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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
IN THE INCOME TAX APPELLATE TRIBUNAL “E” BENCH, MUMBAI BEFORE SRI MAHAVIR SINGH, JM AND ASHWANI TANEJA, AM (A.Y:2004-05) (A.Y:2005-06) ITA No.7592/Mum/2011 (A.Y:2006-07) The Asst. Commissioner of Income Sanofi Synthelabo (India) Ltd. Tax-8(3), Room No.217, Aayakar 54/4, Sir Mathuradas Vasanji Bhavan, M.K. Marg, Mumbai-20 Vs. Road, Andheri (east) Mumbai-400093 PAN No.AACCT3824E Appellant .. Respondent Revenue by .. Miss. Anupama Singha, DR .. Shri J.D Mistry, AR Assessee by Shri Sanjiv M. Shah, AR Date of hearing .. 22-11-2016 Date of pronouncement .. 22-11-2016 O R D E R PER MAHAVIR SINGH, JM:
These three appeals by the Revenue are arising out of different orders of the CIT (A)-18, Mumbai in appeal No. CIT(A)-18/ACIT-8(3)/IT-34/2009-10, CIT (A)- 18/DCIT-8(3)/IT-361/2009-10 and CIT(A)-18/DC-8(3)/IT-738/2009-10 dated 06-07-2011 and 12-08-2011. Assessments were framed in by the ACIT Range 8(3), Mumbai for A.Y. 2004-05 vide his order dated 29-12-2006, in ITA No.7592/Mum/2011 by the DCIT Range 8(3), Mumbai for A.Y.2005-06 and 2006-07 respectively vide his order dated 29-12-2008 and 30-12-2009 all u/s 143(3) of the Income Tax Act, 1961 (hereinafter “the Act”)
The first issue in for the A.Y. 2004-05 is as regards to the order of CIT(A) deleting the addition by treating pre-mature termination compensation as Revenue expenditure. For this Revenue has raised following two grounds:-
“1. On the facts and in the circumstances of the case and in law, the CIT (A) erred in accepting additional evidence in contravention of Rule 46A of the I.T. Rules.
2 ITA No. 6755 & 7592/ Mum/2011 2. On the facts and in the circumstances of the case and in law, the CIT (A) erred in treating Premature Termination Compensation of Rs.98,65,000/- as revenue expenditure instead of capital expenditure.”
Briefly stated facts are that the AO during the course of assessment proceedings required the assessee to explain pre-mature termination compensation claimed as Revenue expenditure. The AO also issued show-cause as to why the payment of compensation be not treated as capital expenditure. The assessee replied that it has decided in May 2003 that instead of manufacturing products for which it has manufacturing license under toll arrangement, it was advantageous to have contract manufacturing arrangement. The assessee company having manufacturing license for Cordarone, Valparine, Fortagesic, Jumex, Ladogal, Tyklid but having no manufacturing facility and accordingly it entered into a toll manufacturing arrangement with Torrent Pharmaceuticals ltd. vide agreement entered on 12-09-1996 and which was subsequently amended on 14-02-2002. This amended agreement provided validity of two years from the date of amendment and it also provided that in case of per-termination of agreement not due to fault of Torrent, the company would pay compensation as per clause 3(b) of the amended agreement. The assessee filed copy of amended agreement dated 14-02-2002 before the AO. But AO was of the view that by paying this amount the assessee has got enduring benefit by way of reduction in manufacturing cost of coming years. Hence, he observed that, had onetime payment not been made by assessee, the assessee would have lost recurring income. Accordingly, he treated the termination charges as capital in nature. Aggrieved, assessee preferred appeal before CIT (A), who allowed the claimed of the assessee by observing in Para 2.8 as under:-
“2.8 I have considered the facts and the submissions made by the AR of the appellant company. The appellant company has terminated its toll manufacturing arrangement (loan license agreement) with Torrent Pharmaceuticals Ltd. In June 2003 by paying a termination compensation of Rs.98,65,000/- as per the terms of termination agreement dated 7th June 2003 read with amendment dated 14th Feb 2002. The AO has disallowed the said expenditure by holding that the termination compensation paid by the appellant company is a onetime payment which resulted in enduring benefit to the appellant company by way of reduction in manufacturing cost in future the appellant company by way of reduction in manufacturing cost in 3 ITA No. 6755 & 7592/ Mum/2011 future years and in the form of safeguarding of its interest. The AO has further reiterated his contention that the termination compensation is a onetime payment resulting in enduring benefit to the appellant company even after perusing third party manufacturing agreements in the remand report dated 16th June 2008. The appellant’s AR rebuttal that once for all payment was not a conclusive test to hold the same as capital expenditure by relying on the Hon’ble Supreme Court decision in the case of Alembic Chemical Works Co. Ltd (Supra) is well founded. Further, I find merit in the AR.s reliance on Hon’ble Supreme Court’s decision in case of Empire Jute Co. Ltd. to support the appellant’s case that the termination compensation was paid with a view to reduce the cost of manufacturing. I am in agreement that this was relatable to carrying on/conduct of the business and hence it should be regarded as an integral part of the profit earning process. I also agree with the proposition that the payment of termination compensation has not resulted in the acquisition of an asset or any right of a permanent character to the appellant company. In the absence of acquisition of an asset, the capital structure of the appellant company has not changed. Therefore, in my considered view, the addition of Rs.98,65,000/- made in the assessment cannot be sustained. Accordingly, I direct the AO to delete the same from the assessed income.” Aggrieved, Revenue came in second appeal before Tribunal on this issue.
