Income Tax Appellate Tribunal - Bangalore
Ibm Global Services India (P) Ltd. vs Deputy Commissioner Of Income Tax on 4 May, 2007
Equivalent citations: (2008)113TTJ(BANG)747
ORDER
N.L. Kalra, A.M.
1.The assessee has filed these appeals against the respective orders of learned CIT(A)-I, Bangalore.
2. The first grievance of the assessee is that the learned CIT(A) has erred in confirming the action of the AO that no part of the expenditure made for use of domestic customer base and transfer of human skills amounting to Rs. 5.3 crores and Rs. 9,38,57,925 respectively can be allowed, as the same is capital expenditure incurred on obtaining a benefit of an enduring nature.
3. The assessee company was incorporated during the financial year 1997-98. Originally, there was a company jointly promoted by Tatas and IBM, which were known 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 (P) Ltd. (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 crores on account of transfer of certain employees to the assessee company and on account of transfer of the database of the domestic business. The assessee company actually paid a sum of Rs. 18.4 crores 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 crores was attributable to STP unit, income of which was exempt.
3.1 Database consisting of following segments was transferred to the assessee company:
1. Product support service customer database;
2. Direct marketing customer database;
3. Government ISU customer database;
4. Manufacturing customer database;
5. BFSI customer database;
6. Process and petroleum ISU customer database;
7. Retail and distribution ISU customer database;
8. Utilities customer database;
9. Travel and transport customers database;
10. Education customer database;
11. Telecom and media customer database.
The above database gives the information about various customers who have purchased IBM computers in the past and who continue to have service maintenance contracts. Such database enables the assessee company to provide the maintenance support services. The AO asked the assessee company to furnish the basis of valuation at Rs. 5.3 crores in respect of value of database. It was stated before the AO that no independent valuation has been determined by the independent valuer. The AO, therefore, concluded that the amount represented a mutually agreed amount payable for the transfer of database. The AO further noticed that the assessee company itself has amortized the above expenditure over a period of 5 years in his books of account. According to the AO, the benefit accrued to the assessee is of enduring nature. The AO therefore concluded that the payment has been made towards acquisition of a capital asset and therefore, such expenditure is not allowable as a revenue expenditure.
3.2 The total value of personnel transferred has been arrived at Rs. 18.4 crores. Such expenditure was allocated between the STP unit and non-STP unit on the basis of the turnover. No report of valuer was filed to justify the valuation attributed to the personnel transferred from Tata IBM to the assessee company. The AO felt that the methodology followed by the assessee indicates that a sum of Rs. 5.24 crores was considered as expenditure incurred by Tata IBM towards training related expenses of the transferred employees. Salaries paid for the transferred employees for a period of six months by Tata IBM during the period of their services with Tata IBM was also added to arrive at the valuation of the employees transferred. Before the AO, it was submitted that such expenditure was incurred in getting the trained and skilled employees from Tata IBM. Thus, the assessee company was not required to incur any expenditure on recruitment and training of the employees. It was argued that the expenditure incurred is towards revenue field. The AO 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 crores was arrived at for transferring such business to the assessee. Such consideration was thereafter bifurcated. The bifurcation has been made to show part of the consideration paid is towards capital asset, while the balance is claimed as revenue expenditure. The transaction has not been presented in true perspective but has been camouflaged to gain an advantage by claiming it as revenue expenditure. The AO, therefore, treated the compensation paid by the assessee company to Tata IBM towards the so-called transfer of human skills and the so-called customer database as part and parcel of overall consideration mutually agreed of the taking over of the software segment of the business of the erstwhile Tata IBM. The AO, therefore, disallowed the expenditure claimed as revenue.
