the assessee by providing a database and documentation relating to sales and marketing of products . The findings of the ITAT given in order in para 12 reads as under: We have gone through the copies of the agreements and considered the facts of the case and the decision of the Mumbai Tribunal in the case of USV Ltd. In this case, the assessee company has already engaged in manufacturing and marketing of pharmaceutical products with a view to expand its market base, it entered into agreement with another company. Apart from acquiring the brands, it also acquired data and details of all scientific and marketing know-how. The benefit of the expenditure and noncompetition was dictated by business necessity and comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 1,07,900.00 48. The AO treated the said expenditure as capital in nature and made an addition of ₹ 1,907,900/-. The CIT(A) sustained the addition to ₹ 57,900/- . 49. We have heard the learned representatives of the parties and records perused. The expenditure is in respect of purchase of 20GB hard disk drive and 128 MB SD RAM. Considering the present scenario of modern technology and as per detailed discussions in Para 15 to 20 of this order, these expenses are revenue in nature. We, therefore, allow the claim of the assessee. 50. Ground No.3 taken by the assessee reads as under: the learned CIT(A) has erred in law and in facts in holding that the expenditure of ₹ 8,00,000/- incurred by the appellant for SAP maintenance is capital in nature . 51. The brief facts of the case are that the AO made an addition of ₹ 8,00,000/- and treated it as capital expenditure as being technical knowhow and allowed depreciation @ 25% of which calculation comes to ₹ 1,00,000. The learned CIT(A) following the order of his predecessor for the assessment year 2002-03 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd ₹ 40,62,469/- has been provided as doubtful debts. In view of the above treatment given by Glenmark Exports Limited in their books, Glenmark Pharmaceuticals Limited has actually written off this amount in its book during the F.Y.2002-03 and accordingly the same has been claimed as allowable expenditure in view of the explanation to sec.36(1)(vii) of the Act. Glenmark Exports is a sister concern of the assessee company. All the trading transactions are routed through Glenmark Exports since the licenses stand in the name of Glenmark Exports. These transactions are recorded in the books of the assessee company and there is no direct activity in Glenmark Exports. Explanation to section 36(1)(vii) of the Act states that deduction claimed for bad debt written off shall not include any provision for bad and doubtful debts. Thus, even though the amount of ₹ 40,62,469/- is written off in the books of the assessee, it has not been written off in the books of M/s.Glenmark Exports Limited. Further, it cannot be denied that there is probability that the same being doubtful may be recovered. If this amount is allowed as a deduction and in the near future the amounts is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue. 60. Ground No. 6 reads as under: The learned CIT(A) has erred in law and in facts in not considering the additional proceedings of ₹ 1,51,54,274/- received by the appellant after the statutory period, with the permission of the prescribed authority, for the purpose of computing deduction u/s.80HHC of the Act. 61. Brief facts of the case are that during the assessment proceedings the AO noticed that the assessee filed a revised claim u/s.80HHC in respect of funds realized after six months from the end of the previous year. However the assessee has not given copy of the authorized dealers/RBI. Therefore, the AO did not allow the claim u/s.80HHC in respect of additional proceeds received beyond the due date ₹ 1,54,54,274/-. The learned AR submitted that the issue is pursuing and the AO may be directed to allow the deduction u/s.80HHC if the assessee is unable to furnish the necessary permission. 62. After hearing the parties, we send back this matter to the file of the AO with direction to consider the assessee s claim u/s.80HHC in accordance with law after providing opportunity of hearing to the assessee. 63. Grounds 8 to 10 taken by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts brought on record by the A.O. 70. During the assessment proceedings while examining the repairs and maintenance expenses the AO noticed that certain items are capital in nature which calculation comes to ₹ 7,16,468/-. The CIT(A) considered item wise and found that except ₹ 57,900/- which pertaining to 20 GB hard disk drive and 128 MB SD Ram were in the nature of capital expenditure and the balance amount of ₹ 6,58,568/- is treated as revenue in nature. The assessee and the revenue were in appeal in the case of assessee s appeal this issue has been decided in Para 49 of the above order. The CIT(A) has examined this item of expenditure and found that the expenses disallowed by the AO are revenue in nature. There is no contrary material on record. The CIT(A) treated the computer parts of ₹ 57,900/- as capital in nature is also allowed by us as revenue expenses in the appeal filed by the assessee. Therefore, under the circumstances we do not find any substance in the grounds of the revenue. Therefore, we dismiss this ground. 