Lakme Lever Private Limited Vs PCIT (ITAT Mumbai)
ITAT Mumbai held that initiation of revisional proceedings u/s 263 of the Income Tax Act unsustainable as AO has carried out enquiry on the issues, however, has failed to discuss the same in the Assessment Order.
Facts- Pr.CIT while perusing the assessment records observed that assessee has claimed EDP expenses to the extent of ₹.2,84,82,194/- in its P&L Account. The said claim of the assessee was allowed by AO while completing the assessment u/s.143(3) of the Act. However, as the said expenditure incurred by the assessee are enduring in nature, AO should have treated the same as capital in nature which AO failed to do so. Further, he observed that, AO failed to disallow the said expenditure by treating it as capital expense and thereby allowed depreciation, if any, as per the provisions of section 32 of the Act.
Further, Pr.CIT also observed that assessee has debited an amount of ₹.2,77,23,272/- in its P&L Account under the head ‘Royalty’. He observed that a careful examination of the Tax Audit Report indicates that TDS u/s. 194J in respect of Fees paid for Technical Services has been shown. However, no TDS in respect of Royalty having been made and paid is shown in Column No.34A of the Tax Audit Report. Therefore, the scope of disallowance @30% of such Royalty u/s.40(a)(ia) of the Act has not been explored. He observed that prima facie it appears that such expenditure appears to be in nature of capital expenditure and therefore, disallowance u/s.37(1) of the Act ought to have been examined. He observed that AO neither made disallowance u/s.40(a)(ia) or u/s.37(1) of the Act nor examined the claim. He observed that AO in not making proper verification of the facts and thereby failed to make correct assessment of the total income for the year under consideration, is erroneous as well as prejudicial to the interests of the revenue.
Conclusion- It is brought to our notice that Assessing Officer has issued various notices u/s. 143(2) and 142(1) and collected the various informations relating to TDS deduction on royalty payments as well as EDP expenses. From the record, we observe that it is not the case wherein Assessing Officer has not made any enquiry, however, he has carried out enquiries but he failed to discuss the same in the Assessment Order. In our considered view, the Assessing Officer has carried out certain verification, therefore the provisions of section 263 in particular Explanation 2 cannot be invoked in the present case.
Held that AO on royalty clearly indicates that Assessing Officer has taken one of the possible view. Therefore, in our considered view Ld.Pr.CIT has not clearly brought on record how the assessment passed u/s. 143(3) of the Act is erroneous and prejudicial to the interest of the revenue. After considering the detailed submissions of the assessee, Ld.Pr.CIT abruptly completed the order u/s. 263 of the Act by merely remitting the issue back to the file of the Assessing Officer without giving any finding on the issues raised by him in notices issued u/s. 263 of the Act.
Accordingly, we are inclined to set-aside the order passed u/s. 263 of the Act.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This appeal is filed by the assessee against order of Learned Principal Commissioner of Income Tax, Mumbai – 1 [hereinafter in short “Ld. Pr.CIT”] dated 27.03.2022 for the A.Y.2017-18.
2. Brief facts of the case are, assessee filed its return of income for A.Y. 2017-18 on 30.11.2017 declaring total income of ₹.NIL. The case was selected for Scrutiny under CASS and assessment was completed u/s.143(3) of Income-tax Act, 1961 (in short “Act”) on 28.12.2019 assessing the total income at ₹.1,47,45,062/- after addition on account of disallowance of depreciation on goodwill to the tune of ₹.24,41,40,229/- and provisions for doubtful debts of ₹.45,79,000/-.
3. Pr.CIT, Mumbai -1 while perusing the assessment records observed that assessee has claimed EDP expenses to the extent of ₹.2,84,82,194/- in its Profit and Loss Account. The above said claim of the assessee was allowed by the Assessing Officer while completing the assessment u/s.143(3) of the Act. However, as the said expenditure incurred by the assessee are enduring in nature, the Assessing Officer should have treated the same as capital in nature which the Assessing Officer failed to do so. Further, he observed that, Assessing Officer failed to disallow the said expenditure by treating it as capital expense and thereby allowed depreciation, if any, as per the provisions of section 32 of the Act.
4. Further, he observed that assessee has debited an amount of ₹.2,77,23,272/- in its Profit and Loss Account under the head ‘Royalty’. He observed that a careful examination of the Tax Audit Report indicates that TDS u/s. 194J in respect of Fees paid for Technical Services has been shown. However, no TDS in respect of Royalty having been made and paid is shown in Column No.34A of the Tax Audit Report. Therefore, the scope of disallowance @30% of such Royalty u/s.40(a)(ia) of the Act has not been explored. He observed that prima facie it appears that such expenditure appears to be in nature of capital expenditure and therefore, disallowance u/s.37(1) of the Act ought to have been examined. He observed that Assessing Officer neither made disallowance u/s.40(a)(ia) or u/s.37(1) of the Act nor examined the claim. He observed that Assessing Officer in not making proper verification of the facts and thereby failed to make correct assessment of the total income for the year under consideration, is erroneous as well as prejudicial to the interests of the revenue. In view of the above observation a show cause notice u/s 263 of the Act dated 12.03.2022 was issued to the assessee to proposing the revise of the order u/s 143(3) of Act.
