TMI Blog2021 (8) TMI 369X X X X Extracts X X X X X X X X Extracts X X X X ..... AO. Nature of expenses - technology recharge cost - whether the assessee s claim of technology recharge cost is revenue expenditure or capital expenditure? - HELD THAT:- It may be gainful to refer to the exposition in the case of Empire Jute Co. Ltd. [ 1980 (5) TMI 1 - SUPREME COURT ] wherein it was observed that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to consider is the 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 management and conduct of the assessee's business to be carried on more effectively or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin 6 months of grant of such registration. The assessee claimed that it commenced business operation from 12/8/2010. The annual report further stated that the company operates as a credit bureau, with 49% shareholding held by the Experian UK and the balance 51% held by seven Indian partners, being leading banks and NBFCS. The report also stated that the company collected information from various sources and provides Experian Credit Reports to lenders and consumers to reduce risk and facilitate responsible lending to consumers, in compliance with RBI guidelines. It is also stated that intangible asset comprise of expenditure incurred by the company on internal design and development of databases and development fees paid for Customising Credit Bureau Platform (CBV2) for Indian operations. All expenditure that can be directly attributed or allocated on a reasonable and consistent basis to create and make the asset ready for its intended use are capitalised by the company. The report states that the company commenced its business operations 12/8/2010 and consequently capitalised WIP, which consisted of cost incurred towards development and designing of databases and credit bureau p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atabase was insufficient the utility of CIR to the user thereof was itself doubtful. That moreover, the assessee company had claimed that it had issued CIR to 32 persons, resulting in earning an aggregate fee of ₹ 4004/- during the previous year as per its profit and loss account. That therefore, the assessee was requested to explain the complete step by step procedure for generating and issue of CIR and furnish the copies of CIR issued to 32 customers from whom the assessee had claimed to have received in aggregate fee of ₹ 4004/-. The assessee furnished written submissions and the copies of reports which was considered by the Assessing Officer. 6. The Assessing Officer stated that the assessee did not produce evidence in support of third party such as UAT certificate signed by the software providers/vendors, the said implementation certificate was a self serving document with questionable authenticity. That also, despite several opportunities to provide suitable certificate/documentation from the likes of third party software, to prove the readiness of the software, the assessee failed to discharge this onus and was not able to prove with cogent evidence that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) deleted the disallowance by holding as under : 5.2.4 It is noted that the appellant is in the business of providing credit information and is duly registered with RBI. Amongst many related services, one of the services is providing Credit Information Report (CIR) giving information regarding borrower's credit accounts and credit ratings etc. This activity requires availability of requisite computer hardware and software. The appellant entered into a software licence agreement with Experian Ltd. (EL) w.e.f. 21/11/2009. As per the agreement, EL was to develop and maintain software platform called Credit Bureau Platform (CBV2). The appellant also pointed another vendor, SAS on 15/01/2010 for providing software required in relation to CBV2 and signed an agreement on 01/05/2010. The customised CBV2 was delivered by EL March 2010. The appellant was receiving non-standard data formats from various banks with Indian names and addresses that was creating certain problem in data upload. However, due to efforts of EL and SAS, the appellant claims that by August 2010 they could successfully provide matches sample enquiries. Accordingly, they announcedl2/08/2010 as the date o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tabase to make it possible even to generate a single CIR report. Secondly, 32 individual customers were too low a number to establish commencement of business. New age software and data processing based business is extremely different from bricks and mortar business Information technology is a dynamic and complex service capable of growing exponentially. Apart from conjectures and surmises, there is nothing to conclude that the claim of the appellant that its software CBV2 platform was functional on 12/08/2010 was incorrect. Particularly so, when the appellant has duly reported operational status to RBI. 5.2.9 Accepting that the software for processing data was operational, it has now to be seen whether the appellant had any data available for processing. As can be seen from the details filed before the Assessing Officer, the appellant had already entered into service agreements with 25 banks/FIs etc., including several nationalised, private Indian and multinational banks such as PNB, ICICI, Kotak Mahindra Bank, HSBC, Indiabulls Financial Services Ltd, Barclays Bank etc. although these 25 financial institutions together would not cover each and every individual bank customer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. Moreover, for a business like this, data from banks/FIs etc., is akin to raw material. Procurement of raw material and processing thereof has to be treated as commencement of business and cannot be subject to a certain volume of sales or even quality of products sold during the year. A new entrant in a market may undergo the entire business process of procurement of raw material, processing it but may end up with making very meagre sales or may end up selling poor quality product. It is for the market forces in to decide whether that business will prosper or fail in future. It is not for the Assessing Officer to dismiss the existence of an any such business which has very meagre sales in its 1st year of operations and conclude that business activity has not commenced. 