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TMI Blog2009 (10) TMI 648X X X X Extracts X X X X X X X X Extracts X X X X ..... or consideration." 4. Following amount of Advertisement & Sales Promotion Expenses were disallowed by the Assessing Officer in these three assessment years :- Assessment year Total expenditure incurred by the assessee Disallowed by the Assessing Officer @ 10% thereof 2003-04 35,05,03,000 3,50,50,300 2004-05 34,88,80,000 3,48,88,000 2005-06 51,27,48,000 Advertisement Expenses Marketing Expenses 31,26,05,000 20,01,43,000 3,12,60,500 The Assessing Officer disallowed Rs. 3,12,60,500 being 10 per cent of 31,26,05,000. 5. During all these assessment years under consideration, it was noticed by the Assessing Officer that assessee had claimed advertisement and sales promotion expenses and debited the same in the profit & loss account as under :- Assessment year 2003-04 35,05,03,000 Assessment year 2004-05 34,88,80,000 Assessment year 2005-06 51,27,48,000 6. The Assessing Officer asked the assessee to justify why part of the expenses should not be allowed being of capital in nature, viz., expenditure incurred towards brand building. The assessee explained before the Assessing Officer that the expenses on account of advertisement and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is added to the income of the assessee on account of disallowance of advertisement and business promotion expenses which is of capital nature as being relatable to brand building." 7.1 On an appeal, CIT(A) deleted the addition by observing and holding as under : "I have considered the observation of the Assessing Officer in the order of assessment as well as the submissions of the appellant before me. I agree with the submissions of the appellant to the effect that the normal advertisement and sales promotion expenditure incurred by it are allowable to it as a revenue expenditure. These expenses do not lead to creation of any capital asset or the benefit of an enduring nature. The case law cited by the appellant is on the identical facts and circumstances. The reliance of the learned AR on the Accounting Standard 26 issued by the Institute of Chartered Accountants also support the view that the expenditure incurred on advertisement and sales promotion including the expenditure incurred even for launching of a new product is allowable as a revenue expenditure in the year in which the expenditure is incurred. In view of the above, this ground of appeal is decided in favour of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd for facilitating assessee's operation of providing cellular mobile services, there exist direct nexus between the advertisement and sales promotion expenses and the carrying out of the business activity of the assessee. We, therefore, do not find any justification in interfering with the order of the CIT(A) in deleting the disallowance of 10 per cent of expenses towards advertisements and sales promotion incurred by the assessee for smooth functioning and carrying on assessee's business effectively, proficiently and profitability. The order of the CIT(A) is, thus, upheld on this issue. 11. Ground No. 2 in assessment year 2003-04, and ground No. 3 in assessment year 2004-05 and assessment year 2005-06, are identical as under : 12. In assessment year 2003-04, the total expenditure of Rs. 95,15,191 incurred by the assessee has been disallowed by the Assessing Officer by considering the same to be of capital in nature. However, the Assessing Officer allowed depreciation at the rate of 60 per cent on Rs. 95,15,191 which comes to Rs. 56,49,115 and the balance amount of Rs. 38,66,076 was disallowed. 13. In the assessment year 2004-05, total expenditure incurred by the assessee was R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er relying upon the decision of Hon'ble Delhi High Court in the case of CIT v. GE Capital Services Ltd. [2007] 164 Taxman 46 and the decision of the Tribunal, Delhi Benches in the case of Addl. CIT v. Asahi India Safety Glass [2006] 6 SOT 656. The CIT(A) also observed that since Hon'ble jurisdiction High Court has held that expenditure incurred on application software is allowable as deduction, which was binding on him, the decision of Hon'ble Rajasthan High Court referred to by the Assessing Officer in the order of assessment will not applicable to the present case. An identical view has been taken by the CIT(A) in all the three years. The expenditure incurred by the assessee on software development were, thus, allowed as deduction under section 37 of the Act by the CIT(A) and consequently, the depreciation allowed by the Assessing Officer by treating the expenses to be of capital in nature was withdrawn by the CIT(A). 17. Being aggrieved with the order of CIT(A) on this issue, the department is in appeal before us. 18. The ld. DR reiterated the reasons given by the Assessing Officer in treating the software development expenses to be capital in nature. 