UCB INDIA P. LTD,MUMBAI vs. ADDL CIT RG 7(3), MUMBAI

The facts of the case, briefly, are as under: - 2.1 The assessee-company, engaged in the manufacture and trading of pharmaceutical products, filed its return of income for A.Y. 2006-07 on 29.11.2006 declaring total income of `23,72,68,243/-. The impugned order was passed under section 144C(13) r.w.s. 143(3) of the Act on 12.10.2009 wherein the income of the assessee was determined at 23,72,70,189/- in view of, inter alia, disallowance of `20,56,266/- on account of e- connectivity expenses.

Aggrieved, the assessee has preferred this appeal raising the following grounds: - UBC India Private Ltd. “1. The learned AO has erred in law and in fact, in making an addition of Rs.20,56,266 by considering e-connectivity charges as an expense incurred for acquiring Software and resulting in benefit of enduring nature and thereby classifying the expenses as Capital Expenditure. Your Appellant prays that such addition be deleted.

Ground No. 1 - Disallowance of e-connectivity charges - `20,56,266/- 4.1 In this ground, the assessee has assailed the action of the AO in making a disallowance of `20.56,266/- by considering e-connectivity charges as capital expenditure by holding that this expense is incurred for acquiring software and resulting in benefit of enduring nature. At the outset, the learned A.R. for the assessee submitted this issue has been considered and decided in favour of the assessee by the decisions of the Coordinate Bench of this Tribunal in the assessee’s own case in & 6682/Mum/2013 and 6558/Mum/2013 dated 18.05.2016 for assessment years 2004-05, 2005-06 and 2007-08 and ITA No. 1218/Mum/2014 both dated 18.05.2016. It is submitted by the learned A.R. that the Coordinate Bench held that the assessee neither acquired any software by payment of e-connectivity charges nor was there any enduring benefit to the assessee and therefore the e-connectivity charges paid by the assessee are revenue in nature. 4.2 Per contra, the learned D.R. supported the finding in the impugned order. 4.3.1 We have heard both parties and perused and carefully considered the material on record, including the judicial pronouncement cited (supra). We find that the issue of whether e-connectivity charges paid by the assessee are capital in nature as held by Revenue or revenue in nature as claimed by the assessee, has been considered by a Coordinate Bench of this Tribunal in the assessee’s own case for A.Y. 2004-05 in its order in ITA No. 6681/Mum/2013 dated 18.05.2016 and for A.Y. 2009-10 in ITA UBC India Private Ltd. No. 1218/Mum/2014 dated 18.05.2016. In the order for A.Y. 2004-05 the Coordinate Bench has considered the issue at paras 17 to 19 of the order and decided the issue in favour of the assessee holding as under at 20 of the order for A.Y. 2004-05: - “20. We have heard both the parties, perused the orders of the authorities below. The assessee is paying charges to its parent 21 UCB India Pvt. Ltd. company UCB SA annually certain amounts towards following services: access/ usage of SAP modules and related functionalities; data security, data protection, backup/ restore facilities; capacity planning and performance tuning; e-mail capacity; connection to intranet sites; web browsing capacity; access to corporate portal and global resources; worldwide support via globalized helpdesk organization and access/ usage of people management software. 20.1. It is the contention of the assessee that it has not acquired any software but was paying annual charges towards activity for various services provided for the parent company in access/usage of SAP modules and various other services referred to above. ON going through the agreement entered into by the assessee, we find that assessee has not acquired any software from its parent company but assessee is paying activity charges for the facility of access/usage of various applications, intranet websites, emails, global resources etc for day today running of the business. We do not find any acquisition of software by the assessee by payment of this activity charges. We also do not find any enduring benefit for the assessee. Thus, we hold that the e-connectivity charges paid by the assessee are of Revenue in nature.” 4.3.2 In its order in the assessee’s own case for A.Y. 2009-10 in dated 18.05.2016, the Coordinate Bench at para 12 thereof decided the same issue, whether e-connectivity charges paid were revenue expenditure as claimed in favour of the assessee holding as under at para 12 thereof: - “12. We find that the assessee had been incurred e-connectivity charges of Rs. 4. 73 crores, being allocated to it by its parent company annually for providing the e-connectivity and system services i.e. SAP services, e-connectivity services and People Soft services, that the AO held that the said expenditure was incurred for acquisition of software, he further held that the assessee was not in the business of software and that it was acquiring of the connectivity UBC India Private Ltd. and information system service to support its pharmaceutical business, that it was a capital expenditure, that he allowed depreciation at the rate of 60% on the said expenditure holding the same as being incurred for acquisition of software, that the DRP following the order for the A.Y. 2008-09 upheld the finding of the AO that the expenses were being incurred for acquisition of software. Here, we would like to refer to the Para 1.1 of the contract which deals with the scope of contract and reads as under: “UCB shall exit the station performed development work on software or new functionalities which shall be offered to UCB company..” A perusal of the above clause of the agreement makes it clear that the assessee had not get any owner’s right to any software, server, processes or connections, that the assessee would merely receive services related to the software, that it would costs/charges