TMI Blog2007 (5) TMI 554X X X X Extracts X X X X X X X X Extracts X X X X ..... ot and cold once it has taken the stand that the receipts in the hands of the recipient are revenue in nature then such payments cannot be held as capital in the hands of the payer representing the consideration paid for the transfer of business. In the instant case, the recipient has not been taxed under the head Capital gain on the transfer of the business. Hence, the action of the Assessing Officer in holding that the receipts represented the receipts on account of transfer of business cannot be upheld. It is also not the case of the Revenue that the payments have been made before the commencement of business. In the instant case, the business was being already carried out by Tata IBM. As per the agreement, it is clear that IBM and Tata have agreed to carry out the activities as mentioned in clause 5 of the agreement through the assessee-company. The issue of commencement of business in respect of purchase of an existing undertaking by an assessee in the case of Vidarbha Irrigation Development Corporation v. Joint CIT [ 2005 (7) TMI 539 - ITAT MUMBAI] . In that case, the corporation was formed for completion of already existing projects or for further entrusted projects. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is that the learned Commissioner of Income-tax (Appeals) has erred in confirming the action of the Assessing Officer that no part of the expenditure made for use of domestic customer base and transfer of human skills amounting to Rs. 5.3 crore and Rs. 93,857,925 respectively can be allowed, as the same is capital expenditure incurred on obtaining a benefit of an enduring nature. 3. The assessee-company was incorporated during the financial year 1997- 98. Originally, there was a company jointly promoted by Tatas and IBM, which were known as Tata IBM. During the financial year 1997-98, it was mutually agreed between the two promoters to bifurcate the business activities into separate entities, viz., IBM Global Services India Private Limited ( the assessee-company ) and Tata IBM. As per the agreement entered into various assets of the erstwhile Tata IBM were transferred to the assessee-company for a certain consideration. As mutually agreed, the assessee-company has paid amounts of Rs. 9,38,57,925 and Rs. 5.3 crore on account of transfer of certain employees to the assessee-company and on account of transfer of the data base of the domestic business. The assessee-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta IBM towards training-related expenses of the transferred employees. Salaries paid for the transferred employees for a period of six months by Tata IBM during the period of their services with Tata IBM was also added to arrive at the valuation of the employees transferred. Before the Assessing Officer, it was submitted that such expenditure was incurred in getting the trained and skilled employees from Tata IBM. Thus, the assessee-company was not required to incur any expenditure on recruitment and training of the employees. It was argued that the expenditure incurred is towards revenue field. The Assessing Officer concluded that the working lacks objective and rational basis. The employees transferred to the assessee-company are to be considered as valuable asset, which would give an enduring advantage to the company over a long period of time. In case such employees are not viewed as valuable asset, there would not have been any necessity to pay such huge compensation towards an arrangement of their transfer to the assessee company. Actually business run by Tata IBM has been bifurcated and part of the business activities have been taken over by the assessee. The business activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efficiently or more profitably whilst leaving the fixed capital untouched, the expenditure would be on revenue account even though the advantage may endure for an indefinite future. By incurring the expenditure under reference, the assessee has saved further revenue expenditure for training the newly recruited personnel and for obtaining information about potential customers. Hence, the expenditure must be regarded on revenue field. Before the learned Commissioner of Income-tax (Appeals), the assessee has relied on the following judgments : 1. India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC) ; 2. CIT v. Gujarat Mineral Development Corporation [1981] 132 ITR 377 (Guj) ; 3. CIT v. Bhor Industries Ltd. [2003] 264 ITR 180 (Bom) ; 4. R. K. Swamy v. Asst. CIT [2004] 88 ITD 185 (Chennai). The learned Commissioner of Income-tax (Appeals), after considering the above submissions of the learned authorised representative, confirmed the finding of the Assessing Officer, after observing as under : I have considered the appellant' s arguments and facts of the case. There is no universal test to determine whether a particular expenditure is capital or revenue in nature. Whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operations. In fact, the expenditure has been incurred for commencing the trading operations in a big way. In the case of Vallambrosa Rubber Co. Ltd. v. Farmer [1910] 5 TC 529, 536 Lord Dunedin said ' . . . in a rough way I think it is not a bad criterion of what is capital expenditure as against what is revenue expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year' . If this test is applied to the expenditure of Rs. 23.70 crores, it is clear that the expenditure is capital in nature. It is true that the fact that the expenditure has been amortised over a period of years in the appellant' s books shall not determine the nature of the expenditure. However, it goes on to prove that even the appellant, in its books of account, has treated the expenditure as capital in nature. It may also be mentioned here that an expenditure may be capital although the corresponding receipts have been treated as a revenue receipt in the hands of the recipient. There is no contradiction between the order of the Commissioner of Income-tax (Appeals) in the case of Tata IBM Ltd., w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital nature, while the Revenue contended that receipts were of Revenue nature. In the case of the recipient, it was contended by the Revenue that the amounts received by the recipient should be treated as income. Support was drawn from the agreement, in which it was stated that the consideration is by reason of training, skills, practical experience and work culture for the transfer of personnel ; there- fore, the receipt on transfer of such employees is to be treated as revenue receipt. It was further argued that as per the agreement, the assessee was merely to share the data base and there is no provision that data base available with the recipient cannot be used by the recipient subsequently. The data base was shared between the payee and the recipient. 5.1 The learned authorised representative thereafter drew our attention to paras 4.8 and 4.9 of the order of this Bench in the case of the recipient. It was argued that when the learned Commissioner of Income-tax (Appeals) decided the issue under reference, he was not having the benefit of the order of the Tribunal in the case of the recipient. The learned authorised representative relied on the decision of the Chennai Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the apex court, the assessee got a long lease of newly constructed building suitable to its own business at a very concessional rent. The assessee made substantial savings in monthly rent for a period of 39 years by expending the amount on construction of building. The saving in expenditure was the saving in revenue expenditure in the form of rent. Whatever substitute for revenue expenditure should normally be considered as revenue. The building never belonged to the assessee and, therefore, the assessee has not acquired any capital asset by spending money on the construction of building. In that case, the expenditure was held as revenue. 5.4 The learned authorised representative further submitted that in the instant case, the return filed shows negative income and the assessed income is also negative and there was no case of tax avoidance as even after adding the amounts by treating certain expenditure as capital, the resultant assessed income is loss. 6. On the other hand, learned Departmental representative supported the order of the authorities below. The learned Departmental representative submitted that the assessee himself has treated the expenses as deferred revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucts in India ; 2. India is emerging as a major market for IBM products and ser vices in trade and industry particularly in view of increasing recognition of the importance of information technology to the overall economic development of India ; 3. IBM and Tata recognize that Tata IBM' s existing highly skilled human resource base needs fuller utilization for meeting the emerging demands for services in India and abroad ; 4. The emerging trends in the international information technology market have underlined the need to set up an independent entity to undertake services activity and in line with IBM' s world wide practices, IBM and Tata have jointly agreed to set up, along with Tata IBM, the IBM Global as a separate organizational base for services subject to the requisite permissions, consents and approvals of the competent authorities in India ; 5. IBM, Tata IBM and Tata have arrived at an understanding with respect to the formation and management of IBM Global, the transferability of their respective interests therein, and other matters ; 6. IBM and Tata have agreed to carry out the following activities through IBM Global : (a) Managed operations, (b) Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ays thereafter; (b) Rs.18.4 crores, being consideration for the value which inheres in the human resources, by reason of training, skills, practical experience and work culture for the transfer of the personnel listed in annexure II hereto, to be remitted within ninety (90) days on the date of receipt of GOI approvals of the application as proposed ; and (c) Rs. 5.3 crores for the transfer of the data base relating to Tata IBM' s clients and customers, including installation and warranty data, the list of which is maintained in the files of Tata IBM, to be remitted within ninety (90) days of the date of receipt of GOI approvals of the application as proposed. 