Income Tax Appellate Tribunal - Mumbai
Tevapharm India P.Ltd ( Formelry Known ... vs Assessee on 26 August, 2016
आयकर अपीलीय अिधकरण "के " यायपीठ मुब
ं ई म।
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "K", MUMBAI
ी आर सी शमा, लेखा सद य एवं
ी अिमत शु ला, याियक सद य के सम ।
BEFORE SHRI R C SHARMA, ACCOUNTANT MEMBER
AND SHRI AMIT SHUKLA, JUDICIAL MEMBER
IT(TP)A No. : 7584/Mum/2012
(Assessment year: 2008-09)
तेवाफाम इं डया ाइवेट ल मटे ड Vs Asst. CIT -Circle-10(3),
M/s Tevapharm India Pvt. Ltd. Aayakar Bhavan,
(Formerly known as M K Road,
Ratiopharm India P Ltd), Mumbai -400 020
402, Omega Harinandani
Gardens, Powai
Mumbai -400 076
PAN:AABCR 7561 F
अपीलाथ (Appellant) यथ (Respondent)
Appellant by : ी धनेश बाफना
मस चाँदनी शाह
ी हर श अरोरा
Shri Dhanesh Bafna
Ms. Chandni Shah
Shri Harish Arora
Respondent by : ी एन के चाँद
Shri N K Chand
सन
ु वाई क तार ख /Date of Hearing : 09-06-2016
घोषणा क तार ख /Date of Pronouncement : 25-08-2016
आदेश
ORDER
ी अिमत शु ला, या स:
PER AMIT SHUKLA, JM:
The aforesaid appeal has been filed by the assessee against final assessment order dated 08.10.2012, passed by the Assessing Officer under section 143(3) r.w.s. 144C(13) for the assessment year 2008-09, in pursuance of direction given 2 तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 by the Dispute Resolution Panel-II (DRP) Mumbai, under section 144C(5), vide order dated 31.07.2005. In the grounds of appeal the assessee has raised following grounds:-
1. determining the arm's-length price of the Appellant's international transaction of contract research and testing services at Rs. 480,668,153 instead of Rs. 447,599,531 determined by the Appellant;
2. disregarding the arm's length price ('ALP') and the methodical benchmarking process carried out by the appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules');
3. requiring financial data of only the current year (FY 2007-08) of the comparable companies to be used for bench marking the Appellant's international transactions;
4. rejecting one comparable of the appellant (i.e. Neeman Medical Intl. (Asia) Ltd. Clinical Research) on the ground that it is having significant related party transactions;
5. identifying 4 fresh comparable companies (i.e. M/s Mindtree Limited- R&D segment, Transgene Biotek-
Diagnostic Segment, IDC (India) Limited and M/s Celestial Labs Limited) which are functionally not comparable to the appellant. Ld. TPO has erred in making an incorrect comparison of the appellant's activities vis-a-vis those performed by the comparables;
6. the learned AO be directed to grant (+1-) 5% benefit as available under proviso to Section 92C(2) of the 3 तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 Act.
7. disregarding the claim of the appellant of Rs 33,22,798/- towards software license fees as revenue expenditure and capitalizing the same under the head Computers (and granting depreciation thereon).
8. consequently, making addition of Rs 13,29,119/- to the total income due to the above.
It is prayed that the learned AO be directed to consider the international transaction of the Appellant as arm's length and accordingly the transfer pricing adjustment of Rs. 3,30,68,622 should be deleted and it is also prayed that the AO be directed to consider the software license fees of Rs 33,22,798 as revenue expenditure and the addition of Rs 13,29,119 should be deleted".
2. At the outset, the Ld. Counsel for the assessee, Mr. Dhanesh Bafna submitted that, ground Nos. 2, 3 & 4 are not pressed and accordingly, these grounds are dismissed as not pressed.
3. Ground No.1&5 relates to Transfer Pricing Adjustment on account of provision of contract research and testing services, whereas ground no.6 relates to granting of benefit of ± 5% in the arms length price under proviso to Section 92C(2) of the Act.
