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TMI Blog2010 (10) TMI 1112X X X X Extracts X X X X X X X X Extracts X X X X ..... ered the assessee's contention that the investment in shares were made in earlier year and there was no borrowed funds. The CIT(A) was of the view that the expenditure pertaining to exempt income is not disallowable in accordance with section 14A of the Act. The CIT(A)estimated 10% of the expenditure related to dividend income disallowable u/s.14A of which calculation comes to ₹ 2,41,598/-. Against the order of the CIT(A), the assessee and the revenue both are in appeal before us. In the revenue's appeal being ITA No. 652/M/08, ground No. 2 is related to this issue. 5. The learned counsel for the assessee submitted that in the assessment year 2003- 04 no such disallowance was made. He further submitted that in the assessment year 2004-05, the Assessing Officer himself accepted the order of the CIT (A) for the assessment year 2002-03 and 10% of the expenditure was disallowed u/s.14A. In the assessment year 2004-05 the Assessing Officer himself held that 10% of disallowance is fair and justifiable. 6. The learned Departmental Representative, on the other hand, relied upon the order of the Assessing Officer. 7. We have heard the learned representatives of the parties and reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. The CIT(A) considered the following break up of the expenditure : Sr.No. Nature of expenditure Amount (Rs.) 1 License to use software - List Price 74,15,133 2 Maintenance Fees @17% of the list price 12,60,572 3 Consultancy Fees 30,00,000 4 Pther expenses (out of pocket expenses of consultants, personnel cost) 20,94,180 Total 1,37,69,885 The CIT(A) allowed maintenance fee of ₹ 12,60,572/-and for the balance amount he confirmed the order of the Assessing Officer observing that the assessee has incurred substantial amount on the installation of new soft ware. The assessee obtained enduring benefits for a number of years. 11. The assessee is in appeal against the order of the learned CIT(A). Though the revenue has filed appeal but no ground of appeal is taken in respect of this issue decided by the CIT(A). 12. The learned counsel for the assessee submitted that the assessee has claimed SAP expenditure as revenue expenditure. The A.O. taken it as capital expenditure. The CIT(A) confirmed the order of the A.O. except maintenance fees of ₹ 12,60,572/-. The learned counsel for the assessee submitted that SAP/ERP is a comprehensive software/program, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough the decisions cited. The assessee purchases the software called as SAP. The assessee claimed the expenditure incurred on the said software as revenue expenditure, but the same disallowed by the revenue, treating it as capital expenditure. The question to be examined in this ground of appeal is whether the expenditure incurred on SAP/ERP/software by the assessee is a revenue expenditure or capital expenditure. There is no embracing formula, which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure incurred. To know the nature of activities for which expenditures incurred we would like to refer written submissions of the assessee filed before CIT (A) of which copy placed in paper book at page numbers 80 to 117. The relevant part of Para 42 of the said letter reproduce as under:- "It is relevant to note the concept of ERP in brief in order to understand the correct nature of said expenditure. There are number of different systems in a large company's "back office," including, planning, manufacturing, distribution, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intellectual property rights, including patent, trademark, service mark, copyright and trade secret rights, in the SAP Proprietary information are and shall remain in SAP and its Licensors. Licensee acquires only the right to use the Software under the terms and conditions of this Agreement and does not acquire any ownership rights or title in or to the SAP Proprietary information and that of SAP's licensors. (a) Licensee shall not copy, translate, disassemble, or decompile, nor create or attempt to create, by reverse engineering or otherwise, the source code from the object code of the Software. In the event source code is provided to Licensee, SAP, in its sole discretion, reserves the right to delete, or to require the deletion of, such source code and all copies thereof in Licensee's possession or control whenever a future Release, Version, or Correction Level provides for like functionality in an object code format. (b) Subject to Section 6.3, all Modification and Extensions to the Software and Documentation shall be considered part of the Software and Documentation for purposes of this Section 6." 17 We find from the clauses of the agreement that the agreement itself coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Explanation 4 in clause (ii) of sub-section 1 of Section 32 of the Act. The said section provides that know-how means any industrial information or technique likely to assist in the manufacturer or processing of goods or in the working of mines, oil-well or other sources of mineral deposits. In the case under consideration, the assessee neither purchased any software nor the expenditure is incurred related to manufacturing operation, therefore, we do not agree with this reason of the A.O. for disallowing the assessee's case. 20 In the light of discussions, we allow the claim of the assessee as revenue expenditures and the AO is directed accordingly .The AO further directed that if depreciation if any has been allowed same be withdrawn. 