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Income Tax Appellate Tribunal, “B” BENCH, PUNE
Before: SHRI ANIL CHATURVEDI, AM & SHRI VIKAS AWASTHY, JM
आदेश / ORDER
PER VIKAS AWASTHY, JM :
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-7, Pune dated 02-05-2016 for the assessment year 2011-12.
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The assessee in appeal has assailed the findings of Commissioner of Income Tax (Appeals) by raising following grounds: “1. The learned CIT(A)-7, Pune erred in law and on facts in confirming the action of the learned ACIT, Circle 11(2), Pune (hereinafter referred to as the learned AO) in treating the enrollment expenditure of Rs.19,82,32,378/- incurred by the appellant towards Rashtriya Swasthya Bima Yojana (RSBY Scheme) as deferred revenue expenditure, liable for amortization over a period of three (3) years. 2. The learned CIT(A)-7, Pune erred in law and on facts in not appreciating the fact that the same Insurance company or Third Party Administrator (TPA) may or may not operate in the same district, next year for enrollment of Below the Poverty Line (BPL) family under RSBY scheme. As such, there is no any long term benefit accruing to the appellant per se. 3. The learned CIT(A)-7, Pune further erred in law and on facts in not appreciating the fact that post enrollment of a card holder under the RSBY scheme, appellant forwards the list of enrolled families to the respective insurance companies and raises bills on the insurance company and recognizes the revenue attributable to the enrollment of BPL family under RSBY scheme and issuance of smart card and, which is based on matching principle of accounting. 4. The learned CIT(A)-7, Pune erred in law and on facts in not following the order of the Honorable ITAT, Pune Bench in appellant's own case for AY 2009-10 and instead relied on the order of the learned ClT(A)-I, Pune for AY 2010-11. The learned CIT(A)-7, Pune ought to have appreciated the fact that the order of the Honorable ITAT, Pune Bench was not available before the learned CIT(A)-I, Pune while deciding the appeal for AY 2010-11. 5. The learned CIT(A)-7, Pune erred in law and on facts in holding that proper facts were not available before the Income Tax Authorities dealing with AY 2009-10. The learned CIT (A)-7, Pune has not brought anything on record to support his claim that facts for AY 2009-10 and AY 2010-11 are different.
The learned CIT(A)-7, Pune and the learned AD erred in law and on facts in treating legal expenses of Rs.10,00,000/- incurred for suit against the appellant at Delhi High Court as capital expenditure instead of revenue expenditure. 7. Alternatively and without prejudice to Ground No. 6, the learned err (A)-7, Pune and the learned AO erred in law and on facts in not granting the depreciation on the alleged capital expenditure. 8. The appellant craves, leave to add / modify / delete all or any of the grounds of appeal.”
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Shri Kishor Phadke appearing on behalf of the assessee submitted at the outset that the grounds of appeal No. 1 to 5 relate to the single issue of disallowance of expenditure Rs.19,82,32,378/- incurred by the assessee towards making of enrollment cards under Rashtriya Swasthya Bima Yojana (RSBY Scheme). The ld. AR submitted that similar expenditure was disallowed by the Assessing Officer in assessment years 2009-10 and 2010-11. The matter travelled to the Tribunal in both the aforesaid assessment years. The Tribunal in ITA No. 2585/PN/2012 for assessment year 2009-10 decided on 10-07-2014 dismissing the appeal of Revenue held that the expenditure is allowable. In assessment year 2010-11 the assessee carried the matter in appeal in ITA No. 829/PN/2014. The Tribunal vide order dated 27-07-2016 following its earlier order deleted the addition.
3.1 In respect of ground Nos. 6 and 7 the ld. AR submitted that the assessee has incurred legal expenditure to the tune of Rs.10,00,000/- defending the suit filed by Microsoft Corporation USA against the assessee. The assessee was using software/operating system licensed by the Microsoft in excess of authorized/licensed version purchased by assessee. For this mismatch Microsoft Corporation USA and its Indian Associate filed civil suit against the assessee before Hon’ble Delhi High Court for grant of permanent injunction and violation of copyrights, etc. The assessee in order to settle the dispute made payment of Rs.10,00,000/- to the Microsoft Corporation. The ld. AR submitted that the payment made by the assessee was on revenue account. However, the Assessing Officer held the same to be capital expenditure. In First Appellate proceedings the Commissioner of Income Tax (Appeals) disallowed the amount holding it to be payment for infringement of copyrights. The ld. AR submitted that the
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assessee had paid the amount of Rs.10,00,000/- in order to secure his business. Placing reliance on the decision of Pune Bench of the Tribunal in the case of Harbinger Systems (P.) Ltd. Vs. Deputy Commissioner of Income Tax reported as 77 taxmann.com 284 and the decision of Kolkata Bench of the Tribunal in the case of ITO Vs. M/s. MPR Marketing Pvt. Ltd. in ITA No. 1514/Kol/2012 for assessment year 2009-10 decided on 14-03- 2013, the ld. AR submitted that payment of Rs.10,00,000/- to Microsoft Corporation is allowable as business expenditure in the hands of assessee.