19. However, on the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 2529/Delhi/2002 relevant to the assessment years 1995-96 to 1997-98. The only question that has arisen in this case pertaining to the assessment year 1997-98 is that the expenditure incurred by the assessee on software was treated by the Assessing Officer as capital expenditure. The Tribunal was of the view that due to technological changes and the need to upgrade the software on a regular basis it cannot be said that the software was of an enduring nature. We are informed that the software for which the expenditure was incurred was MS Office, which is not a custom built software for the assessee and it is common knowledge that this software requires regular upgradation. We can understand that where customized software is prepared, then it could be of an enduring nature, but in this case MS Office is not customized software and it cannot be said that the software does not require frequent upgradation. We are of the view that there is no error committed by the Tribunal in taking the view that it did. No substantial question of law arises. Dismissed." 23. In the present case also, the software for which expenditure was incurred was Acrobat reading PDF files and M.S. Office a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical services and operating Agreements" entered into with Distacom Communication (India) Ltd. has been furnished to the Assessing Officer. During the year, a payment of Rs. 3,47,69,118 was made to Distacom. The assessee further submitted before the Assessing Officer that it had entered into a management-services Agreement with Modicorp for providing assistance as per the Agreement executed in October, 1999, a copy of which was also furnished to the Assessing Officer. In this regard, the company paid Rs. 3,42,56,250 to Modicorp for the services rendered during the year. 26. The terms of the Agreement were considered and analysed by the Assessing Officer, and after considering the same, the Assessing Officer was of the view that the assessee's Agreement with M/s. Distacom and M/s. Modicorp was with regard to the transfer of technical know-how and license to use Intellectual Property Rights. The relevant extract of the Agreements with above concerns were reproduced by the Assessing Officer in his assessment order. 27. In the light of the terms and conditions of the management services Agreement titled "know-how and Intellectual Property Rights", the Assessing Officer has taken a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o state that depreciation is allowable on intangible assets owned, wholly or partly, by the assessee. Thus, even part ownership of the assets is enough for claiming depreciation. In the instant case, even if it is accepted that the license of rights in Modicorp know-how and the Modicorp Intellectual Property Rights has not been fully transferred, there is no doubt that the assessee at least has part ownership of these licenses and know-how. In view of the above, the revenue expenditure claimed for computing Business Income on account of "Management Service Charges" of Rs. 6,82,06,000 is disallowed, being capital expenditure, on which depreciation at the rate of 25 per cent, i.e., Rs. 1,70,51,500 is allowable, as the same is part of "Intangible assets" as per the provisions of sub-section (1) of section 32. Net addition of Rs. 5,11,54,500." 28. On an appeal, the CIT(A) after considering the nature and character of the services obtained by the assessee, the CIT(A) has taken a view that management service charges paid by the assessee to Distacom and Modicorp does not resulted in creation of any intangible asset in favour of the assessee whether wholly or in part. The concluding part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management service charged of capital in nature. 30. The ld. counsel for the assessee, on the other hand, supported the order of the CIT(A) and drew our attention to the submissions made in details before the CIT(A) as reproduced in the order of the CIT(A). 31. Rival contention of both the parties has been considered and order of the authorities have been carefully gone through. We have also perused the papers and documents filed before us, which includes (i) the Agreement entered into between Distacom Communication (India) Ltd. and Distacom Communication Ltd. and Modicom Network Ltd., and (ii) Agreement entered into between Modicorp Pvt. Ltd. and Modicom Network Ltd. 32. The assessee-company is a joint venture company set-up by Dr. B.K. Modi Group of Companies in India along with Distacom Communications (India) Ltd., Hongkong, for providing cellular mobile services in the States of Punjab and Karnataka pursuance to the licenses granted to it by the Department of Telecommunications, Government of India. For its day-to-day operations and to made use of the expertise of the promoters, the assessee-company entered into Agreements with Modicorp and Distacom in 1999. A copy of