LAKME LEVER PRIVATE LIMITED ,MUMBAI vs. PRINCIPLE COMMISSIONER OF INCOME TAX-PCIT,MUMBAI-1, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “A”, MUMBAI BEFORE SHRI KULDIP SINGH, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited v. Pr.CIT, Mumbai -1 Unilever House 3rd Floor, Room No. 330 B.D. Sawant Marg, Chakala Aayakar Bhavan Andheri (E), Mumbai - 400099 M.K. Road Mumbai - 400020 PAN: AABCL5555B (Appellant) (Respondent) Assessee Represented by : Shri Nishant Thakkar & Ms. Jasmin Amalsadvala Department Represented by : Smt. Shailja Rai

Date of Hearing : 03.01.2023 Date of Pronouncement : 03.04.2023

O R D E R PER S. RIFAUR RAHMAN (AM)

2 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited was selected for Scrutiny under CASS and assessment was completed u/s.143(3) of Income-tax Act, 1961 (in short “Act”) on 28.12.2019 assessing the total income at ₹.1,47,45,062/- after addition on account of disallowance of depreciation on goodwill to the tune of ₹.24,41,40,229/- and provisions for doubtful debts of ₹.45,79,000/-.

3 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited that TDS u/s. 194J in respect of Fees paid for Technical Services has been shown. However, no TDS in respect of Royalty having been made and paid is shown in Column No.34A of the Tax Audit Report. Therefore, the scope of disallowance @30% of such Royalty u/s.40(a)(ia) of the Act has not been explored. He observed that prima facie it appears that such expenditure appears to be in nature of capital expenditure and therefore, disallowance u/s.37(1) of the Act ought to have been examined. He observed that Assessing Officer neither made disallowance u/s.40(a)(ia) or u/s.37(1) of the Act nor examined the claim. He observed that Assessing Officer in not making proper verification of the facts and thereby failed to make correct assessment of the total income for the year under consideration, is erroneous as well as prejudicial to the interests of the revenue. In view of the above observation a show cause notice u/s 263 of the Act dated 12.03.2022 was issued to the assessee to proposing the revise of the order u/s 143(3) of Act.

4 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited "Background: Lakme Lever Private Limited is a wholly owned subsidiary of Hindustan Unilever Limited. The Company is engaged in providing beauty services in the area of skin and hair through its own beauty salons and franchisees. The main objective of the Company is to promote health, beauty and personal care products. The Company also aims to operate as well as manage institutes, training centers in the field of beauty and wellness services. In addition to above, the Company is engaged in the business of converting raw materials and packing material into finished and semi-finished goods for its parent entity on job work basis. Further, during the year under consideration the Company has e- furnished its return of income under section 139(1) of the Act declaring loss to the tune of INR 23,39,74,167. The Company's case was selected for scrutiny proceedings and the jurisdictional assessing officer passed an order under section 143(3) of the Act post making certain additions computing income to the tune of INR 1,47,45,062. Being aggrieved by the said order, the Company has preferred an appeal before the Commissioner of Income Tax (Appeals) which is pending for disposal. Further, the Company humbly submits the following facts and explanations to the issues raised in the aforesaid notice: EDP expenses amounting to INR 2,84,82,194/- It is proposed to initiate revision proceedings u/s 263 on the basis that EDP expenses incurred by assessee are enduring in nature, thus should have been treated as capital expenditure and hence, should have been disallowed. During the captioned assessment year, the Assessee has debited expenditure amounting to INR 2,84,82,194 under the head EDP expenses in P&L account. These expenses mainly comprise of license fee, maintenance charges, etc. for billing software used by Assessee at various salons. It also includes expenses related to rental charges for printer, desktop, laptop, etc. taken on hire and other miscellaneous IT related expenses. These expenses are incurred for efficient functioning of the business operations and are accordingly charged to P&L account. Assessee did not acquire any new asset or right or advantage of an enduring nature by incurring these expenses, Sample invoice copies of EDP expenses is enclosed as Annexure 3. Further, as per the provisions of section 37 of the Act any expenditure not being in the nature of capital expenditure or

