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2017 (1) TMI 956 - ITAT MUMBAI

2017 (1) TMI 956 - ITAT MUMBAI - TMI - Treatment to consultancy expenditure - capital expenditure or revenue expenditure - Held that:- The expenditure on development of new product in the line of business being carried out by the assessee is an expenditure related to such business and benefit to the assessee is in the revenue field, inasmuch as it seeks to improve the profitability of the assessee and the enduring benefit cannot be regarded to be in the capital field. The parity of reasoning lai .....

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h expenditure, which are incurred in the course of carrying on of business. - Decided in favour of assessee - Disallowance of one-third of directorsí foreign travel and conveyance expenses - Held that:- The details were furnished by the assessee company before the AO. In Seshasayee Brothers Ltd. vs. CIT (1960 (3) TMI 50 - MADRAS HIGH COURT) and Cooper Engineering Ltd. vs. CIT (1981 (3) TMI 49 - BOMBAY High Court) it has been held that where the details are not furnished by the assessee, the .....

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M/2014, ITA No. 4466/MUM/2014 - Dated:- 16-1-2017 - SHRI C.N. PRASAD (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) For The Revenue : Shri Rajesh Ojha, DR For The Assessee : Shri M.P. Lohia, Shri Nikhil Tiwari and Shri Rajiv Narayanan ORDER PER N.K. PRADHAN, AM The captioned cross-appeals by the assessee and the revenue are directed against the order of the Commissioner (Appeals) - 16 2 Mumbai dated 28.03.2014 which, in turn, has arisen from the order dated 10.12.2010 passed by the .....

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n of income for the A.Y. 2008-09 on 30.09.2008 declaring loss of ₹ 1,42,78,056/-. The nature of business is software development and related activities. The AO on examination of the details of bills submitted by the assessee-company along with copy of agreement for services, noticed that it had incurred an expenditure of ₹ 3,98,41,574/- for product development and customized software development and later on it marketed the same to its clients. The AO has narrated the details at page .....

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assets, the learned CIT(A) sent a copy of written submission and additional evidence filed by the of the assessee- company before her to the AO for examination and 3 called for a remand report. After considering the assessment order, the remand report of the AO, the contentions of the assessee and materials on record, the learned CIT(A) noted that the assesseecompany claimed that it had contracted with Fundtech Corporation, US, for providing software development services for fees, and the asses .....

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customers. The learned CIT(A) thus came to a finding that the assessee-company had developed software and provided services to its clients, hence in principle she agreed with the AO s action in treating expenses on software development of the assessee s products as capital expenditure. Thus coming to specific invoices listed at serial No. 1 to 39, she held the related expenses as capital expenditure. Regarding invoices at serial No. 40 & 45, the learned CIT(A) arrived at a finding that the .....

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eld in 4 respect invoices at serial No. 41 to 49 and 51 that these were for marketing services and the same cannot be held as for software development and held the AO s action treating the same as capital expenditure as incorrect. She also held the invoice at serial No. 50 of ₹ 2,33,836/- for online support services to be for providing annual maintenance services and for implementation of the product after sales and hence held the same as revenue expenditure. The learned CIT(A) also direct .....

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ech Ltd. Our charges for providing consultancy and technical assistance for product development and customized software development Technical assistance for product development and customized software development 2. Quexst Solutions Pvt. Ltd. The invoice is towards software development services of software product Provision of software development services for software product 3. I-flex Solutions Ltd. Professional fees for consultants - Offshore Professional fees for consultants - Offshore Softw .....

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77; 1,71,08,348/- and that the department is not in appeal against the said direction of the learned CIT(A). 2.4. The learned DR supported the order passed by the learned CIT(A). 2.5. We have heard the rival submissions and perused the relevant material on record. The AO in the assessment order dated 10.12.2010 for the impugned assessment year has mentioned the nature of business of the assessee-company as software development and related activities. As per Form No. 3 CD, the nature of business .....

