Income Tax Appellate Tribunal - Chennai
Danfoss Industries Private Limited, , ... vs Assessee on 10 September, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH, CHENNAI
BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND SHRI V. DURGA RAO, JUDICIAL MEMBER
I.T.A. No. 962/Mds/2012
(Assessment Year : 2006-07)
M/s Danfoss Industries Pvt. Ltd., The Assistant Commissioner of
296, Old Mahabalipuram Road, Income Tax,
Sholinganallur, v. Company Circle - I(4),
Chennai - 600 119. Chennai - 600 119.
PAN : AABCD0321M
(Appellant) (Respondent)
Appellant by : Shri T. Banusekar, CA
Respondent by : Shri Shaji P. Jacob, Addl. CIT
Date of Hearing : 10.09.2012
Date of Pronouncement : 27.09.2012
O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
Assessee in this appeal assails an order dated 27.3.2012 passed by Commissioner of Income Tax, Chennai-I, under Section 263 of Income-tax Act, 1961 (in short 'the Act'). As per the assessee, there was no error or prejudice caused to the Revenue in the order of the Assessing Officer warranting invocation of Section 263 of the Act. 2 I.T.A. No. 962/Mds/12
2. Facts apropos are that assessee, manufacturing and marketing refrigeration and air-conditioning controls and also engaged in servicing of such products, had filed its return for impugned assessment year on 22.11.2006 declaring an income of ` 10,37,48,890/-. In the course of assessment proceedings, it was noted by the A.O. that assessee had international transaction with its Associate Enterprise, value of which exceeded ` 15 Crores and accordingly a reference was made to Transfer Pricing Officer (TPO) under Section 92 of the Act. TPO, vide her order dated 28.10.2009, opined that no adjustment was required to the value of international transactions reported by the assessee. Thereafter, the assessment was completed accepting the income returned, except for a disallowance of ` 26,222/- for an excess claim mentioned in the audit report in Form No.3CD filed along with return of income.
3. Later, CIT issued a notice under Section 263 of the Act asking the assessee to explain why the said section should not be invoked with regard to a claim of ` 2,13,72,000/- made by the assessee towards software expenses, which was allowed by the Assessing Officer. As per the CIT, the Assessing Officer had considered it as revenue expenditure ignoring new Appendix-I under Income-tax Rules, 1962 applicable from assessment year 2003-04 onwards, 3 I.T.A. No. 962/Mds/12 which specified a depreciation rate of 60% for computer software. CIT also noted that a co-ordinate Bench of this Tribunal in the case of one M/s Asco (India) Ltd. (I.T.A. No. 43/Mds/2007 and 121/Mds/2007 dated 17.11.2008) had held computer software to be a capital asset. As per the CIT, Assessing Officer did not go into these aspects before allowing the claim of the assessee, but had on the other hand, accepted such a claim without proper enquiry.
4. In response to the notice issued on the above lines, reply of the assessee was that the conditions required for invocation of Section 263 of the Act were not satisfied. As per the assessee, Assessing Officer had taken one view of two possible views. Just because such a view was beneficial to the assessee, jurisdiction under Section 263 of the Act could not be assumed. As per the assessee, expenditure incurred on software was a revenue outgo. Assessee also argued before CIT that it had furnished a break-up of expenditure, copies of invoices and ledger extract in support of its claim and Assessing Officer had allowed the claim after taking due cognizance of such records.
5. However, CIT was not impressed. According to him, for assessment year 2004-05 also there was a similar claim made by the 4 I.T.A. No. 962/Mds/12 assessee, which was allowed by the Assessing Officer. CIT had invoked Section 263 of the Act for that year also and on assessee's appeal, it was held by this Tribunal that Assessing Officer's order allowing software expenses, was erroneous and prejudicial to the interests of Revenue. As per CIT, the facts and circumstances for impugned assessment year were identical to that of assessment year 2004-05 and therefore, he was having powers under Section 263 for making a revisionary order. CIT noted from the assessment records that Assessing Officer had not called for important details like copies of invoices and other supporting documents which, according to him, were necessary for verifying the claim of software expenditure. As per CIT, Assessing Officer did not go into the issue whether software expenses claimed were capital or revenue in nature, but had gone by the break-up of expenses given by the assessee. CIT also noted that in the Assessing Officer's order sheet for impugned assessment year, there was no reference at all to the claim of software expenditure. He thus came to a conclusion that Assessing Officer, despite obtaining the break-up of software expenses, did not go into the important aspect whether such claim could be allowed as revenue outgo or whether it was capital in nature. Though the assessee relied on various decisions like that of Hon'ble Apex Court in the case of 5 I.T.A. No. 962/Mds/12 Malabar Industrial Co. Ltd. v. CIT (243 ITR 83), that of Hon'ble Bombay High Court in the case of CIT v. Gabrial India Ltd. (203 ITR
108), that of Hon'ble jurisdictional High Court in the case of CIT v. Southern Roadways Ltd. (282 ITR 379) and decision of Special Bench of this Tribunal in Amway India Enterprises v. DCIT (111 ITD
112). CIT was of the opinion that none of these cases would help the assessee because expenditure incurred by the assessee included cost of new software and it was not the question of upgradation of any existing software. In any case, according to him, Assessing Officer having not called for any details nor gone into the details of expenditure, the order of Assessing Officer was erroneous and prejudicial to the interests of Revenue. He, therefore, set aside the order of Assessing Officer and directed him to pass a fresh order in accordance with law after giving opportunity to the assessee to explain its case.
