Ita/456/2008 Of The Commissioner Of Income Tax v. Robert Bosch India Ltd

IN THB HIGH COURT OF KARNATAKA AT BANGALOREDATED THIS THE 23[rd]DAY OF JUNE 2014 PRESENT THR HON BLE MR. JUSTICE N. KUMAR. AND THR HON’BLE MR. JUSTICK B MANOHAR. ITA No.456 OF 2008 BETWEEN; 1.The Commissioner of Income-Tax,C.R.Building, Queens Road, Bangalore. 2 The Asst. Commissioner ofIncome-Tax, Central circle-12(2), |C R Building, Queens Road,Bangalore._ APPKRLLANTS (By Sri K V Aravind, Advocate) AND: Robert Bosch India Ltd., No.123, Industrial Layout|Hosur Road, KoramangalaBangalore.RBSPONDENT (By Sri T Suryanarayana for M/s.King & Partridge Adv.) -Q-O-O-O-O- This ITA is filed under Section 260-A of I.T. Act,|1961 arising out of Order dated 26.10.2007 passed in ITA No.49/Bang/2006 for the Assessment year 2002-03to formulate the substantial questions of law statedtherein and to allow the appeal and set aside the orderpassed by the ITAT, Bangalore in ITA No.49/Bang/2006—dated 26.10.2007 and confirm the order of the AppellateCommissioner confirming the order passed by theAssistant Commissioner of Income Tax, Central Circle-12(2), Bangalore. This appeal coming on for orders this day,N.,KUMAR, J.delivered the following:- JUDGMENT This appeal is by the revenue challenging the.order passed by the Tribunal granting relief to theaSSESSCEC,. oDThe appeal was admitted to consider the| following substantial questions of law:-_ “(l) Whetherthe|Tribunal Wascorrect in holding that when computing|deduction under Section SOHHE of the|Act 90% of net interest income had to be|reduced when computing the profits ofbusiness and not the gross interest income as held by the Assessing officer|and confirmed by the CIT? u)Whetherthe|TribunalLUGScorrect in holding that the amount paid|for purchase of software was a revenue|expenditure even when the same was|used in the course of business of the|assessee not only during the current|assessmentyearbut|alsoduringsubsequentYE i resultingin|artenduring benefit and consequently a|capital expenditure?” This Court had an occasion to consider the first§substantial|questionOT law1NtheCASEoT Commissioner ofIncome Tax and Another .vs. KroneCommunication Limited (2011) 333 ITR 497(Karn)where aiter noticing the statutory provisions and aiterreview of the entire case laws this Court has held at§Paragraph 20 as under:- “20. Therefore, the law on thepoint is fairly well-settled. Tax under the|Act is upon income, profits and gains. It| is not a tax on gross receipts. Under|section 2(24) the word "income" includes|profits and gains. The charge is not on|gross receipts but on profits and gains.|GrossreceiptsOYsaleproceeds,however, include profits. The very basis|for computing section SOHHC deduction|was ‘business profits" as computed|under section 28, a portion of which had|to be apportioned in terms of the above|ratio of export turnover to total turnover.In the case of combined business of an|assessee having export business and|domestic|businessthe|Legislatureintended to have a formula to ascertain|export profits by apportioning the total|businessprofits:Orthebasisof|turnovers. Apportionment of profits on|the basis of turnover was accepted as a|method of arriving at export profits. If|the assessee has two incomes with "one|common pool of expenses" and _ sinc"orinciple of|attribution”has|been|retained in the scheme of section|SOHHCGCbothIn|termsof|sectionSOHHC(3). Clause (e) to the Explanation|to section SOHHC(3)(a), (b) and (c) and in| clause (baa) to the Explanation to|section SOHHC, instead of going into|lengthy|exerciseof|dividingsuchcommon expenses, the Legislature has|estimatedthe|reductionof|exportturnover by 10 per cent. Ultimately,|clause (baa) to the Explanation is itself|based on the assumption that 10 per'cent of the income would be an expense.This guidance value is not flowing from|clause (baa) but from the scheme of|sectionSOHHC.readwiththeMemorandum to the Finance (No.2) Actof 1991. By the Finance (No. 2) Act,|1991 with effect from April 1, 1992, for'the first time, the expression "profits of|the business" stood defined to mean the|"profits of the business" as computed|under the head "Profits and gains of|business" under sections 28 to 44D.Therefore, before giving deduction under|section SOHHC, the gross total income of|the assessee being profits from business|had to be arrived at in terms of clause|(baa)totheExplanation.Whilecalculating “business profits" the same|had to be done in terms of section 28 to| section 44D alone. The idea of section|SOHHC is to ensure that the exportergets the benefit of the profits derived|from export and not to depress the profit|further. Therefore, it can only be the net|commission, interest, rent, etc., which|can be included in the profits. If netting|were not to be permitted the resultwould be that the profits of the exporter|would be depressed by an item that 1s|expenditureincurredOnearningcommission, interest, rent, etc., which|does not form part of the profit at all.