BHARTI TELEVENTURES vs. JOINT COMMISSIONER OF INCOME TAX

$-12 & 13 * IN THE HIGTI COURT OI.' DELIII A'I' NEW DELIII Dtua of'tlectston; 18'h December, 2012 + ITA 1395/2006 + ITA 1656/2010 M/S BFIARTI TELEVENTURES t.l'l) Appcllant Through N'Ir Kaanan Kapoor, Advocate \,OTSUS ADDL /JT COMMISSIONER OIi INCONII,TAX Respondent Through IVIs Suruclu Agganval. Sr Standing Counsel CORAM: MR. JUSTICE S. RAVINDRA I}IIA'I MR. JUSTICE R.V. EASWAIT S. RAVINDRA BHAT. J: (OPEN COtllt'I') Thc present appeals are dircctcd against a common order of Income Tax Appellate Tribunal dated 10 03.2006 in cross-appeals filed before the l'ribunal l'hc questions of law sought to be urged are - (t) Whelher lhe Tnbunul ./all rrtlo crror tn holdrng lhal il,35,05,869 - parcl b.), tlrc.I.!.!r'.\5'cs cts tnstallalion expendrlure by the assessee was coptt.tl ttt ttulitra and has lo be lrealed as su ch i n usse s.vnte n l proce e d t t t g.\') ftr) Ll/hether lhe lribuncrl/cll rttr., arror til hol&ng lhat lhe sofltt,are expenses lo lhe exlant of I,69,35,669,- rrtcun'ecl by lhe as.se.s.sec v'ere captlal rn nalure') (iii) Whelher lhe [ribunal wus.ltrsti/ied itt cfusollov,ittg the nght of ull the sunt of Q,33,76,671 - crore.s us becldcbt has bustness lo.ts?" 2 The assessee inter alia engagcs itsclf in thc promotion and establishing telecom services and allied activities, including mobilc and cellular services. Pursuant to its main object it leased to M/s l-]harti 'l'clcnct certain plant and machinery llharti I]'n 1 395/2006 &. 165612t0 Page I ol'10 2012:DHC:7825-DB

Telenet had obtained licence for the purpose of providing cellular services tn Himachal Pradesh. The lease arrangemcnt cntcred into between the assessee and Bharti Telenet was scrutinized. 't'he asscssing olliccr noticed that the cost of plant and machinery given on lease by the assessec was {10,57,25,094/- which was reflected in the balance sheet of the assessee under thc head "plant and machinery given on lease"' That apart the assessee had incurred an expcttciiturc to the tune of {1,35,05,8691- towards installation of these plant and machittcry, in addition to it had incurred a sum of {2,69,35 ,6691- towards software expcnscs 'l'he assessee claimed the installation expenses as a deduction, debiting it to thc profit and loss account The software expenses on the other hand were treatcd in thc accounts as deferred revenue expenditure and a sum of {15,05,446l- was rvrittett off in the previous order. In the computation of income accompanying tilc return the software expenses of <2.69,35,6691- were claimed as a cicduction 'l'hc asscssing officer disallowed both these amounts. The assessee carried the tttattcr uttsucocssfully in appeal. As far as the first issue i.e. installation expenses wcrc conccrnod. 'I hc CI't (Appeals) confirmed the assessing offrcer's order holding that the c.xpontliture fell properly in the capital field. The Tribunal confirmed the same 3 Learned counsel for the appellant urgcs that thc expenditure on installation of <1,35,05,869/- did not confer any capital aiivantage He argued that since no enduring benefit ensued as a rcsult of this expcndituro and a separate lease rental was obtained from the IWs. Bharti 'Ielcnct, thc expcnditure towards installation had to be considered in the light of the clccisions which iaid down the test as to whether commercially, they conferrcd any aclvantagc ln support of the submissions learned counsel relied upon the decisions o1'tho Sul)funrc Court rcported as CI|'v. Assouated C.ement Company Ltd. (1988) 172 t'Ili.257 (SC) r.r'hereitr the Supreme Court held as under. - rLA 1 395/2006 &. 16561210 Page 2 ol'10 2012:DHC:7825-DB