4. Before the learned CIT(A) it was submitted that to ascertain as to whether the expenditure is capital or revenue, one has to see as to whether by incurring the expenditure, the assessee has acquired an asset or an advantage for the enduring benefit of the trade. It was submitted that by incurring expenditure relating to transfer of human skills and database, the assessee has not acquired any capital asset. The assessee has obtained the use of the customer database of Tata IBM Ltd. as well as employed a trained work force, which would enable the appellant to carry on its business more efficiently. The learned Authorised Representative relied on the decision of the apex Court in the case of Empire Jute Co. Ltd. v. CIT wherein it has been held that there may be cases where expenditure even if incurred for obtaining an advantage of enduring benefit may breakdown. If the incurring of the expenditure merely facilitates the assessee's trading operations or enables the management and conduct of the assessee's business to be carried on more efficiently or more profitably whilst leaving the fixed capital untouched, the expenditure would be on revenue account even though the advantage may endure for an indefinite future. By incurring the expenditure under reference, the assessee has saved further revenue expenditure for training the newly recruited personnel and for obtaining information about potential customers. Hence, the expenditure must be regarded on revenue field. Before the learned CIT(A), the assessee has relied on the following judgments:
1. India Cements Ltd. v. CIT ;
2. CIT v. Gujarat Mineral Development Corporation (Guj);
3. CIT v. Bhor Industries Ltd. ;
4. R.K. Swamy v. Asstt. CIT (2004) 88 TTJ (Chennai) 940 : (2004) 88 ITD 185 (Chennai) The learned CIT(A), after considering the above submissions of the learned Authorised Representative, confirmed the finding of the AO, 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 transfer of database is concerned, the appellant has no doubt derived an advantage of enduring benefit in the sense that by utilizing the database the appellant shall be able to earn substantial profits year after year. The database enables the appellant company to provide maintenance support services to the erstwhile customers of Tata IBM who are now the customers of the appellant. As far as the payment of Rs. 18.40 crores (including the payment of Rs. 9.38 crores relating to non STP units) on account of transfer of human skills is concerned, the appellant is deriving an advantage of enduring benefit in the sense that it shall have the benefit of services of the skilled and trained employees originally employed by Tata IBM Ltd. and thus earn substantial profits year after year. The next question to be considered is whether this is a case where the expenditure even if incurred for deriving an advantage of enduring benefit may be on revenue account and the test of enduring benefit breaks down. As noted by the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT (supra), if the incurring of the expenditure merely facilitates the assessee's trading operations or enables the management and conduct of assessee's business to be carried on more efficiently or more profitably whilst leaving the fixed capital untouched, the expenditure would be on revenue account even though the advantage may endure for an indefinite future. The ratio of the abovementioned case does not apply to the present case. It is to be noted that the appellant company was incorporated during the previous year under consideration and asst. yr. 1998-99 is the first year of the appellant's business. The appellant in its desire to earn substantial profits right from the first year of the business has incurred a one time expenditure in the form of payment of Rs. 23.70 crores to Tata IBM Ltd. to acquire customer database and trained personnel. The expenditure cannot be said to have been incurred merely for facilitating the assessee's trading operations. In fact, the expenditure has been incurred for commencing the trading operations in a big way. In the case of Vollambrose Rubber Co. Ltd. v. Farmer (1910) 5 Tax Cases 529, 536 Lord Dunedin said ",,,,.,,,,,,In a rough way I think it is not a bad criterion of what is capital expenditure-as against what is revenue expenditure-to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is 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 has been treated as a revenue receipt in the hands of the recipient. There is no contradiction between the order of the CIT(A) 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 Hon'ble Supreme Court in the case of CIT v. Madras Auto Service (P) Ltd. on which the appellant has relied. In that case, the appellant had acquired a land on long lease of 39 years and the Court had an occasion to discuss the nature of expenditure incurred on constructing a building on the land. The Hon'ble Supreme Court held that the appellant made substantial savings in monthly rent for a period of 39 years by expending the amount on constructing the building. The saving in expenditure was a saving in revenue expenditure in the form of low rent. The ratio of this case too is not applicable to the appellant's case. The appellant has not been able to show that by incurring this expenditure how there would be saving on revenue account in future years. The reliance placed by the appellant on the Tribunal decision in the case of Wipro GE Medical Systems Ltd. v. Dy. CIT (2003) 81 TTJ (Bang) 455 is also not justified as the above decision is based on peculiar facts of that case. The Tribunal decision was based on the fact that the Hon'ble Tribunal did not agree with the CIT(A) that the payment made towards access to information base and transition of customer order filing represented amount paid for obtaining information useful for a long period and that the same could be treated as plant. In the present case, as held above, the payment for transfer of human skills and transfer of customer database represent a payment for deriving benefits in terms of higher profits over future years. Every capital expenditure may not necessarily result in acquisition of an asset.