We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the learned Counsel for the assessee Shri J D Mistry, Senior Advocate referred to loan license agreement dated 12-09-1996, amended loan license agreement dated 14-02-2002 and termination agreement dated 07-06-2003. It was argued that the amended agreement provided for the validity of the main agreement for two years from the date of amendment and it has also provided that in case of termination of agreement not due to any breach or fault or negligence of Torrent, the assessee Co. would pay compensation as per Clause 3(b) of the amended agreement. On perusal of the loan License Agreement, we find that the said agreement was made for the period of total 7 years and this is clear from Article 9.1 of the agreement. The consideration (as per Article 7) agreed upon was a fee corresponding ID ten percent (10%) of the net sales of the products manufactured and processed by Torrent. The ‘net sales’ was defined to provide for certain deductions from the sales invoices and it was agreed that from the invoice value the deduction was to be made as under:- i) freight and insurance included in the price; We further find that the above terms were amended vide the amendment dated 14.02. 2002 that the consideration was revised from 10% to 16% at the net sales of the products and the definition of 'net sales' was revised. As per the revision of this definition reasonable rebates allowed to the customers were no longer deductible from net sales. The term of the license Agreement was reduced to two years effective from the date of the amendment i.e. up to 13-03-2004. Even in original agreement, in the event of termination of the agreement on account of Government discontinuing issuing/renewing FDA loan License allowing to perform the agreement, it was provided that the parties would discuss the possible remedies. Further, in the amendment agreement it was specified that in the event of termination, the company would pay to Torrent 6% of Net Sales calculated for the remaining period of the Agreement on the average of Net Sales of the past 6 months of the discontinuation of the agreement. This agreement was subsequently terminated vide dated 07-06-2003 with Torrent and terminate the loan license agreement effective as of 30-06-2003 and the compensation for early termination was also agreed upon as is specified in articles 2 & 3 of this agreement. The compensation of Rs.98.65 lacs was paid as per this agreement.
On the basis of the above facts, the deduction of compensation paid for early termination of Toll Manufacturing Agreement was claimed by assessee and AO disallowed the claim on the ground that the assessee got enduring benefit by way of reduction in the manufacturing cost in coming years. According to him the expenditure was capital in nature because the assessee had made onetime payment of compensation to Torrent Pharmaceuticals Ltd., for termination agreement to avoid any loss of recurring nature in the future by way of payments under the toll manufacturing agreement. But we are of the view that onetime payment was not conclusive test of enduring benefit. For this Ld. Counsel relied on the decision of the Hon’ble Supreme court in the case of Alembic Chemical Works Co. Ltd., Vs. CIT (1989) 177 ITR 377 (SC). For this, we are of the view that since the early termination compensation was paid with view to reduce the 5 ITA No. 6755 & 7592/ Mum/2011 cost of manufacturing, it was related to carrying on/conduct of the business of the assessee and thus it was to be regarded as an integral part of the profit earning process and not for acquisition of an asset or a right of a permanent character or the possession of which is a condition of the carrying on of the business and hence the expenditure was allowable as revenue expenditure. For this view of ours, we are placing reliance on the decision of the Hon’ble Supreme court in the case of Alembic Chemical Works Co. Ltd. (supra), wherein it is held as under: - “The improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture The further circumstance that the agreement pertained to a product already in the line of the assessee’s established business and not to a new product indicates that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the assessee’s established enterprise. It appears to us that the answer to the questions referred should be on the basis that the financial outlay under the agreement was for the better conduct and improvement of the existing business and should, therefore Be held to the revenue expenditure Reference may also be made to the observations of this court in CIT Vs Ciba of India Ltd [1968] 69 ITR 69. There is also no single definitive criterion which by itself, is determinative as to whether a particular outlay is capital or revenue The ‘once for all’ payment test is also inconclusive What is relevant is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities In a given case, the test of ‘enduring benefit’ might break down In CIT Vs Associated Cement Companies Ltd [1988] 172 ITR 257 (SC) at p 262, this court said: As observed by the Supreme Court in the decision in Empire Jute Co Ltd Vs CIT [1980] 124 ITR 1 (SC) that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, 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 principles 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.”