4. Tata IBM shall, prior to the transfer of its personnel as afore said, secure prior written consent of such personnel to be transferred in terms hereof and agreed to be employed by IBM Global. IBM Glo bal agrees to give due credit to all the transferred personnel who have opted for employment with IBM Global for their past service in Tata IBM. If substantially all of the personnel listed in annexure II accept offers of employment by IBM Global shall assume responsibility for payment of severance compensation leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee was before the Mumbai Bench in the case of Vidarbha Irrigation Development Corporation v. Joint CIT [2006] 102 ITD 1. In that case, the corporation was formed for completion of already existing projects or for further entrusted projects. The business was already in existence and, therefore, the commencement of business is not in dispute. Hence, the expenditure under reference in the instant case cannot be termed as an expenditure incurred before the commencement of the business. 7.3 The Revenue has relied on the treatment given to such expenses by the assessee in its books of account. It is now well settled law that if according to the revenue law, the assessee is entitled to treat a sum as revenue expenditure, then the legal right of the assessee is not self estopped by the treatment given by the assessee to it in its own books of account. The Calcutta High Court in the case of CIT v. Berger Paints (India) Ltd. (No. 2) [2002] 254 ITR 503 treated the advertisement expenditure in respect of new brand products of the assessee as revenue though such expenditure was not treated as revenue by the assessee in its books of account but such expenditure was claimed as revenue in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. This issue has been considered by this Bench in the case of Wipro GE Medical Systems Ltd. [2003] 80 TTJ 455. This Bench on this issue has observed as under : As regards the payment made towards access to information base and for transition of customer order filing, this payment again, is for business consideration and we do not agree with the Commissioner of Income-tax (Appeals) that the amount was paid for obtaining information useful for a long period and that the same could be treated as plant. There is no question of acquisition of any asset when the assessee made the payments and acquire the information about the customer base. That will help the assessee to carry on its business very efficiently and in a more profitable manner. The payment of Rs.28.80 lakhs, in our view, is, therefore, a proper business expenditure allowable as deduction. Following the order of this Bench on this issue, it is held that the payment made for using the data base is revenue in nature and is allowed. 8. In respect of payment made for transfer of human skill, it is clear that the expenditure has been incurred to save the expenses on training and on recruitment. Such expenses were und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation as it does not result into an intangible asset entitled for depreciation. 9. The next grievance of the assessee is that the learned Commissioner of Income-tax (Appeals) has erred in not allowing the loss of Rs. 8,63,047 on account of exchange fluctuation. 9.1 It has been held by the learned Commissioner of Income-tax (Appeals) that such increased liability on account of exchange fluctuation will increase the value of the closing stock and, therefore, the expenditure will not be allowable. 9.2 This issue has been considered by this Bench in the case of Yokogawa India Ltd. This Bench, vide order dated September 8, 2006 in ITA Nos. 3443 and 3444/Bang./04 has held as under : 9. We have heard both the parties. Valuation of inventories is to be done as per para 6.2 of the AS-2. As per para 6.2 historical cost represents an appropriate combination of the : (a) Cost of purchase (b) Cost of conversion (c) Other costs incurred in the normal course of business in bringing the inventories upto their present location and condition. 10. Cost of purchase consists of the purchase price including duty and taxes, freight inwards and other expenses directly attr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0. The stock was valued at the end of the year at Rs. 300 as market price was low. In the subsequent year, the market price at the end of the year was Rs. 400. The assessee argued that the cost price at the end of the year was Rs. 300. The assessee argued that cost price of the item in the opening stock was Rs. 300 and, therefore, the same should be adopted as cost price in the sub sequent year for valuation. This contention was rejected by the Madras High Court. It was submitted that one has to see the original cost price. The original cost price is Rs. 500 and at the end of the sub sequent year, the market price was Rs. 400. The assessee was allowed to value at original cost or market value, whichever is less. When the assessee has purchased stock, the original cost price is to be seen. Subsequent effect in the increase in the liability of the assessee will not affect the original cost price of the inventory. 12. The learned authorised representative during the course of proceedings has pointed out that the assessee is consistently following the system of accounting, vide which the foreign exchange fluctuations is not added to the cost. The amount has not been included in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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