4. At the outset, Mr. Dhanesh Bafna, submitted that here in this case the transfer pricing issue revolves around inclusion of 4 comparables by the TPO. Out of these 4 comparables, 3 comparables are directly covered by the 4 तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 order of the Tribunal for the assessment year 2007-08 in ITA No.6625/Mum/2011 decided vide order dated 23.12.2011. He further pointed out that if these 3 comparables are removed then average arithmetic mean of the comparables would fall within ± 5% range of arms length price.
5. Brief facts qua the Transfer Pricing Adjustment are that, the assessee company was formerly known as (Ratiopharm India P Ltd.) and is engaged in the business of providing following categories of services to its AE:-
Contract Testing and Research Services
- Stability Testing;
- Pharmaceutical Product Development; and
- Analytical R & D and API Research Activities;
Business Development and Procurement Services and
- Business Development; and
- Pharmaceutical Technical(Procurement/Sourcing);
Pharmacovigilance Related Support Services.
During the relevant financial year, the assessee reported following international transactions with its AE in Form 3CEB:-
S. Transaction FY 2007-08 Method FY 2006-07 No. adopted by assessee 1 Business development and 3,36,96,649 Procurement Services (Receipt) 2,02,84,887 TNMM 2 Contract Research and Testing Services (Receipt) 44,75,99,531 TNMM 39,80,98,772 3 Pharmacovigilance Related Support Services (Receipt) 23,23,561 TNMM NA 4 ECB Loan Interest (Payment) 86,15,111 CUP 2,18,14,215 5 Reimbursement of personnel, travel Expenses, Recovery of Interest on Security Deposit.
Recovery of Depreciation and Interest on the car (Receipt) 1,91,71,387 CUP 1,80,36,874 Total 49,79,94,477 47,16,46,510 5 तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 The assessee, in its Transfer Pricing Study Report, had benchmarked the second nature of transactions, that is, provision of contract research and testing services by adopting TNMM as Most Appropriate Method (MAM) and PLI as operating profit to total cost. For benchmarking the transaction, the assessee has carried out detailed search process and had identified 9 comparable companies with the following PLI of the financial year 2007-08:-
S. Name of the Comparable Company Updated PLI No. for FY 2007-08 % 1 Alphageo (India) Ltd. 40.27 2 Choksi Laboratories Ltd. 29.95 3 Dolphin Medical Services Ltd. 9.24 4 Medinova Diagnostic Services Ltd. 4.47 5 N G Industries Ltd. 21.56 6 Vimta Labs Ltd. 15.84 7 TCG Lifesciences Ltd. 29.97 8 Neeman Medical Int. (Asia) Ltd -Clinical Research 12.74 9 Pfizer - Services 13.63 Arithmetic Mean 19.74 Assessee 16.22 Hence it was reported that, assessee's profit margin is at ALP.
6. However, Ld. TPO undertook fresh comparability analysis and introduced 4 additional comparable companies and rejected one comparable company selected by the assessee on the ground that, it has significant related party transaction (RPT) of 36.70%. The final list of comparables of the TPO with its PLI margin was as under:-
S. Name of the Comparable PLI (%) Remark No. Company 1 Alphageo (India) Ltd. 40.27 Common 2 Choksi Laboratories Ltd. 29.23 Common 3 Dolphin Medical Services Ltd. 6.77 Common 4 Medinova Diagnostic Services Ltd 4.15 Common 5 N G Industries Ltd. 21.56 Common 6 Pfizer - Services 13.64 Common 7 Vimta Labs Ltd. 15.82 Common 8 TCG Lifesciences Ltd. 29.97 Common 6 तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 9 Mindtree Ltd. (Seg.) 7.07 Department 10 Transgene Biotek Limited -
Diagnostic Segment 25.97 Department
11 IDC (India) Ltd. 15.45 Department
12 Celestial Labs Ltd. 87.83 Department
Arithmetic Mean 28.81
Assessee 16.22
Accordingly, upward adjustment of Rs.33,30,68,622/- was made on the 'contract research and testing services'. The Ld. DRP has confirmed the adjustment made by the TPO.