5. In response Ld. AR of the assessee submitted the relevant information to through ITBA portal, for the sake of clarity it is reproduced below: –
“Background:
Lakme Lever Private Limited is a wholly owned subsidiary of Hindustan Unilever Limited. The Company is engaged in providing beauty services in the area of skin and hair through its own beauty salons and franchisees. The main objective of the Company is to promote health, beauty and personal care products. The Company also aims to operate as well as manage institutes, training centers in the field of beauty and wellness services. In addition to above, the Company is engaged in the business of converting raw materials and packing material into finished and semi-finished goods for its parent entity on job work basis.
Further, during the year under consideration the Company has e-furnished its return of income under section 139(1) of the Act declaring loss to the tune of INR 23,39,74,167. The Company’s case was selected for scrutiny proceedings and the jurisdictional assessing officer passed an order under section 143(3) of the Act post making certain additions computing income to the tune of INR 1,47,45,062. Being aggrieved by the said order, the Company has preferred an appeal before the Commissioner of Income Tax (Appeals) which is pending for disposal.
Further, the Company humbly submits the following facts and explanations to the issues raised in the aforesaid notice:
EDP expenses amounting to INR 2,84,82,194/-
It is proposed to initiate revision proceedings u/s 263 on the basis that EDP expenses incurred by assessee are enduring in nature, thus should have been treated as capital expenditure and hence, should have been disallowed.
During the captioned assessment year, the Assessee has debited expenditure amounting to INR 2,84,82,194 under the head EDP expenses in P&L account. These expenses mainly comprise of license fee, maintenance charges, etc. for billing software used by Assessee at various salons. It also includes expenses related to rental charges for printer, desktop, laptop, etc. taken on hire and other miscellaneous IT related expenses. These expenses are incurred for efficient functioning of the business operations and are accordingly charged to P&L account. Assessee did not acquire any new asset or right or advantage of an enduring nature by incurring these expenses, Sample invoice copies of EDP expenses is enclosed as Annexure 3.
Further, as per the provisions of section 37 of the Act any expenditure not being in the nature of capital expenditure or personal expenditure incurred for the purpose of business and profession shall be allowed while computing the total income from business and profession. Various Courts have time and again discussed on the demarcation of capital and revenue expenditure. The Company places reliance on the remarkable judicial precedent of Apex Court in case of Empire Jute Co. Ltd. vs CIT [1980] 3 taxman 69 (SC) wherein it was held that where there is no addition to or expansion of the profit-making apparatus of the Assessee, it cannot be said that the advantage is of the enduring nature. Accordingly, expenses merely facilitating the trading operations or enabling efficient conduct of the business of the taxpayer cannot be categorized as capital in nature.
Further, the Company places reliance on the Hon ‘ble Bombay High Court ruling in case of PCIT vs. Holcim Services (South Asia) Ltd. [2018] 93 taxmann.com 270 (Bombay) wherein the taxpayer had made payments for upgrading a computer software which was categorized as capital expenditure by the assessing officer. However, while passing the order the Hon ‘ble Court relying on the principles laid down in the case of Empire Jute Co. Ltd. (Supra) held that expenses incurred by the taxpayer to enhance the effective functioning of the business shall be characterized as revenue in nature. Relevant extract of the ruling is enumerated below
We find that in this case both the CIT (Appeals) as well as the Tribunal have rendered a finding of the fact that the software purchased from M/s. C.A. India Technologies Pvt. Ltd. brought about better efficiency in the appellant’s business as it enabled it to meet specifically user problem faced by the Respondent- Assessee. The impugned order also records the fact that in view of fast changing technology, software has to be regularly updated so as to keep pace with the changing technology. On the aforesaid facts the view taken by the Tribunal that the expenditure of Rs.38.90 Lakhs is on Revenue account is an entirely possible view.”
The Company also relies on the ruling of the Hon ‘ble Bombay High Court in case of PCIT vs. TATA AIG General Insurance Co. Ltd. [2020] 116 taxmann.com 492 (Bombay) wherein it was held that expenditure incurred by the taxpayer on purchase of hard disk and other peripherals categorized as EDP expenses in the books of accounts cannot be said to be capital in nature.
In connection to above, reliance is also placed on the judicial precedent in case of CIT vs UHDE India (P) Ltd. (2014) 46 taxmann.com 259 (Bombay) wherein it was held that expenses incurred on account of software development in the nature of annual maintenance contracts, upgradation and installation of antivirus expenses cannot result in any benefit of enduring nature so as to be called capital expenses.