5 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited personal expenditure incurred for the purpose of business and profession shall be allowed while computing the total income from business and profession. Various Courts have time and again discussed on the demarcation of capital and revenue expenditure. The Company places reliance on the remarkable judicial precedent of Apex Court in case of Empire Jute Co. Ltd. vs CIT [1980] 3 taxman 69 (SC) wherein it was held that where there is no addition to or expansion of the profit-making apparatus of the Assessee, it cannot be said that the advantage is of the enduring nature. Accordingly, expenses merely facilitating the trading operations or enabling efficient conduct of the business of the taxpayer cannot be categorized as capital in nature. Further, the Company places reliance on the Hon'ble Bombay High Court ruling in case of PCIT vs. Holcim Services (South Asia) Ltd. [2018] 93 taxmann.com 270 (Bombay) wherein the taxpayer had made payments for upgrading a computer software which was categorized as capital expenditure by the assessing officer. However, while passing the order the Hon'ble Court relying on the principles laid down in the case of Empire Jute Co. Ltd. (Supra) held that expenses incurred by the taxpayer to enhance the effective functioning of the business shall be characterized as revenue in nature. Relevant extract of the ruling is enumerated below We find that in this case both the CIT (Appeals) as well as the Tribunal have rendered a finding of the fact that the software purchased from M/s. C.A. India Technologies Pvt. Ltd. brought about better efficiency in the appellant's business as it enabled it to meet specifically user problem faced by the Respondent- Assessee. The impugned order also records the fact that in view of fast changing technology, software has to be regularly updated so as to keep pace with the changing technology. On the aforesaid facts the view taken by the Tribunal that the expenditure of Rs.38.90 Lakhs is on Revenue account is an entirely possible view." The Company also relies on the ruling of the Hon'ble Bombay High Court in case of PCIT vs. TATA AIG General Insurance Co. Ltd. [2020] 116 taxmann.com 492 (Bombay) wherein it was held that expenditure incurred by the taxpayer on purchase of hard disk and other peripherals categorized as EDP expenses in the books of accounts cannot be said to be capital in nature.

6 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited In connection to above, reliance is also placed on the judicial precedent in case of CIT vs UHDE India (P) Ltd. (2014) 46 taxmann.com 259 (Bombay) wherein it was held that expenses incurred on account of software development in the nature of annual maintenance contracts, upgradation and installation of antivirus expenses cannot result in any benefit of enduring nature so as to be called capital expenses. Separately, the reliance placed on the judicial precedent in case of DCIT vs IKEA Trading India (P) (Ltd) (2017) 82 taxmann.com 325 (Delhi Tribunal) wherein the taxpayer had incurred certain expenses in the nature of EDP maintenance charges comprising of purchase of Printer tonner, ink infuser, repair and annual maintenance of EDP peripherals which was categorized as capital expenditure by the Assessing Officer. However, CIT(A) held that it can be Said that that these expenses are allowable as revenue expenses us 37 () of the IT Act as these have been incurred for the purposes of business. The Hon'ble ITAT further upheld the order of the CIT(A). The relevant extracts of the ruling are reproduced below: "In view of the details of expenditure provided by the appellant and verification thereof through the bills/vouchers submitted in form of paper book it is observed that all these expense are allowable as revenue expenses u's 37(1) of the IT Act as these has been incurred for purposes of business. In fact from the order or the AO it is observed that even he has not questioned the business purpose or genuineness of these expenses and has rather disallowed these expenses holding it as capital in nature under Explanation-1 to section 32(1) of the Act and has allowed depreciation on the same. As has already been discussed in detail above none of these expenses are capital in nature and therefore the question of these expenses falling within the meaning of section 32 of the IT Act itself and therefore capitalization of these expenses and allowing depreciation thereon do not arise." Further, notice has no mention of any evidence or cogent reason given for treating EDP expenses as capital in nature. Based on the above, your office shall appreciate that the EDP expenses are not capital expenditure as alleged in the notice but are actually in the nature of regular business expenses incurred year on year (as evident from the audited financial statements). Thus, such expenses are tax deductible under section 37(1) of the Act as they

