IN INCOME TAX APPELLATE TRIBUNAL, KOLKATA C BENCH, KOLKATA Before Shri M.Balaganesh, Accountant Member and Shri S.S. Viswanethra Ravi, Judicial Member I.T.A. No. 712/KOL/2013 Assessment Year: 2008-09 Exide Industries Limited,.................................................Appellant 59E, Chowringhee Road, Kolkata-700 020 [PAN : AAACE 6641 E] -Vs- Deputy Commissioner of Income Tax,............................. Respondent Circle-I, Kolkata, AayakarBhawan, P-7, Chowringhee Square, Kolkata-700 069 Appearances by: Shri Anup Sinha, ACA, for assessee Shri G. Mallikarjuna, CIT, DR, for Department Date of hearing: 23-08-2016 Date of pronouncement: 19-10-2016 Shri. S.S.VISWANETHRA RAVI, JM: This appeal by Assessee against order dt:28-02-2013 passed by Commissioner of Income Tax-(Appeals) for assessment year 2008-2009 2. Ground no s 1(a) & (b) are similar to each other, involving disallowance of 1,51,03,956/- on account of provision made by assessee for leave encashment made by Assessing Officer by invoking provision under section 43B(f) of Act and confirmed by CIT-(Appeals). 1 ITA No. 712/Kol/2013 Exide Industries Limited 3. During course of hearing before us, Ld.AR submits that issue squarely covered by consolidated order of Coordinate Bench in Assessee s own case for A.Y 2003-04 & 2004-05 in ITA 189/Kol/2007 and ITA 1414/Kol/2007 respectively. Ld. DR relied on orders of CIT-A and AO. 4. Heard rival submissions and perused material on record. We find that consolidated order supra as placed on record by Ld.AR, Tribunal decided issue therein is similar to issue on hand covering grounds as raised in no s 1(a) & (b) and relevant portion of which is reproduced herein below: 25. issue raised in Ground No. 8 relates to disallowance of 1.51 crores made by Assessing Officer and confirmed by ld. CIT(Appeals) on account of provision made by assessee for leave encashment. 26. assessee-Company during year under consideration had made provision of Rs.1.51 crores for leave encashment on basis of acturial valuation and same was claimed as deduction by relying on decision of Hon ble Calcutta High Court in assesese s own case reported in 292 ITR 470 and decision of Hon ble Supreme Court in case of Bharat Earth Movers reported in 245 ITR 428. Assessing Officer, however, disallowed claim of assessee for provision of leave encashment relying on Clause (f) inserted in Section 43B by Finance Act, 2001 w.e.f. 1s t April, 2002. ld. CIT(Appeals) confirmed said disallowance. assesese challenged constitutional validity of Clause (f) inserted in Section 43B before Hon ble Calcutta High Court by way of Writ Petition and although same was initially dismissed by Single Bench, it was admitted and ruled in favour of assessee by Division Bench of Hon ble Calcutta High Court by holding that introduction of Clause (f) to Section 43B is ultra virus of Act in absence of disclosure of objects and being inconsistent with basic intent of Section 43B. Thereafter Department filed SLP against decision of Hon ble Calcutta High Court and while admitting same, Hon ble Supreme Court vide its judgment dated 08.09.2008 stayed judgment of Hon ble Calcutta High Court until further orders. 27. At time of hearing before us, ld. Counsel for assessee has contended that even though decision of Hon ble Calcutta High 2 ITA No. 712/Kol/2013 Exide Industries Limited Court holding Clause (f) of Section 43D as ultra virus is stayed by Hon ble Supreme Court while admitting SLP filed by Revenue, same has not been reversed and this Tribunal, therefore, is bound to follow same being binding precedent. He has also contended that decision of Hon ble Calcutta High Court was stayed by Hon ble Apex Court vide its judgment dated 08.09.2008 until further orders and there being another Interim Order passed by Hon ble Supreme Court on 08.05.2009, stay granted earlier stands automatically vacated. copy of said interim order dated 08.05.2009 is placed on record before us, contents of which are extracted below:- Pending hearing and final disposal of Civil Appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as outstanding interest demand as of date is concerned, it would be open to Department to recover amount in case Civil Appeal of Department is allowed. We further make it clear that assessee would during pendency of this Civil Appeal, pay tax as if section 43B(f) is on Statute Book but at same time it would be entitled to make claim in its returns . 