" ...tntrffe of the advattage til tt cotiltttcrt'tctl sense ond ft ts only u'here the atlvantage ts in the iapnat ftelcl thtrt the expendrlure would be drsallov,able on qn apltlrcatton of lhrs lesl. If the advantage cortsisls merely irt facilrtating the (Isss.ssce 's lrucfung operultotts or enablmg the monogement and cincltrct of the (l.trs.t.tsc".r Dlts2re'ss to be carrred on moreeffecttvell,()rmoreprofitubh,lrhi|elcqvtngthefixedc?pila! utttouchetl, the expenditure v"ttrtld be tttt rcr:eiltte accttttttt, even though lhe atlvanlage ntay endurefor un tnclefrmte./itlure'" Similarly counsel also relicd upon thc decision in l:mprre Jute Co' Ltd' v' CI'1.' (1980)124ITRl(SC)whereintheCourtheldasfollows- ,,There may, be coses where expuultltrre, eyail tJ' tncurred for obtanung ath,anlage, of endurutg bene.fit, ttlu-1':, ttone-lhe-less, be ott rev'enue, crcco,,t arill'the te1 ;f endurtrry bene.ftl t,uS' break dov'rt' Il ts lttl everl cuivatilage of ertitrrntg naltrre crctyttrctl b1' urt ds"te'tse't thal bnngs the case wthrTt thl prmcipie tcrul clovri ttt tltts tesl' Whal rc ntalenal lo cortsuler tS the tntt)re of'fhe atlt'ct,luge til u commeraql sense and tl ts onl1, yrTrp the advanlage ts irt the c'ttlttttrl Jieltl that the expendrture t+,oultl be drsallov'able on att appltc'ttlir-ttt of tht's lest' If the advantage cottsisls merely in facfulatrng tlrc c7.sre.t.tsc's trading operations or etwblittg the niaragentenl antl c'ttrulrrc'l rt/'tlrc l;'ssessee's buvness lo be car.rred ott more efficientty or nlor,: prrtlitubll'v'hrle leat'ing the fixed cupilal ntouched, lhe expencltlure votrlcl ba otr revettue Qccouttl, eyetl thotrgh lhe advantuge nrcr)'enclttre Jor utr ;ndqfinrlefulure'" 4 Learned counsel emphasised and highlightcd the fact that expenditure incurred in this case was one-time and at the sitc o1'thc lcssce which was an important aspect that escaped the notice of both thc authoritics below It was urged that at the end of the lease period the equipment had to be disrttantlcd and it had to be reassembled and such expenditure had to be spent time artcl again and it propcrly fell in the revenue and not in the capital field Learned counscl for thc rcvenue resisted the submissions and stated that no substantial question of law ariscs and that the expenditure incurred for installation of the plant and machinery r.r'as irltrinsically connected with the plant and machinery. The counsel in other words statecl lhat the machinery was incapable of use rfA I 395/2006 & 16561210 Page 3 ol' l0 2012:DHC:7825-DB

without being installed The installation cost, thcrefore was part of "actual cost" that went into the setting up of the machincry and in turn had to be treated as capital expenditure. Therefore, it was rightly disallowcd by the lower authorities. 5 This Court has considered thc submissions made on behalf of the assessee. The test of "enduring benefit" which was pcrceivcd as the true and applicable test to judge whether an expenditure fell in capital ticld has becn, over the years, considered as a self-limiting one. The Courts havc hcld that a proper approach has to be adopted and in doing so the nature of the advantagc in a cornmercial sense and whether it falls properly in the capital freld in a conirncroial sensc has to be considered (refer judgment of Associatecl Oement Cotnpanrcs Ltd. and Empire Jule Co. Ltd., etc ) In the present extent, however, this Court recalls the judgment of the Supreme Court in Challapalli Sugars Ltd. v. (:17-,(1975) 98 l1'l{ 167 'l'hc Courtthere had occasionto considerwhetheranexpenditurenecessarytObtiug-an-as_$9L!!@ in working condition wqi_qap{al _e_r tetygt}ut: 'I'he (lourt held that expenditure necessary to bring into existence and to put thc lrsscts in a working condition would be capital in nature. In case money is borrowed by a ncwly started company, the interest incurred prior to the commencing of procluction would be part of the actual cost of the plant and machinery. It was noted that thc accepted rule of accountancy for determining the cost of fixed asscts is to includc all expenditure necessary to bring such assets into existence and put them irr working condition. f'herefore, the test "all expendrture necessary to bring .urch usltccts ittlo cxr.slence and to put lhem in a workmg condttrcn" is a determinativc tcst lbr irrstailation and other charges needed to effectuate the working condition of thc leased ecluipmcnt In this case clearly the authorities have applied the test and hcld tho cxpenditurc in cluestion ({1,35,05,869/-) to be properly falling in the capital licld \A/c scc no rcason to differ with them. The Tribunal's reasoning is unexceptionablc lts order necds no interference and the first I1'A 1395/2006 E 16561210 Page { of 10 2012:DHC:7825-DB