21. Ground Nos. 4 to 8 read as under: "4. The learned CIT(A) has erred in law and in facts in restricting the claim of deduction of ₹ 47,72,129/- made by appellant u/s.80HHC of the Act. 5. The learned CIT(A) has erred in law and in facts in holding that income from DEPB should not be considered u/s.80HHC(3)(c) for the purpose of computing deduction u/s.80HHC of the Act 6. The learned CIT(A) has erred in law and in facts in upholdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t u/s.115JB deduction u/s.80HHC is to be reduced or not. The learned counsel for the assessee submitted though in earlier years the ITAT has decided this issue in favour of the assessee but on account of fairness, the issue is covered against the assessee by the judgment of the jurisdiction High Court in the case of CIT v. Al-Kabeer Exports Ltd. ITA No. 2619 of 2010, judgment dated July 8/9, 2010. 25. After hearing learned representatives of both the sides, we find that the issue is covered against the assessee by the judgment of the jurisdictional High Court in the case of CIT v. Al-Kabeer Exports Ltd. ITA No. 2619 of 2010, judgment dated July 8/9, 2010 but subsequently it was noticed the finding of said judgment has been reversed by the Supreme court in the case of Ajanta Pharma Ltd V CIT Civil appeal NO 7518 of 2010 dated 9.9.2010, therefore the matter is sending back to the file of AO with direction to decide the issue a fresh in accordance with above judgment of the supreme court after providing opportunity of hearing to the assessee. 26. The assessee has also raised the following additional ground: "The learned CIT(A) has erred in law and in facts in confirming the action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails of expenditure, we notice that the items, which mentioned by the AO in the details, are revenue in nature. The contention of the learned Departmental Representative that the items pertained to store items cannot be claimed as revenue unless the same is utilized for the purpose of business. We find that this was not the case of the AO. Therefore, we do not find any substance in this contention of the learned Departmental Representative, as contentions of the Learned DR are not relevant to the case make out by the AO. Even otherwise, when the assessee followed a particular method of accounting that the consumable store items as and when purchased is accounted for as expenditure. Such method is not an incorrect method of accounting. We, therefore, do not find any substance in this ground of the appeal of the same is dismissed. 34. Ground No. 2 taken by the revenue reads as under: "On the facts and in the circumstances of the case and in law, the learned CIT(A) was not correct in restricting the disallowance u/s.14A of the I.T.Act to ₹ 2,41,598/- as against ₹ 16,45,319/-made by the A.O. without appreciating the facts brought on record by the A.O. 35. This ground ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orked the depreciation claim on royalty payment for the financial year 2001-02 and withdrew the excess claim of ₹ 21,95,752/-, the balance depreciation amount is ₹ 46,76,519/- as claimed on actual payment of royalty for the year under consideration. The AO was of the view that the assessee is not entitled to depreciation, as royalty is not a depreciable asset. The AO followed the detailed discussion made in the assessment year 2001-02 and disallowed the assessee's claim of depreciation. The CIT(A) allowed the assessee's claim following the order of the CIT(A) for the assessment year 2001-02 holding that the assessee is entitled to depreciation on the use of trade marks. 39. The learned representative for the assessee submitted that the issue is covered by the order of the Tribunal in assessee's own case for the assessment year 2001-02 in ITA No. 6477/M/04 and others order dated 9th July, 2008. The relevant facts and findings of the ITAT are as under:- "16The next dispute in the Revenue's appeal relates to allowing of depreciation of ₹ 69,97,585/- in respect of royalty payments. We have heard the learned counsel for the assessee and gone through the discussions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 002-03) & page No. 22 of his said order) dated 22.07.2004, considered the same as capital in nature and allow the depreciation of ₹ 2.50 crores (i.e. @ 25% on said amount of ₹ 10 crores) thereon. The copy of the said first appellate order, dated 22.07.2004 for assessment year 2001-02 is enclosed at Serial No.5 of said Paper Book for the assessment year 2002-03. 3. Meantime, the Learned Assessing Officer passed the assessment order for assessment year 2002-03 on 31.01.2005, rejecting the claim of the appellate company to consider the same as revenue expenses and at the same time did not allow the depreciation on the same , against which the Appellate company preferred an appeal dated 16.03.2005 before your honour, which is pending for final hearing and disposal." 