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Income Tax Appellate Tribunal, BENCH ‘B’ KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Shri M.Balaganesh, AM ]
ORDER PER N.V.VASUDEVAN, JM:
This is an appeal by the Assessee against the order dated 30.11.2012 of CIT(A)-XX, Kolkata relating to A.Y.2005-06.
Ground No.1(a) and (b) raised by the assessee read as follows :-
1(a)That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) erred in confirming the disallowance made by the Assessing Officer on account of provision for leave encashment amounting to Rs. 86,73,251/- b y invoking provisions of section 43B(f) of the Act without appreciating the fact that the issue is now covered in favour of the appellant by the decision of the Division Bench of the Calcutta High Court in its own case reported in 292 ITR 470 and defying the principle laid down by the Supreme Court in the case of Bharat earth Movers Ltd reported in 245 ITR 428 (SC) . (b) That the Ld CIT(A) erred in law by confirming the disallowance on the presumption that the Apex Court had stayed the operation of the Calcutta High Court decision, whereas it had merely admitted the SLP moved by the Revenue against the above order.“ 3. The Assessee is a company. It is engaged in the business of manufacturing and trading of storage batters and accessories thereof. In the course of assessment proceedings AO noticed that the assessee while computing its income from business Exide Industries Ltd. A.Y.2005-06 had claimed deduction of a sum of Rs.86,73,251/- on account of provision for leave encashment. AO after making reference of the provision of section 43B(f) of the Income Tax Act, 1961 (Act) held that deduction claimed cannot be allowed. CIT(A) confirmed the order of AO.
Aggrieved by the order of CIT(A) the assessee has raised the aforesaid grounds of appeal before the Tribunal.
5. At the time of hearing it was brought to our notice by the learned counsel for the assessee that identical issue had come for consideration in assessee’s own case for A.Y.2003-04 and 2004-05 in and 1414/Kol/2007 . This Tribunal vide its order dated 20.01.2016 held as follows :- “ 25. The issue raised in Ground No. 8 relates to the disallowance of 1.51 crores made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of provision made by the assessee for leave encashment. 26. The assessee-Company during the year under consideration had made a provision of Rs.1.51 crores for leave encashment on the basis of an acturial valuation and the same was claimed as deduction by relying on the decision of the Hon’ble Calcutta High Court in assesese’s own case reported in 292 ITR 470 and the decision of the Hon’ble Supreme Court in the case of Bharat Earth Movers reported in 245 ITR 428. The Assessing Officer, however, disallowed the claim of the assessee for provision of leave encashment relying on the Clause (f) inserted in Section 43B by the Finance Act, 2001 w.e.f. 1st April, 2002. The ld. CIT(Appeals) confirmed the said disallowance. The assesese challenged the constitutional validity of Clause (f) inserted in Section 43B before the Hon’ble Calcutta High Court by way of a Writ Petition and although the same was initially dismissed by the Single Bench, it was admitted and ruled in favour of the assessee by the Division Bench of the Hon’ble Calcutta High Court by holding that the introduction of Clause (f) to Section 43B is ultra virus of the Act in the absence of disclosure of the objects and being inconsistent with the basic intent of Section 43B. Thereafter the Department filed the SLP against the decision of the Hon’ble Calcutta High Court and while admitting the same, the Hon’ble Supreme Court vide its judgment dated 08.09.2008 stayed the judgment of the Hon’ble Calcutta High Court until further orders. 27. At the time of hearing before us, the ld. Counsel for the assessee has contended that even though the decision of the Hon’ble Calcutta Exide Industries Ltd. A.Y.2005-06