6. Now before us, learned A.R., at the outset, pointed out that similar orders were passed by the CIT under Section 263 of the Act, for assessment year 2004-05 as well as 2005-06. According to him, assessee had moved in appeals, for both these years, before this Tribunal. This Tribunal in the appeal of the assessee for assessment year 2004-05, had upheld the order of CIT under Section 263 of the 6 I.T.A. No. 962/Mds/12 Act. However, according to him, the order of CIT was upheld for a reason that records relating to the issue were not available before the A.O. Learned A.R. pointed out that on a similar order of CIT for assessment year 2005-06, this Tribunal had held that once Assessing Officer had obtained the evidence for purchase of software and details were available before assessing authority, revisionary order of CIT could not be sustained. According to him, this Tribunal in its order for assessment year 2005-06 placed at paper-book (containing case laws) pages 197-201, at para 2 onwards had dealt with the issue regarding claim of software expenses, extensively. It was held by this Tribunal that software expenditure claimed was revenue in nature and Assessing Officer having obtained evidence for such software expenses, CIT could not invoke revisionary jurisdiction under Section 263 of the Act. As per learned A.R., order of this Tribunal, for assessment year 2004-05, placed at paper-book pages 192-196, could not be followed because the order of CIT under Section 263 for that year clearly showed that there was no indication whatsoever in the assessment order that Assessing Officer had considered the claim of software expenses during the course of assessment proceedings. According to him, for that year, Assessing Officer had not taken any view at all because the allowability of the 7 I.T.A. No. 962/Mds/12 claim made by the assessee was not considered at all. On the other hand, the order of CIT under Section 263 of the Act, for assessment year 2005-06, was for different reasoning since the CIT had not questioned the purchase of software. The CIT himself stated that his only concern was regarding the nature of expenditure as to whether they were capital or revenue and whether assessee's claim was allowed without examining this aspect. According to the learned A.R., impugned order of CIT was very similar to his order for assessment year 2005-06, which was quashed by this Tribunal on assessee's appeal. Here also, the CIT had not questioned the expenditure involved, but had held that Assessing Officer had not examined the nature of claim whether it was in the capital field or revenue field.
7. Learned A.R. then brought to our attention the order of this Tribunal in a Miscellaneous Petition filed by the Revenue against its order for assessment year 2005-06. According to him, this Tribunal had brought out the difference between the revisionary orders of CIT for assessment year 2004-05 and 2005-06, and the reason why it had taken a different view for assessment year 2005-06. According to him, claim of the assessee for impugned assessment year, being akin 8 I.T.A. No. 962/Mds/12 to its claim for assessment year 2005-06, Tribunal order for assessment year 2005-06, had to be followed.
8. Proceeding further, learned A.R. submitted that assessee was, during the course of assessment proceedings, required by the A.O. by his letter dated 24th August, 2009 (paper-book page 49) to furnish ledger accounts of expenses, which inter alia included software expenses also. Assessee had thereupon, vide its letter dated 7th September, 2009 placed at paper-book pages 22-25, given a detailed note which at para 7, gave a break-up of the expenditure which inter alia included expenditure relating to software also. According to him, Annexure 9 to this letter (paper-book page 25) gave the full break-up of expenses for software. Thereafter, on 9th December, 2009, the nature of expenditure was further explained (paper-book pages 26-
28) and it was submitted to the Assessing Officer that software expenses were paid to its Associate Enterprise, namely, M/s Danfoss A/S Danfoss IT Nordborg, Denmark (in short Danfoss Denmark), for various services rendered by them. According to him, Danfoss Standard Infrastructure was a software provided by M/s Danfoss Denmark and created a basic administrative workplace environment which enabled its employees to share information online and also for troubleshooting errors and failures. Learned A.R. made specific 9 I.T.A. No. 962/Mds/12 reference to the letter dated 21st December, 2009 (paper-book pages 29-30) written by the assessee to the Assessing Officer, where justification for the claim of software expenditure was given in detail. According to him, assessee had placed reliance on the decision of Hon'ble jurisdictional High Court in the case of CIT v. Southern Roadways Ltd. (282 ITR 379), that of Special Bench of this Tribunal in Amway India Enterprises v. DCIT (111 ITD 112), Bangalore Bench of this Tribunal IBM India Limited v. CIT (105 ITR 001) and co- ordinate Bench of this Tribunal in the case of L&T Ramboll Consulting Engineers Ltd. v. ACIT in I.T.A. No. 886/Mds/2006, in support of its claim that software expenditure could be considered only as a revenue outgo. It was after considering all such case laws, Assessing Officer decided to allow the claim. According to him, on the face of these submissions made by the assessee during the course of assessment proceedings, just for a reason that Assessing Officer had not made any specific mention regarding the claim in the assessment order, non-application of mind by the Assessing Officer could not be inferred. Having called for all the details and having submitted all such details before the Assessing Officer, it could not be presumed that Assessing Officer had allowed the claim without considering the records and without applying his mind. 10 I.T.A. No. 962/Mds/12
9. Thus, according to the learned A.R., CIT was only trying to substitute his view to a lawful view taken by the Assessing Officer. Further, he pointed out that under cover of its letter dated 1st October, 2009, assessee had even filed a copy of the agreements which it had entered with M/s Danfoss Denmark, for various IT services rendered by the said Associate Enterprise (paper-book pages 35-48). The payment of software expenses were in accordance with the bills raised by M/s Danfoss Denmark, based on such contracts, and Assessing Officer had considered such agreements also before allowing the claim of the assessee. According to him, all these aspects were brought before the CIT also during the course of proceedings under Section 263 of the Act. In addition, assessee had also filed copies of invoices raised by M/s Danfoss Denmark for the software service rendered by them. It was clear and evident from various invoices (placed at paper-book pages 6-14) that the expenditure did not give any enduring benefit to the assessee. Assessee did not acquire any software but, had only received licenses for using the software facilities made available by M/s Danfoss Denmark, for one year. Despite all such records being produced, CIT had unjustifiably held that order of Assessing Officer was erroneous and prejudicial to the interests of Revenue. Reliance 11 I.T.A. No. 962/Mds/12 was placed on the Full Bench decision of Delhi High Court in the case of CIT v. Kelvinator of India Ltd. (256 ITR 1) for arguing that Section 114(e) of Indian Evidence Act would apply and a presumption had to be taken that all judicial and official acts were regularly performed.