On the other hand Shri J.P. Chandrakar representing the Department vehemently defended the impugned order and prayed for dismissing the appeal of assessee.
We have heard the submissions made by representatives of rival sides and have perused the orders of authorities below. The ground Nos. 1 to 5 relate to the single issue of expenditure of Rs.19,82,32,378/- incurred by the assessee towards making of enrollment cards under RSBY Scheme. We find that disallowance of similar expenditure was made in the immediately two preceding assessment years. The matter travelled up to the Tribunal. The Tribunal deleted the addition. For the sake of completeness the relevant extract of the order of Tribunal in assessment year 2009-10 is reproduced here-in-below : “5. We have considered the rival arguments made by both the sides. From the finding given by the CIT(A) we notice that as against incurring of approximately Rs.77/- towards cost of each smart card the assessee received service charge of Rs.97/- per smart card from the insurer. Further, the finding given by the Ld.CIT(A) that the issue of smart card per se is completely independent line of business for the assessee company from the main business of settling the beneficiaries claimed on behalf of the insurance companies under the RSBY scheme could not be controverted by the Ld.
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Departmental Representative. Further, the Ld. Departmental Representative also could not controvert the finding given by the CIT(A) that the amount received during the year has been shown as income and the assessee has claimed the corresponding expenditure incurred on the printing and issue of smart cards. Under these circumstances and in view of the detailed reasoning given by the CIT(A) we find no infirmity in her order. The Ld. Departmental Representative also could not point out any other mistake in the order of the CIT(A). Merely because the amount appears to be huge cannot be a ground to disallow the same on the ground of enduring benefit to the assessee when the corresponding revenue earned has been considered as income of the impugned year. In this view of the matter and in view of the detailed reasoning given by the CIT(A) we find no infirmity in the same. Accordingly, the same is upheld and the grounds raised by the Revenue are dismissed.”
On similar set of facts the Tribunal deleted the addition in assessment year 2010-11 as well. In the assessment year under appeal the ld. DR has failed to point out any distinguishing factor. Since, the nature of expenditure is same, following the order of Tribunal in assessee’s own case in preceding assessment years, we hold that Rs.19,82,32,378/- incurred by the assessee towards making of enrollment cards under RSBY Scheme is an allowable expenditure. Accordingly, ground Nos. 1 to 5 raised in the appeal by the assessee are allowed.
The ground No. 6 in in respect of damages paid by the assessee to Microsoft Corporation USA for unauthorized use of software / operating system. The Microsoft Corporation along with its Indian Associate had filed civil suit against the assessee for unauthorized use of Software/Operating System before the Hon’ble Delhi High Court. The Hon’ble Delhi High Court granted injunction against the assessee. The assessee negotiated with the Microsoft Corporation and paid Rs.10,00,000/- as damages. We find that under similar set of facts in the
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case of Harbinger Systems (P.) Ltd. Vs. Deputy Commissioner of Income Tax (supra), the Tribunal held that the payment of such damages is allowable business expenditure u/s. 37(1) of the Act. The relevant extract of the findings of Tribunal are reproduced here-in-below : “10. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is the claim of deduction on account of compensation paid to Microsoft Corporation and others. The assessee was engaged in the business of software development and was carrying on its business on the platform of Microsoft. The said use of Microsoft Windows, etc. was an unauthorized use by the assessee. When the same came to the knowledge of Microsoft Corporation and others, civil suit was filed against the assessee before the Hon’ble High Court of Delhi. As per the settlement of the suit, the assessee and others in the group company were directed to pay compensation to the tune of Rs.35 lakhs. The share of assessee in the said Rs.35 lakhs worked out to Rs.23,33,278/-.
