TMI Blog2009 (10) TMI 648X X X X Extracts X X X X X X X X Extracts X X X X ..... quired by the assessee. Similarly, putting hoardings and neon signs could not also be considered on capital field. These expenditures do not lead to create any capital asset to the assessee. Even there is no benefit of enduring nature so to treat the expenses as capital expenditure. Since by incurring expenditure on advertisement and sales promotion, the assessee has not acquired any fixed capital asset, but these expenditures were incurred for earning better profits, and 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. Software expenses - Nature of expenditure as ''Capital or Revenue'' - The expenditure incurred by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture and partly towards revenue expenditure. The AO 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. We would like to say that the decision of Hon ble Bombay High Court in the case of CIT v. Kiloskar Tractors Ltd.[ 1998 (2) TMI 117 - BOMBAY HIGH COURT] , treating the whole of the payment as revenue in nature is of no help to the assessee as in that case, the payment was made towards right to use know-how for efficiently running of business and better profitability, and no part of the payment was at all related to the initial set-up of that assessee s business. The Hon ble Supreme Court in the case of Jonus Woodhead Sons Ltd. [ 1997 (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sement and sales promotion is not feasible to work out. 10 per cent of the expenses is treated as relatable to brand image and is treated as capital expenditure. Therefore, an amount of Rs. 3,50,50,300 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure so to treat the expenses as capital expenditure. Since by incurring expenditure on advertisement and sales promotion, the assessee has not acquired any fixed capital asset, but these expenditures were incurred for earning better profits, and 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 Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s allowed depreciation at the rate of 60 per cent on Rs. 94,15,191 which amounts to Rs. 56,49,115. The balance excess claim of depreciation of Rs. 38,66,076 is added back to the income of the assessee." 16. On an appeal, the CIT(A) allowed the assessee s claim after 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es were paid for use of software, which cannot be considered to be of capital in nature. In this connection, we may rely upon the decision of Hon ble jurisdictional Delhi High Court in the case of GE Capital Services Ltd. s case ( supra ), where the Hon ble jurisdictional Delhi High Court has held and observed as under : "The Revenue is aggrieved by an order dated August 25, 2006, passed by the Income-tax Appellate Tribunal Delhi Bench "C" in IT Appeal Nos. 2038, 2525 and 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 cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed expenses under the head "Management service charges to shareholders" of Rs. 6,82,06,000 as per details given in Schedule - 12 of the profit loss account, pertaining to "Administration cost". The assessee submitted before the Assessing Officer that these expenses were on account of management servicing charges paid to Distacom and M/s. Modicorp to the tune of Rs. 6,82,06,433 for providing assistance and advices as per Agreement with the above concerns. A copy of Agreement styled as "technical 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes that "Management Services" means the transfer of Modicorp know-how and the grant of non-exclusive, non-transferable license to use the Modicorp Intellectual Property Rights in India and advice and assistance more fully described in Schedule 1. As fees has been paid for the management services only have the assessee-company it is clear that know-how and license to use the Modicorp Intellectual Property Rights in India have been transferred to the assessee-company. The provisions of section 32 also 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment on quarterly basis for use of the expertise of its promoter companies. The decision of Income-tax Appellate Tribunal, Delhi in the case of Glaxo Smithkline Asia (P.) Ltd. v. ACIT , Range 12 [2006] 6 SOT 113 (Delhi) is on identical facts wherein the appellant instead of employing its own staff has made use of the infrastructure of another company and made payment to it." 29. Hence, the department is in appeal. The ld. DR reiterated the reasons given by the Assessing Officer in treating the payment of 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 Netwo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d company under the Companies Act, 1956, having its registered office at 60-D, Sainik Farms, New Delhi - 110 062 and its circle office at Mohali for Punjab circle and Karhati for Bangalore circle. 33.2 In the Agreement styled as "Technical Services and Operating Agreement" entered into with DCIT/Distacom and others, it has been stipulated that by this Agreement, DCIL and Distacom shall provide Modicom with the full transfer of Distacom know-how, and non-exclusive, non-transferable license to use the Dislacom Intellectual Property Rights 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... third party; and 2.3-2 ensure that the Distacom know-how and Distacom Intellectual Property Rights shall only be used and disclosed on a need to know basis to Modicom s employee." 