for uses of the leased line separately, that the parent company would provide the services to the assessee as any other party would provide. We find that the allocation of expenses by the parent company has not been challenged by the AO, that the AO and the DRP had not been able to prove that the expenses were not in nature of periodic charges(annual charges) and were one-time costs. It is also a fact that in case of failure to pay the costs it would not be able to have the benefit of the services. cumulatively, all these facts prove that the assessee had neither acquired any enduring benefit nor did any capital asset came into existence. Here, we would like to refer to the case of Asahi Safety Glass Ltd (346 ITR 329) believed by the Honorable Delhi High Court and same reads as under: “It is now somewhat trite to say that the test of enduring benefit is not a certain or a conclusive test which the Courts can apply almost by rote. What is required to be seen is the real intent and purpose of the expenditure and whether the expenditure results in creation of fixed capital for the assessee. It is important to bear in mind that what is required to be seen is not whether the advantage obtained lasts forever but whether the expense incurred does away with a recurring expense(s) defrayed towards running a business as against an expense undertaken for the benefit of the business as a whole. In other words, the expenditure which is incurred, which enables the profit making structure to work more efficiently leaving the source of the profit-making structure untouched, would be an expense in the nature of revenue expenditure. Fine tuning business operations to enable the management to run its business effectively, efficiently and profitably, leaving the fixed assets untouched would be an expenditure in the nature of revenue expenditure even though the advantage may last for an indefinite period. Test of enduring benefit or advantage would thus collapse in such like cases. It would be only truer in cases which deal with technology and software application, which do not in any manner supplant the source of income or add to the fixed capital of the assessee. The Tribunal, which is decidedly the final fact-finding authority has after noticing the material on record observed that the expenditure was incurred under various subheads, which included licence fee, annual technical support fee, professional charges, data entry operator charges, training UBC India Private Ltd. charges and travelling expenses. The final figure was a consolidation of expenses incurred under these sub-heads. The Tribunal rightly came to the conclusion that none of these resulted in either creation of a new asset or brought forth a new source of income for the assessee. The Tribunal classified the said expenses as being recurring in nature to upgrade and/or to run the system. In the background of the aforementioned findings, it cannot be said that the expenses brought about an enduring benefit to the assessee. The AO was perhaps swayed by the fact that in the succeeding financial year, i.e., 1997-98 (asst. yr. 1998- 99), the amount spent was large. First of all, the extent of the expenditure cannot be a decisive factor in determining its nature. …. the rationale supplied by the AO in support of its order which found resonance in submissions of the counsel for the Revenue is, flawed and, hence it would have to be rejected. What the assessee acquired through AA was an application software which enabled it to execute tasks in the field of accounting, purchases and inventory maintenance. The fact that the application software would have to be updated from time to time based on the requirements of the assessee in the context of the advancement of its business and/or its diversification, if any, the changes brought about due to statutory amendments by law or by professional bodies like the ICAI, which are given the responsibility of conceiving and formulating the Accounting Standards from time to time, and perhaps also, by reason of the fact that expenses may have to be incurred on account of corruption of the software due to unintended or intended ingress into the system—ought not give a colour to the expenditure incurred as one expended on capital account. Given the fact that there are myriad factors which may call for expenses to be incurred in the field of software applications, it cannot be said that either the extent of the expense or the expense being incurred in close proximity, in the subsequent years, would be conclusively determinative of its nature. The AO has erred precisely for these very reasons……. The contention raised by the counsel for the Revenue that in the books of accounts, the assessee had not written off the expense in issue, while in the succeeding assessment year only a part of the expense had been written off and, therefore, the assessee’s own understanding of the nature of the expense involved was that it was expended on capital account is only to be stated to be rejected. The reason being that the treatment of a particular expense or, a provision in the books of accounts can never be conclusively determinative of the nature of the expense. An assessee cannot be denied a claim for deduction which is otherwise tenable in law on the ground that the assessee had treated it differently in its books.” Cases relied upon by the AR also support the stand taken by the assessee. So, we are of the opinion that the expenditure incurred by the assessee on e-connectivity is incurred for day-to-day running of its business without creating any asset and therefore same is allowable as revenue expenditure. Effective ground of appeal, raised by the assessee is decided in its favour.” 4.3.3 Respectfully following the decisions of the Coordinate Bench in the Assessee’s own case for A.Y. 2004-05 in (supra) and for A.Y. 2009-10 in ITA No. 1442/Mum/2014 dated 18.05.2016