High Court holding Clause (f) of Section 43D as ultra virus is stayed by the Hon’ble Supreme Court while admitting the SLP filed by the Revenue, the same has not been reversed and this Tribunal, therefore, is bound to follow the same being a binding precedent. He has also contended that the decision of the Hon’ble Calcutta High Court was stayed by the Hon’ble Apex Court vide its judgment dated 08.09.2008 until further orders and there being another Interim Order passed by the Hon’ble Supreme Court on 08.05.2009, the stay granted earlier stands automatically vacated. A copy of the said interim order dated 08.05.2009 is placed on record before us, the contents of which are extracted below:- “Pending hearing and final disposal of the Civil Appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover the amount in case Civil Appeal of the Department is allowed. We further make it clear that the assessee would during the pendency of this Civil Appeal, pay tax as if section 43B(f) is on the Statute Book but at the same time it would be entitled to make a claim in its returns”. We have carefully perused the Interim Order dated 8th May, 2009 28. passed by the Hon’ble Supreme Court in the matter. It is observed that the Hon’ble Apex Court in the said order has made it clear that the assessee, during the pendency of the Civil Appeal, would pay tax as if Section 43B(f) is on the Statute Book, but at the same time, it would be entitled to make claim in its return. Keeping in view all these developments, the Coordinate Bench of this Tribunal in the case of Dy. CIT –vs.- BLA Industries Pvt. Ltd. (ITA No. 1434/KOL/2012 dated 16.01.2015) has restored the similar issue to the file of the Assessing Officer with a direction to await till the final decision of the Hon’ble Supreme Court on the issue and then to decide the issue accordingly. Following the said decision of the Coordinate Bench, we restore this issue to the file of the Assessing Officer with the similar direction. Ground No. 8 is accordingly treated as allowed for statistical purposes.
The learned counsel for the assessee prayed for similar direction as given by the Tribunal referred to above in the present assessment year also. The learned DR, however submitted that in view of the order of Hon’ble Supreme Court dated 08.05.2009 the addition should be confirmed.
Exide Industries Ltd. A.Y.2005-06
We have considered the rival submissions. In fact similar submission was made by the learned DR in A.Yrs. 2003-04 and 2004-05. This Tribunal had preferred to set aside the order of CIT(A) and remand the issue for fresh consideration by the AO after the final outcome of the case pending before the Hon’ble Supreme Court. We, therefore are of the view that the issue in the present assessment year also needs to be set aside to the AO for fresh consideration as was decided by the Tribunal in A.Y.2003-04 and 2004-05. We hold accordingly.
Ground Nos.2(a) & (b) raised by the assessee read as follows :- “ 2(a) That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) erred in confirming the disallowance made by the Assessing Officer on account of provision of warranty amounting to Rs. 10,19,48,2011- (being the excess amount over and above the actual expenditure), thereby violating the decision of the Hon'ble Supreme Court in the case of Rotak Controls (India) Pvt. Ltd reported in 314 ITR 62. (b) That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) erred in facts as well as law in confirming the disallowance of provision for warranty provided by the appellant in its books of account on scientific basis, holding it to be contingent in nature, thereby defying the principle laid down by the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd reported in 245 ITR 428(SC).”
The Assessee as manufacturer of lead acid storage batteries sells its products to customer with certain guaranteed life. In case of any failure during such guaranteed period, such battery is replaced free of cost (FOC). The Assessee does not directly sell the batteries to the customers. The batteries are sold to dealers who thereafter sell it to customers. The guarantee cards are provided by the dealers on behalf of the Assessee to the customers as soon as batteries are sold. The Assessee estimated the liability on account of warranty claims that may arise in future in respect of batteries sold during the previous year and claimed the same as deduction while computing its income from business. According to the Assessee the estimate so made by it was on a reasonable and scientific basis, i.e. based on warranty track record of 3 preceding years (which was submitted before the Assessing Officer) and recognized the same in accordance with the norms prescribed by the Institute of Chartered Accountants of India, namely the Accounting Standard 29. The provision for FY 2004-05 was recognized in the Exide Industries Ltd. A.Y.2005-06 profit & loss account in the accounts. According to the Assessee such warranty provision has been calculated on a systematic scientific approach based on warranty trend of earlier years in correlation to sales effected during previous two years and the current year i.e. FY 2094- 05 and the same was claimed as deduction u/s 37(1) in AY 2005-06.