Form the above ratio of Hon’ble Supreme Court in the case of Alembic Chemical Works Co. Ltd and the facts of the present case that the assessee Co. decided that instead of manufacturing the products, for which it had manufacturing licenses under toll arrangements, it was advantageous to have contract manufacturing arrangements. Accordingly, the assessee terminated 6 ITA No. 6755 & 7592/ Mum/2011 pre-maturely the agreement with the Torrent Pharmaceuticals Ltd. and paid compensation as per the terms of agreement, as discussed above in detail. The compensation paid for pre-mature termination of agreement to reduce the cost and increase profitability is a business decision and assessee is already in the product of line of the business and not a new product is developed by the assessee by virtue of payment of this compensation. Accordingly, we are of the view that this is a revenue expenditure and allowable as deduction. We find no infirmity in the order of CIT(A) and hence the same is confirmed. This issue of Revenue’s appeal is dismissed.
The next ground in this appeal of Revenue in for the A.Y. 2004-05 is against the order of CIT(A) deleting the disallowance made by AO on account of product development expenses u/s 37(1) r. w. s 35(1) of the Act. For this Revenue has raised following ground:-
On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the disallowance made u/s 37(1) on account of Product Development Expenses of Rs.92,98,000/- and directing the AO to allow the same u/s 35(1) on account of scientific Research expenditure even though the assessee had not made any claim u/s in the Audit Report.
Brief facts leading to the above issues are that the AO during the course of assessment proceedings noticed from the accounts of the assessee Schedule 40 that it has debited a sum of Rs. 92.98 lacs as product development charges. The AO required the assessee to explain and justify its claim. The AO after going through the details noted that these expenses are in the nature wherein a new product has been created or developed and a new source of income is generated by the assessee. Hence, the AO disallowed the claim of deduction. But, CIT(A) allowed the claim of the assessee by observing as under: - 3.9 I have considered the submissions made by the AR as well as the documents submitted to support the appellant company’s claim for product development expenditure u/s 35(1) and u/s 37 of the Act. I am accepting all the fresh documents submitted by the appellant during the appeal proceedings as the AO has not furnished any reason for not taking them on record in two remand reports submitted by him. Upon perusing the service agreements and the dossier submitted, I am of the view that the services rendered by MJ Bio Pharma Pvt. Ltd and Medreich Sterilab Ltd would be in 7 ITA No. 6755 & 7592/ Mum/2011 the nature of scientific research covered u/s 35(1) finds support in Hon’ble ITAT Delhi decision in the case of Escorts Ltd. Vs. ACIT reported in (2006) 102 TTJ (Del) 522. The Hon’ble ITAT concluded that the question whether the expenditure is revenue or capital, loses its significance while considering its deductibility because the nature of expenditure is on account of R&D and is admissible u//s 35(1)(iv). It is also noted that the Hon’ble Bombay HC in the case of CIT Vs. National Rayon Corp. Ltd, reported in (1983) 140 ITR 143 (Bom) has held that for claiming deduction u/s 35(1), it is not necessary that the research must carried on by the assessee himself. It can be claimed even if the research must carried on by the assessee himself. It can be claimed even if the research is carried on by some other person on behalf of the assessee. Thus the appellant company’s claim that product development expenses paid to two parties and not incurred in their own in- house research centre is fully supported by this Hon’ble Bombay HC’s decision. Further, it is noted that the appellant is in the business of Pharmaceutical products. The product development expenses are incurred for introducing new products in the same business line and therefore could not be considered as capital expenditure as such expenditure is incurred to increase the efficiency of the business. This conclusion finds support in Hon’ble ITAT Chandigarh Bench in the case of Glaxo Smith Kline Consumer. Healthcare Ltd. Vs. ACIT, reported in (2007) 112 TTJ (Chd) 94. The Hon’ble ITAT has decided this case by relying on apex court’s decision in the case of Empire Jute Co. Ltd. It has held that mere development and introduction of new varieties of products do not result in creation of a new line of business. It has