substantial question of law is answercd in fayour of the revenue and against the assessee 6 The Second issue concerns softw'are cxpellses to the tune of <2,69,35,6691-' The assessee's contention herein is that 1[is was a pre-design software and not customized to suit its particular rcquirements Learned counsel highlighted the fact that the lower authorities particularly thc -l'ribunal were influenced by the consideration that a composite amount was chargcd for such software in the lease arrangement lt was submitted that whcther such charges were an integral part of financing should not obscure the real nature ot'thc software for which again the test is whether it would fall in the revenue filed (lounsel in this regard relied upon the license agreement entered between thc asscssee and N{/s UB Vest (Usha Bethron Ltd ) whereby the latter agreed to licensc its software The assessee's claim was noticed by the Tribunal who extracted it in thc lbllowing terms - "The haruJware equPmettt '\ttpplted b1t ['r'v'"on are 'BSCs (Base Statiott Control) ana tutsC (lvlu.ster S'tcttrrttr Control)' T'he BSC's comprtses of towers and chll receit'tttg turd recordtng equqmenls, v,hereas MSC conpnses oJ equry)mettt.\ cottlrutllrng the BSCs. T-hese are the prtmary equip,nenls for tntuutgtrry lhe callular services in the regrcn of Hmachal Pradesh. The software requrrecl.for uptlcrttttg cuul accotttttrng of cellular phone calls rs independenl of llrc.fitttctrrtrtrrtg of hurdw'are equryment's' In absence of the sofhvare ocrpttretl, u lurge ntmtber of ntanpov'er would have "been deptoyett lrt nu;nttot' cuch IJSCs and MSCs' 'l'hrs w,oupl hqv,e resultedin ietal:ert tnforrtttrtrttns,.fttr accowtling and hlltng of cellular .servtces. the software suppltetl b1' l,,rric's\tt Y'as lo carry out lhe followmg futtct t orts : - (t) collect oriltne rrtfortrtutt,tr tn regard to cDlls ft.e. (-.all delection records) at BS(': Il'A 1395/2006 & 16561210 Paee 5 of l0 2012:DHC:7825-DB

(i, Compiling of the ('/)/is orthrrc at MSC in regard to CD House received at each IJSC. 'I'he scfiv,are suppltedfi'om I/|) l,'c.st, Ccrlcufta, are requiredfor .funclrcning of online rafing of' thc CDlls collect from MSC and finanual accotnttirtg o/' the compat ry. On accrnmt of bemg tndclterr{ant nalure to the equipment, Erricsort have rarsed separate bill.s/itr s'ofrv,are supplrcd. The software are independent of the hardware ecluipmertts /iutclrcning and relates to financrul accortnti ng and b i I I i ng." 7 After the submissions were nradc and tirc inipugned order was passed, the appellant apparently moved a miscellaneous application for correction/ rectification which was allowed by thc Tribunal but rvrthout any changc in the result. The assessee underlined the fact that the software lcasc was not an intcgral part of the lease It was submitted that the Tribunal despite the rcctitlcation did not reverse the order Counsel highlighted the fact that the software in this casc was general and only modified in a limited manner to suit the end user It r.'u'as urged that the software had no pecuniary features so as to cater to the hardware that lii d bcen lcased to IWs. Bharti Telenet. The counsel, therefore, submitted that to treat thc cxpenditure incurred by the assessee in this regard as capital in nature was error]oorrs 8. This Court noticcs that the lower autlrr-tritics and the'l'ribunal had the benefit of considering all the documents which irrolucicd thc lease agreement with Bharti Telenet and the license agreement dated I 1 I I i 996 whcreby thc assessee secured license to exploit the software, providcd it procurccl har dwarc as per agreed specification and also complied with order by the lessor tJll Vest 'l'he software as well as hardware were made an integral part of the arrangcrncnt I'he software apparently caters to the hardware. In this case, it is neccssary lbr thc kind of software to cater to diverse activities such as billing regarding user ancl :rnaiyzing such like activities to promote speed and efficiency. l'hat the parties chosc ro havc a composite arrangement is one ITA 1395/2006 & 1656t210 Page 6 of l0 2012:DHC:7825-DB