The AO rejected the claim of the assessee company by stating that the warranty charge is not an ascertained liability as the detailed calculation was not filed. The Ld.CIT(A) confirmed the view of the Assessing Officer after observing that the CIT(A) has confirmed similar disallowance in AY 2003-04, 2004-05 by holding the said provision as contingent in nature. In subsequent years also the Ld CIT(A) have confirmed the net disallowance (i.e. over and above the actual payments) and thus he continued to consider the same view till the matter reaches finality. Aggrieved by the order of CIT(A) the assessee has raised ground Nos.2(a) and (b) before the Tribunal.
At the time of hearing it was brought to our notice that following the decision of the Hon’be Supreme Court in the case of Rotak Controls (India) Pvt. Ltd. 314 ITR 62 this Tribunal in assessee’s own case for A.Y.2003-04 and 2004-05 decided on an identical issue by remanding the same for fresh consideration by the AO. The following are the directions of the Tribunal in this regard :- “ 10. The ld. D.R. has not raised any contention to dispute the proposition propounded by the Hon’ble Supreme Court in the case of Rotork Controls India (Pvt.) Limited (supra) on this issue. He, however, has contended that the issue as to whether the assessee in the present case has satisfied the conditions laid down by the Hon’ble Supreme Court for allowing deduction on account of provision for warranty requires verification and since the same has not been done either by the Assessing Officer or by the ld. CIT(Appeals), the matter may be restored to the file of the Assessing Officer for the limited purpose of such verification. We find merit in this contention of the ld. D.R. and since the ld. Counsel for the assessee has also not raised any objection in this regard, we restore this issue to the file of the Assessing Officer with a direction to decide the same in the light of the decision of the Hon’ble Supreme Court in the case of Rotork Controls India (Pvt.) Limited. Ground No 2 is accordingly treated as allowed for statistical purposes. Exide Industries Ltd. A.Y.2005-06
After considering the rival submissions we are of the view that identical directions will be appropriate on ground no.2 raised by the assessee. Accordingly, we restore the issue to the file of AO to decide the issue afresh as was directed by the Tribunal in A.Y.2003-04 and 2004-05.
Ground No.3 raised by the assessee reads as follows :- “ 3. That the learned CIT (Appeals) erred both in facts as well as in law in confirming the disallowance of the provision for royalty and technical fees payable by the appellant aggregating to Rs. 70,67,245/- to a resident of Japan under section 40(a)(i), without considering the favorable provisions of India Japan Tax treaty, namely Article 24(3), which enables the appellant to claim deduction for the amount payable as royalty and technical fees as if the said amounts were payable to a resident, instead held that section 40(a)(i) read with section 195 applies to any payment of royalty.”
The assessee paid royalty and consultancy fees to a Japanese entity amounting to Rs.70,67,245/- during the relevant assessment year in respect of which tax was not deducted and deposited as per the provisions of section 195 of the Act. Such fact was disclosed in Clause 17(i) of the tax audit report as well. The relevant extract of the TAR for AY 2005-06 is enclosed at page 20 of the Paper book. The said sum was debited in the P/L account and claimed as deduction while computing income from business. According to the Assessee in respect of the payment in question, there was no liability to deduct tax at source and therefore no disallowance u/s 40(a)(i) of the Act could be made. The Assessee in this regard was of the view that by applying the principle of non-discrimination as per Article 24 of the India-Japan Double Taxation Avoidance Agreement ("tax treaty" or "DTAA"), there could be no disallowance u/s.40(a)(i) of the Act, since the section 40(a)(i) which specifically applies to non- residents is more restrictive than the law applicable to residents. The AO rejected the claim of the assessee company by simply stating: (i) Indo-Japan DTAA was in force since 07-03-1989 and the assessee all across offered similar amount of royalty and technical service to tax. Since this treaty was Exide Industries Ltd. A.Y.2005-06 effective since March 1989, there is no occasion to claim allowability of royalty / technical service by make a new interpretation of the said treaty. (ii) The tax treaty has been entered for avoidance of double taxation only and not for deciding whether any amount is disallowable or not. (iii) No-where it is specifically mention in the tax treaty that such fees is allowable irrespective of tax being deducted Or not. He relied on the decision of Apex Court in CIT vs PV AL Kulandaqan. Chettiar 267 ITR 654(SC) (iv) Similar disallowance stands confirmed by the Ld CIT(A) in AY 2004-05 and hence the same is being followed
On appeal by the Assessee, the Ld. CIT(A held that the issue arose during AY 2003-04 & 2004-05 wherein all this disallowances were sustained by his predecessor, he was also sustaining the addition made by the AO. He had held that as per the section 40(a)(i), if the tax is not deducted on of the amount of technical services or royalty payable to a non-resident, the same has to be disallowed. The deductibility of such expense depends only if the tax is deducted and deposited as per Chapter XVII-B of the Act. The tax auditor has clearly highlighted that the appellant had not deducted and deposited the tax and hence such expense can only be allowed in the year in which such taxes are actually deducted and deposited. Hence there is no occasion to deviate from the view taken by the AO and the CIT(A) in earlier years, i.e. AY 2003- 04 & 204-05.