10. Even on merits, as per learned A.R., claim of the assessee that software expenses were allowable as revenue outgo, could not be assailed by virtue of the decision of Hon'ble jurisdictional High Court in the case of CIT v. Sundaram Clayton Ltd. (321 ITR 69). According to him, Hon'ble jurisdictional High Court had followed its own decision in the case of CIT v. Southern Roadways Ltd. (282 ITR 379) and these decisions were cited before the Assessing Officer during the course of original assessment proceedings. Specific reliance was also placed on the decision of Hon'ble Delhi High Court in the case of CIT v. Asahi India Safety Glass Ltd. (2011) 64 DTR 63 which, according to him, had clearly held that even expenses incurred for acquisition of software application, which enabled execution of a task in the field of accounting, would still be considered as revenue outgo only. Thus, according to him, the situation for the impugned assessment year was unlike that of assessment year 2004-05, but more like of assessment year 2005-06. The situation here was that assessee had provided all details on its claim regarding software and 12 I.T.A. No. 962/Mds/12 Assessing Officer had considered such claim. CIT was only trying to substitute his view with a lawful view taken by the Assessing Officer. Therefore, according to him, order of CIT had to be quashed.
11. Per contra, learned D.R., submitted that it might be true that assessee had given a break-up of software expenses. According to him, the issue was not whether the assessee had given a break-up of software expenditure, but the issue was whether Assessing Officer had considered the aspect whether such expenditure was revenue outgo or capital outgo. No examination was done as to the liability for deducting tax at source on such expenditure. There was no discussion in the assessment order regarding claim of software expenditure made by the assessee and how it was considered. Invoices produced before CIT for software expenditure were never produced before the Assessing Officer. May be, the Assessing Officer was given copies of agreement entered by the assessee, with M/s Danfoss Denmark. However, assessee could never link such agreement with the invoices raised by the said concern, nor did Assessing Officer make a further examination of such agreement vis- à-vis the claim of software expenditure. Just because assessee had produced a ledger, a presumption could not be taken that expenses shown in such ledger were revenue in nature. Assessing Officer was 13 I.T.A. No. 962/Mds/12 duty bound to verify such claim and having not done so, the order of Assessing Officer was erroneous insofar as it was prejudicial to the interests of Revenue.
12. As for the reliance placed on the order of this Tribunal in the Miscellaneous Petition filed by the Revenue, for assessment year 2005-06, learned D.R. submitted that this Tribunal had given a clear finding that assessee had filed all details before Assessing Officer for assessment year 2005-06, whereas, it had not filed any such details for assessment year 2004-05. According to him, for the impugned assessment year also, assessee had not filed details by way of invoices raised by M/s Danfoss Denmark in support of its claim for software expenditure. Assessing Officer had just gone by the break- up given by the assessee. Further, according to learned D.R., even the break-up clearly showed that one of the items of expenditure mentioned therein, namely, EDP expenses for FOCUS (Accounting software) coming to ` 1,10,45,000/- was for acquiring an accounting software and at least this amount was nothing but a capital outgo. Learned D.R. also pointed out that the CIT had duly considered depreciation table shown under Rule 5 of Income-tax Rules, 1962, as applicable for assessment year 2003-04 and as applicable for assessment year 2006-07, wherein there is a specific rate of 14 I.T.A. No. 962/Mds/12 depreciation prescribed for computer software. This clearly showed that expenditure for computer software, was in the nature of capital outgo. Omission to consider the relevant rule and allowing the claim of the assessee, just going by its claim, rendered order of the A.O. erroneous and prejudicial to the interests of Revenue. In assessment year 2005-06, for which assessee had obtained a favourable order from this Tribunal, there was a clear finding that Assessing Officer had received evidence for purchase of software. On the other hand, here admittedly, assessee had not furnished any such evidence before Assessing Officer. In any case, according to him, question of the merits of a claim could not be gone into by this Tribunal on an appeal against an order under Section 263, by virtue of decision of Hon'ble Delhi High Court in the case of CIT v. Eastern Medikit Ltd. (337 ITR 56). Further reliance was placed on the decision of Hon'ble Karnataka High Court in the case of CIT v. Infosys Technologies Ltd. (341 ITR 290) for arguing that reasons for allowing a claim of the assessee should be forthcoming from the assessment order. Learned D.R. also placed reliance on the decision of Hon'ble jurisdictional High Court in the case of SRM Systems & Software Pvt. Ltd. v. ACIT [T.C.(A) No.824 of 2010 dated 31st August, 2010] for arguing that where Assessing Officer had not verified the documents 15 I.T.A. No. 962/Mds/12 relating to a claim of assessee, assessment order framed without such verification, was erroneous and prejudicial to the interests of Revenue. Further, according to learned D.R., CIT had only remitted the matter to the file of the Assessing Officer and there was no prejudice caused to the assessee for simple reason that if the claim of the assessee was justified, it could still get it allowed.