|This could not have been the intention oftheLegislature. Hence|the|words“commission, interest, rent, etc.", im|clause (baa) to the Explanation in|section SOHHC is indicative of “netinterest", Le., gross amount less the|expenditure incurred by the assessee in|earning such amount. Where, as a result|of the computation of profits and gains|of|businessand.profession,theAssessing Officer treats the commission,interest,rentreceiptas|businessincome, thendeductionshouldbepermissible, in terms of Explanation| (baa) of the net commission, interest,|rent, etc., 1e., the gross commission,|interest, rent, etc., less the expenditure|incurred for the purposes of earning|such commission, interest, rent, etc. Similarly, the second question of law was also thesubject-matter of decision by this Court in the case ofCommissioner ot Income-lTax and another .vs. IBM IndiaLimited (2013) 397 ITR 88(Karn) wherein this Court hasheld as under:- “The Tribunal on consideration ofthe material on record and the pnivalcontentions held, when the expenditureis made not only once and for all but'also with a view to bringing into|existence an asset or an advantage for'the enduring benefit, the same can beproperlyclassifiedas|capitalexpenditure. At the same time, eventhough the expenses are once and for alland.givean.advantageforenduring benefit but is not with a view|to bringing into existence any asset, the same cannot be always classified as|capital expenditure. The test to be|applied is, is it a part of company’s|working expenses or is it expenditure|laid out as a part of process of profit|earning. Is it on the capital layout or tsit |an expenditure necessary for acquisition|of property or of rights of a permanent|character,possessionof|which1S|condition on carrying on trade at all. The|assessee in the course of its business|acquired certain application software.|The amount is paid for application of|software and not system software. The|applicationsoftwareenablestheassessee to carry out his business|operationefficientlyand.smoothly. However, such software itself does not|work on Stand alone basis. The same'has to be fitted to a computer systemto |work. Such software enhances the|efficiency of the operation. It is an aid in|manufacturing process rather than the|tool itself. Thus, for payment of such|application software, though there is an|enduring benefit, it does not result into|acquisition of any capital asset. The| same merely enhances the productivity|or efficiency and hence to be treated as|revenue expenditure. Infact, this Court|had an occasion to consider whether the|software expenses is allowable as|revenue expenses or not and held, when|the life of a computer or software 1s less|than two years and as such, the right to|use it for a limited period, the fee paid|for acquisition of the said right 1s|allowable as revenue expenditure and|these softwares tif they are licensed fora particular period, for utilizing the|same for the subsequent years fresh|licence fee is to be paid. Therefore,|when the software is fitted to a|computer system to work, it enhances|the efficiency of the operation. It is an|aid in manufacturing process rather|than the tool itself. Though certain'application is an enduring benefit, it|does not result into acquisition of any|capital asset. It merely enhances the|productivity or efficiency and therefore,|It|has|tobetreatedas|revenueexpenditure. In that view of the matter,|the finding recorded by the Tribunal is in accordance with law and do not callfor any interference. Accordingly, the|second substantial question of law 1isanswered in favour of the assessee and|against the Revenue. “| The above decisions equally applies to the facts of this case. Therefore, the substantial questions of lawframed by this Court are answered in favour of theassessee and against the revenue. 3.| Accordingly, this appeal is dismissed. Sd/-| JUDGE. Sd/-| JUDGE. *alb/-.