each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India and is obliged to provide certain advice assistance for the designs, construction, installation, management operations, marketing, and accounting and finance of the Systems under and in accordance with the license Agreement dated 18-12-1995 between Modicom and Department of Telecommunications, Ministry of Communications, Government of India relating to the Punjab and Karnataka telecom circles. The expression "Distacom Intellectual Property Rights" has been defined as under :- ""Distacom Intellectual Property Rights" means any and all of the following in which the Distacom Group has any rights whatsoever, namely, patents, service marks, trade names, registered designs, copyrights, all forms of intellectual or industrial property (including in each case applications thereof and renewals and extensions thereof) in any part of the work and whether or not registered or registerable but excluding the trademarks and trade names "Sunday"." 33.3 The expression "Distacom know-how" has been defined as under:- ""Distacom know-how" means all of the knowledge, skill and experience of the Distacom Group in the design, construction, installation, management, operations, marketing, acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. Schedule 1 runs as under :- "Schedule 1 Services to be provided by Distacom to Modicom "Transferring Distacom Know-how and licensing Distacom Intellectual Property Rights to Modicom and training Modicom staff to be capable of operating efficiently and independently in the following areas :- 1.1 Construction and erection of the cellular telecommunications network; 1.2 Selection of appropriate computer hardware systems, platforms and associated technology; 1.3 Selection and training of computer software personnel to continuously upgrade software and software tools; 1.4 Quality assurance of hardware and software chosen so that data security and integrity is maintained; 1.5 Specification of switch equipment, network design and layout ("Systems"); 1.6 Holding technical discussions with potential vendors and contractors for installation and upgrade of the systems; 1.7 Engineering layout for microwave sites; 1.8 Erection of microwave stations; 1.9 Identification of suitable locations for installation of microwave towers and base stations and interfacing with them with the electronic equipment of the main switch center; 1.10 Identifications of suitable locations for insta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.30 Pricing strategy. 1.31 Provide the necessary technical support for the value added services. 1.32 Negotiation of all types of equipment and services supply contracts, interconnect and maintenance Agreements subject to approval of the terms thereof by the Board of Modicom. 2. Providing Advice and Assistance 2.1 Reporting on developments in the field of information technology and bringing in state of the art produce and tools for increased productivity and cost reduction in the following ways; 2.2 Providing radio paging network engineering services; 2.3 Evaluating appropriate types of networks equipment and technical services; 2.4 Information technology requirements for billing and customer care systems, network management systems and integration requirements; 2.5 Network design services and support services; 2.6 Project management and implementation services, including turnkey supervision; and 2.7 Network performance evaluation and adjustment; 2.8 Advice and assistance on customer care processes, including billing credit control, fraud control systems and processing and management processing adapted by Modicom; 2.9 Assistance in the development and grooming of loca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent for performance guarantee given by Mr. Richard Siemens acting on joint instructions of AIM and PAII. 34. Another Agreement on similar lines was entered into with Modicorp Pvt. Ltd. along with Dr. B.K. Modi and Asian Infrastructure (Mauritius) Inc. and PAII (Mauritius) Co. Ltd. This Agreement was entered into October 1999, styled as "Management Services Agreement" as per this Agreement, Modicorp shall provide assessee with the full transfer of Modicom know-how and the non-exclusive and non-transferable license to use Modicorp Intellectual Property Rights in India and shall be obliged to provide certain advice and assistance with respect to organization, structure and management process, Government relations, public relations and advertising, finance and human resources and other functions of its businesses in accordance with the license granted to the assessee by the Department of Telecommunications. The expression "Management Services" has been defined as transfer of Modicom know-how and grant of non-exclusive and non-transferable license to use the Modicom Intellectual Property Rights in India and advice assistance morefully described in Schedule 1 to the Agreement. The expre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rol. 1.7 Establishing effective financial control systems. 