Income Tax Appellate Tribunal - Chennai
Heidelberg India Private Limited, ... vs Assessee on 3 May, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH, CHENNAI
BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER
I.T.A. No. 293/Mds/2012
(Assessment Year : 2007-08)
M/s Heidelberg India Private The Deputy Commissioner of
Limited, Income Tax 8(2), Mumbai
333, GST Road, Chrompet, v. (Now assessed by Assistant
Chennai - 600 044. Commissioner of Income Tax,
Company Circle II(2), Chennai)
PAN :
(Appellant) (Respondent)
Appellant by : Shri S.P. Chidambaram, Advocate
Respondent by : Shri K.E.B. Rengarajan,
Junior Standing Counsel
Date of Hearing : 03.05.2012
Date of Pronouncement : 03.05.2012
O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
In this appeal filed by the assessee, its grievance is that the CIT(Appeals) confirmed the disallowance of expenditure of ` 2,09,11,571/- relating to Enterprise Resource Planning (ERP) implementation and also confirmed disallowance of expenditure of ` 6,53,524/- on purchase of cabinets and lights.
2 I.T.A. No. 293/Mds/12
2. Short facts relating to first issue is that assessee had debited in its Profit & Loss account a sum of ` 2,09,11,571/- as ERP implementation cost. During the course of assessment proceedings, assessee was required to explain why it should not be treated as capital outgo. From the details submitted by the assessee, it was noted by the A.O. that the expenses were on account of staff training, reimbursement of cost in relation to installation and implementation of SAP Software and these were done through its associated concern in Singapore. The A.O. observed that not only it was not allowable being a capital outgo, but assessee had also not made deduction of tax on the payment made to the Singapore concern. Therefore, according to him, rigours of Section 40(a)(i) of Income-tax Act, 1961 (in short 'the Act') were also invited. As per the A.O., if the payments were treated as fees for technical services, then assessee was bound to deduct tax at source and failure to deduct tax at source called for a disallowance under Section 40(a)(i) of the Act.
2. In its appeal before CIT(Appeals), argument of the assessee was that the payments made for modification and implementation of existing SAP Software had not resulted in creation of any asset of enduring nature. Assessee also submitted that just because the 3 I.T.A. No. 293/Mds/12 payments were made in a lump sum, it could not be considered as a capital outgo. CIT(Appeals) was not in agreement with such contention and held that it was not a routine expenditure, but an expenditure incurred, which gave the assessee an enduring benefit. Relying on the decision of Special Bench of this Tribunal in the case of Amway Enterprises v. DCIT (111 ITD 112) (Del.)(SB), CIT(Appeals) confirmed the order of A.O. However, he directed the A.O. to give depreciation on the expenditure amount.
3. Now before us, A.R., strongly assailing the order of CIT(Appeals), submitted that the expenditure had not created any asset nor had given it any enduring benefit. Further, the A.R. submitted that the expenditure was in the nature of salary, travel, accommodation, food, etc. and these were even otherwise allowable as revenue expenditure. Reliance was placed on the decision of Chandigarh Bench of this Tribunal in the case of Glaxo Smith Kline Consumer Healthcare Ltd. v. ACIT (2007) 112 TTJ (Chd) 94. According to him, taxes as required under law were withheld from the payments made to the Singapore concern.