5.2.12 In deciding this issue, I find guidance in decision of Hon'ble ITAT A Bench, Mumbai, [2016] 71 taxmann.com 374 (Mumbai - Trib.)Pinebridge Investments Capital India (P.) Ltd.v.Income Tax Officer, Range 6(1)(4), Mumbai. The headnotes read as below: Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of (Setting up of business) - Assessment year 2007-08 - Whether bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf Ltd. [1980J 121 ITR 262 (Bom.) (para 10), CIT Vs. Saurashtra Cement Chemical Industries Ltd. [1973] 91 ITR 170 (Guj.) (para 10) and DHL Express (I) (P.) Ltd. v. Asstt CIT (2009) 124 TTJ 108 (Mum.) (para 10.1). 5.2.15 Questions such as lack of 3rd party/vendor certification etc., raised by the Assessing Officer are not relevant in deciding the issue. In the instant case, relying on decisions of jurisdictional courts and considering the facts and circumstances, it cannot be denied that the appellant had set up its business from the date of registration with RBI and the business commenced on 12/08/2010 as also intimated to RBI. Therefore, the income shown has to be treated as business income and not income from other sources and deduction of business expenses and depreciation has to be allowed as per law. These grounds of appeal are therefore allowed. 8. Against the above order the Revenue is in appeal before us. 9. We have heard both the parties and perused the records. We find that the issue in dispute here is whether the assessee has commenced the business on the date claimed or not. The assessee was duly granted registration by the RBI and as per the terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany. That it is the CBV2 software platform and all related intangibles that enable the company to run its business. Such costs are not of a revenue nature but clearly an intangible capital item. That these costs are not expensed out to earn income during the course of the financial year, but continue to provide benefit over a period of years and are the core asset of the company for the conduct of its business. That the costs are, therefore, held to be of capital nature, being an intangible asset on which depreciation shall be allowed as and when the appellant is eligible to claim it, upon the commencement of its business. That the assessee's claim that the technology costs are of revenue item and hence charged to its profit and loss account was, therefore, rejected. The Assessing Officer, therefore, disallowed the entire technology recharge cost of ₹ 10,80,95,804/- as capital expenditure and added it back to the total income of the assessee. 11. Upon assessee s appeal learned CIT(A) deleted the disallowance. He noted the assessee s submission as under :- The appellant submits that during the previous year relevant to the assessment year 2011-12, the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture is recurring and therefore revenue in nature. Accordingly a deduction has been claimed under section 37(1) while computing the total income. ii. Computer hardware installation and maintenance cost - ₹ 3,87,505 The amount of ₹ 3,87,505 in incurred towards hardware installation and support services for the stability of the CBV2 platform. iii. CBV2 support and maintenance cost - ₹ 1,81,17,617 The above expenses are towards maintenance cost for the CBV2 software from 12 August 2010 to 31 March 2011. These are additional monthly cost for standby resources from EL to support CBV2 team of the appellant. The expenses also cover support services provided by EL to stabilize the CBV2 software and to improve the functionalities with regard to matching of data. The above expenditure is revenue in nature. Accordingly a deduction has been claimed under section 37(1) while computing the total income. iv. Technical Service Recharges-₹ 1,13,40,598 The CBV2 platform is on the server which is located in United Kingdom. Also, the data within the CBV2 system is stored in the data storage centre maintained in the United Kingdom. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , repair and maintenance. Accordingly, disallowance of ₹ 4,07,89,789/-is deleted. This ground of appeal is allowed. 13. Against the above order the Revenue is in appeal before us. 14. We have heard both the parties and perused the records. We find that the issue here is whether the assessee s claim of technology recharge cost is revenue expenditure or capital expenditure. The order of the Assessing Officer is again thoroughly based upon surmises and conjecture with no cogent material whatsoever. The opinion of the Assessing Officer that cost and expenses are incurred not to earn income during the year but continue to provide benefit over a period of years is totally a surmises and conjecture. Moreover, in tax laws there is no concept of deferred revenue expenditure. Moreover, we are of the opinion that the Assessing Officer has not brought on record any cogent material how these items are in capital in nature. On the other hand learned CIT(A) has analyaised expenditure in detail and has found that these expenses are basically revenue in nature and they should not be treated as capital expenditure. Here we note that learned CIT(A) was rightly referred to the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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