13. Ad libitum, submission of the learned A.R. was that just because the CIT had set aside the assessment order giving the Assessing Officer a free hand to proceed in accordance with law, would not mean that there was no prejudice caused to the assessee. According to him, setting aside of an order by itself effected the rights of an assessee, when it was not done in accordance with law. Further, according to him, submission of learned D.R. that deductibility of tax was not considered by the Assessing Officer, was a fresh issue raised and this was never in contemplation of CIT in the proceedings under Section 263 of the Act. Again, according to the learned A.R., ledger pages were indeed produced before the A.O. and claim of the CIT that ledger pages by itself would not show the nature of expenditure, was incorrect since grouping of expenditure was done based on ledger only. Various folios were grouped together for proper reflection in the Profit & Loss account. Insofar as 16 I.T.A. No. 962/Mds/12 break-up of software expenditure was concerned, learned A.R. submitted that this had to be read along with various submissions made by the assessee during assessment proceedings which, inter alia, gave full details. In any case, according to him, decision of Hon'ble jurisdictional High Court in the case of Southern Roadways Ltd. (supra) was cited before Assessing Officer and Assessing Officer had allowed the claim after considering such submissions of the assessee. As for the reliance placed by learned D.R. on the decision of Hon'ble Delhi High Court in the case of Eastern Medikit Ltd. (supra), learned A.R. submitted that no enquiry whatsoever was made by the Assessing Officer in that case and it was for that reason that the assessment order was considered erroneous and prejudicial to the interests of Revenue. Similar was the case before Hon'ble Karnataka High Court in the case of Infosys Technologies Ltd. (supra) also. As for the reliance placed on the decision in the case of SRM Systems & Software Pvt. Ltd. (supra) of Hon'ble jurisdictional High Court was concerned, learned A.R. submitted that the facts there were entirely different and was not at all comparable with that of assessee's case.
14. We have perused the orders and heard the rival submissions. First issue to be decided is whether we have to follow the order of 17 I.T.A. No. 962/Mds/12 Tribunal for assessment year 2004-05 or that for assessment year 2005-06. For both these years, there were proceedings under Section 263 by CIT. With regard to assessment year 2004-05, finding of this Tribunal in I.T.A. No. 702/Mds/2010 dated 23rd December, 2010, on assessee's appeal was as under:-
"8. In regard to the issue of the software expenses it is noticed that the learned CIT has given a specific finding that either in the order sheet noting or in the assessment order there is no discussion made by the Assessing Officer. True, in the 142(1) notice at clause (6) the issue has been raised by the Assessing Officer and the assessee has filed a reply dated 2.3.2007 as per the paper-book filed. However, when the learned CIT has given a specific finding of fact and this finding of fact has not been disturbed by filing of the necessary affidavit as also on account of the fact that the records are not before us, we are unable to find any error in the direction given by the learned CIT in regard to the issue of software expenses. I the circumstances, the direction of the learned CIT in regard to the software expenses is upheld. In the circumstances, the appeal of the assessee is partly allowed and the order of the learned CIT passed u/s 263 stands consequently modified."
For assessment year 2005-06, this Tribunal in I.T.A. No. 612/Mds/2011 dated 9th May, 2012, held at paras 3 and 4, as under:-
"3. We heard both sides in detail. The Commissioner of Income Tax has fairly stated in the last paragraph of the revision order that the Assessing Officer has obtained the evidence for purchase of software expenses. He has also fairly stated in the order that he has not at all questioned the very purchase of software. Having the basic facts so accepted, let us go to the details of the expenditure which totaled to ` 61,32,795/-. This is available in the details filed before the assessing authority. The same has been placed before us by the 18 I.T.A. No. 962/Mds/12 learned Chartered Accountant appearing for the assessee in page 4 of the paper-book filed by him on 11.11.2011. As per the details available on records, the expenditure of ` 61,32,795/- consisted the following:
S.No. Particulars Amount (in `)
1. Consumables & Others 178,311
2. IT Help Desk Charges 4,690,583
3. Internet 996,364
4. Servicing 223,338
5. Training fees 35,428
6. Others ___8,721
6,132,795
4. On perusal of the above components of software expenses, it is clear that the assessee has spent the amounts for running its software system and not for acquiring any new system. Consumables and others were purchased for servicing the existing net work. This is the same which goes with the servicing as well. Another item is internet charges and small expenditure expended on training. The major amount is spent for IT help desk. It is to be seen that none of these expenses was incurred for acquiring any new system or facility of enduring nature. By the nature of the expenditure itself, it is clear on the face of the records that the expenses incurred were in the nature or revenue expenditure. Therefore, we find that Assessing Officer has rightly allowed the claim of the assessee. As such, the finding of the Commissioner, is untenable. Accordingly, the revision order is set aside."
15. To resolve the issue whether to follow one or other of the above decisions, we have to go into orders of the CIT for respective years. For assessment year 2004-05, the order of CIT insofar as it related to issue regarding software expenditure, read as under:-
"Coming to the expenditure on software incurred by the assessee, it is to be noted that there has been no discussion 19 I.T.A. No. 962/Mds/12 made by the Assessing Officer either in the order sheet noting or in the assessment order. In fact, it is seen that there was an omission on the part of the Assessing Officer to examine the question of allowability of the software expenditure claimed by the assessee. In such circumstances, the decision of the Supreme Court in the case of M/s Malabar Industrial Company Ltd. Vs. CIT (2000) 243 ITR 83 (SC) cannot be considered as applicable to the facts of this case at all. When the Assessing Officer has failed to consider the allowability of claim made by the assessee, the question of two views and the Assessing Officer adopting one of the views etc. does not arise. Thus with regard to the allowability of software expenditure, the order passed by the Assessing Officer is clearly erroneous and prejudicial to the interests of revenue. The Gujarat High Court in the case of Addl. CIT Vs. Mukur Corporation (1978) 111 ITR 312 (Guj) has held that if the Assessing Officer had allowed a claim of the assessee without probing into the same, the Commissioner is justified in invoking the provisions of 263. Similarly, the Madras High Court in the case of Indian Textiles Vs. CIT (1986) 157 ITR 112 (Mad) had also held that if the Assessing Officer allowed a claim of the assessee without verification, then the Commissioner can intervene u/s.263. Drawing support from these two different decisions, I would hold the view that the order passed by the Assessing Officer is erroneous and prejudicial to the interests of revenue with regard to the claim of the assessee in respect of software expenditure.
On the merits of the issue relating to software expenditure, the assessee had relied upon the following case laws also.
(a) Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC)
(b) CIT Vs. Southern Roadways Ltd. (2006) 282 ITR 379 (Mad)
(c) Amway India Enterprises Vs. DCIT & SQL Star International Ltd. Vs. ACIT (2008) 111 ITD 112 (Delhi-SB) As regards the decision at (a), the assessee has relied upon this decision to highlight the general proposition that an 20 I.T.A. No. 962/Mds/12 outlay can be considered as capital only when it is incurred with a view to bring into existence, any asset which provides enduring benefit and has enough durability to justify its capitalization.
This decision cannot be considered as applicable on all fours to the facts of this case inasmuch as the point here is that the Assessing Officer did not examine the nature of expenditure at all and only then the question as to whether the assessee had derived enduring benefit etc. could have been considered. Since there was total failure on the part of the Assessing Officer to call for the details and examine the nature of expenses incurred by the assessee, the order passed by the Assessing Officer is clearly erroneous and prejudicial to the interests of revenue. It is also to be noted that this decision of the Supreme Court relied upon by the assessee was rendered in the year 1955 and the concept of software was alien during the period. The Statute itself allows 60% of depreciation on computer / software which shows that the enduring benefit need not be spread over for many years. In fact, in the case of M/s Empre Jute Company Ltd. (1980) (124 ITR 1) (SC), the Hon'ble Supreme Court themselves have made observations to the effect that the question of deciding an expenditure as capital or revenue in nature need not necessarily depend upon the enduring benefits derived by the assessee. This only shows that the decision of the Supreme Court in the case of M/s Assam Bengal Cement Co. Ltd. Vs. CIT (1955) 27 ITR 34 (SC) cannot be considered applicable to the facts of this case in the present age of computers and software."
For assessment year 2005-06, the order of CIT under Section 263 of the Act on the issue regarding software expenditure, read as under:-
"I have carefully considered the submissions of the assessee. In this connection at the outset, I want to emphasize the fact that in earlier assessment years (2004-05), the Hon'ble ITAT has virtually upheld the order passed by the CIT u/s. 263 on the issue of software expenses and it is only in respect of the issue relating the provision for warranty, the Hon'ble ITAT allowed relief to the assessee. Thus on this count alone, the 21 I.T.A. No. 962/Mds/12 assessee's objection that I cannot interfere u/s. 263 on the issue of software expenses falls.
It is not clear as to why the assessee wants an opportunity to file an affidavit in respect of the facts stated by them, when I am not disputing that the assessee has furnished the details of copies of invoices, beak up of expenditure and ledger extracts of software expenses before the Assessing Officer. The Hon'ble ITAT in their order dated 23.12.2010 has observed that when the CIT has given a specific finding of fact that either in the order sheet noting or in the assessment order, there is no discussion in the order passed by the Assessing Officer on the issue of software expenses and when this finding has not been disturbed by filing necessary affidavit, as also on account of the fact that the records are not before them, they are unable to find any error in the direction given by the CIT in regard to the issue of software expenses. Probably, based upon this observation the assessee has now sought for a further opportunity to file an affidavit.
I am of the view that there is no need for the assessee to file an affidavit before me. I don't basically deny the assessee's contention that the assessee has furnished copies of invoices, break up of expenditure and ledger extracts of software expenses before the Assessing Officer. My only point is that it can be seen from the order sheet noting as well as the assessment order that the Assessing Officer did not go into the issue of allowability of software expenses as capital or revenue in nature. From the order sheet noting in the MR for the assessment year 2005-06, it is clear that on 23.10.2008, the Assessing Officer, inter alia, called for evidence of software purchases. As per the order sheet noting dated 5.12.2008 in the MR it is seen that details have been filed by the assessee as claimed by them. The Assessing Officer had also completed the assessment accepting the income returned by the assessee on 5.12.2008. In the relevant order sheet noting, it was specifically remarked by the Assessing Officer as under:-
"It is seen though "provision" term used, actually they come under 'expenses'. This fact verified. They have been paid 22 I.T.A. No. 962/Mds/12 in April and TDS deducted and paid in May. Assessment is completed accepting returned income".