33.5 In Clause 3 of the Agreement, it is stipulated that Modicom has appointed DCIL and Distacom to provide, and DCIL and Distacom each agrees to provide to Modicom, on the terms of the Agreement, the advice and assistance as set out in Schedule 1 during the term of the Agreement. 33.6 Services to be provided by Distacom to Modicom has been specified in Schedule 1 of the Agreement. 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 so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and tariffs for its cellular services if tariff control removes. 1.27 Providing a full range of customer support services from the point of sale onwards including customer inquiry helplines and service centres, and on line assistance to customers with inquiries with respect to bill and technical difficulties. 1.28 Improving billing accuracy, payment convenience and timelines or resolving network difficulties, in order to promote customers loyalty. 1.29 Developing wide range of value added services including voicemail, short messaging and advanced date transfer capabilities if applicable. 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 appropr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided in sub-clauses 9.1-1 to 9.1-7. 33.9 Clause 9.2 of the Agreement provides that notwithstanding any disclosure of proprietary information, the Modicom acknowledges that proprietary information shall remain the proprietary information of the Distacom, and Modicom shall not use such proprietary information in any manner or disclose such information to third parties, except as expressly permitted under the Agreement. 33.10 Clause 9.3 provides that performance of this Clause 9 shall survive the termination to this Agreement subject to a maximum of three years from the date of the Agreement. 33.11 Clause 11 of the Agreement 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 R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... com Commission for Policy issues on Cellular Industry towards financing of telecom projects, reduction of project costs in terms of import duty and interfacing with Telecom Commission on cellular policies. 1.2 Keeping current on various policies and guidelines of the Government. 1.3 Getting timely approvable from respective Central/State Government departments, including Reserve Bank of India. 1.4 Initiating, developing and maintaining contacts with external agencies ( e.g., bureaucrats, Government officials, foreign missions). 1.5 Dealing with the Indian and international banking communities. 1.6 Establishing, sound and effective credit control. 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 organizat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t obtaining enduring benefit for a considerable part on account of the technical information received from a foreign firm, payment whether made "once for all" or in different instalments co-relatable to the percentage of gross turnover of the product ultimately find out whether the expenditure or payment, thus, made makes an accretion to the capital asset and after the Court come to the conclusion that it does so, then it has to be held to be a capital expenditure. As has been held by this Court and already indicated in Alembic Chemical Works case [1989] 177 ITR 377 no single definitive criterion by itself could be determinative and, therefore, bearing in mind the changing economic 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights, in India and was desires of certain advice and assistance in order to enable the assessee to successfully provide cellular commercial services in the States of Punjab and Karnataka as per the license granted to it by the Department of Telecommunications. The nature of services provided by DCIL and Distacom and Modicorp, are to provide know-how for establishing or constructing and erecting of cellular telecommunications networks as per the obligations under the license granted to the assessee by the Department of Telecommunications. It is also equally true that these agreements provides for providing know-how and other information for carrying on the business of providing cellular 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring nature, the payment on that account would be certainly on revenue account. It is, thus, a case where the payment made by the assessee is composite payment for supply of technical know-how services, and use of Intellectual Property Rights for setting up cellular telecommunication networks or business, and also for operating and carrying on efficiently and profitably the assessee s business of providing cellular telecommunication services. In the present case, there exist no embargo on the assessee in carrying on business of providing telecommunication services even after expiry of agreement entered into with DCIL/Distacom and Modicorp. Thus, the payment of lump sum Base fee specified in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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