71. Ground No. 2 reads as under: On the facts and in the circumstances of the case and in law, the learned CIT(A) was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of building. Section 35(2AB) allows deduction of 1.5 times the expenses incurred by the assessee for research and development, whereas section 35(1)(iv) allows deduction of 100% for capital expenditure on land and building also. The scope of both the sections is different. Also expenditure incurred to claim deduction u/s.35(2AB) requires approval of the prescribed authority, which is not the case u/s.35(1)(iv). I see no reason why deduction u/s.35(1)(iv) cannot be allowed to the appellant. Hence, this ground is decided in favour of the appellant. 75. The learned AR submitted that this issue is covered by the order of the ITAT in Assessment Years 1999-2000 and 2001-02 in assessee s own case in ITA No. 4781 and 4782/M/2007 order dated 7.09.2009. The finding of the ITAT is reproduced below: Having heard both the parties and having considered their rival contentions, we find that sec.35 of the Income Tax Act provides for deduction of expenditure incurred on scientific research. Cl.(iv) of sub-section (1) of sec.35 relates to deduction of any expenditure of capital nature on ad hoc research related to he business carried on by the assessee, and such deduction as may be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ming the disallowance of ₹ 1,24,500/- being 10% of the dividend earned on the premise that an amount of 10% of dividend earned would be expenses incurred for earning dividend income exempted under the provisions of the Act. 80 We heard the learned representatives of parties. We find that CIT (A) relied upon their earlier years order for AY 2001-2002 and 2002-2003. The issue has been decided in para 7 of this order, in the light of that discussions we confirmed the order of the CIT (A). 4. The Hon ble CIT(A) has erred in facts and in law in confirming the disallowance of SAP/ERP implementation expenses amounting to ₹ 4,00,000/- treating the same as capital in nature. 81 We heard the learned representatives of parties. The issue has been decided in Para 53 of this order, following the discussions made in that Para the AO is directed accordingly. 5. The Hon ble CIT(A) has erred in facts and in law in confirming the disallowance claim of repairs and maintenance expenses of ₹ 7,32,341/- by treating the same as capital in nature. 82 The AO treated following expenditure as capital in nature. Sr.No. Amount N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure of ₹ 1,81,336/- on laying LAN cabling at Nasik factory. The appellant is claiming that the same is for replacement of old LAN cabling. Again no evidence has been filed for this. Therefore, the action of the assessing officer is upheld on this account also. As regards expenditure incurred on repairs and maintenance to machinery, the contention of the appellant is acceptable. The expenditure has been incurred on replacing old parts, the expenditure incurred by the appellant is on regular maintenance of plant and machinery and it cannot be said that any new asset of enduring nature has been brought into existence. Therefore, expenditure incurred by the appellant on repairs to plant and machinery amounting to ₹ 1,34,052/- is held as revenue expenditure. This ground of appeal is partly allowed. 84 We heard the learned representatives. We find that the CIT (A) has examined the expenditures in detail. Some of the expenditure like structural steel and torr steel which are generally used for new structure. We therefore find that the order of the CIT (A) is a reasoned order and due relief has already been granted by the CIT (A). There are no contrary material on re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of capital expenditure incurred for construction of building for the purpose of research. 4. On the facts and in the circumstances of the case and in law, the learned CIT(A) has failed to appreciate that the Assessing Officer has rightly invoked the provisions of section 35(2AB) of I.T.Act act disallowed the claim of the assessee amounting to ₹ 1,46,19,646/- in respect of capital expenditure incurred for construction of building for the purpose of research. 93 The grounds NO 3 and 4 are related to one issue, allowable of expenditure under section 35(1) (iv) of the Act. The identical ground NO3 has raised by revenue in its appeal for AY 2003-2004 which has been decided in this appeal in Para 73 to 75 of this order, the AO is directed accordingly. 94 In the result- Appeals filed by assessee ITA No. Assessment Year the result 1110/Mum/07 : 2002-03 ---- partly allowed for statistical purposes 1221/Mum/07 : 2003-04 ---- partly allowed for statistical purposes 4434/Mum/07 : 2004-05 ----partly allowed for statistical purposes Appeals by revenue I.T.A. No. Assessment Year the result 652/Mum/07 : 2002-03 -------- partly allowed 653/Mum/07 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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