factor which the Tribunal was entitlcd to take into considcration The Tribunal in our opinion correctly held that the test to discern whether the expenditure incurred by the assessee in this regard was capital or revenuc did not in any manner differ from the content or character which were applicable rvhile considering issue No.i. This Court finds no reason to differ from the Tribunal, there is certainly no reason to interfere with the Tribunal and accordingly the second cluestion is answered in favour of the revenue and against the assessee. 9 The third question which the assessec sought to urge is with regard to the amount of t2.33,76,7611- which it had clairncd to write off as bad debt and alternatively as a business loss The subrnissions in this regard were that the assessee was also engaged inthe business of lending ntoncy through inter-corporate deposits in the course of such business which generatcd substantial interest during the assessment years Certain amounts could not be rccor,'ercd and were treated as bad debt The assessee wrote offthe unrecoverable arnount and claimed it to be treated as bad debt l0 Counsel for the assessee had urgcd tirat thc'Iribunal fell into error in holding that the memorandum of association of the assessee could not bind the income tax authorities which had to discern what was its rcal and true business Counsel emphasised the fact that the term "business" is rvidc I-Ie relied upon the decisions in Krrshtn prasad & Co. Ltd. r,. CIL', (1955) 27 t'l'lt .19 (SC), C1f v. Tamrl Nadu Dqtrv' Developmertt Corporation Ltd., (1955) 216 l'l'R 535 (Mad ), wherein the Madras High Court held as under' - ,,The term ,business' ts q vortl oJ' t'ers' wrtle, lhough by no means deterntrrnte, scope. It has rightl1.,beett obsert'etl itr judrcialdeusnn's of hrgh atrthonty rhat it rs nerlher prttcttccrltle nr.tr tlesirable to tnake any oitrnrpt at di-tmitrng lhe anrbtl ttJ tl.s c'rtttttrtlcrltort. Each case has lo be deteritmetl u,ilh reference lo lhc pctt'trc'ular krnd of actrvtty cuul occttpatron of the prrtoil concertratJ. 'l'lmtgh ordmanly 'business' ,rrpin, a cortttrttrous aclivtlT' ttt cur,tng ott a particular trade or I1'A I 395/2006 &. t656lTl0 Page 7 ol'10 2012:DHC:7825-DB

ovoccttion, tt may also include on uc'/it,rly w,hich may be calletl, 'quie,scenl'." 11. rnCIT v. Motilal Haribhqi Spnnrng antl l4/eut,rng Co. Ltd., (1978) 113 ITR 173 (Guj ), it was held as under. - "In Oriental Investment Co. Ltcl. ('ontnisstoner of Income Tax, (1957) 32 I7'R 664 (SC), tt w,a.y ob.ycrvcd that merely because the company hadwithin ils ob.jecls lhe c{euling in tnveslntent in shares does rtttt give to it the characterntics o-/' cr dcoler m shares. But if other arcumstance.t qre proved, il trtctl, bc tt t'clevqnl ciramtstance for lhe purpose of delermming the nulure (t'ucttvtlies o.f'an assessee. It would thus appear that.for lhe purpose oJ.luclgiitg v;hether lhe transactions rn advances of montes were in lhe rtului'c rl' bu.stness or investment, the Tnbunal was entitled to rely upott lhc ob.lccts clmrses along with other circuntstances and to arrive at tha c'ottclusrort thal it did." This Court has considered thc subnrissions 'l'he 'fribunal held as follows on this issue: - "Though it is true thot Memoruxlun urcl Articles of Association of the compony is ttot conclustve ort tlie que.\lrolt whelher activities of a company amounts to carryittg ott lhc qtreslron v,helher actiwfies of a company amounts lo carrying ort of busirrcss, but il shows sfficiently the intenlion of the assessee to l)urstrc cerlam mam ohjects. T'he freErency of the activity is sought to bc hrghlighted as giving rise to o conlinuous and organrzed acltvttl;. Ltr'e huve ulrecrdy noticed that it rs the first year of business oltcruiion of' ilu compuny and it cannot be satd that it was a continuous ctcln,tls, cun'ied oul ttt tt normal organized manner. As held by the rrs,!c,r.t/i,s o{f tcar, the main activity of the assessee company was the busitrc.s's' a.l'l,ronrclrtry, e.slablishmg teleconr services. By rc stretch oJ rmagrnuttort c'ctt it be saicl that the assessee was engqged in the busness oJ'nronay lerdrng. Since the business of the assessee v)cts not thal o.f nntrcy lcinltng, tl cattnctt be said that the sum in queslion represents motrcy letrt irt the u"dinary course of the business of money lending ccu'rted ort b.1, the u,ssessee. fherefore, the clarm o.f the qssessee did nol.full vrtlrttt lhe poranteters of provisions of section 36(l)fut) read wilh sccitr.trt 36(2) oJ the Act. 'l'he alternative claim of the assessee lhat the flrnt tn tlttc.s'liort should be allowed as a ITA 1395/2006 & 1656t210 I']age 8 of 10 2012:DHC:7825-DB