5. During the course of proceedings before us, the learned Authorised Representative has filed a paper book containing 63 pages. The learned Authorised Representative drew our attention towards the order of this Tribunal dt. 2nd March, 2006 in the case of M/s IBM India Ltd. M/s IBM India Ltd. is a company, which received the amounts paid by the appellant. In the case of the recipient, it was contended that receipts were of capital nature, while the Revenue contended that receipts were of revenue nature. In the case of the recipient, it was contended by the Revenue that the amounts received by the recipient should be treated as income. Support was drawn from the agreement, in which it was stated that the consideration is by reason of training, skills, practical experience and work culture for the transfer of personnel; therefore, the receipt on transfer of such employees is to be treated as revenue receipt. It was further argued that as per the agreement, the assessee was merely to share the database and there is no provision that database available with the recipient cannot be used by the recipient subsequently. The database 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 CIT(A) 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. Asstt. CIT (supra) 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 Ltd. v. Dy. CIT (2003) 81 TTJ (Bang) 455. In that case, the assessee acquired an agency business and entered into a tripartite agreement with the principal and the former agency to acquire access to records. The assessee also contributed to 1/3rd cost of VRS of the former agency. The assessee also took over 2/3rd of the staff of the former agency though no capital asset was acquired by these payments. It was held that the contribution to the former agency's VRS by the assessee was allowable under Section 37(1) as being in the nature of recruitment cost. The Tribunal vide para 28 of the order held that the payment has been made to carry on business efficiently and in a profitable manner, therefore, the expenditure is revenue in nature. In respect of the expenditure incurred for obtaining information about the customer base, it was held by the Tribunal that information so acquired does not tantamount of acquisition of any asset. Such information was useful for carrying on the business. The same was also allowed as revenue expenditure.
5.2 The learned Authorised Representative further submitted that accounting entries made by the appellant are not relevant for deciding the issue. The Bombay High Court in the case of CIT v. Bhor Industries Ltd. (supra) allowed the expenses incurred by way of payment under voluntary retirement scheme though such payments were written off for a period of 5 years in the books of accounts.
5.3 The learned Authorised Representative thereafter drew our attention to the decision of the apex Court in the case of CIT v. Madras Auto Service (P) Ltd. (supra). In this case, the assessee obtained on lease a premises for a period of 39 years. The assessee constructed a new building on the land taken on lease. The issue before the apex Court was as to whether the expenditure incurred in the construction of building was capital or revenue. The learned apex Court observed that one has to look at the expenditure from a commercial point of view. In the case before the apex Court, the assessee got a long lease of newly constructed building suitable to its own business at a very concessional rent. The assessee made substantial savings in monthly rent for a period of 39 years by expending the amount on construction of building. The saving in expenditure was the saving in revenue expenditure in the form of rent. Whatever substitute for revenue expenditure should normally be considered as revenue. The building never belonged 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 assessee is relevant for deciding the issue. The learned Departmental Representative further pointed out to para 6.2 of the order of Chennai Bench in the case of R K Swamy (supra). 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 that the receipts were treated as revenue in the hands of the recipient cannot be considered to conclude that the payments under reference are of the nature of revenue in the case of the payer.
7. We have heard both the parties. The learned AO in his order has observed that part of the business being handled by erstwhile Tata IBM has been handed over to the assessee company. The learned AO therefore held that it was a transfer of the business and the amounts paid are capital in nature. Before proceeding further, it will be relevant to reproduce the agreement entered between Tata IBM and the assessee company:
This agreement is made and entered into as of this twenty-fifth day of August, 1997, by and between:
(A) Tata IBM Ltd. (Tata IBM), a company duly established under the laws of the Republic of India, having its registered office at Golden Enclave, Airport Road, Bangalore-560017 (which expression shall unless it be repugnant to the context or meaning thereof be deemed to mean and include its successors and assigns) and (B) IBM Global Services India (P) Ltd. (IBM Global), a company duly established under the laws of the Republic of India, having its principal office at ground floor, Golden Enclave, Airport Road, Bangalore-560017 (which expression shall unless it be repugnant to the context or meaning thereof be deemed to mean and include its successors and assigns).
