Expenditure made for use of domestic customer base and transfer of human skills – revenue in nature – allowable deduction : ITAT
The transferred data base gives the information about various customers who have purchased IBM computers in the past who continue to have service maintenance contracts. Such database enables the assessee company to provide the maintenance support services. The Assessing Officer asked the assessee company to furnish the basis of valuation at Rs. 5.3 crore in respect of value of data base. It was stated before the Assessing Officer that no independent valuation has been determined by the independent valuer. The Assessing Officer, therefore, concluded that the amount represented a mutually agreed amount payable for the transfer of data base. The Assessing Officer 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 Assessing Officer, the benefit accrued to the assessee is of enduring nature. The Assessing Officer therefore concluded that the payment has been made towards acquisition of a capital asset and therefore, such expenditure is not allowable as revenue expenditure.
The total value of personnel transferred has been arrived at Rs. 18.4 crore. Such expenditure was allocated between the STP unit and non-STP unit on the bass 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 Assessing Officer felt that the methodology followed by the assessee indicated that a sum of Rs. 5.24 crore 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 period of their services with Tata IBM was also added to arrive at the valuation of the employees transferred. Before the Assessing Officer, 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 Assessing Officer 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 crore 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 Assessing Officer, 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 data base 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 Assessing Officer, therefore, disallowed the expenditure claimed as revenue.
The Tribunal observed,
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. However, in the case of the recipient, the revenue has treated the receipts as revenue receipts and included in the income. 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 Assessing Officer in holding that the receipts represented the receipts on account of transfer of business cannot be upheld.
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 cear that TBM and Tata have agreed to carry out the activities as mentioned in clause 5 of the agreement through the assessee company. 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.
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 assessee has treated the expenditure as deferred revenue expenditure. Such term presupposes that concerned expenditure creates a benefit in revenue field. Such benefit maybe of enduring nature but if it does not create any asset, then it cannot be treated as capital.
So it is held that the payment made for using the database is revenue in nature and is allowed.
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.
The Assessing officer 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 Assessing Officer 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.