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Income Tax Appellate Tribunal, “F”BENCH,
Before: S/SHRI B. R. BASKARAN & AMARJIT SINGH]
स्थायीलेखासं./जीआइआरसं./PAN/GIR No. : AAACS7155D (Appellant) .. (Respondent) Appellant by Shri Nitesh Joshi Respondent by Shri Pooja Swaroop Date of Hearing: 12.10.2017 Date of Pronouncement: 05.01. 2018 O R D E R PER: AMARJIT SINGH: JM The above mentioned appeals have been filed by the Assessee against the different order passed by the CIT(A)-16 Mumbai [hereinafter referred to as “CIT(A)”].
The Assessee has filed the present appeal against the order dated 04.08.2015 passed by the Commissioner of Income Tax (Appeals)-16, Mumbai relevant to the AY. 2009-10.
The Assessee has raised the following grounds:- “
based on the facts and in the circumstances of the case and in Taw, the Appellant respectfully craves leave to prefer an appeal 5638/M/2015 A.Y. 2009-10 & 2010-11 against the order, dated 4 August 20 35, passed by the Commissioner of Income-tax (Appeals) - 16, Mumbai [hereinafter referred to as the ' Hon’ble C1T(A)'], under Section 250 of the Income-tax Act, 1961 (Act) on the following grounds: On the facts and in the circumstances of the case and in law, the Hon’ble CIT (A) has: 1 erred in upholding the consultancy expenditure of Rs.84,26,429 pertaining to offshore software development services, as capital expenditure instead of revenue expenditure,
2. Without prejudice lo the above, erred in not granting consequential depreciation on the consultancy charges which have been treated as capital in nature in the assessment order passed for AY 2008-09; 3. erred in upholding the disallowance of one-third of director's foreign travel and conveyance expenses amounting to Rs.4,30,733 on an adhoc basis even though it was wholly and exclusively incurred for the purpose of business of the Appellant, which were demonstrated through evidence by the Appellant before the Assessing Officer CIT(A); 4. erred in disallowing the genuine business expenditure of Rs.52,540 incurred by The Appellant for purchase made from Siddhivinayak Enterprises, 5. erred in upholding The levy of interest under Section 234Dof the Act; 6. erred in initiating penalty proceedings under Section 27l(1)(c) of the Act] Each of the above ground is independent and without prejudice lo one another. The Appellant craves leave to add, to alter, to amend or to delete any or all of the above grounds of appeal, at or prior to hearing of the appeal.”
4. The brief facts of the case, are that the assessee company filed its return of income for the A.Y. 2009-10 on 30.09.2009 declaring total income to the tune of Rs.5,79,52,050/-. In its return of income, the assessee has declared Book Profit u/s 115JB of the Act at Rs.5,63,18,654/-. The return of income was processed u/s 143(1) of the Act. The case was selected for scrutiny assessment and accordingly notice u/s 143(2) of the Act was issued on 22.09.2010 and served upon the assessee. Thereafter, the notice u/s 142(1) of the Act was also issued to the assessee company on 09.11.2012 which was also served upon the assessee. The assessee company is engaged in the business of software development & related activities and trading in computer software. The assessee company has shown the consultancy charges from a company to the tune of Rs.1,16,80,544/- which was 5638/M/2015 A.Y. 2009-10 & 2010-11 considered as capital expenditure within the meaning of Section 32(1)(ii) of the I.T. Act, 1961 and depreciation @ 25% to the tune of Rs.29,20,136/- was allowed and the remaining charges to the tune of Rs.87,60,408/- was disallowed and added to the income of the assessee. The assessee company also claimed Foreign Travel expenses to the tune of Rs. 5,25,49,626/-. On verification the same was not found fully for the purpose of business, therefore, 1/3rd of the said amount was disallowed and added to the income of the assessee. The expenditure to the tune of Rs.52,540/- was also not explained, therefore, the same was added to the income of the assessee. The claim of set-off on unabsorbed depreciation for the A.Y. 2008-09 to the tune of Rs.1,42,78,056/- was also disallowed and added to the income of the assessee. The total income of the assessee was assessed to the tune of Rs.8,14,73,777/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who confirmed the said addition, therefore, the assessee has filed present appeal before us.