observed by the Bench that prior to development and introduction of the new productions and post development and introduction of new products, the business of the assessee remains the same. Relying on this decision, the appellant company’s claim is well supported. Therefore, in my considered view, the addition of Rs. 92,98,000/- made in the assessment cannot be sustained. Accordingly, I direct the AO to delete the same from the assessed income. Aggrieved, now Revenue is in second appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. The facts of the case are that the assessee is a pharmaceutical company. The pharmaceutical products are marketed by the assessee but before that they are required to be subjected to number of tests/trials etc. so that they conform to the acceptable quality/standards. For the same the assessee carry out activities in the nature of research and development and this fact have also been recorded by the AO. The specimen agreements were self- evident of the fact that the activities were in the nature of research and product 8 ITA No. 6755 & 7592/ Mum/2011 development expenses. In case, of a pharmaceutical company these expenses are necessarily incurred for the purpose of business. The assessee company is in the business of production, sales of pharmacy products and even if it incurs expenditure for development of new products, it is expenditure on the activities of the existing business and thus it cannot be treated as an expenditure incurred on acquiring new source of business as has been erroneously held by the AO. Needless to say all pharmaceutical companies have to incur product development expenses either in its in-house R&D facilities or through others as has been done by the assessee. We are of the view that the expressions “Scientific research and Scientific research related to business" are defined in section 43(4) of the Act. Reference is being made to the definition at 43(4) (iii) which reads as under :-
(iii) References to Scientific research related to business or class of business include (a) any Scientific research which may lead to or facilitate an extension of that business or, as the case may be, all business of that class.
We find from the decision of the Hon’ble Bombay High Court in the case of CIT Vs. National Rayon Corporation Ltd.(1983) 140 ITR 143 (Born), wherein the High Court has held that research need not be carried on by the assessee himself but can be done throughout her party on its behalf. The High Court further held that the narrow approach viz., that the present activity alone are to be considered as acceptable even then the research undertaken must be properly regarded as related to the business of the company. To take any other view must be regarded as impractical and contrary to commonsense. In the present case, we mention that assessee’s company expenditure on product development has to be regarded as the expenditure covered u/s 35(1) of the Act as held by Bombay High Court in the case referred to hereinbefore. The findings of revenue that the product development expenditure resulted in the creation of new source of income is also not justified since in the definition of the research related to business such expenditure is covered and the decision of the Bombay High Court only supports the claim of the assessee. We are of the view that the product development expense is a necessity for running of fast moving goods because of competition and continuing changes in consumer choices. This expenditure is a 9 ITA No. 6755 & 7592/ Mum/2011 recurring expenditure and need not be incurred only once for all. This expenditure merely results in enabling the assessee to carry on the business in a more efficient profitable manner being responsive to the needs of consumers but did not lead to creation of any fixed asset. Alternatively also, we have to point out that in the case of CIT Vs. Ciba of India Ltd. (1968) 69 ITR 692 (SC) and in several other High Court decisions it is held to the effect that where the expenditure on research was carried on for and on behalf of the assessee, the expenditure laid out or expended was expenditure on research related to business. The Supreme Court has also observed that nonetheless, the expenditure so incurred could be allowed as deduction u/s 37 of the Act. Even otherwise, it cannot be overlooked that u/s 35(1)(iv) of the Act is capital expenditure and is also allowable. In view of the facts of the case and case law cited above, we are of the view that CIT(A) has rightly allowed the claim of assessee and we confirm the same. This issue of revenue’s appeal is dismissed.
