BANGALORE, MAY 26, 2014: THE issues before the Bench are - Whether any expenditure incurred on acquiring right to use database can be treated as akin to acquring capital asset and Whether loss on account of foreign exchange fluctuation is for importing various consumable items is allowable as revenue expenditure or is to be included in the valuation of closing stock. And the verdict goes in favour of the assessee.
Facts of the case
There was a company jointly promoted by TATAs and IBM which were known as TATA IBM. Both agreed to bifurcate the software development activities and the hardware business into two separate entities namely IBM Global Service India (P) Limited and TATA IBM where hardware business was taken care of. Various assets of the erstwhile TATA IBM were transferred to the newly established assessee-company for certain considerations.
AO observed that assessee had claimed revenue expenditure towards domestic customer database and towards transfer of certain skilled and trained employees who were originally recruited by TATA IBM to the assessee-company. It actually paid Rs.18.4 crores towards transfer of employees to the assessee-company, but claimed revenue expenditure of Rs. 9.38 crores and the remaining sum attributable to STP unit, the income of which was exempted. It claimed a sum in respect of the loss towards foreign exchange fluctuation. The AO held that domestic customer database was a capital asset which provides an enduring advantage or benefit to the assessee since, by utilizing the same, the assessee can successfully run its business activities over a considerable period of time and treated the payment made towards acquisition of domestic customer database as the payment made towards acquisition of capital asset and not allowable as revenue expenditure. With regard to transfer of human skill i.e. skilled and trained employees is concerned, AO held that the compensation paid by the assessee to TATA IBM is towards taking over of software segment of the erstwhile TATA IBM to the assessee-company. It is the capital asset of the company and it cannot be treated as revenue expenditure. With regard to loss towards foreign exchange fluctuation, AO held that the assessee has been importing various consumable items, the additional expenditure incurred on account of such imports caused by adverse exchange fluctuations should be taken into account for the purpose of valuation of closing stock. Therefore, AO added foreign exchange fluctuation loss to the value of closing stock resulting in addition.
The CIT (A) confirmed the order of AO. Tribunal partly allowed the appeal holding that payment for using domestic customer database is revenue in nature. In respect of payment made towards transfer of human skill is concerned, it should be treated as revenue expenditure further the assessee is entitled for deduction with regard to fluctuation of foreign exchange.
Revenue contended that there was transfer of software business undertaken by the TATA IBM Limited. The domestic customer database gives the information about various customers who have purchased IBM computers in the past and who continued to have service maintenance contract. The said asset provides an enduring advantage or benefit to the assessee and cannot be treated as revenue expenditure. The transfer of trained employees originally recruited by the TATA IBM to the assessee-Company, the expenditure incurred for training and salary paid for the transferred employees for a period of six months by TATA IBM also provide an enduring advantage. The transfer of existing business as a going concern naturally includes the employees and the customer data. Thus, the expenditure incurred was revenue in nature. Regarding foreign exchange fluctuation, it was contended that the amount payable as on the closing date for purchase of item has been increased and it has to be taken as the cost of item for the purpose of closing stock valuation.
After hearing both the parties, the High Court held that,
++ in the instant case, insofar as payment for getting domestic customer database is concerned, it is clear that, assessee has only got right to use that database, the company which has provided such database is not precluded from using such database. Hence the expenditure incurred is for the use of database and not for acquisitions of such database. There is no question of acquisition of any assets when the access is made and the payment is made for the same;
++ in respect of payment made towards transfer of human skill is concerned, as per the agreement, Rs.9.01 crores was attributable to STP Unit, for which the payment of tax is exempted. The payment has been made towards the expenses incurred for training and on recruitment. Such expenses were under revenue field, and therefore the payments have been made to save such revenue expenses as per the agreement. TATA IBM has spent lot of money to give training to those employees who were transferred to the assessee-company. They are trained in the field of software. They have opted for employment with assessee-company and for their past services in TATA IBM, expenditure has been incurred. Such expenditure cannot be termed as expenditure laid for carrying on the business. The advantages obtained by TATA IBM can be treated as services rendered by those employees to TATA IBM. The concept of payment made once and for all and of the enduring benefit respond to the changing economic realities of business and hence the expenditure incurred on processing domestic customer database and transfer of human skill is a revenue, though the benefit may be of enduring in nature;
++ the issue of foreign exchange fluctuation is covered by the judgement in the case of Yokogawa and thus the assessee is entitled for deduction of loss due to foreign exchange fluctuation.