7. Before us, the Ld. Counsel submitted that in the AY 2007-08 similar adjustments on account of provision of contract research and testing were made based on by and large same set of comparable companies by the TPO. The Tribunal in AY 2007-08 vide its order dated 23.12.2011 has rejected these comparables selected by TPO namely, Celestial Labs Ltd., IDC (India) Ltd and Mindtree Ltd. (Seg.). He also informed that in the subsequent year, that is, in the AY 2009-10, the DRP itself has excluded these comparables following the order of the ITAT. Thus, so far as these three comparables are concerned, following the earlier precedence, same should be excluded. As regards Transegene Biotek Ltd. Diagnostic segment he submitted that, this comparable has IPR worth Rs.99.6 crores whereas, the assessee is operating as a cost plus company and, therefore same cannot be taken as a comparable.
8. On the other hand, Ld. CIT DR, Mr. N.K. Chand submitted that, the services rendered by the assessee are high end services which involve providing high level research work, business development, technical services and various 7 तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 high end support services to its AE in the field of pharmaceuticals. Thus, the very nature of services undertaken by the assessee involves creation of IPR. The assets employed are for high end activities. Hence huge intangibles are created during the course of rendering of services to the AE which leads to creation of IPR to the AE. Thus, the submission of the ld. Counsel regarding Transegenic Biotek cannot be sustained. He further pointed out that Transgene Biotek Limited was a comparable chosen and included by the assessee in the earlier year as in that year its margin was at 10.78% and now in this year assessee is pleading for exclusion because in this year margin is 25.97%. Therefore, the assessee cannot pick and choose the comparable from year to year basis. The TPO in the present case had selected the comparables which are by and large on the same line of activities carried out by the assessee and any comparability analysis under TNMM, the comparison is to be seen on a broader spectrum and elasticity has to be given while analyzing the comparables. The Tribunal in the earlier year while adjudicating on the impugned comparables has gone into deep analysis and if such parameters are adopted for such a deep analysis, then probably all the other comparables including those comparables which are not in dispute will also stand in the same footing and have to be excluded. Thus, he submitted that the Tribunal order cannot be followed blindly and broad analysis has to be seen for this year. Finally, he strongly relied upon the finding and observation of the DRP.
9. In rejoinder, the Ld. Counsel submitted that it is true 8 तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 that M/s Transgene Biotek Limited was included by the assessee but in this year the said company was rejected in the accept/reject matrix itself. Therefore, no further FAR analysis was carried out. In any case, he submitted that even if the three comparables which are covered by the earlier and subsequent order of the Tribunal and DRP are taken into account and are excluded, then also the average profit margin of the final comparables will fall within the ± 5% range of ALP.
10. After considering the rival submissions and on perusal of the impugned orders, we find that neither the TPO nor the DRP has given any finding on FAR analysis of the 4 comparables chosen by the TPO. The only reason given by the TPO is that these comparables are also under the R&D services and since, under the TNMM broad similarity has to be seen, therefore, it has to be included in the comparability list. It is true that under the TNMM broad parameters of transactions and functions are to be seen, but the scrutiny on FAR analysis has to be done vis-à-vis the comparable companies. We find that the Tribunal in assessee's own case in the AY 2007-08, so far as three comparables are concerned which are subject matter of dispute before us, viz., Celestial Labs Ltd., IDC (India) Ltd. and Mindtree Ltd. (Segmental), has threadbare analyzed the functions and other comparability parameters of the assessee vis-a-vis the comparable companies and has given a concrete conclusion for exclusion. The Tribunal first of all has analyzed the services and functions carried out by the assessee and, thereafter have analyzed the various 9 तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 comparables for accepting and rejecting the same. The relevant findings of the Tribunal with regard to these comparables are as under:-
"3. IDC (India) Limited (IDC): IDC primarily undertakes research and survey services for products. IDC research documents cover areas like Enterprise Management Applications, Broadband, Internet and eBusiness, Mobile Usage, IT Service Exports and Continuous Market Review of Computing and Peripheral Products. Such research reports provide market forecasts, competitive analyses, vendor profiles, and information on customer requirements and buying patterns. Further, the areas of research include Communication Services Broadband Business, Network Services, IP based services, residential small business and wireless communications. The products and services of IDC consist of the following:
- Customized Services: IDC delivers strategic and tactical research, and consulting services to support the development and implementation of business strategies of ICT builders and providers. These projects are customized to address the client's specific business problem. The uniquely qualified, multi- disciplinary experts help you develop business strategies, fine tune product development and pricing, define and implement marketing goals, asses competitive forces, and evaluate joint ventures and acquisitions.