42. The finding of the CIT(A) reproduced as under:- "I have perused the order of CIT(A) in the appellant's case for assessment year 2001-02. it is held therein that the expenditure incurred on marketing know-how be considered as a capital expenditure and depreciation be accordingly allowed. For this year the appellant has claimed depreciation on the basis of the decision of the CIT(A) for the assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the decision of the Mumbai Tribunal in the case of USV Ltd. In this case, the assessee company has already engaged in manufacturing and marketing of pharmaceutical products with a view to expand its market base, it entered into agreement with another company. Apart from acquiring the brands, it also acquired data and details of all scientific and marketing know-how. The benefit of the expenditure and noncompetition was dictated by business necessity and commercial expediency and the benefit derived out of it was directly related to enhancement of its profitability and was not in connection with the acquisition of any tangible or capital assets. The expenditure was held to be revenue in nature. The facts of this case are identical to the facts of the USV Ltd. case, where under identical circumstances, the Tribunal has already allowed the said expenditure to be treated as revenue in nature. To the same effect the decision of the Bangalore Bench of the Tribunal in the case of IBO Global Services India (P) Ltd., vs. DCIT., 113 TTJ (Bang.) 747. Following the aforesaid decisions, we are of the view that the expenditure in question is clearly in the revenue field and in the direction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000. The learned CIT(A) following the order of his predecessor for the assessment year 2002-03 held that the expenditure on acquiring the licence to use ERP software is a capital expenditure. 52. The learned Departmental Representative submitted that the A.O. may be directed to follow the directions for the assessment year 2002-03. He further submitted that the assessee was not having the relevant bills and description and, therefore, the matter may be sent back to the file o the CIT(A) for necessary verification. 53. We have heard the learned representatives of the parties and records perused. Identical has been decided in the assessee's appeal for the assessment year 2002-03 in Para 15 to 20 of this order. The nature of payment is subject to verification, we, therefore, send back this issue to the file of the A.O. with direction to verify the nature of expenditure and decide the ground in the light of our discussion made in the assessee's appeal for the assessment year 2002-03 after providing adequate opportunity to the assessee. 54. Ground No. 4 taken by the assessee reads as under: "The learned CIT(A) has erred in law and in facts in upholding the contention of the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. If this amount is allowed as a deduction and in the near future the amounts is recovered then, the whole purpose behind the provision of this section shall be defeated. Thus, the deduction claimed by the assessee is reduced by ₹ 40,62,469/- and accordingly the deduction claimed and allowed for bad debts remains at ₹ 62,37,531/-." 56. The CIT(A) confirmed the order of the AO observing that the assessee has not furnished any evidence to show that the amount is impossible to recover from the debtor. 57. We have heard the parties and records perused. The admitted facts of this ground are that the assessee had written off the amount as bad debt in the books of accounts. The objection of the AO is that Glenmark Exports is a sister concern of the assessee. All trading transactions were routed through Glenmark Exports Pvt. Ltd. Glenmark Exports, not assessee but its sister concern has shown this amount as a provision for doubtful debts. The AO is not in correct in appreciating the facts. He should consider facts of the case of assessee and not the facts of books other party. As stated above that the assessee had written off the amount as bad debt in the books of accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the assessee. 63. Grounds 8 to 10 taken by the assessee read as under: "8. The learned CIT(A) has erred in law in confirming the action of the AO of computing book profit u/s.115JB at ₹ 43,16,98,053/- as against ₹ 42,91,21,845/- declared by the appellant. The Hon'ble CIT(A) ought to have appreciated that the claim made by the appellant is as per the provisions of the Act and hence, should be allowed. 