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Income Tax Appellate Tribunal, MUMBAI BENCH “A”MUMBAI
Before: SHRI B.R BASKARAN & SMT. KAVITHA RAJAGOPAL
ORDER Per Kavitha Rajagopal (JM):
This appeal has been filed by the assessee as against the order passed by the Ld.Commissioner of Income-tax (Appeals)-49, Mumbai dated 12/12/2018 relevant to assessment year 2015-16.
The solitary ground of appeal is whether the expenses pertaining to business transformation of Rs.3,71,97,540/- paid to M/s Earnst & Young be 2 ITA 1496/Mum/2019 treated as revenue expenditure, which the Ld.CIT(A) has treated the same as capital expenditure.
3. The brief facts are that the assessee is engaged in the business of manufacturing and trading of tooth paste, soaps, etc. The assessee filed its return of income on 30/09/2015 declaring total loss of Rs.45,32,69,164/-. The assessee’s case was selected for scrutiny and assessment order under section 143(3) of I.T. Act dated 20/12/2017 was passed determining total income of the assessee at (-) 41,71,05,343/- wherein Rs.3,71,97,540/- was treated as capital expenditure instead of revenue expenditure which was paid towards professional fees for business transformation to Earnst & Young during financial year 2014-15. The assessee was in appeal before the Ld.CIT(A) as against the order of the Assessing Officer in treating the impugned amount as capital expenditure which was confirmed by the Ld.CIT(A) on the ground that the said expenditure was incurred for the transformation of business as a whole resulting in benefit of enduring nature to the assessee company thereby treating the same as capital expenditure. The assessee is in appeal before us. It is observed that the assessee had made payment of Rs.3,71,97,540/- to Earnst & Young as professional fees for business transformation during the impugned year, which the assessee company had claimed it to be revenue expenditure. At the time of assessment proceedings, the assessee company was showcaused as to why the same should not be treated as capital expenditure instead of revenue expenditure vide notice dated 04/12.2017. The assessee has submitted that in their books of account, P&L Account and balance-sheet prepared as per Companies Act, 2013, the assessee had debited 1/3rd of the impugned expenses amounting to Rs.1,23,99,180/- and the balance 2/3rd amnounting to Rs.2,47,98,360/- was treated as deferred revenue
3 ITA 1496/Mum/2019 expenditure to be written off equally in the next two years in the books of account of the assessee. Further to this, the assessee stated that the assessee company entered into an agreement with Earnst & Young vide agreement dated 14/10/2013 that the latter would assist the assessee company in an integrated business transformation exercise which would cover sales and distribution, transformation, supply chain transformation through integrated planning and execution, organization transformation, development of robust new product, introduction process and MIS generation and revenue capabilities. The assessee further stated that the above mentioned expenses would be in the nature of revenue and are incurred during the previous year relevant to the impugned year and the same are allowable as revenue expenses in the impugned year by following mercantile system of accounting as per section 37(1) of the I.T. Act, 1961. The assessee company further stated that the impugned expenditure does not amount to any enduring benefit of assessee’s asset, but was only aiding the company in promoting sales, distribution, production, organization, planning and execution impacting in the profit of the assessee company. The assessee relied on the decision of the Apex Court in the case of Empire Jute Co Ltd vs CIT (1980); 124 ITR 1 3 Taxmann 69 (SC).
The Ld.AR for the assessee contended that it is trite to consider the nature of services rendered by Earnst & Young to the assessee company in order to determine the issue whether the impugned expenditure would fall under capital expenditure or revenue expenditure. The Ld.AR brought to our attention the scope of services rendered by Earnst & Young at page 39 of the paper book which enumerates the scope of services and the different phases of services as per the agreement which are illustrated at page 40 of the paper book. The Ld.AR
4 ITA 1496/Mum/2019 reiterated that these are in the nature of revenue expenditure and does not have any enduring benefit to the assessee company. The Ld.AR relied on the decision in the case of Excel Industries Ltd (2013 358 ITR 295 (SC), Taparia Tools Ltd vs CIT (2015) 372 ITR 605 (SC).