- Standard research reports: These research documents cover everything in hardware-PCs, peripherals, servers, software services and key industry issues. The research reports provide market intelligence, forecasts, competitive 10 तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 analysis, vendor profiles, information on customer requirements and buying patterns. The frequency of standard research offerings may be monthly, quarterly, half-yearly and yearly.
Based on the above descriptions of activities undertaken by IDC it is clear that IDC engaged in providing market research and survey services which is not comparable to the functional profile of the assessee and accordingly ought not to be considered a comparable".
"5. Celestial Labs Limited (Celestial Labs):
According to assessee Celestial Labs as a comparable has been cheery picked by the TPO. Celestial Labs is a diversified company operating in varied fields such as rendering IT services encompassing application development and maintenance, production support, EERP, data warehousing, SAP implementation. Celestial Labs also is into manufacturing and trading of products such as ERP package for manufacturing and has a product 'Sarijivani' which is a portal for live ayurvedic consultation. The company is also engaged in the distribution of herbal ayurvedic products.
SAP Services: Celestial delivers SAP consulting, SAP implementation and post-SAP implementation services for its customers. Celestial is engaged in implementing SAP for customers from initial planning, design and implementation to maintenance and ongoing optimization. Celestial helps the company align IT Solutions with business strategies.
CelSanjivani Products: CelSanjivani is a part of Celestial Labs Ltd, an ISO 9001-2000 company working in this space of Bio-informatics and Gio-11
तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 Technology. The goal is to become a primary market place for the herbal products providing quality products to the customers and industrial community. This is an Ayurvedic portal dedicated to B28&C market with online live consulting with our Ayurvedic consultants. It provides excellent platform for trading of herbal products, with identification of raw herbs, scientific data, market & trade data, monographs, policy, laws, good manufacturing practices, DNA finger printing etc. It facilitates contacts with suppliers, manufacturers and dealers of herbal Pharma industry.
The activities undertaken Celestial Labs are in the nature of providing host of IT related services and some trading activity which is not comparable to the Assessee. Hence it is clear that it is not comparable to the functional profile of the Company and accordingly ought not to be considered a comparable The learned D.R. however drew our attention to page- 389 of the paper book which is an extract from the Directors report which reads as follows:
"The Company has developed a de novo drug design tool "CELSUITE" to drug discovery in, finding the lead molecules for drug discovery and protected the IPR by filing under the copy if right/patent act. (Apprised and funded by Department of Science and Technology New Delhi) Based on our in silico expertise (applying bio- informatics tools). The Company has developed a molecule to treat Leucoderma and multiple cancers and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable.12
तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad.
In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas.
The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R & D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh."
According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software for discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not 13 तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard".
"6. Mind tree Limited - R&D Segment (mind tree): Mindtree's R&D segment is engaged in providing domain-specific end-to-end R&D Services to help organizations meet their engineering needs. As per page 11 of the annual report, the segment is engaged in providing R&D Services for various industries like Communication, Industrial Automation, Automotive and Avionics, Storage and Systems etc. The relevant extract has been provided below for ready reference:
"The diversified focus in the R&D Services Business into various verticals, such as Communication, Industrial Automation, Automotive and Avionics. Storage and Systems, Semi Conductor, Wireless and Consumer Electronics had shown results in 2006-07 as well"
As per the website of the company, the services in this segment consist of the following departments:
IP Led Services - The department offers research that focuses on creating long term technology innovation and licensable intellectual properties with applicability across industry groups.
Semiconductor and Hardware Engineering - The department provides product realization and feasibility services, as well as high-speed interface design, helping its clients assess the right electronic architectures and design high-speed hardware interfaces. It helps its customers at any stage of ASIC/SoC development from concept to silicon. These 14 तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 services offered on an individual as well as on a turnkey basis.
Software Engineering - The department set of skills spanning from embedded software to application software needed for product realization. This, coupled with hardware engineering capabilities, enables the company to work as a "one-stop shop" for software product development needs.
Video Surveillance Solutions - The department provides a range of licensable components that enable OEMs, large system integrators, and distributors to introduce products like surveillance manager, intelligent video encoders, video decoders, and intelligent Digital Video Recorders (DVR)s quickly into the market.