ISSUE NO.1:-
Under this issue the assessee has challenged the disallowance of consultancy expenditure of Rs.84,26,429/- pertaining to offshore software development services treated as capital expenditure instead of revenue expenditure. The Ld. Representative of the assessee has argued that the said issue has duly been covered by the order of the Hon’ble ITAT in the assessee’s own case for the A.Y. 2008-09 in ITA. No.4508/M/2014. The relevant para is hereby reproduced below: - “2.5. We have heard the rival submissions and perused the relevant material on record. The AO in the assessment order dated 10,12.2010 for the impugned assessment year has mentioned the nature of business of the assessee-company as software development and related activities. As per Form No. 3 CD, the nature of business of the assessee- company has been mentioned as (a) software development and related activities and [B) trading in computer software. 3 5638/M/2015 A.Y. 2009-10 & 2010-11 2.6 A perusal of the "Independent Contractor Agreement" entered into on 24.03.2006 between Cashtech Solution India Ltd (the former name of the present assessec) and Quexst Solutions Pvt. Ltd., indicate that the former engages the latter, as an independent contractor, to perform services, for product development and customized software development. We may refer to clause 10 of the said agreement which says: "All intellectual property rights including, rights and inventions, designs and improvements, which the contractor may make either alone or with Cashtech pursuant to or in relation to this agreement, shall automatically belong to Cashtech. The contractor shall have no claims and shall not make any claims in respect thereto. For this purpose, the contractor shall promptly disclose and deliver to Cashteth all the information and data in its possession necessary to impart a full understanding of the said improvement, invention, processes, systems or designs and shall assist Cashtech or its nominees in every proper way, without any person-month charges, in obtaining protection of said improvements, inventions, processes, systems or designs In any and all countries. The Contractor hereby agree that the Cashtech is an shall be the sole and exclusive owner of all present and future intellectual property rights in and to all malarial written or devised by the contracture pertaining to the product, the operation or business of Cashtcch or resulting from any work which the contractor shall have carried out pursuant I this Agreement and all nights of action for damage*, for infringement of such intellectual property rights for the entire period of the subsistence of the intellectual property rights and any renewals and extensions thereof and irrevocably undertake and confirm to execute, upon receipt of a request from Cashtech. All necessary and adequate documents to confirm the same," 2.7 Similar is the agreement between the assessee and the other entities. The assessee has engaged them to perform software services, for product development and customized software development. 2.8 A similar issue arose before 1TAT, Pune Bench in the case of Opus Software Solutions (P) Lid. vs. ACIT (2012) 139 1TD 427. In this case the assessee was engaged in the business of development of software products. The claim of the assesse was that it was engaged in the development of various software packages, like Trade Now, Electra ATM, Electra Card and Electra Payment Gateway (EPG), etc. The assessee explained to the AO that the expenditure incurred on development of such products was to the tune of Rs, 2,77,Q7,736/-and the same was claimed as revenue expenditure. The AO and thereafter the learned C1T(A) held that such development expenditure was capital in nature. In further appeal, the Tribunal held that: 5638/M/2015 A.Y. 2009-10 & 2010-11 " In our considered opinion, the aforesaid proposition of the Revenue i.e quite alien to the business realities under which the assessee is operating. Quite clearly, the assessee is in the business of software development which entails fast technological changes and in that view, there is no permanence attached to any product developed. In fact, it is quite understandable that the business of the assessee is exposed to volatility of new and upcoming technological advances and the products developed by [t may not be sustainable over a period of time to compete in the market place. Therefore, in this background advantage in the revenue for in the capital field The Hon'ble Supreme Court in the case of Empire Co Lid (supra) has held that the true test to ascertain the nature and import of the expenditure is to examine the same from a commercial perspective. Even if, it has to be accepted that that expenditure results in an enduring benefit to the assessee, yet following discussion by the Hon'ble Supreme Court would show that each and every incidence of enduring benefit would not result in classification of expenditure as a capital expenditure: "There may be cases where expenditure even if incurred for obtaining an advantage of endure benefit, may, nonetheless, be on revenue account and the test of enduring benefit may breakdown, it is not every advantage of enduring nature acquired by an assessee chat brings the case within the principle laid down in this test. What is maternal to consider is nature of the principle laid down in this test. What is material to consider is 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 assesses 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 of revenue account, even though the advantage may endure for an indefinite future." In the present case, in our view, the expenditure on development of new product in the tine of business being carried out by the assessee is an expenditure related to such business and benefit to the assessee is in the revenue field, inasmuch as it seeks to improve the profitability of the assessee and the enduring benefit cannot be regarded to be in (he capital field. The parity of reasoning laid down by the Hon'ble Apex Court in the case of Empire Jute Co Ltd [supra, as extracted above, clearly supports the stand of the assessee, inasmuch as the expenditure in question merely results in development of new products by the assessee in its existing line of business. Even otherwise, it note worthy that none of the expenditures in question are of capital nature and in fact, the expenditure which has been referred to by us in the earlier paragraph clearly are such expenditure, which are incurred in the course of carrying on of business," 5
ITA. NO. 5252/M/2015 5638/M/2015 A.Y. 2009-10 & 2010-11 2.9 In view of the foregoing reasons, the lst ground of appeal of the assessee is allowed.”