4. Per contra, D.R. strongly supported the orders of the authorities below.
4 I.T.A. No. 293/Mds/12
5. We have perused the orders and heard the rival submissions. There is no dispute that the expenditure incurred was in the nature of salary, travel, accommodation, food, etc. though it related to implementation of SAP Software which was a part of ERP. We find that similar issue had already come before Chandigarh Bench of this Tribunal in the case of Glaxo Smith Kline Consumer Healthcare Ltd. (supra). It was held at paragraphs 43.1 to 45 as under:-
"43.1 We have considered the rival submissions carefully. Insofar as factual aspect of the matter is concerned, details of the expenditure in question amounting to Rs. 3,77,65,412 have been placed in the paper book at pp. 60 to 62. The assessee has implemented a new ERP package for recording of manufacturing and accounting transactions, i.e. in the field of financial and commercial activities. At p.62 of the paper book and also as noted by the lower authorities, the new package is with regard to the recording of transactions in the field of accounting and finance, commercial transactions (i.e. sale and purchase order management, inventory management etc.). In order to implement, the new ERP system, the assessee claims to have incurred the impugned expenditure. The details of the expenditure reveal that the majority of heads of expenses are relating to salaries, employees' travelling cost, other routine business expenditure like postage, stationery, employees' training seminars, consultancy expenses etc. The first aspect is that the expenditures in question by itself do not result in acquisition of any asset in the hands of the assessee. The impugned expenditure also is not related to the actual acquisition of the ERP package and on this count, even the A.O. does not dispute the factual situation. The stand of the A.O. for treating the expenditure, as capital is that the said expenditure has brought enduring benefits to the assessee.5 I.T.A. No. 293/Mds/12
44. We have considered the nature of the expenditure incurred and the resultant benefits to the assessee. Evidently the business of the assessee is to carry on manufacture and sale of food and healthcare products. The activity pertaining to accounting, finance, recording of transactions relating to sales/purchases, inventories etc. are all secondary and assist in the furtherance of the main business objective of the assessee i.e. manufacturing. These secondary activities are necessary as 'aids' or 'tools' of management so as to enable the assessee to accurately and correctly ascertain the true state of affairs. An efficient and reliable recording of activities of accounting, finance, inventory management, processing of purchases, sales etc. would enable the assessee to be more efficient and profitable in carrying out its main business activity of manufacturing. What we are trying to emphasize is that where the assessee incurs expenditure to further improve and upgrade its manner of recording of accounting, finance and other related transactions, it does have an impact on generation of income since the assessee acquires improved inputs to take business decisions. So, however, it does not add to the capital apparatus of the assessee. It merely enables the assessee to take management decisions more efficiently. Therefore, the resultant benefits, in the shape of carrying on business more efficiently and smoothly, cannot be said to be an advantage accruing in the capital field. We have already referred in our earlier paras to the decision of the apex Court in the case of Empire Jute Co. Ltd. (supra) in this regard and again reiterate that the test of 'enduring benefit' may not be applicable under all circumstances. For instance, as we have seen in the instant case, there does not flow any advantage in the capital field and thus the expenditure cannot be attracted as a capital expenditure. In fact the advantage is in the Revenue field as it facilitates the assessee to carry on its business efficiently and smoothly. At this point it is also pertinent to mention that even prior to the implementation of the new ERP package, the assessee has been carrying on the impugned activities. The only change is that with the implementation of the new ERP package, the assessee seeks to carry on such activities more smoothly, efficiently and meaningfully so as to enable the assessee to take business decisions. The expenditure in question is merely incurred on implementation of the new 6 I.T.A. No. 293/Mds/12 package. Therefore, our inference that the impugned expenditure has only enabled the assessee to carry on its business efficiently and smoothly.
45. With this background we may now look at the break up of the expenditure as per the details placed at pp. 60 to 61 of the paper book. We have perused the same and find that as per the details on record, the entire expenditure fits the bill except in relation to the expenditure voice telecom circuit Rs. 19,86,581 and data/ telecom circuit usage Rs. 69,16,888. With respect to the aforesaid two expenses there is no specific discussion either in the orders of the lower authorities or even before us; to gauge its nature. Therefore, while in principle, we uphold the stand of the assessee that the expenditures of the nature which have been incurred in the implementation of the new ERP package, are revenue expenditures, insofar as it relates to the aforesaid two expenditures, we deem it fit and proper to direct the A.O. to ascertain their nature and thereafter decide the issue. For this limited purpose, we hereby set aside the order of the CIT(A) and restore the matter to the A.O. to carry out the aforesaid exercise. The assessee shall provide the necessary details to the A.O. and also justify that the same was of revenue nature in consonance with our discussion in the aforesaid paras."