The application of these set-vices will come in use for the following industries:
- Automotive
- Communication Systems
-Consumer Appliances and Computer Peripherals
- Industrial Systems
- Medical Electronics
- Storage and Computing Systems Thus it is clear that Mindtree is engaged in providing diversified set of services under its R&D segment for various industries. Hence it is not comparable to the functional profile of the Company and accordingly ought not to be considered a comparable"
11. From the above finding of the Tribunal with regard to 15 तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 the aforesaid three comparables, it is amply clear that detail analysis has been done and then a concrete finding has been arrived at, as to why these three companies cannot be taken as comparables for benchmarking the assessee's transaction. Thus, respectfully following the earlier years' precedence, we hold that these three comparables viz., Celestial Labs Ltd., IDC (India) Ltd. and Mindtree Ltd. (Segmental), should be removed from the comparability list and we accordingly direct the AO/TPO to exclude the same.
12. So far as the inclusion of M/s Transgene Biotek Limited, we are not entering into merits of the said comparable because no strong reasons have been given by the assessee as to why same was included in the comparability list in the assessment year 2007-08 and why it has been excluded in this year. Since the Ld. Counsel has submitted that, if the three comparables are excluded then the arithmetic mean of the final comparable would be 20.82% and in that case, the resultant arithmetic mean will fall ± 5% range, therefore, we direct the TPO/AO to examine the working of ± 5% margin range, after excluding the three comparables from the final list of comparables. Thus, with this direction ground no.1&5 is partly allowed and ground No.6 is treated as allowed.
13. In ground No. 7 and 8, the assessee has challenged the disallowance of 'Microsoft License fee' by treating it as capital expenditure.
14. Brief facts qua the issue are that, the assessee has debited an amount of Rs.41.95 lakhs under the head "Annual 16 तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 Software License Fees". During the course of the assessment proceedings, the assessee was required to furnish the details of the said expenditure along with copies of bills/invoices. In response, the assessee vide letter dated 13.10.2011 had furnished the party-wise details along with the amount and the purpose for which the payment was made. However, the AO initially noted that no bills and invoices were enclosed. He further noted that, the major expense has been incurred for making the payment to one party namely, M/s Nirmal Computers, the details of which were as under:-
Sr. Name Amount Purpose
No.
01 Nirmal Computers 31,54,666 Desktop Pro Lic/
SA Pack OVL
02 Nirmal Computers 62,400 MS Win 2003 Svr Std
R2 OVL
03 Nirmal Computers 21,146 Ms Exchange 2003
Std Svr OVL
04 Nirmal Computers 84,586 M/s Share point
server software
TOTAL 33,22,798
He observed that, these payments relate to Microsoft product licenses which are one time licenses taken for Microsoft products for existing desktop, laptops and servers. From the perusal of the copies of the bills (which were later on furnished by the assessee), he observed that, these licenses are not annual licenses but are one time license. Accordingly, he treated the same as capital expenditure. However, he allowed deprecation @ 60% and accordingly, net amount of Rs.13,29,119/- was added.
15. The Ld. DRP has confirmed the said addition/disallowance.
17तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012
16. Before us, the Ld. Counsel Mr. Harish Arora, submitted that the assessee's entire work depends upon the computer systems. The existing computer systems were already in use and were operating with pre-loaded software. In the assessment year 2008-09, the assessee company took conscious decision that official license should be procured to avoid any system problem from the Microsoft. Accordingly, it entered into agreement with Microsoft for Microsoft Volume Licenses for ACPA Enterprise and CUSA Enterprises product. The license cost was apportioned for 3 years and the payment of Rs.33,22,798/- was incurred in this year. He submitted that the AO has failed to appreciate that firstly, there was no creation of any new asset but the assets were used for the existing desktop computers, lab-tops & servers etc. which were procured and installed in earlier years; and secondly, these licenses merely help to run the business properly and efficiently. In the age of fast changing technology and in the working of day-to- day computer systems, these software are required and are required to be upgraded from time to time, hence same cannot be reckoned as 'giving enduring benefit'. In support, he relied upon the following decisions:-
i) CIT vs Varinder Agro Chemicals Ltd, reported in [2009] 309 ITR 272 (P&H);
ii) CIT v Southern Roadways, reported in [2008] 304 ITR 84 (Mad)
iii) CIT vs Ashahi India Safety Glasses [2011] 61 DTR 63 (DEL).