The next issue in A.Y. 2005-06 is as regards to the order of CIT(A) in deleting the disallowance of product development expenses of Rs.15.35 lacs and project registration expenses of Rs.12.43 lacs, thereby the total addition of Rs. 27.77 lacs. For this Revenue has raised following ground:-
On the facts and in the circumstances of the case and in law, the CIT (A) erred in treating Product Development Expenses and Product Registration Expenses amounting to Rs.22,77,600/- as revenue expenditure instead of capital expenditure.
As regards the issue of product development expenses, we have already allowed the issue in favour of assessee while adjudicating the appeal in for the A.Y. 2004-05 in Para 10 of this order. Taking a consistent view, we allow this issue in favour of assessee and this issue of Revenue’s appeal is dismissed.
As regards to project registration expenses the facts of the case are that these expenses amounting to Rs.12.43 lacs was disallowed by the AO by holding that they too have resulted in enduring benefit and/or creation/acquisition of intangible asset. The assessee submitted the detail of project registration 10 ITA No. 6755 & 7592/ Mum/2011 expenses i.e. an amount of Rs.5,67,215/- incurred towards cost of reference standards purchased/imported, Rs.2,79,540/- towards drug registration fees/expenses, Rs.137,565/- towards site registration fees/expenses, Rs.16,000/- towards expenses for regulatory documents and other expenses of Rs.2,41,900/-. The AO disallowed the same. The CIT(A) allowed the claim of the assessee by observing in Para 2.6 as under: - “I have considered the submissions made by the AR as well as the documents submitted to support the appellant company's claim for product registration being allowable expenditure. u/s 37 of the Act, upon pursuing the nature of expenses, submissions made, I am of the view that the product registration expenses are in the nature of revenue expenses. The appellant company's claim u/s 37 finds support in Hon'ble ITAT Chandigarh case of Glaxo Smith Kline Consumer Healthcare Ltd. Vs ACIT, reported in (2007) 112 TN (CM) 94. The Hon'ble ITAT has decided this case by relying on apex court's decision in the case of Empire Jute Co. Ltd. It has held that mere development and introduction of new varieties of products do not result in creation of a new line of business. It is observed by the Bench that prior to development and introduction of the new products and post development and introduction of new products, the business of the assessee remains the same. Relying on this decision, the appellant company's claim is well supported. Therefore, in my considered view, the addition of Rs.12.42 lacs made in the assessment cannot be sustained. Accordingly, I direct the AO to delete the net addition of Rs. 11.51 lacs from the assessed income.” Aggrieved, now revenue came in second appeal before Tribunal against the order of CIT(A).
We find that this issue is now covered by the decision of co-ordinate bench in the case of ITAT Chandigarh bench in the case of Glaxo Smith Kline Consumer Health Care Ltd. Vs ACIT (2007) 112 TTJ 94 (CHD), wherein the Tribunal has clearly held that mere development and introduction of new varieties of product and consequent registration charges do not create any new line of business or fixed asset and hence these type of expenses are to be held as Revenue expenditure. We confirmed the findings of CIT(A) and this issue of Revenue appeal is also dismissed.
The next issue in this appeal of Revenue in A.Y. 2005-06 is as regards to exclusion of provision of leave encashment and gratuity amounting to Rs.36.61 lacs and provision for date expire of stock of Rs. “On the facts and in the circumstances of the case and in law, the CIT (A) erred in directing the AO to exclude provision for leave encashment and gratuity of Rs.36,61,000/- and provision for date expired stock of Rs. 47,000/- for computing Book Profit u/s 115JB.”