It is also worth noting that in the assessment order passed, there is no discussion and the Assessing Officer has completed the assessment accepting the income admitted.
It may be thus seen that while the Assessing Officer obtained the evidence for purchase of software expenses, she did not go into the aspect as to whether the software expenses is allowable as revenue expenses or capital in nature. At this stage, I am not questioning the very purchase of software. My only concern is that the Assessing Officer did not examine the aspect of the nature of software expenses i.e. whether they are capital or revenue in nature and the assessee's claim has been allowed without examining this aspect of the matter. From the order sheet notings, referred to above as well as the assessment order this fact remains. Hence I am of the view that the order passed by the Assessing Officer on the issue of software expenses is clearly erroneous and prejudicial to the interests of revenue. I am also of the opinion for the Assessing Officer, the assessee cannot file any affidavit and thus no useful purpose would be served by allowing a further opportunity for filing any affidavit.
In the above circumstances, I set aside the assessment order passed by the Assessing Officer on 5.12.2008 and direct him to pass a fresh order in accordance with law keeping in mind the above points."
16. A reading of orders of CIT for assessment years 2004-05 and 2005-06 would show that though the issues for both years were related to software expenditure, the basis for reaching the respective conclusions were different. For assessment year 2004-05, there was a clear finding by the CIT that Assessing Officer did not examine the nature of expenditure, nor the question of allowability of the claim. 23 I.T.A. No. 962/Mds/12 There was no discussion on these aspects by the Assessing Officer in the order sheet noting or in the assessment order. Thus, CIT came to a conclusion that the Assessing Officer had allowed the claim without probing into it. There was also a finding that there was a total failure on the part of the Assessing Officer to call for the details and to examine the nature of software expenses claimed by the assessee. On the other hand, a look at the order for assessment year 2005-06 would show that the CIT had given a clear finding that assessee had furnished details like copies of invoices, break-up of expenditure, ledger extract, etc before the Assessing Officer. It was also mentioned by the CIT that on 23.10.2008, Assessing Officer had, inter alia, called for evidence of software purchases and the order sheet also mentioned that such details were filed by the assessee. Despite these, CIT held the order of the A.O. for that year to be erroneous and prejudicial to the interests of Revenue. Reason given was that Assessing Officer did not go into the aspect of nature of expenditure, but, was on the other hand, satisfied by the evidence for software expenses. No doubt, we can say that the orders of Tribunal for both these years were justified on the facts for the respective years. For assessment year 2005-06, assessee had produced evidence for software expenditure and the order of CIT clearly 24 I.T.A. No. 962/Mds/12 mentioned that details regarding claim of assessee were produced before the Assessing Officer, whereas, for assessment year 2004-05, there was nothing similar coming out of the order of Commissioner of Income Tax What can be discerned from this is that each assessment year is independent and even if the head of expenditure looks to be the same, a decision has to be reached on facts available for a given assessment year and not simply based on precedents which were based on different set of facts.
17. Now taking an independent look on the facts as available for impugned assessment year, what we can find is that assessee had filed three letters dated 7th September, 2009 (paper-book page 22 to
25), another dated 9th December, 2009 (paper-book pages 26 to 28) and a third one dated 21st December, 2009 (paper-book pages 29 to
30), all of which gave some details regarding its claim of software expenditure. In the first letter mentioned above, assessee had given a break-up of the software expenditure, which reads as under:-
Particulars Amount in
000's
EDP Expenses for FOCUS (Accounting software)
Total 11,045
ERP Seal Price Total 583
Internal DSD Charges Total 6,114
Internal DSI Charges Total 1,988
25 I.T.A. No. 962/Mds/12
MATFLOW (Accounting Software) Licence Fee 2,603
Total
Grand Total 22,333
Less:
Reversals 961
Amount as per Financials 21,372
In the second letter dated 9th December, 2009, assessee had given a note on the software cost, which reads as under:-
"IT Services Costs consists of Danfoss Standard Infrastructure Services (DSI) and Danfoss ERP Services, Danfoss Sales and Distribution Services.
Danfoss Standard Infrastructure (DSI): This is the basic standard administrative workplace environment with decided tools such as email, intranet and Internet access, Microsoft Office, Group Drive and Personal Drive and Help Desk 24 x 7. It enables employees to co-operate and share information in an online environment.
It includes Maintenance and Support on the decided tools and infrastructure. When a user experiences an error or failure situation where existing systems, hardware, software or services fail to perform as usual or as they should it is included in the DSI Service identified as in Incident.
When a user wants Danfoss IT to provide a service that is not related to a failure situation it will be identified as a service request and charged on an hourly basis.
ERP Seats Agreement: These are user charges and support charges for the ERP system, for all employees. This includes troubleshooting as well. An example will be Problem in generating Sales Tax/Central Excise Register etc. 26 I.T.A. No. 962/Mds/12 Danfoss Sales & Distribution (DSD): Danfoss globally uses standardized templates in business processes such as Standard Sale & Distribution Templates to integrate sales, finance & logistics operations. This DSD template ensures one way of working world wide and provides improvement in providing available data both in respect of sales, as well as finance."
Third letter dated 21st December, 2009 was again regarding claim of software expenditure and this read as under:-
"We refer to the above. In this connection and under instructions from and on behalf of our client, please find our submissions in relation to the nature of software cost incurred.