5. In view of the above said finding of the Hon’ble ITAT Bench in the assessee’s own case in we allowed the claim of the assessee and delete the addition of consultancy charges to the tune of Rs.1,16,80,544/-. Accordingly, this issue is decided in favour of the assessee against the revenue.
ISSUE NO.2:-
Since issue no.1 has been decided in favour of the assessee against the revenue. Therefore, this issue has been become infructuous.
ISSUE NO.3:-
Under this issue the assessee has challenged the disallowance of 1/3rd 7. of director’s foreign travel and conveyance expenses to the tune of Rs.4,30,733/-. The Ld. Representative of the assessee has argued that this issue has been covered by assessee’s own case for the A.Y. 2008-09. We deemed it necessary to advert the finding of the CIT(A) on this issue: -
“In this ground, the assessee has aggrieved against imposition of interest u/s 234D of the I.T. Act. Charging of interest is mandatory and AO has charged interest as per existing provision of law. Moreover, Hon’ble Jurisdictional High Court in the case of CIT Vs. Indian Oil Corporation Ltd. 254 CTR 0113 (2012) has held as under:- “Plain language of section 234D envisages that provision would apply retrospectively. In any case, consequent to addition of Explanation-2 by Finance Act, 2012 which is declaratory of the law there can be no manner of doubt that S. 234D is to be applied retrospectively even to the period prior to A.Y. 2004-05. In view of judgment in case of Govinddas v. ITO 103 ITR 123, explanation 2 to S. 234D does not restrict its application to A.Y. 2003-04 but is applicable to all assessment years prior to 1.6.2003. A statute could be retrospective in operation ITA. NO. 5252/M/2015 5638/M/2015 A.Y. 2009-10 & 2010-11 being expressly stated on by necessary implication. Therefore, order of tribunal is reversed. Appeal allowed. In view of the legal provisions of the Act and judgment of Hon’ble Jurisdiction High Court in case of CIT vs. India Oil Corporation Ltd. (supra), the interest charged by AO u/s 234D is confirmed.”
In view of the above said finding and by honoring the finding of the Hon’ble ITAT in the assessee’s own case for the A.Y. 2008-09 in we allowed the claim of the assessee in this regard and delete the said addition which is to the extent of Rs.1/3rdof the claim. Accordingly, we set aside the finding of the CIT(A) in this regard and delete the penalty and allowed the claim of the assessee.