The Ld.DR, on the other hand, contended that the impugned expenses incurred by the assessee company are of enduring benefit to the assessee company and that the cases relied upon by the Ld.AR are distinguishable to the present case in hand. The Ld.DR further stated that even otherwise, if the expenses are in the nature of revenue expenditure, then the same should have been claimed by the assessee in the impugned year only and not spread over three years. The Ld.DR relied upon the decision of lower authorities.
We have heard the rival contentions and perused the materials on record. It is an undisputed fact that the assessee company has made payment of Rs.3,71 97,540/- to Earnst & Young as professional fees for the purpose of business transformation such as sales distribution transformation, supply chain transformation, integrated planning and execution, organizational transformation, development of robust new process, introduction, etc agreed upon by both the parties vide its agreement dated 14/10/2013. The assessee has relied upon a plethora of decisions which has made proposition as to an expenditure would amount to capital or revenue in nature. The Ld.CIT(A), on the other hand, has relied upon the decision of CIT vs Pioneer Engineering Syndicate (1989) 175 ITR 93 (Mad) wherein it was held that the test of enduring benefit is not certain nor a conclusive test and that it should not be applied plainly and mechanically without referring to particular facts and circumstances of the given
5 ITA 1496/Mum/2019 case. The Ld.CIT(A) has further relied on the decision of CIT vs Cominco Binani Zinc Ltd (1993) 204 ITR 56, 61 (Cal). The Ld.CIT(A) has observed that since the term “capital expenditure” has not been defined in the Act and that there is no specific test to determine whether a particular expenditure is a capital expenditure or revenue expenditure, the same has to be considered depending upon the facts and circumstances of each case, Ld.CIT(A) has further stated that at Appendix B Point No.23 of the Earnst & Young addressed to the assessee company dated 14/10/2013, Earnst & Young made use of data software, designs, utilities, details, models, systems and other methodologies and know-how (materials) which the assessee company made use of upon payment for the said services, which, according to the Ld. CIT(A) was that the assessee company has acquired know-how from Earnst & Young for the business transformation in the future. Further, the Ld.CIT(A) has referred to clause 25 of Annexure B which states that except the assessee company, the know-how specified in the agreement should not be used by any other person, which indicates that the assessee company has acquired the know-how for the future which are in the nature of enduring benefit to the assessee company. From this, the Ld.CIT(A) has inferred that the said expenditure incurred by the assessee company is for creating an enduring benefit to the assessee company and thereby upholding the decision of the Assessing Officer that the same is in the nature of capital expenditure thereby depreciation @25% on the know-how of the impugned amount was allowed and the remaining was added to the total income of the assessee company.
From the above observation, it is evident that the Ld.CIT(A) has not given a specific finding as to how the assessee company will have an enduring benefit
6 ITA 1496/Mum/2019 from the services availed by the assessee from Earnst & Young. The Ld.CIT(A) has also erred in not specifying the test that was applied by the lower authorities to determine whether the impugned expenditure amounted to capital or revenue in nature. The Ld.CIT(A) has also not distinguished the facts of the cases relied upon by the assessee in determining the said expenses as revenue or capital. We would like to place our reliance on the decision of the Hon’ble Supreme Court in the case of Empire Jute Co Ltd vs CIT (supra) which has reiterated the fact that in order to ascertain whether any expenditure is capital or revenue, it is an admitted fact that there is no test which is paramount or conclusive. It has to be decided on considering the facts and circumstances of the case in hand in corroboration with few tests that were formulated by the Courts to arrive at the conclusion for this controversy. It is necessary to quote the relevant portion of this decision, which is extracted below:-
“8………………………………………. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a, commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.……………………….”
From the above decision, it is pertinent to point out that though the expenditure incurred by the assessee in engaging Earnst & Young is in the nature
7 ITA 1496/Mum/2019 of enduring benefit, considering the nature of services which is only in a commercial character and it is not in the nature of addition or expansion of the profit making apparatus of the assessee. This ultimately is not in the nature of enduring benefit for the assessee company. Nevertheless to say that it is an enduring benefit in the capital asset of the assessee.
From the above observation and by considering the other decisions cited by the assessee, we are of the opinion that the expenses incurred by the assessee as professional fee to Earnest & Young is in the nature of revenue expenditure as opposed to capital expenditure. In this background, we allow the grounds of appeal filed by the assessee.
In the result, appeal filed by the assessee is allowed.