(Tata IBM and IBM Global being sometimes referred to herein as the 'parties') Recitals
1. IBM World Trade Corporation (IBM), Tata Industries Ltd. and Tata Engineering and Locomotive Company Ltd. (Tata Industries Ltd. and its associated company are hereinafter referred to as "Tata") have cooperated with each other in undertaking joint venture operations in India through Tata IBM, for manufacturing and marketing of certain information technology products in India:
2. India is emerging as a major market for IBM products and services in trade and industry particularly in view of increasing recognition of the importance of information technology to the overall economic development of India:
3. IBM and Tata recognize that Tata IBM's existing highly skilled human resource base needs fuller utilization for meeting the emerging demands for services 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 worldwide 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 services, (c) desktop systems management, (d) business recovery services, (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 services, and it is the understanding of IBM, Tata and Tata IBM that such services include but is not limited to (1) software design, (m) hardware design, (n) professional services, (o) information technology consulting, (p) international procurement operations, (r) value added network, (s) fee based education, (t) systems integration, (u) availability services, and (v) hardware maintenance and software support.
7. Therefore, for and in consideration of the premises and the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. Tata IBM agreed to do the following:
(a) Sell all maintenance spares and accessories comprising inventory of Tata IBM relating to IBM computers,
(b) Facilitate transfer of its personnel of Tata IBM set out in Annex. I; and
(c) Share the database relating to Tata IBM's clients and customers, list whereof is set out in Annex. III hereto.
2. The transfer aforesaid shall be effective from the twenty-fifty day of August, 1997.
3. In consideration of the transfer aforesaid, IBM Global shall pay to Tata IBM a sum of:
(a) Rs. 28.6 crores for the transfer of the maintenance spares and accessories set out in Annex. I, comprising Tata IBM's inventory relating to IBM computers; provided however that (i) this amount is subject to adjustment according to the physical inventory as on 31st of March, 1997 and (ii) IBM Global's obligation to pay this amount (or the adjusted amount) is subject to the condition that Tata IBM has fully paid IBM or its subsidiaries for all and any sums due to them in respect of the spares supplied by them. Fifty percent (50 per cent) of the amount payable under Clause 3(a) will be remitted to Tata IBM within seven (7) days of the date of receipt of Government of India ("GOI") approvals of the application as proposed, for the commencement of activities in India by IBM Global and the remaining fifty per cent (50 per cent) within thirty (30) days thereafter;
(b) Rs. 18.4 crores, being consideration for the value which inheres in the human resources, by reason of training, skills, practical experience and work culture for the transfer of the personnel listed in Annex. II hereto, to be remitted within ninety (90) days of the date of receipt of GOI approvals of the application as proposed; and
(c) Rs. 5.3 crores for the transfer of the database 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 aforesaid, secure prior written consent of such personnel to be transferred in terms hereof and agreed to be employed by IBM Global. IBM Global 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 Annex 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 Annex II who did not accept offers of employment from IBM Global and who services with Tata IBM are terminated by Tata IBM.
5. Tata IBM confirms and declares that as on and from the transfer date, it is the absolute owner of the spares and inventories and the database agreed to be transferred, and that there are no encumbrances, charges or lien of any nature whatsoever, and shall indemnify IBM Global against any claims from any third party in respect thereof.
6. The parties agree and undertake to do and execute all other deeds and documents as may be required to effectuate the transfer aforesaid.
7.1 If the Revenue wanted to treat that the consideration paid as per the agreement was for the transfer of the business being undertaken by Tata IBM Ltd. then such receipts should have been held as capital in the hands of the recipient. The jurisdictional High Court in the case of Syndicate Bank Ltd. v. Addl C1T (1985) 45 CTR (Kar) 68 : (1985) 155 1TR 681 (Kar) has held that the transfer of undertaking is a transfer of capital asset and is liable to capital gain. However, in the case of the recipient, the Revenue has treated the receipts as revenue receipts and included in the income. The matter has travelled upto the Tribunal and the Tribunal has held that the receipts are revenue in nature. The Revenue cannot blow hot and cold once it has taken the stand that the receipts in the hands of the recipient are revenue in nature then such payments cannot be held as capital in the hands of the payer representing the consideration paid for the transfer of business. In the instant case, the recipient has not been taxed under the head "Capital gain" on the transfer of the business. Hence, the action of the AO in holding that the receipts represented the receipts on account of transfer of business cannot be upheld.