The question which arises for adjudication before us is whether the said amount paid by the assessee which is claimed to be in accordance with the terms of settlement between Microsoft Corporation & others and the assessee & its group companies, before the Hon’ble High Court of Delhi, is in infraction of law and hence, hit by Explanation under section 37(1) of the Act or the same is allowable expenditure under section 37(1) of the Act. The assessee had utilized software of Microsoft without any licence / permission and once it came to the knowledge of said concern, a civil suit was filed. The assessee had violated the Copyrights Act. However, ultimately, the matter was settled by way of Compromise decree, under which, the assessee was allowed to use licenced software after the final settlement. The assessee and others undertook to pay sum of Rs.35 lakhs which would cover litigation and other related costs suffered by Microsoft and others. The computer systems seized by the Commissioner was released for the use of assessee and the assessee undertook to clean / delete the hard drives of seized computer systems of all illegal / pirated / un-licenced software of the Microsoft companies. The said compromise entered into between the parties was approved by the Hon’ble High Court of Delhi vide its order dated 31.08.2009. The question which arises before us is whether the payment made pursuant to the said compromise is for infraction of law or is expenditure which is wholly and exclusively incurred for the purpose of business and is allowable as expenditure in the hands of assessee. The amount which has been agreed to be paid by the assessee and its group companies to Microsoft
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Corporation and others is on account of contractual liability. It is not the case of payment of any penalty. In any case, the payment on account of penalty would arise where one of the parties is the Government and the connotation of payment of penalty cannot arise when there is an understanding between two private parties. As far as payment which is prohibited by law is concerned, then the same refers to speed money, hafta money, etc., but the same is not to be applied in cases where one party agreed to compensate the other party for loss of its business.
In the facts of the present case, use of pirated software by the assessee and its group companies which is the property of Microsoft Corporation and others admittedly, resulted in loss of business of Microsoft Corporation. Where because of civil suit between the parties, there was compromise entered into between the parties for payment of compensation for loss of business and also covering the cost of litigation, then such an amount is to be allowed as business expenditure in the hands of assessee under section 37(1) of the Act. The Explanation to section 37(1) of the Act does not apply to such understanding between the two private parties. The Kolkata Bench of Tribunal in ITO Vs. M/s. MPR Marketings Pvt. Ltd. (supra) has laid down similar proposition, which has been approved by the Hon’ble High Court of Calcutta and we find support from the said ratio. Accordingly, we allow the claim of assessee and the grounds of appeal No.1 to 4 are thus, allowed.”
The ld. DR has failed to controvert the findings of Tribunal in the said case. We are of considered view that nature of payment made by the assessee to Microsoft Corporation in the present case is similar to the one made in the case of Harbinger Systems (P.) Ltd. Vs. Deputy Commissioner of Income Tax (supra). Thus, following the order of Co-ordinate Bench we hold that the payment of Rs.10,00,000/- by the assessee as damages to Microsoft Corporation is an allowable expenditure. Accordingly, ground No. 6 raised in the appeal by the assessee is allowed.
In ground No. 7 of the appeal the assessee has made an alternate prayer to allow depreciation on legal expenditure, if it is capitalized. Since,
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we have accepted the first prayer of the assessee to allow the expenditure as revenue, the alternate prayer of the assessee has become infructuous. Accordingly, ground No. 7 raised in the appeal by the assessee is dismissed as infructuous.
In the result, the appeal of assessee is partly allowed in the terms aforesaid.
Order pronounced on Wednesday, the 12th day of September, 2018.
Sd/- Sd/- (अननऱ चतुवेदी / Anil Chaturvedi) (ववकास अवस्थी / Vikas Awasthy) ऱेखा सदस्य / ACCOUNTANT MEMBER न्यानयक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक / Dated : 12th September, 2018 RK आदेश की प्रनतलऱवऩ अग्रेवर्त / Copy of the Order forwarded to : अऩीऱाथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. आयकर आयुक्त (अऩीऱ) / The CIT(A)-7, Pune 3. प्रधान आयकर आयुक्त / The Pr. CIT-6, Pune 4. ववभागीय प्रनतननधध, आयकर अऩीऱीय अधधकरण, “बी” बेंच, 5. ऩुणे / DR, ITAT, “B” Bench, Pune. गार्ड फ़ाइऱ / Guard File. 6. //सत्यावऩत प्रनत // True Copy// आदेशानुसार / BY ORDER,
ननजी सधचव / Private Secretary, आयकर अऩीऱीय अधधकरण, ऩुणे / ITAT, Pune