As submitted earlier, software costs primarily comprise maintenance and support software to supplement routine operations, user and support charges for the ERP system, and costs incurred for the purpose of generating standardized templeates which integrates business functions.
For instance, these costs include expenses incurred towards a common URL, intranet access, 24*7 help desk, etc. which aid employees to access and share information in an online environment.
Further costs are incurred towards standard templates viz. standard Sale & Distribution Templates to integrate sales, finance & logistics operations.
These expenses facilitate routine business functions, and do not provide any ensuring benefit, and thus have been claimed as revenue expenditure.
The Company also relies on the following judicial precedents in support of its contention.27 I.T.A. No. 962/Mds/12
a. CIT v. Southern Roadways Ltd. [288 ITR 15 and TC(A) Nos 700 to 704 of 2007] In this case, the Madras HC had considered whether acquisition of computer software would be in the nature of revenue expenditure. The Madras High Court ruled that payment for application software does not result in acquisition of any capital asset and hence, has to be treated as revenue expenditure.
b. Amway India Enterprises v. DCIT & SQL Star International Ltd. v. ACIT [2008] 111 ITD 112 (Delhi - SB) In this judgement, in relation to AY 1998-99 and AY 2001-02, the Special Bench of the Delhi Tribunal had dealt with the question of whether the expenditure incurred by the assessee on account of computer software was of revenue nature or capital nature.
The Bench considered the existing precedents on the subject exhaustively, and held that the issue of capital or revenue should be decided for each software taking into account three tests (ownership, enduring benefit and functional). The Bench further held that where the life of the software is short, say 2 years, it may be treated as revenue expenditure. Any software with life of greater than 2 years would be a capital asset, if the test of enduring benefit is satisfied. The Bench reiterated the principle that the point of view of the businessman and the functional role played by the software needs to be considered before classifying the same as capital or revenue.
c. IBM India Limited v. CIT [2006] 290 ITR 183 (Bang.) In this precedent, the Bangalore Tribunal has held that the expenditure incurred in acquiring application software to enable the assessee to carry its business more efficiently would be allowable as business expenditure even if some enduring benefit resulted by use of software.
d. L&T Ramboll Consulting Engineers Ltd. v. ACIT [2008] ITA No.886/Mds/2006 28 I.T.A. No. 962/Mds/12 In this judgement relating to AY 2002-03, Bench 'B' of the ITAT, Chennai remanded the matter back to the assessing officer to judge whether having regard to the nature of the software; the same would be capital or revenue in nature. In pronouncing its judgement, the Chennai ITAT relied upon the decisions of the jurisdictional HC in Southern Roadways case and the Delhi ITAT in the Amway case mentioned supra.
Given the above, the Company submits that expenditure on software was purely revenue in nature, and therefore, no part of the same can be subject to capitalization.
We request you to take the above information on record.
In case you have any reservations, or require any explanations / clarifications, kindly provide us with a further opportunity to present our case and make submissions."
18. Assessing Officer in his letter dated 24th October, 2009 (paper- book page 49), in the first instance, had required the assessee to furnish ledger copies for the claim of the software expenses and all the above records were submitted by the assessee in the course of assessment proceedings thereof. Despite the letters and records provided by the assessee, there is not even a whisper in the assessment order regarding how the A.O. had considered claim of software expenditure. What we note is that assessee had not produced at any point of time invoices raised by M/s Danfoss Denmark on it for various software services rendered by the said Associate Enterprise. At the same time, it needs to be mentioned that assessee had indeed produced before the Assessing Officer 29 I.T.A. No. 962/Mds/12 copies of various agreements entered by it with said M/s Danfoss Denmark. Ordinarily, in such a situation, normal inference that could be drawn is that Assessing Officer had applied his mind and came to a conclusion that expenditure on software were allowable as revenue outgo, despite his cryptic order, which was silent on the aspect. As mentioned by the learned A.R., presumption under Section 114(e) of Indian Evidence Act can be raised and ordinarily it has to be assumed that Assessing Officer had applied his mind. But, there is a certain peculiar fact situation here which takes this case out of application of such rule of presumption. First is that assessee had never produced invoice copies before Assessing Officer. Second is that Assessing Officer had never made any effort for verifying the agreements produced by the assessee for the service rendered by M/s Danfoss Denmark, to it for various software services, vis-à-vis the invoices raised by the said company. In other words, the claim, though made by the assessee and though justified by it by its letter dated 21st December, 2009 reproduced by us above, was never considered by the Assessing Officer in the proper prospective. The question whether the expenditure incurred by the assessee was capital or revenue in nature, in our opinion, was never given a thought by the Assessing Officer, since he had completed the 30 I.T.A. No. 962/Mds/12 assessment without verifying the invoices raised on the assessee by the service provider. Records produced by the assessee in the nature of various agreements it had with M/s Danfoss Denmark, would make little sense, without verifying it with invoices raised by the said party. Admittedly, such invoices were first produced by the assessee before CIT during the course of proceedings under Section 263 only. These were never before Assessing Officer. In other words, the fact situation is entirely different from that of assessment year 2005-06 where there was a clear finding by the CIT that assessee had provided evidence for the software expenditure. Here, on the other hand, assessee did not prove the expenditure for the software service before the Assessing Officer by producing invoices raised by M/s Danfoss Denmark on it. It may be true that the transactions with M/s Danfoss