9. The learned CIT(A) has erred in law and in facts in not agreeing with the contention of the appellant that for the purpose of computing book profits u/s.115JB, deduction u/s. 80HHC, which is reduced from the 'profit after tax', is to be computed considering 'book profits' as 'profits of the business' in pursuance to provisions of section 115JBof the Act. 10. The learned CIT(A) has erred in law and in facts in not agreeing with the contentions of the appellant that for the purpose of computing book profits u/s.115JB, 100% of the eligible profit so computed u/s.80HHC is to be reduced, in pursuance with subclause (iv) of Explanation to section 115JB(2) of the Act." 64. These grounds are identical to grounds taken in assessment year 2002- 03 which has been deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in law, the learned CIT(A) was not correct in directing to allow the deduction u/s.43B of I.T.Act amounting to ₹ 87,68,137/- being late payment of P.F. and ESIC without appreciating the facts brought on record by the A.O." 72. The AO made disallowance under section 43B.The AO was of the view that the payments were to made within 15 days .The AO did not allowed grace period of 5 days . The CIT(A) allowed the claim of the assessee by observing that the payment made within the grace period is allowable u/s.43B. After hearing the parties, we notice that the admitted facts of this ground are that the payment of PF, ESIC, bonus and gratuity, etc were made within the grace period as held by the CIT(A) and there is no contrary material on record neither it has been pointed out by the revenue, we therefore confirm the order of the CIT(A). 73. Ground No. 3 reads as under: "On the facts and in the circumstances of the case and in law, the learned CIT(A) was not correct in directing to allow the claim of the assessee u/s.35(1)(iv) of I.T.Act amounting to ₹ 3,70,35,456/- in respect of capital expenditure incurred by the assessee on cost of land the construction of building ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch deduction as may be admissible under the provisions of sub-se.(2). Sub-sec (2AB) of sec.35 provides that where a company engaged in the business of pharmaceuticals etc. incurs and expenditure on scientific research [not being expenditure in the nature of cost of any land or building] on in-house research and development facility as approved by the prescribed authority, then deduction of a sum equal to 1 1/2time of the expenditure so incurred shall be allowed. Thus, it can be seen that the exception to the claim of deduction of the expenditure incurred on cost of any land or building is provided for only under sub-sec.[2AB] of sec.35 and not under clause (iv) of subsec.( 1) of sec.35 of the Act. The assessee's claim is undisputedly u/s.35(1)(iv) of the Act and as rightly held by the ld.CIT(A) 100% of the capital expenditure on scientific research relating to the business carried on by the assessee is admissible as provided under sub-sec.(2) thereof. In view of the same, we do not see any reason to interfere with the order of the CIT(A) and the revenue's appeal is dismissed." Since identical facts the issue has been decided in favour of the assessee, we respectfully follow the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory building 1 27000 Gypsum Board False Ceiling 2 87425 Interior ceiling and side walls of Gr. 3 436580 Structural Steel and Torr steal Ismb-400 551005 Repairs and maintenance - Factory others 4 181336 LAN Cabling at Nasik factory 181336 Repairs and maintenance - Machinery 5 31362 Prefilter (Flange Type) - Animal house 6 28308 Cooling coil 7 50966 Piston 8 23416 Tungsten lamp with holder 134052 83 The CIT(A) decided the issue as under:- "5.5 I have considered the submissions of the appellant. On going through the details of repairs and maintenance expenditure of building which has been capitalized by the assessing officer. It is seen that the expenditure is incurred for making substantial renovation of office. The appellant has provided false gypsum board ceiling and also carried out work on Interior ceiling at side walls. The appellant has filed no evidence that the expenditure is in the nature of repairs only. By incurring this expenditure, the appellant has brought into existence a totally new asset in the form of furnished office. The expenditure is, therefore, required to be treated as capital expenditure as the same is for substantial renovati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 002- 2003,accordingly confirmed the order of the CIT(A). 8. The Hon'ble CIT (A) has erred in facts and in law in charging interest u/s.234B and 234C of the Act. 88 This ground is consequential ground, the AO is directed accordingly. 9. The Hon'ble CIT (A) has erred in facts and in law in initiating penalty proceedings u/s.271 (1) (c) of the Act. 89 This ground requires no finding as same against the initiation of penalty. ITA No 4783/M/07 Ay 2004-2005 by revenue 90 The grounds raised in this appeal reads as under:- "1. On the facts and in the circumstances of the case and in law, the learned CIT(A) is not right in directing to allow depreciation amounting to ₹ 26,30,542/- on payment of royalty, which is not a depreciable asset 91 This ground of appeal is similar to ground No 3 of appeal of revenue for AY2002-2003 where in the issue has been decided in para 36 to 40 of this order, the AO is directed accordingly. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) is not right in directing to allow deduction u.s,43B r.w.s.36(1) of I.T.Act in respect of payments of the employee's contribution to the Provident Fund and to the ESIC etc ..... 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