7 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited have been incurred wholly and exclusively by the Assessee for the purposes of its business and are not capital in nature. Treating such expenses as capital in nature will tantamount to gross miscarriage of settled judicial principles. In the light of above facts and judicial precedents, we humbly submit that the EDP expenses charged to the profit and loss account do not result in any benefit of enduring nature and thus cannot be categorized as capital expenditure. Royalty Expenses amounting to INR 2,77,23,272 It is proposed to initiate revision proceedings u/s 263 on the basis that no tax has been deducted On Royalty expenses debited to the P&L account and thus, possibility of disallowance under section 40(a)(ia) of the Act need to be examined. Further, the expenditure also appears to be in the nature of capital expenditure and hence, disallowance under section 37(1) of the Act ought to have been examined. During the captioned assessment year, the Assessee has debited expenditure amounting to INR 2.77,23,272 under the head Royalty in P&L account. This expense is covered under the trademark license agreement entered with its holding company, Hindustan Unilever Limited (CHUL). Accordingly, in consideration of the license rights granted by HUL to the Assessee, the Assessee was under an obligation to pay HUL, royalty for the use of the Licensed Marks, Domain names and Licensed Services as also the fees for the technical know-how and other services It's further submitted that tax has been duly deducted at source under section 194) of the Act by the Assessee on such payments/amounts credited to HUL. The Company at the time of payment of royalty has withhold taxes at the rate of 10% under section 194) of the Act and same is evident in the tax audit report for the year under consideration. We would like to bring to your attention that under clause 34(a) of the tax audit report it is reported total amount of payments under section 194) of the Act amounts to INR 16,72,51,762 on which taxes have been withheld to the tune of INR 1,66,57,265. Relevant extract of the Tax Audit Report is attached as Annexure 4. Further, the payment of royalty expenses by the Company is included in the above payments reported under section 194) of the Act in the tax audit report. We have attached herewith sample invoice copies mapped with the corresponding TDS certificates depicting that the taxes have been withheld on the above payments under section 194) of the Act as Annexure 5 for your reference.

8 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited This establishes that the reason for initiating revision proceedings is based on a mistaken notion that taxes have not been deducted on such payments by the Assessee. Therefore, the question of disallowance under section 40(a)(ia) of the Act does not arise. Based on the above, your office shell appreciate that the royalty and technical know-how expenses are not capital expenditure as alleged in the notice for revision proceedings but are actually in the nature of regular business expenses incurred year on year (as evident from the audited financial statements and related party disclosures). Thus, such expenses are tax deductible under section 37(1) of the Act as they have been incurred wholly and exclusively by the Assessee for the purposes of its business and are not capital in nature. Treating such expenses as capital in nature will tantamount to gross miscarriage of settled judicial principles. Therefore, the Assessee submits that the revision proceeding is based on incorrect facts and hence, such proceedings ought to be dropped. Prayer Having regard to the above submissions of the Assessee and associated judicial precedents thereof the Assesses humbly requests your office to kindly drop the revision proceedings on account of the following: • EDP expenses are routine in nature (incurred year on year) for efficient and smooth running of day-to-day business operations, EDP expenses are not to bring any benefit of Enduring nature to the Company and therefore cannot be categorized as capital expenditure. Adequate taxes have been withheld on Royalty payments made by the Company under Section 194J of the Act. Such expenses are tax deductible under section 37(1) of the Act as they have. been incurred wholly and exclusively by the Assessee for the purposes of its business and are not capital in nature. Treating such expenses as capital in nature will tantamount to gross miscarriage of settled judicial principles. Kindly take the above submission on record and acknowledge. If you have any questions on the submission, we request you to provide us/our authorised Representatives an opportunity of being heard in person and present our case."

9 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited 6. After considering the submissions of the assessee, Ld. Pr.CIT rejected the submissions of the assessee and he observed that Assessing Officer has allowed deduction of ₹.2,84,82,194/- on account of EDP expenses without verification whether it is capital expenditure or revenue expenditure. The Assessing Officer has not conducted any inquiry into about allowability of EDP expenses or capitalization thereof. Further, he observed that assessee has paid royalty, but as per return of income, it is not discernible whether the TDS has been done on royalty expenses. It was imperative on the part of the Assessing Officer to verify TDS on royalty expenses claimed, and since TDS on royalty expenses is not discernible from the return/Tax Audit Report, it was required to be disallowed. Therefore, Assessing Officer should have conducted inquiry into this, but he has not done. Therefore, he treated the assessment passed u/s. 143(3) of the Act as erroneous and also prejudicial to the interest of revenue.