1.8 Establishing effective risk management systems. 1.9 Developing human resources strategies linked to business plans. 1.10 Benchmarking and implementing best human resources processes/practices in the business and facilitating development of organizational culture and systems. 1.11 Management development and training. 1.12 Brand positioning. 1.13 Corporate communications with third parties. 1.14 Support in development in implementation of effective organization structure. 1.15 Support in development in implementation of management processes. 1.16 Handling Media - PR and public affairs. 2. Providing advice and assistance 2.1 Advertising and marketing communications. 2.2 Support in representing Modicom in Cellular Industry Association (COAI) and Telecom Industry Associates (TISA). 2.3 Support in forging marketing alliances to introduce Value Added Services (VAS). 2.4 Procure candidates suitable executives to fill the position of the Modicom Chief Executive Officer and Chief Technical Officer and other executives suitable to fill senior management positions in Modicom other than the Chief Financial Officer, ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omic realities of business and the varieties of situational diversities the various clauses of the agreement are to be examined. But, in the case in hand, the High Court having considered the different clauses of the agreement and having come the conclusion that under the agreement with the foreign firm what was set up by the assessee was a new business and the foreign firm had not only furnished information and the technical know-how but rendered valuable services in setting up of the factory itself and even after the expiry of the agreement, there is no embargo on the assessee to continue to manufacture the product in question, it is difficult to hold that the entire payment made is revenue expenditure merely because the payment is required to be made at a certain percentage of the rates of the gross turnover of the products of the assessee as royalty. In our considered opinion, in the facts and circumstances of the case, the High Court was fully justified in answering the reference in favour of the revenue and against the assessee. These appeals are, accordingly, dismissed but in the circumstances without any order as to costs." 36. In the above case, 25 per cent of the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... telecommunication services. It is, thus, clear that the agreements of providing technical know-how, and rights to use Intellectual Property Rights is a composite agreements for providing technical know-how, and right to use Intellectual Property Rights and providing services for setting up of cellular telecommunication networks, and as well for carrying on successfully the business of providing cellular communication services to the assessee's customers in the States of Punjab and Karnataka as per the license granted to the assessee by the Department of Telecommunications. It is well-settled that know-how for establishing/setting-up the business is prima facie capital character. 38. In the present case, the assessee-company is a joint venture company set up by Dr. B.K. Modi Group of Companies in India along with Distacom Communications (India) Ltd., Hongkong, for providing cellular mobile services in the States of Punjab and Karnataka pursuance to the licenses granted to it by the Department of Telecommunications, Government of India, and has intended to start a business of providing cellular communication services as per the license agreement granted by the Department of Telecom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement payable in instalments is to be allocated partly towards capital expenditure and partly towards revenue expenditure. The Assessing Officer has treated whole of the payment to be of capital in nature as against which the CIT(A) has treated the whole of the payment as revenue expenditure. The present case is a case whether entire payment made by the assessee could not either be held to be of revenue expenditure or, on the other hand as capital expenditure. The entire payment made by the assessee is to be considered as paid towards set-up of the business as well as for efficiently carrying on the business after the same was being set-up, and, thus, the payment is to be allocated towards capital as well as revenue expenditure. 39. The Hon'ble Supreme Court in the case of Jonus Woodhead & Sons Ltd. (supra) has treated 25 per cent of the total payment on capital side. The said criterion of allocating 25 per cent of payment towards capital has also been applied by the Hon'ble Madras High Court in the case of CIT v. Southern Switchgear Ltd. [1984] 148 ITR 272 which had been affirmed by the Hon'ble Supreme Court in Southern Switechgear Ltd. v. CIT [1998] 232 ITR 359. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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