17. On the other hand, Ld. DR submitted that assessee was using unofficial software earlier and whenever A computer is bought there is already preloaded software. The software license fee is not an annual payment, it is a onetime payment and the advantage runs into number of years. Therefore, it is enduring in nature. If the computer is bought along with 18 तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 software for the first time then how software which has been purchased onetime can be treated as revenue expenditure. If any license of software is made on annual basis and thereafter it is renewed then it can be reckoned as revenue expenditure but not on onetime license fee payment.
18. We have heard the rival submissions and perused the relevant material on record. We find that, assessee has made payment for procurement of Microsoft Licenses and the license cost was apportioned for period of 3 years and this was the first year in which the amount of Rs.33,22,798/- was incurred. Three types of licenses were taken which were used for Server, Desktop computers, laptops etc. the details of these license given before the authorities below were as under:
"1.4 Under Item No.1 of invoice, 250 official Microsoft Enterprises 6 licenses were been taken for Pro Desktop listed Licenses / SA Pack MVL. It is for the most current versions of MS Office Professional Windows Desktop, including of Windows NI Workstation and the BackOffice Client Access for the existing Desktop Computers and Laptops, which were procured and installed in the earlier years and used in the Research & Analytical Labs, Development Labs and offices.
1.5 Similarly under Item No.2, 4 number of official Microsoft Enterprises 6 Licenses for windows Server Standard listed licenses / SA Pack MVL were taken for the existing Servers.
1.6 Under Item No. 3 one License for Microsoft Exchange Server listed languages licenses was taken. This again was for the existing email application system, server version and under Item No.4 one License for Office Sharepoint Server listed license was taken".19
तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 Without these software, it is difficult to carry out the functioning of the business properly and efficiently, specifically in the case of the assessee whose entire operation of business is carried out through computers. The test of enduring benefit cannot be conclusive test which should be applied in each and every case. What is required to be examined or seen is the real intent and purpose of expenditure and whether such expenditure results in creation of a fixed capital for the assessee. Before us, the Ld. Counsel had brought out that, the computers were already bought and used in the business and the licensed software were installed to make the running of the computers more efficiently. Thus, this expenditure has enabled the operation of the assessee's business effectively and properly, that is, the profit making apparatus to work more efficiently. It does not have any impact on the sources of the business. If certain expenses are incurred which may have enduring benefit of 2 to 3 years, for smooth running of the business operation leaving the fixed assets untouched then, same has to be reckoned as revenue expenditure. The Hon'ble Delhi High Court in the case of State of Asahi Safety Glass Ltd. (supra) on the issue of expenditure on licensed software has concluded as under:-
"Expenditure incurred by the assessee on software is allowable as revenue expenditure, more so as the software acquired by the assessee was an application software which enabled it to execute tasks in the field of accounting, purchases and inventory maintenance; and expenditure cannot be treated as capital expenditure merely for the reason that the assessee has not written off the impugned expenses 20 तेवाफाम इं डया ाइवेट ल मटे ड M/s Tavapharm India Pvt Ltd.
(Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 in its books of account in the first year and has written off only a part of the expenses in the succeeding year".
Thus, on the facts of the case we hold that the expenditure incurred by the assessee for procurement of software is to be treated as revenue expenditure. Accordingly, the same is directed to be allowed.
19. In the result, appeal of the assessee stands partly allowed.
Order pronounced in the open court on 25th August, 2016.
Sd/- Sd/-
(आर सी शमा) (अिमत शु ला)
लेखा सद य याईक सद य
(R C SHARMA) (AMIT SHUKLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Date: 25th August, 2016.
त/Copy to:-
1) अपीलाथ /The Appellant.
2) यथ /The Respondent.
3) The DRP-II/ CIT(A) Concerned___, Mumbai.
4) The CIT -10/ CIT Concerned___, Mumbai
5) िवभागीय ितिनिध "के ", आयकर अपीलीय अिधकरण, मुब ं ई/ The D.R. "K" Bench, Mumbai.
6) गाड फाईल \ Copy to Guard File.
आदे शानुसार/By Order / / True Copy / / उप/सहायक पंजीकार आयकर अपील य अ धकरण, मुंबई Dy./Asstt. Registrar I.T.A.T., Mumbai *च हान व.िन.स *Chavan, Sr.PS