ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE - 6,, PUNE vs. SUZLER INDIA PVT.LTD,, PUNE

This appeal by the Revenue against the order dated 24-05-2017 passed by the Commissioner of Income Tax (Appeals)-8, Pune [„CIT(A)‟] for assessment year 2011-12.

Ground No. 1 raised by the Revenue challenging the action of CIT(A) in allowing warranty expenses and provisions of sales cost in the facts and circumstances of the case.

The brief facts relating to the case on hand are that the assessee is a company engaged in the business of equipment manufacturing and sale of petroleum and distillation equipment. During the course of assessment proceedings, the AO asked the assessee to furnish the details of claim on account of warranty, but however, considering the disallowances concerning the said expenditure in earlier assessment years disallowed in the year under consideration. Likewise an amount of Rs.3,62,000/- on account of provision of after sales cost the AO disallowed the same since the appeals are pending of earlier years by the assessee filed against the same disallowances made. We note that the AO disallowed an amount of Rs.73,23,000/- and Rs.3,62,000/- only on account of the appeals of earlier years are pending. The CIT(A) by placing reliance on the orders of ITAT deleted the addition made by the AO. The relevant portion of para 5.2 of CIT(A) is reproduced here-in-below: “5.2 I have carefully perused the submissions of the appellant as well as the findings of the AO. The appellant has relied upon the decision of Rotork Controls India Pvt. Ltd. (supra) wherein Hon'ble Apex Court has held that where warranty is attached to the sale of a product, the provision gets attached thereby, and that liability then becomes ascertainable which is allowable. The appellant has also stated that consistent view has been taken by the Hon'ble Tribunal, Mumbai, in its own case, spanned across various assessment years, wherein it has deleted this disallowance made by the AO, and no further appeal has been filed against it, by Revenue, in High Court. It has been categorically stated that in AY 2006-07, the issue was referred back to the AO for verification, who after making the necessary verifications allowed the claim of the appellant for both the provisions. It has also been brought to my notice that same disallowance was made in AY 2008-09 and 2010-11, which was deleted by Ld. CIT(A), against which no appeal has been filed by the Revenue. It is further stated that after accepting the decision of Ld. CIT(A) in AY 2008-09, the AO has also dropped the penalty proceedings initiated in this case. Lastly, it has been stated that no disallowance of this nature has been made by the AO in AY 2009-10. In view of the facts brought out as above, it is clear that the issue stands settled in favor of the appellant. Accordingly, the addition made by the AO on account of Provision for 'Warranty of Rs.73,23,000/-, and Provision for After Sales cost of Rs.3,62,000/- is deleted. Ground No.1 is allowed.”

On perusal of the above, we find that the Tribunal in assessee‟s own case remanded the matter to the file of AO for verification and we note that after making necessary examination the AO allowed claim of assessee on account of warranty expenses and after sales cost for A.Y. 2006-07. Further, for A.Ys. 2008-09 and 2010-11 the CIT(A) deleted the addition made by the AO wherein the Revenue did not prefer an appeal before the Tribunal. Therefore, in our opinion the issue raised before us in ground No. 1 is settled in favour of assessee. Thereby, we find no interference is required from us and the order of CIT(A) is justified. Ground No. 1 raised by the Revenue is dismissed.

Ground No. 2 raised by the Revenue challenging the action of CIT(A) in allowing expenditure towards SAP implementation as revenue in nature.

We note that the assessee has debited an amount of Rs.3,25,32,555/- towards SAP implementation charges. The AO treated the said expenditure as capital in nature as against the claim of revenue expenditure. The CIT(A) by placing reliance in the case of Raychem RPG Limited reported in 346 ITR 138 held that the expenditure incurred towards implementation of SAP is revenue in nature. The relevant portion of para 7.4 of CIT(A) is reproduced here-in-below : “7.4 The nature of expense in the case of the appellant is that of SAP ERP implementation. SAP system is a software system consisting of a number of fully integrated modules, which cover virtually every aspect of the business management. Business Processes included in SAP ERP are - Operations, Financials, Human Capital Management and Corporate Services. It is normally used in large companies having many departments or business units, like sales department, production planning department, finance department, etc. The appellant company being in the business of equipment manufacturing and sale of petroleum and distillation equipment has large scale operations involving various departments/business units. These departments or business units in such large companies, continuously communicate and exchange data with each other. The success of any organization lies in effective communication, and data exchange, within these departments, as well as associated third party such as vendors, outsourcers, and customers. Hence, SAP ERP is a highly technical software, which, if successfully implemented, enhances the efficiency and managerial ability of an organisation to a large extent. The very nature of the SAP software shows, that it only enhances the managerial capacity of an organisation and does not in any way lead to creation of an asset that will yield profits in future. It is for this reason that the Hon'ble Jurisdictional High Court as well as various other Hon'ble Courts, whose decisions have been relied upon by the appellant are taking a consistent view that an expense of this nature is a revenue expense. Respectfully following the decision of Hon'ble Jurisdictional High Court in the case of Raychem RPG Ltd. (supra), and the other decisions relied upon by the appellant, it is held that the expenses incurred on implementation of SAP ERP are of revenue nature. Accordingly, the AO is directed to delete the addition of Rs.3,25,32,555/- made on this account. Ground No. 3 is allowed.”

On perusal of the above finding of CIT(A), we note that the Hon‟ble High Court of Bombay in the case of Raychem RPG Limited (supra) taken a consistent view that the expenditure incurred for implementation of an Enterprises Resources Planning software known as SAP is revenue expenditure and upheld the order of Pune Bench of Tribunal. The ld. DR did not bring on record any contrary position and we agree with reasons recorded at para 7.4 of impugned order by the CIT(A). Thereby, the order of CIT(A) is justified and deleting the addition made by the AO. Thus, ground No. 2 raised by the Revenue is dismissed.

In the result, the appeal of Revenue is dismissed.