ISSUE NO.4:-
Issue no. 4 is in connection with the confirmation of disallowance of expenses to the tune of Rs.52,540/-. The assessee raised the claim of repair and maintenance to the tune of Rs.52,540/- with regard to purchase of aluminum windows and flush door etc purported to have been made from M/s. Siddhivinayak Enterprises. The name of the M/s. Siddhivinayak Enterprises was listed as a hawala dealers provided by the Sales Tax Department (State of Maharashtra). Therefore, the notice was given and after considering the reply, the claim of the assessee was declined which was confirmed by the CIT(A). In support of his claim the assessee furnished the invoice no. 131 dated 08.08.2008 for a sum of Rs.31,824/- (including VAT of Rs.1,224/-) and invoice no. 150 dated 29.08.2008 for a sum of Rs.20,716/- ( including VAT of Rs.2,302/-) and also produced the extract of its bank statement, reflecting the relevant entries of having paid the sum to the said party. Sufficient evidence has been produced by the assessee to justify his claim. The necessary record has been produced before the Assessing Officer as well as before the CIT(A). Merely non service of 5638/M/2015 A.Y. 2009-10 & 2010-11 notice u/s 133(6) of the Act nowhere justify the claim of addition to the tune of Rs.52,540/- . In this regard we also placed reliance upon the law settled CIT Vs. M/s. Nikunj Eximp Enterprises P. Ltd. 2016 taxman.com 171 (Bombay High Court). In view of the said circumstances, we are of the view that the addition is not justifiable, therefore, we delete the same and allowed the claim of the assessee. :- 10. The Assessee has filed the present appeal against the order dated 28.09.2015 passed by the Commissioner of Income Tax (Appeals)-16, Mumbai relevant to the AY. 2010-11. 11. The Assessee has raised the following grounds:- “
Based on that facts and m the circumstances of the case and in law, the Appellant respectful \y craves leave to prefer an appeal against the Order, dated 21 October 2015, paired by the Commissioner of Income-tax (Appeals) -
16. Mumbai [hereinafter referred to as the ' Hon'ble Cir(A)'J, under Section 250 of the income-tax Act, 1961 ('Act'1, on the following grounds: On the facts and in the circumstances of the case and in law, the Assessing Officer and the C1T(A) has: 1. erred in upholding the consultancy expenditure of Rs 58,40,596/- pertaining to offshore software development services, as capital expenditure instead of revenue expenditure; 2. erred m not appreciating the fact that the Appellant is in the business of software development and amount paid for offshore software development services are pertaining to normal business transaction of software development; 3. erred in treating an amount of RS.58,04,596/- pertaining to offshore software development services outsourced by the appellant out of the total consultancy charges of Rs 90.61,146 as capital in nature;
4. Without prejudice to the above, erred in not granting consequential depreciation on the consultancy charges which have been treated as capital in nature in the assessment order passed for AY 2008-09 and AY 2009-10; Wrong amount taken for onsite support service 5. erred in inadvertently taking onsite support services amount al Rs. 50,000 (while providing.) relief to the Appellant), without considering the fact that the total onsite support services amounts to Rs.32,20,550/- Ad-hoc disallowance of director's foreign travel expenditure 6 erred in upholding the disallowance of one-third of director's foreign travel and conveyance expenses amounting to Rs 3,07, 803 on an ad-hoc 8 5638/M/2015 A.Y. 2009-10 & 2010-11 basis even though it as wholly and exclusively incurred for the purpose of business of the Appellant; 7. erred in upholding the levy of interest under Section 234D of the Act;” Additional Issue:- Ön the facts and in the circumstances of the case a\nd in law, the Ld. A|ssessing Officer, has:
9. Without prejudice to ground number 1 to 3 erred in allowing depreciation at the rate of 25% instead of 60% on consultancy charges which have been capitalized as software development expenses during the year under appeal.”
12. The facts of the present case are quite similar to the facts of the case as narrated in ITA. No.5252/M/2015. Therefore, there is no need repeat the same, however, the figure is different.
ISSUE NO.1 to 3:-
All the issues are in connection with the confirmation of consultancy charges of Rs.58,40,596/- pertaining to offshore software development services. These issues have already been discussed and decide in favour of the assessee while deciding the issue no. 1 in ITA. No. 5252/M/2015. Therefore, the said circumstances, these issues are decided in favour of the assessee against the revenue on similar lines.
ISSUE NO.4:-
This issue has been taken up alternative issue no. 1 to 3 since this issue has already been decided in favour of the assessee deciding this issue could be academic in nature. Therefore, there is no need to decide the same.
ISSUE NO.5:-
Issue no.5 has also become infructuous in view of the decision of the issue no. 1 to 3 above.
ISSUE NO.6:- 5638/M/2015 A.Y. 2009-10 & 2010-11 16. Issue no. 6 is in connection with the disallowance of director’s foreign travel expenses to the extent of 1/3rd i.e., to the tune of Rs.3,07,803/-. This issue has already been discussed and decided while deciding the issue no. 3 in ITA. No. 5252/M/2015. Accordingly, we allowed the claim of the assessee on similar lines.
ADDITIONAL ISSUE:-
Since the claim of the consultancy charges has already been discussed and decided in favour of the assessee in the appeal of the assessee in ITA. No. 5252/M/2015. Therefore, there is no need to decide this issue.
In the result, appeals filed by the Assessee are allowed. Order was pronounced in the open court on 05.01.2018.