Separately, the reliance placed on the judicial precedent in case of DCIT vs IKEA Trading India (P) (Ltd) (2017) 82 taxmann.com 325 (DelhiTribunal) wherein the taxpayer had incurred certain expenses in the nature of EDP maintenance charges comprising of purchase of Printer tonner, ink infuser, repair and annual maintenance of EDP peripherals which was categorized as capital expenditure by the Assessing Officer. However, CIT(A) held that it can be Said that that these expenses are allowable as revenue expenses us 37 () of the IT Act as these have been incurred for the purposes of business. The Hon ‘ble ITAT further upheld the order of the CIT(A). The relevant extracts of the ruling are reproduced below:
“In view of the details of expenditure provided by the appellant and verification thereof through the bills/vouchers submitted in form of paper book it is observed that all these expense are allowable as revenue expenses u’s 37(1) of the IT Act as these has been incurred for purposes of business. In fact from the order or the AO it is observed that even he has not questioned the business purpose or genuineness of these expenses and has rather disallowed these expenses holding it as capital in nature under Explanation-1 to section 32(1) of the Act and has allowed depreciation on the same. As has already been discussed in detail above none of these expenses are capital in nature and therefore the question of these expenses falling within the meaning of section 32 of the IT Act itself and therefore capitalization of these expenses and allowing depreciation thereon do not arise.”
Further, notice has no mention of any evidence or cogent reason given for treating EDP expenses as capital in nature.
Based on the above, your office shall appreciate that the EDP expenses are not capital expenditure as alleged in the notice but are actually in the nature of regular business expenses incurred year on year (as evident from the audited financial statements). Thus, such expenses are tax deductible under section 37(1) of the Act as they have been incurred wholly and exclusively by the Assessee for the purposes of its business and are not capital in nature. Treating such expenses as capital in nature will tantamount to gross miscarriage of settled judicial principles.
In the light of above facts and judicial precedents, we humbly submit that the EDP expenses charged to the profit and loss account do not result in any benefit of enduring nature and thus cannot be categorized as capital expenditure.
Royalty Expenses amounting to INR 2,77, 23,272
It is proposed to initiate revision proceedings u/s 263 on the basis that no tax has been deducted On Royalty expenses debited to the P&L account and thus, possibility of disallowance under section 40(a)(ia) of the Act need to be examined. Further, the expenditure also appears to be in the nature of capital expenditure and hence, disallowance under section 37(1) of the Act ought to have been examined.
During the captioned assessment year, the Assessee has debited expenditure amounting to INR 2.77,23,272 under the head Royalty in P&L account. This expense is covered under the trademark license agreement entered with its holding company, Hindustan Unilever Limited (CHUL). Accordingly, in consideration of the license rights granted by HUL to the Assessee, the Assessee was under an obligation to pay HUL, royalty for the use of the Licensed Marks, Domain names and Licensed Services as also the fees for the technical know-how and other services
It’s further submitted that tax has been duly deducted at source under section 194) of the Act by the Assessee on such payments/amounts credited to HUL. The Company at the time of payment of royalty has withhold taxes at the rate of 10% under section 194) of the Act and same is evident in the tax audit report for the year under consideration. We would like to bring to your attention that under clause 34(a) of the tax audit report it is reported total amount of payments under section 194) of the Act amounts to INR 16,72,51,762 on which taxes have been withheld to the tune of INR 1,66,57,265. Relevant extract of the Tax Audit Report is attached as Annexure 4. Further, the payment of royalty expenses by the Company is included in the above payments reported under section 194) of the Act in the tax audit report. We have attached herewith sample invoice copies mapped with the corresponding TDS certificates depicting that the taxes have been withheld on the above payments under section 194) of the Act as Annexure 5 for your reference.
This establishes that the reason for initiating revision proceedings is based on a mistaken notion that taxes have not been deducted on such payments by the Assessee. Therefore, the question of disallowance under section 40(a)(ia) of the Act does not arise.
Based on the above, your office shell appreciate that the royalty and technical know-how expenses are not capital expenditure as alleged in the notice for revision proceedings but are actually in the nature of regular business expenses incurred year on year (as evident from the audited financial statements and related party disclosures). Thus, such expenses are tax deductible under section 37(1) of the Act as they have been incurred wholly and exclusively by the Assessee for the purposes of its business and are not capital in nature. Treating such expenses as capital in nature will tantamount to gross miscarriage of settled judicial principles.
Therefore, the Assessee submits that the revision proceeding is based on incorrect facts and hence, such proceedings ought to be dropped.
Prayer
Having regard to the above submissions of the Assessee and associated judicial precedents thereof the Assesses humbly requests your office to kindly drop the revision proceedings on account of the following:
