COMMISSIONER OF INCOME TAX Vs. IBM GLOBAL SERVICES INDIA P. LTD.

JUDGEMENT

(1.) The Revenue has preferred this appeal under Section 260A of the Income Tax Act, 1961 (for short the Act ), being aggrieved by the order dated 4-5-2007 made in ITA Nos.1286-1287/Bang/2005 passed by the Income Tax Appellate Tribunal, Bangalore Bench B (hereinafter referred to as the Tribunal for short) whereby the Tribunal allowed the appeal in part while setting aside the order passed by the Commissioner of Income Tax (Appeals)-I ( for short the First Appellate Authority ) dated 15-6-2005 and the assessment order dated 30th March 2001 passed by the Assessing Officer for the assessment years 1998-99 and 1999-2000.

(2.) The respondent-assessee is a Private Limited Company incorporated under the Companies Act, 1956 during the financial year 1997-98. Originally, there was a company jointly promoted by TATAs and IBM which were known as TATA IBM. During the financial year 1997-98, it was mutually agreed between the two promoters to bifurcate the software development activities and the hardware business into two separate entities namely M/s. IBM Global Service India (P) Limited and TATA IBM where hardware business is taken care. As per the agreement entered into between the two promoters, various assets of the erstwhile TATA IBM were transferred to the newly established assessee-company for a certain consideration. The assessee-Company filed the return of income on 30-11-1998 declaring loss of Rs.21,51,30,926/- on various heads. The returns was processed under Section 143(1)(a) of the Act. Subsequently, it was selected for scrutiny. Accordingly, a notice under Section 143(2) of the Act was issued.

(3.) In pursuance of the notice, the authorized representatives of the assessee-company appeared before the Assessing Authority and furnished the details called for. Among other things, the Assessing Officer noticed that the assessee-company has claimed revenue expenditure of Rs.5,30,00,000/- towards domestic customer database, and Rs.9,38,57,925/- towards transfer of certain skilled and trained employees who were originally recruited by TATA IBM to the assessee-company. Though the assessee-company actually paid a sum of Rs.18.4 crores towards transfer of employees to the assessee-company, but claimed revenue expenditure of Rs.9,38,57,925/- as referred to above as the remaining sum of Rs.9.01 crores was attributable to STP unit, the income of which was exempted. The assessee also claimed a sum of Rs.8,63,047/- in respect of the loss towards foreign exchange fluctuation. The Assessing Officer after examining the matter held that domestic customer database is 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 the human skill i.e. skilled and trained employees is concerned, the Assessing Officer 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. The expenditure incurred on recruitment and training of transferred personnel is an enduring benefit. It is the capital asset of the company and it cannot be treated as revenue expenditure. With regard to the loss towards foreign exchange fluctuation is concerned, the Assessing Officer 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, the Assessing Officer added foreign exchange fluctuation loss to the value of closing stock resulting in addition.