We have heard rival contentions and gone through the facts and circumstances of the case. We find that the AO added the following sums in the assessment order while computing book profit u/s 115 JB of the Act but he has not considered the explanation (1)(c) of Section 115 JB (2) of the Act wherein, the book profit as per net profit is required to be increased by the amount or amounts of provision made for meeting liabilities other than ascertained provision as under:- “provision for leave encashment Rs.31,61,000 Provision for stock-expiry Rs. 47,000 Rs.32,08,000”
We find that the CIT(A) after conceding the provision of section 115 JB of the Act to explanation (1)(c) of the Act, noted that the provision for contingent liabilities debited to the profit and loss A/c are required to be added to the book profit. He also noted that the provision for leave salary encashment and gratuity was made by the assessee on the basis of actuarial valuation done by actuary and these are considered as ascertained liabilities and allowable expenses. The CIT(A) mainly relied on the decision of Hon’ble Supreme Court in the case of Bharat Earthmovers Vs.CIT (2000) 245 ITR 482 (SC). The CIT(A) allowed the claim of assessee after considering the submissions of the assessee as under: - “The AR has also filed extract of Notes to Accounts for the F.Y. 2004-05 (A.Y. 2005-06) and draws my attention particularly to Note 1(f) which has spelt out that additional liability for gratuity arising out of difference between the actuarial valuation and the amount contributed to LIC has been provided and also the liability for leave encashment benefits has been provided on the basis of valuation carried out by an independent actuary. He has further stated both these liabilities have been provided in accordance with the normally accepted accounting standard. The AR only reiterates his submission with regard to provision for date expired stock made in the foregoing ground 3 of the appeal and sys that such adjustment 12 ITA No. 6755 & 7592/ Mum/2011 is not even warranted to determine normal taxable income. In view of all these submissions, he concludes that adjustments to book profit u/s 115JB is not in accordance of the law and has to be deleted. I have considered the submissions made by the AR as well as the statement of facts. I am in agreement with the appellant company that adjustment to book profit by way of increasing the same by adding the provisions for leave salary encashment, gratuity and date expired stock is not warranted. All these liabilities are ascertained liability in view of the above quoted decisions of the Hon’ble SC and Hon’ble Delhi HC. I allow the appeal of the appellant and direct the AO not to add them to the book profit determined u/s 115 JB of the Act.” We find no infirmity in the order of CIT(A) and hence the same is confirmed. This issue of Revenue’s appeal is dismissed.
The next two issues in ITA No.7592/Mum/2011 for the A.Y. 2006-07 of Revenue’s appeal is as regards to the order of CIT(A) deleting the addition of product development expenditure and product registration expenditure. For this Revenue has raised following grounds: - “
On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in treating Product Development Expenditure of Rs.74 lakhs as revenue expenditure instead of capital Expenditure.” “On the facts and in the circumstances of the case and in law the Ld. CIT (A) erred in treating Product Registration Expenditure of Rs. 8.11 lakhs as revenue expenditure instead of Capital Expenditure.”
18. As regards the issue of product development expenses and product registration expenses, we have already allowed these two issues in favour of assessee while adjudicating the appeal in ITA No. 6720/Mum/2011 for the A.Y. 2004-05 in Para 10 of this order and in A.Y. 2005-06 in Para 14 of this order. Taking a consistent view, we allow these two issues in favour of assessee. Hence these two issues of Revenue’s appeal are dismissed.
19. However, it is to be clarified that the above ground of Revenues’ appeal regarding product development expenditure of Rs.74,00,000/- does not arise out of the order of the AO or that of the CIT(A) but it arises on account of disallowance of computer expenditure software of Rs.74,00,000/- held as capital 13 ITA No. 6755 & 7592/ Mum/2011 expenditure and CIT(A) deleted the same holding the expenditure as Revenue in nature by observing as under: - “I have considered both the submissions made by the AR regarding SAP customization expenses. The reliance on the ratio laid down by Hon'ble ITAT, Delhi Special bench is clearly applicable in this case. The appellant is using SAP in The business as a tool to run the same more efficiently and not as an apparatus for profit earning; The Hon'ble Special Bench, Delhi ITAT has stated that before classifying the expenditure as capital or revenue expenditure, one has to apply the functional test vis-a-vis the nature of business of the assessee. It has observed that "software normally functions as a tool enabling the business to be carried on more efficiently". However, if the software is used as profit earning apparatus, then it could be classified as capital expenditure. The Hon’ble Special bench ITAT Delhi, has held that software expenditure was capital