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use 10 of the said agreement which says: All intellectual property rights including, rights and inventions, designs and improvements, which the contractor may make either alone or with Cashtech pursuant to or in relation to this agreement, shall automatically belong to Cashtech. The contractor shall have no claims and shall not make any claims in respect thereto. For this purpose the contractor shall promptly disclose and deliver to Cashtech all the information and data in its possession necessa .....

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by the contractor pertaining to the product, the operation or business of Cashtech or resulting from any work which the contractor shall have carried out pursuant to this Agreement and all rights of action for damages for infringement of such intellectual property rights for the entire period of the subsistence of the intellectual property rights and any renewals and extensions thereof and irrevocably undertake and confirm to execute, upon receipt of a request from Cashtech. All necessary and ad .....

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in the development of various software packages, like Trade Now, Electra ATM, Electra Card and Electra Payment Gateway (EPG), etc. The assessee explained to the AO that the expenditure incurred on development of such products was to the tune of ₹ 2,77,07,736/- and the same was claimed as revenue expenditure. The AO and thereafter the learned CIT(A) held that such development expenditure was capital in nature. In further appeal, the Tribunal held that: In our considered opinion, the afores .....

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period of time to compete in the market place. Therefore, in this background one has to examine as to whether the expenditure incurred on development and launching of new products in the same line of business results in an 7 advantage in the revenue field or in the capital field. The Hon ble Supreme Court in the case of Empire Jute Co Ltd (supra) has held that the true test to ascertain the nature and import of the expenditure is to examine the same from a commercial perspective. Even if, it has .....

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ing nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is nature of the principle laid down in this test. What is material to consider is nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee s trading operations or enabling the manageme .....

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to improve the profitability of the assessee and the enduring benefit cannot be regarded to be in the capital field. The parity of reasoning laid down by the Hon ble Apex Court in the case of Empire Jute Co Ltd (supra), as extracted above, clearly supports the stand of the assessee, inasmuch as the expenditure in question merely results in development of new products by the assessee in its existing line of business. Even otherwise, it is noteworthy that none of the expenditures in question are .....

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llowing depreciation @25% instead of 60% on consultancy charges which have been capitalized as software 8 development expenses . Therefore, the additional ground filed by the assessee is dismissed. 4. The 2nd ground raised by the assessee in this appeal is that the learned CIT(A) has erred in upholding the disallowance of one-third of directors foreign travel and conveyance expenses amounting to ₹ 11,72,587/- on an adhoc basis even though it was wholly and exclusively incurred for the purp .....

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ed with the said explanation of the assessee-company because of the reasons that in now-a-day s, business scenario nobody requires to go door to door for effecting sales particularly in software trade. The sales made to various foreign clients are not the new one. In view of the above, the AO disallowed ₹ 1,50,00,000/- (out of travel expenses of ₹ 4,49,96,230/-) as not related to business expenditure and added to the total income of the assesseecompany. 4.2 In respect of disallowance .....

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ngs of the discussion, what was discussed and the outcome of the same. The learned CIT(A) thus confirmed the disallowance of ₹ 1,50,00,000/- made by the AO. 4.3 The learned counsels submitted that on perusal of the details filed before the AO, it would be apparent that the entire expenditure towards travel and conveyance by the directors were incurred wholly and exclusively for the purpose of business. Commercial expediency was explained by stating that as most of the clients are located o .....

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on the basis of ad-hoc disallowance is liable to be deleted. 4.4 The learned DR supported the order passed by the learned CIT(A). 4.5 We have heard the rival submissions and perused the relevant material on record. We find that the conclusion arrived at by the AO that the sales were not made to new foreign clients, hence there is no requirement of prolonged visit of a week or so is not based on reasons. We find that the AO has disallowed an ad-hoc amount of ₹ 1,50,00,000/- out of travel ex .....

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Cooper Engineering Ltd. vs. CIT (1982) 135 ITR 597 (Bom), it has been held that where the details are not furnished by the assessee, the claim can be disallowed on the ground that the assessee had not established that the amount in question was expenditure laid out wholly and exclusively for the purposes of the business. If the object of the undertaken tour is commercial in nature, the expenditure would qualify for deduction. We find that the disallowance made by the AO of the directors expense .....

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