At the time of hearing it was brought to our notice by the learned AR that the issued has already been decided in assesse's own case in AY 2003-04 & AY 2004-05, which was disposed off by a consolidated order of the Hon'ble ITAT C Bench on 20- 1-2016 [ITA nos 189/Kol / 2007 & 1414/ Kol/2007]. It was pointed out that the ITAT held that the stand of the assessee was that since PO disallowance on account of non- deduction of tax at source from payments of similar nature made to a resident was liable to be made under Income tax Act, the disallowance under section 40(a)(ia) on account of non deduction of tax from similar payments made to a non-resident could Exide Industries Ltd. A.Y.2005-06 not be made as it would result in discrimination. The Hon'ble Bench held that the said stand squarely covered by the Delhi Bench in the case of Millennium Infocom Technologies Ltd vs ACIT reported in 21 SOT 152 and accordingly directed the AO to delete the disallowance. The observations of the Tribunal in this regard reads as follows : “ 6. We have heard the arguments of both the sides and also perused the relevant material available on record. As agreed by the ld. Representatives of both the sides, this issue now stands squarely covered in favour of the assessee by various decisions of this Tribunal. In one of such decisions rendered by Delhi Bench of this Tribunal in the case of Millenium Infocom Technologies Limited –vs.- ACIT reported in 21 SOT 152, it was held that since royalty payments to residents could not be disallowed for non-deduction of taxes, similar payments made to non- residents could not be disallowed in the hands of the assessee under section 40(a)(i) as per Article 26(3) of the Indo-U.S. DTAA. Since the relevant provision of Article 26 of Indo-Japanese DTAA is analogous to the provision of Article 26 of Indo-US DTAA, we respectfully follow the decision of the Coordinate Bench of this Tribunal in the case of Millenium Infocom Technologies Limited (supra) and delete the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) under section 40(a)(i). Ground No. 1 is accordingly allowed.”
Respectfully following the aforesaid decision we direct that disallowance u/s 40(a)(ia) of the Act be deleted. Accordingly ground no.3 is allowed.
The assessee has filed an application seeking to raise the following additional ground of appeal :- “ That on the facts and circumstances of the case and the materials available before the Assessing Officer (AD), the disallowance of upgradation of ERP, SAP and software support system aggregating to Rs 88,82,203/- has been wrongly held to be capital in nature by the AO when the same has been incurred for the purpose of coordinating and rationalizing its functions and business process in order to ensure efficient and effective business practices without creating any new asset or advantage of enduring nature.”
19. It is not in dispute before us that the assessee had not challenged the order of AO disallowing the claim of the assessee for deduction of ERP upgradation expenses as revenue expenses. The learned DR objected to the admission of the additional Exide Industries Ltd. A.Y.2005-06 ground on the ground that adjudication of the additional ground may require examination of facts and therefore the assessee should not be permitted to raise the additional ground. We have considered his objection and are of the view that the question can be decided on the basis of facts available on record. Therefore the additional ground is admitted for adjudication as the same would result in proper adjudication of tax liability of the assessee.