7.2 It is also not the case of the Revenue that the payments have been made before the commencement of business. In the instant case, the business was being already carried out by Tata IBM. As per the agreement, it is clear that IBM and Tata have agreed to carry out the activities as mentioned in Clause 5 of the agreement through the assessee company. The issue of commencement of business in respect of purchase of an existing undertaking by an assessee was before the Mumbai Bench in the case of Vidarbha Irrigation Development Corporation v. Jt. CIT (2006) 104 TTJ (Mumbai) 524 : (2006) 102 ITD 1 (Mumbai). In that case, the corporation was formed for completion of already existing projects or for further entrusted projects. The business was already in existence and therefore, the commencement of business 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 accounts. 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 accounts. The Calcutta High Court in the case of CIT v. Berger Paints (India) Ltd, 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 accounts 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 accounts 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 benefit may be of enduring nature but if it does not create any asset, then it cannot be treated as capital. Reliance has been placed on the decision of Delhi Bench in the case of Hero Honda Motors Ltd. v. Jt. CIT (2005) 95 TTJ (Del) 782 : (2006) 103 ITD 157 (Del).
7.5 This Bench in the case of IBM India Ltd. v. CIT (2007) 108 TTJ (Bang) 531 : (2007) 105 ITD 1 (Bang) had an occasion to consider as to whether the expenditure incurred in acquiring certain application software is revenue or capital. It was held in that ease that in case the expenses are once and for all and may give advantage of enduring benefit but is not with a view to bringing into existence any asset, then the expenditure cannot be classified as capital expenditure. Hon'ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT held that the concept of payment made once and for all and of an enduring benefit must respond to the changing economic realities of the business. This Tribunal in the case of IBM India Ltd. (supra) held that expenditure incurred on procuring an application software is revenue though the benefit may be of an enduring nature.
7.6 Payment which frees an assessee from the liability to make recurring revenue payments is revenue expenditure. This has been held by the apex Court in the case of CIT v. Associated Cement Companies Ltd. . But. such test will fail in case an asset is acquired. If a labour saving machinery is purchased then revenue expenditure is reduced in respect of newly labour bill but the cost of machine cannot be treated as revenue expenditure as it bring into existence of an asset. In the instant case, we have to apply the law as discussed in earlier paras. So far as payment made for getting the domestic customer database is concerned, it is clear that the assessee has only got right to use that database. The company which is provided such database is not precluded from using such database. Hence, the expenditure incurred is for the use of the database and not for the acquisition of such database. This issue has been considered by this Bench in the case of Wipro GE Medical System Ltd. (supra). This Bench on this issue has observed as under:
As regards the payment made towards access to information base and for transition of customer order filing, this payment again, is for business consideration and we do not agree with the CIT(A) 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 acquired 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 database 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 transaction is to be collected from the entire document. As per Clause C(3)(d), the assessee company agreed to give due credit to all the transferred personnel who have opted for employment with IBM Global for their past services in Tata IBM. Such employees rendered services to the Tata IBM and the amounts, if any, which were to be paid to such employees for rendering services to Tata IBM, were agreed to be paid by the assessee. Such expenditure cannot be termed as an expenditure laid for carrying on the business. The advantages were obtained by Tata IBM as services were rendered by those employees to Tata IBM. It is not the case of the assessee that as and when such employees will leave the assessee company, the assessee will not claim expenditure in respect of payments made to such employees after considering the credit of services given by such employees to Tata IBM. The AO has mentioned that for valuing the amount paid for transfer of human skills, salary of six months paid by Tata IBM has been added for arriving at the valuation of the employees transferred. Though it is not clear from the order that such quantum was attributable in respect of the credit to be given for the past services rendered to Tata IBM by the employees transferred to the assessee company. However, it is held that the expenditure included in the valuation of transfer of human skills and representing the credit to be given to the transferred employees in respect of their services to Tata IBM, is not allowable, as the same expenditure will be claimed by the assessee company as and when such employees leave their organization. The assessee cannot be allowed double benefit of such expenditure. The AO will determine the amount representing the cost to the assessee in respect of credit to be given to these employees in respect of services rendered to Tata IBM. The balance expenditure is held as allowable as it has been incurred by the assessee company to free itself in making recurring revenue expenditure. The amount so disallowed will not be entitled to depreciation as it does not result into an intangible asset entitled for depreciation.