deductron as a busnrcs.s /oss cannol al.w he uccepted, since lhe sun' nt question was not utcurred as erytetulrlttre til lhe ordtnary course of brrrrrrrs of the qssessee. T'he suttt ttr tptesltrtn has, therefore, to be cutstdered as a capttal los,s cuul llte u.s.se.ssee :r''cts not entitled lo claint the sante as deductiort. It ntal' ulso bc menltotrcd here that everyth\rg associaled or connected wilh lhe bttstttc.s:; ccrttnol be said to be mcrdenlal thereto. It rs ttot enttugh i'tharc ts 'rome close proxiruty of the tleposrt lo the business carrtetl ott bS' lhe assessee, as Yrch but il should also be an uilegral part oJ'the currl;rttg on of the husiness. I;or the reasons stated ebove, v,e are tf'tlrc r'tcl' lhctl the dtsallotuance made by the assessutg fficer v'os propct' tncl the CI'I' (.lppeals) v'as iustified ih cottfirmrng the ortler of tlrc rr.\'.rsr.\/r/g r.1l/icer. I(e ntay also clartfl' that the CIT (Appeal.s)'s obsert'(lttons tlrul tlu clarm of the as'sessee wQS pre-malure ts vtlhoul any basts ulkl Y'e lnt'e ulreadT' dtscusse<l the reasonsfor cnrr conclusiorts. 7'he thtrcl groutul of appeal of the assessee n accordrngly drsnrt ss." lZ While it is true that the term 'busincss' is of wide connotation, the true and applicable test in the opinion of this (lour1 u,as articulated in 'futtconn Alkalt Chemcals & Fernhzers Ltd. t,. CIT', (1997) 227 l'l.l\ 172, which reads as under - "1-he basc proposttion thal lms lo ha bonte tn mrnd rn thrs case is lhat rt rs posstile for a compan), lo ha,e .st:t dlferenl sources of ttrconte, each one of v,hrch wrll be chargeuble l0 tttcome-lox. Profrls and gatns of busrness or professrcn ts onlT' orte of the hcad.s under w'hch the company's ittcome is lruble lo he ussvs.secl lo lux. I/a compan)' has nol crrnimencerl business, lhere cumtol he nry que'sliott rtf assessntent of tls profits and gauts of business. 'l-hut tloe.s rtol neail that unlil and unless lhe company commences ils bu.sttrcss, tt.s tttconte J|otn any other source wrll rtot be taxetl. If lhe conry)en)', even be.fbre rl contntences busrnes.s, untesls the wrplus fiurds rtt rl.; hutrcls .fbr put'chase of land or house property antt liter sells it al pyof tl, ihe guttt mocle by lhe companl'vill -be assessable under the head "()uprtul gl:,ttts". *milarly, tf a contpany purchases a rented lnuse and gel.s rettl, .;uch reill \r'ill be assessable to 'tax under section 22 as urc'il?e fi'rtn furusa properly. Likewise, a Company nta1, hsyts ittconte from olher sottrceS. It nny buy shares and get'dnr-t)enis. Such tlwitJends v'tll be tuxaltle under section 56 o.f the Act. The company may also, us rtt lltts ca.se, keep lhe rurplus funds rn short-lernt tlepostls tn ortler lo a(ttt utteresl. Such uilerest wrll be chargeable under seclnn 56 of the ,'1c't'" ITA 1395/200(, & 16561210 Pagc 9 of l0 2012:DHC:7825-DB