10 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited Assessing Officer as erroneous and prejudicial to the interest of the revenue and accordingly he directed the Assessing Officer to reframe the assessment order denovo after conducting all necessary enquiries and verifications as warranted on facts of the case and also after giving opportunity of being heard to the assessee.

“1. On the facts and in the circumstances of the case and in law the learned PCIT has erred in exercising jurisdiction in passing of the order under section 263 of the Act dated 27 March 2022. 2. On the facts and in the circumstances of the case and in law the order under section 263 of the Act is bad in law and deserves to be quashed inasmuch as it has been passed without application of mind. 3. On the facts and in the circumstances of the case and in law the learned PCIT erred in holding that the order of assessment under section 143(3) insofar as the allowance of EDP expenses of Rs 2,84,82,194 and Royalty expenses of Rs 2,77,23,272 was erroneous and prejudicial to the interest of the revenue. 4. On the facts and in the circumstances of the case and in law the learned PCIT erred in acting in excess of jurisdiction by directing the assessing officer to reframe the assessment de novo 5. The appellant company craves leave to add to, to amend, to alter or modify any or all the aforesaid grounds of appeal.”

11 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited claimed by the assessee and on royalty, Assessing Officer has verified whether the assessee has deducted TDS.

12 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited 11. Further, he brought to our notice Page No. 139 of the Paper Book which is the details submitted by the assessee subsequent to notices issued u/s. 143(2) of the Act before the Assessing Officer wherein assessee has submitted all the information before the Assessing Officer. Further, he brought to our notice Page No. 143 of the Paper Book which is the notice issued u/s. 142(1) and brought to our notice page 151 of the Paper Book wherein assessee has submitted partial informations before the Assessing Officer. Further, he brought to our notice Page No.153 of the Paper Book which is the section 142(1) notice issued by the Assessing Officer, in which he has specifically asked the assessee to file the details of TDS and other amounts claimed by the assessee as deduction during the year.

13 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited Book with the tax audit report submitted by the auditor which tallies with the information submitted by the assessee before the Assessing Officer. With regard to EDP expenditure he brought to our notice Page No. 179 of the Paper Book in which assessee has claimed expenditure of ₹.284.82 lakhs during the year and assessee has submitted supplier wise details before the Assessing Officer.

14 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited M/s.Vodafone India Limited v. Pr.CIT in ITA.No. 780/Mum/2021 dated 28.01.2022. Further, he relied on the decision of the Hon'ble Bombay High Court in the case of Pr.CIT v. TATA AIG General Insurance Co. Ltd., [2020] 116 taxmann.com 492. He submitted that as held in the above said decision EDP expenditure is a revenue expenditure, it cannot be treated as capital expenditure.

15 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited documents in support of the above claim. He submitted that Assessing Officer has not called for any royalty agreement nor assessee has placed on record. Therefore, Ld. Pr.CIT is right in concluding that no enquiry was made by the Assessing Officer. Further, no invoices were submitted by the assessee relating to expenses claimed by the assessee and he submitted that the issue under consideration is squarely falls under Explanation 2 to section 263 of the Act. In this regard she relied on the following case laws: - a. Sesa Starlite Ltd. v. CIT (Panaji) [123 taxmann.com 217] b. Jeevan Investment and Finance Pvt. Ltd., v. CIT [88 taxmann.com 552]

16 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited notice u/s. 263 of the Act. In response assessee has submitted detailed submissions in support of the claim of the various expenditures claimed by the assessee in particular EDP Expenditure and Royalty expenditure claimed by the assessee. From the record, we observe that these expenditures are regularly claimed by the assessee over the years. We observe from the financial statements submitted before us that assessee has more or less claimed similar amount in the current Assessment Year compared to previous assessment year. It is brought to our notice that Assessing Officer has issued various notices u/s. 143(2) and 142(1) and collected the various informations relating to TDS deduction on royalty payments as well as EDP expenses. From the record, we observe that it is not the case wherein Assessing Officer has not made any enquiry, however, he has carried out enquiries but he failed to discuss the same in the Assessment Order. In our considered view, the Assessing Officer has carried out certain verification, therefore the provisions of section 263 in particular Explanation 2 cannot be invoked in the present case.