9. The next grievance of the assessee is that the learned CIT(A) has erred in not allowing the loss of Rs. 8,63,047 on account of exchange fluctuation.
9.1 It has been held by the learned CIT(A) 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 dt. 8th Sept., 2006 in ITA Nos. 3443 and 3444/Bang/2004 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 drawbacks and subsidies in the year in which they are accounted. As per revised AS 2 effective from 1st April, 1998, it is mentioned that other costs which are to be included in the cost of inventories should be those which are incurred in bringing the inventories to their present location and condition. It is mentioned that conversion costs are usually not considered as relevant to bringing the inventory to their present location and condition and therefore not to be included in cost of inventories. Vide para 13 of the revised AS 2 the institute has mentioned specific items which are to be excluded from the cost of inventories. These include administrative overheads and selling and distribution costs. Foreign exchange fluctuations are to be accounted as per AS 11. As per AS 11 it is nowhere provided that foreign exchange fluctuations in respect of closing stock should be included in the value of the stock.
11. When an item is purchased then an appropriate entry is passed to show the item purchased in the stock and to credit the account of party from whom such purchase has been made. In case the payment is not made at the time of purchase then such payment is to be made subsequently. If subsequently interest is also paid then such interest cannot be considered as part of the cost. Cost means original cost to the assessee. It is an admitted fact that rate of interest on loans repayable in foreign currency is less as compared to the interest payable on foreign currency converted into rupees. The difference in foreign exchange fluctuation at the time of receipt and at the time of repayment of the loan partly benefits the lender for the loss of interest in respect of rate. At the time of purchase of the inventory, if the item has been purchased from a foreign country then the amount is payable in foreign exchange. If the payment is deferred and the liability increases in Indian rupees then such liability can not to be termed to have increased the cost of the material. The learned Madras High Court in the case of Asher Textiles Ltd. v. C1T had an occasion to consider the meaning of the cost price. The learned High Court held that the cost price means the original cost price. In this case, the cost price for a particular item was Rs. 500 and market price at the end of the year was Rs. 300. The stock was valued at the end of the year at Rs. 300 as market price was low. In the subsequent year, the market price at the end of the year was Rs. 400. The assessee argued that the cost price at the end of the year was Rs. 300. The assessee argued that cost price of the item in the opening stock was Rs. 300 and therefore the same should be adopted as cost price in the subsequent year for valuation. This contention was rejected by the learned 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 subsequent 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 are 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 learned Delhi High Court in the case of CIT v. Neo Poly Pack (P) Ltd. has held that consistency is to be maintained. The jurisdictional High Court in the case of CIT v. Sridev Enterprises observed as under:
Consistency and definiteness of approach by the Revenue is necessary in the matter of recognizing the nature of an account maintained by the assessee so that the basis of a concluded assessment would not be governed without actually reopening the assessment.
13. Keeping in view the above discussions it. is held that foreign exchange fluctuation after the date of purchase will not affect the valuation of the stock, considering the consistent method followed by the assessee. Hence the additions made on this account are deleted.
Keeping in view the decision of this Bench on this issue, it is held that the learned CIT(A) was not justified in not allowing the loss of Rs. 8,63,047.
In the result, the appeal is partly allowed.
ITA No. 1287/Bang/200510. The assessee has raised the following grounds of appeal:
(i) Without prejudice to the appellant's contention that the sum of Rs. 5,30,00,000 and Rs. 9,38,57,925 expended on domestic customer database and transfer of human skills respectively in the previous year relevant to asst. yr. 1998-99 was an expenditure in the revenue field and allowable in its entirety the learned CIT(A) ought to have in the alternative held that:
(i) The sum of Rs. 7,90,03,334 being expenditure debited in the accounts of the previous year ended 31st March, 1999 was an allowable deduction;
or
(ii) The appellant would be eligible for depreciation in respect of the sum of Rs. 5,30,00,000 expended for the use of domestic customer database.
11. While deciding the appeal for the asst. yr. 1998-99, which has been held that expenditure incurred for acquiring the use of database and for getting the human skill is revenue in nature and therefore, there is no question of depreciation to be allowed in that year. In respect of expenditure, which has been considered as not allowable for the asst. yr. 1998-99, it has already been held that depreciation on such sum will not be allowed.
12. Accordingly, this appeal is disposed of.