AO observed that assessee had claimed revenue expenditure towards domestic customer database and towards transfer of certain skilled and trained employees who were originally recruited by TATA IBM to the assessee-company. It actually paid Rs.18.4 crores towards transfer of employees to the assessee-company, but claimed revenue expenditure of Rs. 9.38 crores and the remaining sum attributable to STP unit, the income of which was exempted. It claimed a sum in respect of the loss towards foreign exchange fluctuation. The AO held that domestic customer database was a capital asset which provides an enduring advantage or benefit to the assessee since, by utilizing the same, the assessee can successfully run its business activities over a considerable period of time and treated the payment made towards acquisition of domestic customer database as the payment made towards acquisition of capital asset and not allowable as revenue expenditure. With regard to transfer of human skill i.e. skilled and trained employees is concerned, AO held that the compensation paid by the assessee to TATA IBM is towards taking over of software segment of the erstwhile TATA IBM to the assessee-company. It is the capital asset of the company and it cannot be treated as revenue expenditure. With regard to loss towards foreign exchange fluctuation, AO held that the assessee has been importing various consumable items, the additional expenditure incurred on account of such imports caused by adverse exchange fluctuations should be taken into account for the purpose of valuation of closing stock. Therefore, AO added foreign exchange fluctuation loss to the value of closing stock resulting in addition.
The CIT (A) confirmed the order of AO. Tribunal partly allowed the appeal holding that payment for using domestic customer database is revenue in nature. In respect of payment made towards transfer of human skill is concerned, it should be treated as revenue expenditure further the assessee is entitled for deduction with regard to fluctuation of foreign exchange.
Revenue contended that there was transfer of software business undertaken by the TATA IBM Limited. The domestic customer database gives the information about various customers who have purchased IBM computers in the past and who continued to have service maintenance contract. The said asset provides an enduring advantage or benefit to the assessee and cannot be treated as revenue expenditure. The transfer of trained employees originally recruited by the TATA IBM to the assessee-Company, the expenditure incurred for training and salary paid for the transferred employees for a period of six months by TATA IBM also provide an enduring advantage. The transfer of existing business as a going concern naturally includes the employees and the customer data. Thus, the expenditure incurred was revenue in nature. Regarding foreign exchange fluctuation, it was contended that the amount payable as on the closing date for purchase of item has been increased and it has to be taken as the cost of item for the purpose of closing stock valuation.
After hearing both the parties, the High Court held that,
++ in the instant case, insofar as payment for getting domestic customer database is concerned, it is clear that, assessee has only got right to use that database, the company which has provided such database is not precluded from using such database. Hence the expenditure incurred is for the use of database and not for acquisitions of such database. There is no question of acquisition of any assets when the access is made and the payment is made for the same;
++ in respect of payment made towards transfer of human skill is concerned, as per the agreement, Rs.9.01 crores was attributable to STP Unit, for which the payment of tax is exempted. The payment has been made towards the expenses incurred for training and on recruitment. Such expenses were under revenue field, and therefore the payments have been made to save such revenue expenses as per the agreement. TATA IBM has spent lot of money to give training to those employees who were transferred to the assessee-company. They are trained in the field of software. They have opted for employment with assessee-company and for their past services in TATA IBM, expenditure has been incurred. Such expenditure cannot be termed as expenditure laid for carrying on the business. The advantages obtained by TATA IBM can be treated as services rendered by those employees to TATA IBM. The concept of payment made once and for all and of the enduring benefit respond to the changing economic realities of business and hence the expenditure incurred on processing domestic customer database and transfer of human skill is a revenue, though the benefit may be of enduring in nature;
++ the issue of foreign exchange fluctuation is covered by the judgement in the case of Yokogawa and thus the assessee is entitled for deduction of loss due to foreign exchange fluctuation.
Regards
Prarthana Jalan
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