TaxTMI 
TaxTMI 
2007 (5) TMI 554
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....nown 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-company actually paid a sum of Rs. 18.4 crore for the transfer of the employees to the assessee-company but claimed an expenditure of Rs. 9,38,57,925 as the remaining sum of around Rs. 9.01 crore was attributable to STP unit, income of which was exempt. 3.1 Data base consisting of the following segments was transferred to the assessee-company : 1. Product support service customer data base ; 2. Direct marketing customer data base ; 3. Government ISU customer data base ; 4. Manufacturing customer Database ; ....
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.... 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 activity, which has been taken over by the assessee-company, is having high revenue earning potential and, therefore, the payments are in the nature of premium for taking over the software business segments of the erstwhile Tata IBM. In the instant case, neither the old entity nor the new entity is traded on the stock market and, therefore, the quantum of premium available on the business transferred to the assessee is not ascertainable. Net consideration of Rs. 57 crore was arrived at for ....
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....ls), 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. Whether an expenditure is of capital nature or of revenue nature has to be decided on the basis of the facts of the particular case. It is to be considered as to whether by incurring the expenditure the assessee has acquired an advantage of enduring benefit. As far as the expenditure of Rs. 5.3 crores for trans fer of data base is concerned, the appellant has no doubt derived an advantage of enduring benefit in the sense that by utilizing the data- base the a....
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.... 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., wherein it has been held that the expenditure has not resulted in acquisition of any asset by the appellant and this order. Every capital expenditure does not necessarily result in acquisition of an asset. I have also gone through the judgment of the honorable Supreme Court in the case of CIT v. Madras Auto Service P. Ltd. [1998] 233 ITR 468 on which the appellant has relied. In that case, the appellant had acquired a land on long lease of 39 years and the....
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....s 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 in the case of R. K. Swamy v Asst. CIT [2004] 88 ITD 185 to contend that the Revenue is not entitled to hold that in the hands of the recipient there is no transfer of asset while in the hands of the payer there is acquisition of an asset. The learned authorised representative thereafter drew our attention to the decision of this Bench in the case of Wipro GE Medical Systems v. DCIT [2003] 81 TTJ 455. In that case, the assessee acquired an agency busines....
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....longed 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 expenses and, therefore, the accounting entry passed by the asses- see is relevant for deciding the issue. The learned Departmental representative further pointed out to para 6.2 of the order of the Chennai Bench in the case of R. K. Swamy [2004] 88 ITD 185. The Tribunal has held that an item which is treated as capital in nature in the hands of the payer need not be capital but can be treated as revenue in the hands of the recipient. Hence, on the basis ....
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....es 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) Processing ser vices, (c) Desktop systems management, (d) Business recovery ser vices, (e) Custom software training, (f) Systems integration services, (g) Project management, (h) Application software services, (i) Network related services, (j) Site services and (k) Information kiosk ser vices, and it is the understanding of IBM, Tata and Tata IBM that such services include but is not limited ....
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....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 legally required of Tata IBM or approved by the board of directors of Tata IBM to those personnel listed in annexure II who did not accept offers of employment from IBM Global and who services with Tata IBM is terminated by Tata IBM. 5. Tata IBM confirms and declares that as on and from the trans fer date, it is the absolute ....
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....ness 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 return of income. The fact that the assessee has treated the expenditure as capital in its books of account is not relevant to decide the issue. 7.4 The assessee has treated the expenditure as deferred revenue expenditure. Such term presupposes that concerned expenditure creates a benefit in revenue field. Such bene....
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....deration 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 under revenue field and, therefore, payments have been made to save such revenue expenses. The payments have been made as per the agreement. In case the transaction is in accordance with some deed, then proper construction of the deed is necessary to see the allowability of the expenses. The true nature of the transa....
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....missioner 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 attributable to acquisition less trade discounts, rebates, duty draw backs and subsidies in the year in which they are accounted. As per revised AS-2 effective from April 1, 1998, it is mentioned that other costs which are to be included in the cost of inventories should be those which ar....
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....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 value of the opening stock. Different methods cannot be employed to value the opening and closing stock. The method consistently followed cannot be disturbed if the method followed is one of the accepted methods of accounting. The Delhi High Court in the case of CIT v. Neo....