17 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited (supra) has allowed the claim of EPD expenditure as revenue expenditure, and observed as under: - “2. The appeal is admitted for consideration of following substantial questions of law: (i) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the amortized amount of the premium on investments amounting to Rs. 1,18,23,413/- cannot added back to the balance of the profits as there is no specific prohibition against the allowance of such expenditure u/S. 30 to 43B of the Income Tax Act, 1961 even though such expenditure is to be added back in terms of Clause 5(a) of the First Schedule of the Income Tax Act, 1961? (ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the amortized amount of the premium on investments which is not admissible under Section 30 to 43B of the Income Tax Act and is required to be added back as per the provisions of Clause 5(a) of the First Schedule of the Income Tax Act, cannot be allowed to be added to be the balance of profits as there is no specific prohibition against the allowance of such expenditure under Sections 30 to 43B of the Income Tax Act, 1961? (iii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that profit of Rs. 34,77,000/- on sale of investment is exempt in view of the CBDT Circular No. 528 dated 16.12.1988 even though the said Circular was foe General Insurance Corporation of India and its subsidiaries which are wholly owned enterprises of the Union of India? (iv) Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in confirming that the provisions of Sec. 14A of the I.T. Act amounting of Rs. 6,21,923/- is not applicable to assessee as income of the assessee company assessed u/S. 44 of the I.T. Act? 3. We notice that the Revenue has suggested following additional questions:- (a) Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in allowing the expenditure incurred towards purchase of hard discs, head sets, RAM etc amounting to Rs. 8,93,000/- that such expenditure incurred by the assessee creates enduring

18 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited benefit and was a capital assets eligible for depreciation u/S. 32 of the Act? (b) Whether the Tribunal was correct in holding that acquisition of computer software amounting to Rs. 21,76,337/- by the assessee is not capital expenditure without appreciating that computer software acquired by the assessee creates enduring benefit and was a capital asset eligible for depreciation u/S. 32 of the Act? (c) Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in confirming that the tax is not required to be deducted in respect of co-insurance commission paid by assessee? (d) Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in confirming that the coinsurance commission of Rs. 49,61,295/- is allowable under the provisions of Sec. 40(a)(ia) and does not require to deduct TDS on such payments? Questions Nos. (a) and (b) refer to the expenditure incurred by the assessee in purchase of hard discs and other peripherals and for acquiring computer software. Revenue argued that the same was in the nature of capital expenditure. CIT(A) and the Tribunal, however, examined the nature of expenditure and held that the same was revenue expenditure. We do not find any error. Similar issue was examined by this Court in order dated 4.12.2018 passed in Income Tax Appeal No. 778 of 2016 and connected appeal. These questions are, therefore, not considered. As far as Question Nos. (c) and (d) are concerned, we have examined these questions in Income Tax Appeal No. 541 of 2017 and not entertained them. Without recording separate reasons, these questions are not entertained.”

19 ITA NO.1341/MUM/2022 (A.Y: 2017-18) M/s. Lakme Lever Private Limited u/s. 143(3) of the Act is erroneous and prejudicial to the interest of the revenue. After considering the detailed submissions of the assessee, Ld.Pr.CIT abruptly completed the order u/s. 263 of the Act by merely remitting the issue back to the file of the Assessing Officer without giving any finding on the issues raised by him in notices issued u/s. 263 of the Act. Accordingly, we are inclined to set-aside the order passed u/s. 263 of the Act.

Order pronounced in the open court on 03rd April, 2023

Sd/- Sd/- /- (KULDIP SINGH) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 03/04/2023 Giridhar, Sr.PS Copy of the Order forwarded to: 1. The Assessee 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file //True Copy// BY ORDER

(Asstt. Registrar) ITAT, Mum