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Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
Before: SHRI P.M. JAGTAP(KZ) & SHRI S.S. VISWANETHRA RAVI
आदेश / ORDER
PER P.M. JAGTAP, VICE PRESIDENT.
This appeal is preferred by the Revenue against the order of ld. CIT(Appeals) – 4, Pune dt.06.03.2017.
In the first ground, the Revenue has challenged the action of ld. CIT(Appeals) in deleting the disallowance of Rs.4,36,66,315/- made by the Assessing Officer on account of SAP implementation charges.
The assessee in the present case is a company which is engaged in the business of manufacturing of Hi-tech Equipments. The return of income for the year under consideration was filed by it on 30.11.2012 declaring a total income of Rs.4,52,75,720/-. In the Profit and Loss Account filed along with the said return, a sum of Rs.4.36 crores was debited by the assessee on account of expenditure incurred on SAP Implementation. In the assessment completed u/s 143(3) r.w.s 92CA / 144C of the Income Tax Act, 1961 vide order dated 14.03.2016, the Assessing Officer disallowed the said expenditure claimed by the assessee by treating the same as capital in nature. On appeal, the ld. CIT(Appeals) deleted the said disallowance made by the Assessing Officer and allowed the claim of assessee on account of deduction of expenditure incurred on implementation of SAP for the following reasons given in Para No.5.3 to 5.3.2 of his impugned order.
“DECISION: I have perused the assessment order and the submission made by the appellant as above carefully. I find from the assessment order that the AO had denied the appellant's claim of expenditure amounting to Rs. 4,36,66,315/- on account of SAP implementation as revenue expenditure and treated the same as capital expenditure. The appellant's reliance on the decisions of the Hon'ble Bombay High Court in the case of CIT Vs Raychem RPG Ltd (346 ITR. 138) and of the Hon'ble Punjab & Haryana High Court in the case of CIT vs Varindra Agro Chemical Ltd. (309 ITR 272) (P & H) contending that on the similar facts of the case the expenditure was treated and allowed as revenue expenditure, was also denied by the AO attempting to distinguish the findings in the said cases in para 4, page nos. 2 & 3 of the assessment order which has also been quoted above.
5.3.1 The appellant, on the other hand, relying on the said decisions and further a number of decisions during the appellate proceedings contended that SAP package was to be used for business purpose and that such expenditure had not resulted in bringing into existence any new asset nor has any permanent or an enduring benefit accrued to the appellant, which could be capital in nature. The appellant further contended that such expenditure on the assets of the company were necessary for the purpose of preserving and maintaining of already existing assets and under no circumstances such expenditure brought into existence any new asset nor did it give the Appellant any new or different advantage or an enduring benefit. Further contended that such expenditure was not incurred by the appellant on "once and for all basis" but for maintaining and preserving the assets of the company on continuous basis for its effective and efficient day-to-day working. The appellant reiterated that such expenditure was necessary for the efficient functioning of the assets of the company and hence was in the nature of revenue expenditure. The appellant finally stated that under such condition, expenditure on SAP implementation was wrongly treated by the AO as capital expenditure and should be allowed as revenue expenditure. The appellant also relied on the decision cited before the AO and further the decision of the Special Bench of Delhi Tribunal in the case of Amway India Enterprises v. DCIT (114 TTJ 476)(Del.) (SB). The appellant also relied on the decision of the Delhi Tribunal in the case of M/s. Indo Rama Synthesis Ltd. Vs ACIT (ITA No. 2002/Del.2008) (TDel.) in support of its claim.
5.3.2 I find that the AO in a stretched misinterpretation of the decisions cited before him had disallowed the appellant's claim of revenue expenditure on account of SAP implementation of RsA,36,66,315/-. In fact, all the decisions cited by the appellant had decided this type of expenditure as revenue expenditure. The submission of the appellant that expenditure towards SAP implementation incurred did not bring in to existence of any new asset of benefit of induring nature cannot be brushed aside. It is fact that such expenditure of the company were necessary for the purpose of preserving and maintaining of already existing asset, as has been rightly contended by the appellant. I find the appellant's claim is convered in the aforesaid decisions cited before the undersigned. Therefore, the AO is directed to allow the said expenditure as revenue expenditure. Therefore, the addition made of Rs.4,36,66,315/- is therefore deleted. Ground no. I raised by the appellant is accordingly allowed.”
We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As argued by the ld. representatives of both the sides, this issue relating to the assessee’s claim for expenditure incurred on SAP implementation is squarely covered in favour of the assessee inter-alia by the decision of Hon’ble Bombay High Court in the case of CIT Vs. M/s. KSB Pumps Ltd. (ITA No.728 of 2014 with of 2014 dt.05.10.2016) wherein a similar issue was decided in favour of the assessee vide Para Nos.9 to 13 of the Judgment of the Lordship which are extracted below :
“9. The grievance of the Revenue before us is that the acquisition of computer software programme such as SAP in terms of Income Tax Rules, is entitled for depreciation. In that view, it is submitted that fees paid to M/s. KSB Germany cannot be considered to be a revenue expenditure.
We find that the CIT(A) as well as the Tribunal have concurrently rendered a finding of fact that there was no acquisition / purchase of the SAP programme by the respondent assessee. Consequently, occasion to apply depreciation in accordance with the Income Tax Rules would not arise in the present case.
11. Be that as it may, the impugned orders of the CIT(A) as well as the Tribunal record the fact that the professional charges paid for upgrading the software has made the respondent assessee’s operation more efficient. It did not result in any profit making apparatus coming into existence.
12. Our attention was also drawn to the decision of this Court in Commissioner of Income Tax Vs. Geoffrey Manners & Co., Ltd. 226 Taxman 135 wherein in the context of installation of software programme, the Court inter alia has observed as under :
“12…. The assessee in such cases installs the computers. This technology is now said to be acceptable in changing world. The rapid advancement of research also contributes a small degree of endurability, but that by itself does not mean that the expenses incurred cannot be revenue in nature. Since technology advancement is an aspect which must be taken judicial note of, so also, machinery becoming obsolete that there is necessity of acquiring further technology. This is to meet the growing competition and considering trends in the market. Therefore, such expenditure will have to be treated as revenue expenditure.”
13. Therefore, in view of the Court taking note of rapid technological development, purchase of technology may not lead to any enduring benefit as the same may have to be upgraded very soon. In any case, the finding of fact in this case is that there is no purchase of technology by the respondent assessee.”
Respectfully following the decision of the Hon’ble Jurisdictional High Court in the case of CIT Vs. M/s. KSB Pumps Ltd. (supra), we uphold the impugned order of ld. CIT(Appeals) allowing the claim of assessee for deduction on account of expenditure incurred on SAP implementation and dismiss ground No.1.
In ground No.2, the Revenue has challenged the action of the ld. CIT(Appeals) in allowing the claim of the assessee for depreciation on the expenditure of Rs.4.36 crores incurred on SAP implementation / package.
Even though the expenditure of Rs.4.36 crores incurred by the assessee on SAP implementation was disallowed by the Assessing Officer by treating the same as capital in nature, depreciation thereon was not allowed by him on the ground that the SAP package was not put to use by the assessee for the purpose of its business during the year under consideration. On appeal, the ld. CIT(Appeals), however, directed the Assessing Officer to allow the depreciation on SAP package observing that the said package was ready to use during the year under consideration.
We have heard the arguments of both sides on this issue and also perused the relevant material available on record. As rightly pointed out by the Ld. D.R., the entire expenditure of Rs.4.36 crores incurred by the assessee on SAP implementation / package having been allowed by the ld. CIT(Appeals) as revenue expenditure, he was not justified in directing the Assessing Officer to allow depreciation thereon. Now, that we have upheld the order of ld. CIT(Appeals) allowing the claim of the assessee of deduction on account of the entire expenditure of Rs.4.36 crores incurred by the assessee on SAP implementation / package by treating the same of revenue in nature, depreciation on the same cannot be allowed to the assessee. We therefore reverse the decision of the ld. CIT(Appeals) on this issue and allow ground No.2 of the Revenue’s appeal.
The issues raised in ground Nos. 3 and 4 of the Revenue’s appeal relate to the deletion by the ld. CIT(Appeals) of the disallowance of Rs.27,02,616/- and Rs.38,11,924/- made by the Assessing Officer on account of provision for warranty expenses and provision for after sales cost respectively.
10. The deductions claimed by the assessee on account of provision for warranty and provision for after sales cost were disallowed by the Assessing Officer in the assessment completed under Sec.143(3) r.w.s. 92CA / 144C of the I.T. Act on the ground that the said provisions were not made on scientific basis and the same being made for unascertained liabilities represented contingent liabilities which were not allowable as deduction under the Income Tax Act. On appeal, the ld. CIT(Appeals) deleted the disallowance made by the Assessing Officer on these issues and allowed the claim of the assessee for deductions on account of provision for warranty and provision for after sales cost by following the decision of the Tribunal rendered in assessee’s own case for the earlier years consistently allowing the claim of the assessee for similar deductions.
We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that a similar issue had come up for consideration before the Tribunal in the earlier years and the same was consistently decided by the Tribunal in favour of the assessee as discussed in detail year-wise and narrated by the Tribunal in its latest order dt.25.08.2019 passed for A.Y. 2010-11 in in Para No.8 as under :
“8. We have heard both the parties on this limited issue of allowability of provision of warranty and After Sales Costs. This issue is perennially being raised by the Revenue since assessment year 1998-99 onwards. The details of the same are extracted as under:
A.Y. Relevant Releva Remarks CIT(A) No. Para nt Pg. No./Pg. No. of PB of the order 1998-99 2790/M/03 Para No appeal filed by 5/Page the Department No.2 against the said
1999-00 5047/M/04 Para 2/ disallowance Page No.1 before the Hon'ble Bombay High 2000-01 3677/M/04 Para Court. 21/Page No.6 2001-02 8219/M/04 Para 36/Page No.10 2002-03 N.A N.A Allowed by AO in Assessment. 2003-04 2871/M/07 Para 11/ No appeal filed by Page No.4 Department against the said 2004-05 6135/M/07 Para disallowance 12/Page before the Hon'ble No.11 Bombay High 2005-06 3366/M/10 Para Court. 14/Page No.13 2006-07 4435/M/11 Para 2/ page No.2 2007-08 6740/M/11 Para 3/ Page No.2 2008-09 IT- Para 1.2/ No appeal filed 205/2011- Page 4 before the Hon'ble 12 ITAT by the Department 2009-10 U/s. 143 (3) Paper Book of the IT 111 against the relief Act. granted by the Hon'ble CIT(A)/AO.
From the table extracted above, it is evident that the claim of the assessee in principle is allowed by the Hon’ble Jurisdictional High Court in assessee’s own case in many assessment years i.e. 1998-99 to 2009-10. It is also evident from the above table that the Assessing Officer himself allowed claimed of the assessee in assessment year 2002-03 and 2009-10. In same assessment year, the Department accepted the said decision of the Tribunal and never filed appeal before the Hon'ble Bombay High Court. As such, decision of CIT (A) is, in principle, as per judgment laid down by the Hon'ble Apex Court in the case of Rotork Controls India Ltd. (supra.). It is a settled legal principle that in any case where estimation is done based on scientific method and calculated properly, the provision made for warranty in respect of goods should be allowed u/s. 37 (1) of the Act. Therefore, we are of the opinion that the order of the CIT(A) is fair and reasonable and the same does not require any interference. Accordingly, grounds raised by the Revenue are dismissed.”
The issues relating to assessee’s claim for deduction on account of provision for warranty and provision for after sales cost thus are squarely covered in favour of the assessee by the various decisions of the Tribunal passed in assessee’s own case for the earlier years and respectfully following the same, we uphold the impugned order of ld. CIT(Appeals) allowing the claim of the assessee for deductions on account of provision for warranty and provision for after sales cost. Ground Nos. 3 and 4 of the Revenue’s appeal are accordingly dismissed.
In the result, the appeal of Revenue is partly allowed.
Order pronounced on 2nd day of September, 2020.