The Tribunal in the above case had set aside the matter to the file of A.O. only for the limited exercise of verifying the expenditure in relation to voice telecom circuit and data telecom circuit usage. But, for this, it was held by the Tribunal that expenditure incurred only enabled the assessee to carry on its business efficiently and smoothly and was therefore allowable as revenue outgo. Here, in the case before us, the A.O. himself had given a finding that the expenditure was in the nature of salary, travel, accommodation, food, etc. Hence, in our opinion, by applying the decision of Chandigarh 7 I.T.A. No. 293/Mds/12 Bench in Glaxo Smith Kline Consumer Healthcare Ltd.'s case (supra), the claim has to be allowed as revenue expenditure. Before the CIT(Appeals), assessee had also stated that it had deducted appropriate tax on the payments made to Singapore company and remitted it within the prescribed time limit. This was not disputed before us by the D.R. We are, therefore, of the opinion that the claim was allowable and could not be treated as capital outgo. We, therefore, set aside the orders of authorities below in this regard and direct the A.O. to allow the claim.
6. Facts relating to second issue are that assessee had claimed expenditure of ` 6,53,524/- on purchase of cabinets and lights. A.O. was of the opinion that the above amount, included in "repairs and maintenance", was nothing but addition to "furniture and fixture", forming part of fixed assets. Since amounts incurred were for acquiring fixed assets, these were allowed as a deduction under Section 37(1) of the Act.
7. In its appeal before CIT(Appeals), assessee reiterated its contention that the amounts were revenue outgo and did not bring any enduring benefit to the assessee. CIT(Appeals), however, did not accept the contention of the assessee and held that in view of 8 I.T.A. No. 293/Mds/12 Explanation 1 to Section 32 of the Act, even if the expenditure was incurred by the assessee on a building leased by it, by way of renovation, extension or improvement, it had to be treated only as capital outgo. CIT(Appeals) thus confirmed the treatment of the Assessing Officer.
8. Now before us, A.R., assailing the orders of authorities below, stated that what was put up was only purely temporary structure and did not resort in any benefit of enduring nature. According to A.R., the items were not something which could be considered as furniture or fixed assets and hence, irrespective of the Explanation to Section 32, it was allowable as revenue outgo.
9. Per contra, D.R. supported the orders of authorities below.
10. We have perused the orders and heard the rival submissions. It is not disputed that what the assessee had done in the leased premises was dividing it into cabins. In leased area, different enclosures were made by way of cabins. Such temporary set-up cannot be construed on par with a permanent construction. Temporary structure put up, whether in a leased premise or own premise would not give enduring benefit because it is susceptible to frequent changes and modification and also can be easily re-located. 9 I.T.A. No. 293/Mds/12 As for electric lights, we are of the opinion that it can never be considered as an asset giving an enduring benefit, its life being unpredictable by its very nature. Therefore, we are of the opinion that the claim was clearly allowable. In taking this view, we are fortified by the decisions of Hon'ble jurisdictional High Court in the case of CIT v. Dasaprakash (114 ITR 210), CIT v. Sakthi Finance Ltd. (291 ITR 83) and CIT v. Ooty Dasaprakash (237 ITR 902). We, therefore, set aside the orders of authorities below and direct the A.O. to allow the claim of the assessee in this regard.
11. In the result, appeal filed by the assessee is allowed. Order pronounced in the open court after conclusion of hearing on 3rd May, 2012.
sd/- sd/-
(Vikas Awasthy) (Abraham P. George)
Judicial Member Accountant Member
Chennai,
Dated the 3rd May, 2012.
Kri.
Copy to: (1) Appellant
(2) Respondent
(3) CIT(A)-19, Mumbai
(4) CIT-8, Mumbai
(5) D.R.
(6) Guard file