20. On the additional ground raised
by the assessee, we find that in assessee’s own case in A.Y.2003-04 and 2004-05 this Tribunal had considered identical issue and held that the expenditure is revenue in character. The observations of the Tribunal in this regard are as follows :- “
21. Grounds Nos. 5(c) & 6 involve the issue relating to the disallowance of Rs.69.21 lakhs and Rs.2.05 crores made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of payment made by the assessee to Sonata Information Technology and on account of ERP expenses respectively.
22. During the year under consideration, the assessee had incurred expenditure of Rs.2.05 crores for upgradation of ERP. A sum of Rs.69.21 lakhs was also paid by the assessee to M/s. Sonata Information Technology for software and hardware support as well as consultancy services in connection with the implementation of the upgraded ERP. This entire expenditure incurred by the assessee for upgradation of ERP as well as implementation thereof was claimed as deduction being revenue in nature. The Assessing Officer as well as the ld. CIT(Appeals), however, treated the same as capital in nature on the ground that the same resulted in the enduring benefit to the assessee and accordingly allowed only depreciation thereon.
23. We have heard the arguments of both the sides and also perused the relevant material available on record. It is not in dispute that the ERP package was originally purchased and installed by the assessee in the earlier years and the expenditure incurred thereon in the earlier years was finally treated as capital in nature. During the year under consideration, the said ERP package was upgraded by the assessee and the expenditure in question thus was incurred by the assessee on upgradation of ERP as well as implementation thereon. As rightly submitted by the ld. Counsel for the assessee, the expenses incurred on upgradation of ERP has already been held as revenue expenditure allowable as deduction in the various decisions rendered by the Hon’ble High Courts as well as the different Benches of this Tribunal. In one of such decisions rendered in the case of CIT –vs.- Amway India Exide Industries Ltd. A.Y.2005-06
Enterprises, this issue has been elaborately dealt with by the Special Bench of this Tribunal and after discussing all the relevant aspects, it is held that expenditure incurred on upgradation of ERP module would be allowable as deduction being revenue in nature. At the time of hearing before us, the ld. D.R. has contended that the upgradation of ERP is nothing but replacement of ERP package as the earlier version of ERP becomes completely useless after upgradation. We are unable to agree with the contention of the ld. D.R. In our opinion, there is a difference between upgradation of ERP Software and purchase of ERP Software, inasmuch as the benefit of upgradation is only incremental, which is to the extent of additional features provided in the new version, while the same in the case of acquisition of new ERP package is full and completely new. Even this benefit is reflected in the price charge, inasmuch as the price charged for upgradation is only marginal equivalent to the incremental benefit available in the new version while it is full in case of acquisition of new ERP package. The upgradation of ERP, in our opinion, therefore, cannot be equated with replacement as contended by the ld. D.R. and the advantage being only incremental to the extent of the additional features in the new version, the same cannot be treated as the replacement of the entire ERP package so as to treat the expenditure incurred on upgradation as capital expenditure. Moreover, the use of any ERP package in the case of manufacturer like the assesese-Company is generally for coordinating and rationalizing its functions and business process in order to ensure that the business is carried on more efficiently and effectively and by applying the functional test, the expenditure incurred on ERP package, in our opinion, cannot be treated as capital expenditure as it does not result in creation of any new asset or advantage of enduring nature in the capital field. We, therefore, direct the Assessing Officer to allow the deduction claimed by the assessee on account of expenditure incurred on upgradation of ERP and implementation thereof treating the same as revenue in nature.
Respectfully following the aforesaid decision we hold that the expenditure in question has to be considered as revenue expenditure. The learned DR further made a prayer that in the event of the expenditure in question being allowed as revenue expenditure then the depreciation allowed to the assessee should be withdrawn. We are of the view that the prayer of the learned DR is correct and has to be accepted. We hold and direct accordingly.
Exide Industries Ltd. A.Y.2005-06
In the result the appeal of the assessee is partly allowed.
Order pronounced in the Court on 02.03.2016.