Denmark, were a part of the transfer pricing proceeding before TPO and no revision in the value of international transactions was recommended by the TPO in such proceedings. But, this would not by itself establish that the software expenditure incurred by assessee was only a revenue outgo and not a capital outgo. Nor could it show that the Assessing Officer had exercised his mind on this aspect. No doubt, various case laws relied on by the assessee including Southern Roadways Ltd. (supra) would 31 I.T.A. No. 962/Mds/12 clearly show that expenditure incurred for upgradation of existing computer system for improving its efficiency was a revenue outgo. Letter dated 21st December, 2009 of the assessee addressed to the Assessing Officer, where it had placed reliance on this decision of Hon'ble jurisdictional High Court, did not in any way justify its case by making a claim that software expenditure incurred were only for upgradation. Even in the case of Amway India Enterprises (supra), what was held by Special Bench was that the issue of capital or revenue should be decided considering each software, taking into account aspects like ownership, benefits and functionality. There is nothing on record to show that Assessing Officer had applied his mind on the claim of the assessee in the lines of various decisions of jurisdictional High Court or the Special Bench of this Tribunal. Assessee had given some break-up and some information and this was in toto accepted by the Assessing Officer without any discussion. In fact, there is nothing on record to show that Assessing Officer had made any enquiry at all. In the letter issued by him on 24th August, 2009, which is cited by learned A.R. as the genesis of the enquiry conducted by the A.O., out of the 13 number of clarifications sought at Sl.No.12, is the requirement to give ledger account copies of the following expenses:-
32 I.T.A. No. 962/Mds/12
"12. Please furnish ledger account copy of the following expenses:
(a) Training & Recruitment expenses (b) Rent (c) Staff Welfare
(d) Legal & Professional charges (e) Rates & Taxes (f) Software expenses (g) Travelling & Conveyance (h) Sales promotion
(i) Repairs, maintenance (j) Commission & Incentives (k) Insurance
(l) Miscellaneous exp. (m) Foreign Exchange loss"
19. It is clear from the above that in a long list of 13 items, software expenses was one of the items for which ledger copies were called for by the Assessing Officer. Assessee might have continuously given Assessing Officer various explanations and details, but, in our opinion, unless and until assessee could show that it had made a meaningful linking of such details with the eventual claim of software expenses, it cannot be considered as a proper and sufficient submission of details, enabling a rational decision to be reached regarding the allowability of its claim. When there is no such linkable chain discernible from the records produced by the assessee, which could show that the claim was duly made and considered by the Assessing Officer, in the course of original assessment proceedings, the only conclusion that can be reached is that there was non- application of mind by the Assessing Officer. When there is non application of mind by the Assessing Officer, we can definitely say that such order of Assessing Officer was erroneous and prejudicial to 33 I.T.A. No. 962/Mds/12 the interests of Revenue. What the CIT did was only to direct the Assessing Officer to consider the issue afresh in accordance with law, since he had omitted to consider whether the claim of the assessee was allowable as revenue outgo or capital outgo. In any case, as held by Hon'ble Delhi High Court in the case of Eastern Medikit Ltd. (supra), merits of the case cannot be gone into by this Tribunal in appeal against an order under Section 263 and the only question that need to be answered is whether CIT was justified in invoking Section 263 of the Act, i.e. whether there was any error in the order of Assessing Officer and whether such order caused prejudicial to the interests of Revenue. In our opinion, non- application of mind on details submitted by the assessee, is writ large in the assessment order. Failure to form an opinion is clear and this has resulted in the order being erroneous and prejudicial to the interests of the Revenue.
20. Decision of Hon'ble Apex Court in the case of Kelvinator of India's case (supra) was rendered in the context of a reopening attempted where original proceedings were completed under Section 143(3) of the Act. Hon'ble Apex Court affirmed the Hon'ble Delhi High Court Full Bench decision in same assessee's case, and Hon'ble Delhi High Court had indeed made a specific reference to 34 I.T.A. No. 962/Mds/12 Section 114(e) of Indian Evidence Act, regarding presumption of official acts to have been duly performed. In our opinion, it is to address a situation, where events which unfolded during the assessment proceedings give rise to a strong signal that there was no application of mind, which a reasonable man sitting in the chair of a Revenue Officer should have done, or in other words, where there is an omission to apply the mind in a manner a reasonable man would have done, causing detriment to the Revenue, that Section 263 has been provided for in the Act. As already mentioned by us, assessee had given a break-up of the software expenses, and the agreements based on which bills were raised on it by M/s Danfoss Denmark, for the software services provided by it. The break-up given at least had one major item in it which prima facie was for acquiring a software which gave the assessee an enduring benefit. At least this ought have motivated the Assessing Officer to probe further to ascertain the exact nature of the outgo. A failure to do so does show a non-application of mind. The A.O. failed to obtain and verify the invoices raised by M/s Danfoss Denmark on the assessee. Since proper verification of claim of the assessee was not done, we are of the opinion that CIT was justified in invoking Section 263 of the Act and directing the A.O. to pass a fresh order in accordance with 35 I.T.A. No. 962/Mds/12 law after giving an opportunity to the assessee. We do not find any reason to interfere with the order of CIT.
21. In the result, appeal filed by the assessee is dismissed. The order was pronounced in the Court on Thursday, the 27th of September, 2012, at Chennai.
sd/- sd/-
(V.Durga Rao) (Abraham P. George)
Judicial Member Accountant Member
Chennai,
Dated the 27th September, 2012.
Kri.
Copy to: (1) Appellant
(2) Respondent
(3) CIT, Chennai-I, Chennai
(4) D.R.
(5) Guard file