expenditure since the software was used to impart training to the students which was a part of the profit making apparatus of the assessee. This was concluded by the Special Bench as the assessee was engaged in the business of software development and training centre,imparting specialized training to the students in software technology. The Hon'ble Delhi Special Bench decision is based on the principle laid down by Supreme Court in the case of Empire Jute Company vs. CIT, reported in 124 ITR l(SC) that all expenditure resulting in enduring benefit is not a capital expenditure but it is to be seen whether the same is changing the capital structure of the assessee or it is merely increasing the efficiency of the business. In the latter case, it is to be regarded as revenue expenditure. Accordingly, following the decision of Hon'ble ITAT Special Bench in the case of Amway India Enterprises Vs. Dy. CIT (2008) 114 TTJ (Del) (SB) 476, I decide the issue in favour of the appellant and delete the net addition of Rs.22.85 lakhs made in the assessment. 2.7 The AR then made submission in respect of Software charges of Rs. 16.88 lakhs paid to Software Spectrum, France. He submitted that out of the iota) payment of Rs. 16.88 lakhs to Software Spectrum, payment of Rs. 10.23 laid was for annual maintenance charges and payment of Rs. 6.65 lakhs was towards cost of acquiring 52 additional Microsoft Enterprise Desktop licenses. The AR pointed out that the annual charges were paid so that the appellant is entitled to get updates/modifications, etc for the said licenses. This being the annual charge, therefore no enduring benefits have accrued to the appellant. Further, the additional Microsoft Enterprise Desktop licenses were acquired for operational purpose and therefore their cost is to be regarded as revenue expenditure. The copies of three invoices of Software Spectrum which are on record clearly show the above facts. I have considered the above and it is seen that expenditure of Rs. 10.23 lakhs represents annual maintenance charges and therefore it cannot be regarded as resulting in enduring benefits. Therefore I delete the ñet addition of Rs: 4.09 lakhs made on this account. As regard of 52 additional licenses, I allow 14 ITA No. 6755 & 7592/ Mum/2011 the same for the reasons stated in Para 2.6 above. The AO is directed to delete the net addition of 6.75 lakhs made on account of payments to Software Spectrum, France. Hence, this ground appeal is allowed.” Before us also learned counsel for the assessee relied on the decision of Hon’ble Bombay High Court in the case of CIT Vs. Raychem RPG Ltd. (2012) 346 ITR 138 (Bom.) wherein, it is held as Revenue expenditure by observing as under:-
“2. As regards the first question, Tribunal relying upon its order in the assessee’s own case relating to asst. yr. 2001-02 held that the software expenditure was revenue expenditure. The appeal filed by the Revenue for the asst. yr. 2001-02 has been dismissed for want of removal of office objections and thus the order passed by the Tribunal for the asst. yr. 2001-02 has attained finality. Moreover, the Tribunal in its order relating to the asst. yr. 2001-02 has allowed expenditure as revenue expenditure by recording thus : "7. When we apply this functional test suggested by the Special Bench of the Tribunal, we find that impugned software does not form part of the profit-making apparatus of the assessee and hence the same is to be disallowed as revenue expenditure. We hold so because we find that the business of the assessee company is that of manufacturing of telecommunication and power cable accessories and trading in oil retracing system and other products and impugned software is an enterprises resources planning (ERP) package and hence it facilitates the assessee’s trading operations or enabling the management to conduct the assessee’s business more efficiently or more profitably but it is not in the nature of profit-making apparatus. We, therefore, decide this issue also in favour of the assessee and we hold that this expenditure of Rs. 20.60 lakhs is revenue expenditure. We hold so by following the judgment of the Special Bench of the Tribunal relied upon by the learned Authorised Representative of the assessee."
3. In our view, no fault can be found in the aforesaid order of Tribunal holding that software expenditure was allowable as revenue expenditure.” Respectfully following the Hon’ble Bombay High Court in the case of Raychem RPG Ltd. (supra) and the facts discussed above, we confirmed the order of CIT(A) on this issue. This issue of Revenue’s appeal is dismissed.
The next issue in this appeal of Revenue in for the A.Y. 2006-07 is as regards to the order of CIT(A) deleting the disallowance of operating and other expenses. For this Revenue has raised following ground: -
15 ITA No. 6720/Mum/2011 ITA No. 6755 & 7592/ Mum/2011 “On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in deleting the disallowances of the case and in law, the Ld. CIT (A) erred in deleting the disallowance of Rs.10,00,000/- out of Operation and other Expenditure without appreciating the findings of the AO that from the details furnished by the assessee during the course of assessment proceedings genuineness of the expenses could not be verified.”
21. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee has claimed operating and other expenses amounting to Rs.19.34 crores. This includes payment to related concern Aventis Pharma Ltd. on account of service charges amounting to Rs. 2.67 crores. The AO required the assessee to file detail of expenses exceeding Rs.50,000/- giving brief narrations of expenses. The AO disallowed adhoc sum of Rs.10,00,000/- stating that the assessee failed to file the requisite details and also held that the claim of assessee is for non-business purposes. Aggrieved, prefer appeal before CIT(A), who deleted the disallowance by going through remand report of the AO and reply of the assessee by observing as under: - “4.4 Based on the above submission, my predecessor had requested the A.O. to confirm whether he has received the above mentioned letters along with the statement of details of expenses exceeding Rs. 50,000/- each. In reply, the Addl. CIT has confirmed that the A.O. had received the above mentioned two letters. However, he has stated that the details submitted were not in conformity with the requirement. I have asked the appellant to file its response to the Addl. CIT's report dated 03.08.2011. In response, the appellant's A.R. has submitted vide his letter dated 12.08.2011 that the appellant had submitted the details as required by the A.O. and no further queries were received from A.O. Further he also points out that the A.O. has not considered appellant's letter dated 03.12.2008 and 27.11.2009 along with which the required- details were-submitted. In fact, the A.O. has made a disallowance by relying on appellant's letter dated 25.11.2008.
4. I have considered the submission made by the AR as well as the statement of details of expense exceeding Rs.50,000/- field before the AO and copies of which were again shown to me including debit notes in respect of expenses reimbursed to Aventis Pharrna Limited. I have also considered that A.R reply to the remand report. On perusing the letters submitted to the A.O. and also few high value bills and debit notes of Aventis Pharma Limited, I do not find any merit in making a surmise that the operations and other expenses debited to the P&L account are not genuine. I therefore delete the ad hoc disallowance of Rs 1000,000/- made by the AO direct him the same from the assessed income.”
16 ITA No. 6755 & 7592/ Mum/2011 22. We find that the assessee has filed details along with letter dated 27-11- 2009 and 01-09-2009 whereby, compete details as required by the AO were filed. The additional CIT during remand proceedings admitted that the AO has received the information vide above mentioned two letters. We find that the CIT(A) has considered this fact and allowed the claim of the assessee. We find no infirmity in the order of CIT(A) and hence, the same is confirmed. This issue of Revenue’s appeal is dismissed.
The next issue in this appeal in for the A.Y. 2006-07 is as regards the order of CIT(A) deleting the disallowance made by AO u/s 43B of the Act on account of service tax outstanding. For this Revenue has raised following ground: - “
On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in deleting the disallowance u/s 43B of Rs.2, 12,858/- being the amount of Service Tax outstanding as on the Balance Sheet date of 31.03.2006 without appreciating the fact that the same was paid after filing of return of income for A.Y. 2006-07 and hence was not allowable in the year under consideration.”
24. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the AO has disallowed service tax payable at the end of the year amounting to Rs.2,12,858/- by invoking the provision of Section 43B of the Act. The CIT(A) deleted the disallowance by following the co-ordinate bench decision of ITAT Chennai Bench in the case of ACIT Vs. Real Image Media Technologies P. Ltd. (2008) 9DTR 261 (Chennai), wherein, it is concluded that disallowance of service tax payable does not fall under the provision of Section 43B of the Act. Now before us learned Counsel for the assessee relied on the decision of Hon’ble Bombay High Court in the case of CIT Vs. Ovira Logistics P. Ltd. (2015) 377 ITR 129 (Bom) wherein Hon’ble Bombay High Court has considered the following substantial questions of law as under:- “(a) Whether on the facts and circumstances of the case and in law, the Tribunal was justified in deleting the disallowance of unpaid service tax under section 43B of the Act without appreciating that the said liability was clearly disallowable within the provisions of the said section?
17 ITA No. 6755 & 7592/ Mum/2011 (b) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the unpaid service tax would not be disallowable under section 43B of the Act as the liability to pay service tax had not arisen without appreciating the fact that the assessee has shown the said amount as a liability in its Balance Sheet? And Hon’ble High Court answered these questions as under: - “9. Having perused the aforesaid decisions, we are clearly of the view that section 43B does not contemplate liability to pay the service tax before actual receipt of the funds in the account of the assessee. In our view, liability to pay service tax into the treasury will arise only upon the assessee receiving the funds and not otherwise. Accordingly, when services are rendered, the liability to pay the service tax in respect of the consideration payable will arise only upon the receipt of such consideration and not otherwise.” Respectfully, following Hon’ble Bombay High Court in the case of Ovira Logistics P. Ltd. (supra), we allow this issue in favour of assessee and hence confirmed the order of CIT(A) deleting the disallowance. This issue of Revenue’s appeal is dismissed.
In the result, all the three appeals of Revenue are dismissed. Order pronounced in the open court on 22-11-2016.