28. We have carefully perused Interim Order dated 8t h May, 2009 passed by Hon ble Supreme Court in matter. It is observed that Hon ble Apex Court in said order has made it clear that assessee, during pendency of Civil Appeal, would pay tax as if Section 43B(f) is on Statute Book, but at same time, it would be entitled to make claim in its return. Keeping in view all these developments, Coordinate Bench of this Tribunal in case of Dy. CIT vs.- BLA Industries Pvt. Ltd. (ITA No. 1434/KOL/2012 dated 16.01.2015) has restored similar issue to file of Assessing Officer with direction to await till final decision of Hon ble Supreme Court on issue and then to decide issue accordingly. Following said decision of Coordinate Bench, we restore this issue to file of Assessing Officer with similar direction. Ground No. 8 is accordingly treated as allowed for statistical purposes. 5. Taking into consideration order supra, we remand issue to file of AO to decide same in accordance with Judgment of Hon ble Supreme Court that may be passed in Civil Appeal filed by Revenue. Ground no s 1(a) & (b) are allowed for statistical purposes. 6. Regarding ground no s-2(a), (b) & (c) are similar questioning disallowance of Rs.9,97,00,000/- made by Assessing Officer and confirmed 3 ITA No. 712/Kol/2013 Exide Industries Limited by CIT-Appeals on account of provision made by assessee for warranty. 7. During course of hearing before us, Ld.AR submits that issue squarely covered by consolidated order dt:20-01-16 of Coordinate Bench in Assessee s own case for A.Y 2003-04 & 2004-05 in ITA 189/Kol/2007 and ITA 1414/Kol/2007 respectively. Ld. DR relied on orders of CIT-A and AO. 8. Heard rival submissions and perused material on record. We find that consolidated order supra as placed on record by Ld.AR, Tribunal decided issue therein is similar to issue on hand covering grounds as raised in ground nos. 2(a) (b)&(c) and relevant portion of which is reproduced herein below: 7.The issue raised in Ground No. 2 relates to disallowance of Rs.17.65 crores made by Assessing Officer and confirmed by ld. CIT(Appeals) on account of provision made by assessee for warranty. 8. Batteries manufactured and sold by assessee through its Dealers carry certain guaranteed life and in case of any failure during such guaranteed period, Batteries are replaced free of cost. Keeping in view period of guarantee/warranty and based on past experience, provision for warranty of Rs.17.65 crores was made by assessee for year under consideration. It was claimed that said provision was made as per Accounting Standard AS-29 prescribed by Institute of Chartered Accountants of India. Assessing Officer, however, rejected this claim of assessee-Company on ground that provision made for warranty being notional and contingent liability was not allowable as per mercantile system of accounting followed by assessee. On appeal, ld. CIT(Appeals) upheld order of Assessing Officer on this issue by observing that provision for warranty being in nature of uncertain liability was rightly disallowed by Assessing Officer. 9. We have heard arguments of both sides and also perused relevant material available on record. As rightly submitted by ld. Counsel for assessee, this issue is covered in principle in favour of assessee by decision of Hon ble Supreme Court in case of Rotork Controls India (Pvt.) Limited vs.- CIT reported in 314 ITR 62, 4 ITA No. 712/Kol/2013 Exide Industries Limited wherein Hon ble Apex Court has held that provision of warranty is allowable as deduction if following conditions are satisfied:- (i) Enterprise has present obligation as result of past events; (ii) It is probable that out-flow of resources will be required to settle obligation; (iii) reliable estimate based on historical trend can be made on account of obligation on basis of historical trend. 10. ld. D.R. has not raised any contention to dispute proposition propounded by Hon ble Supreme Court in case of Rotork Controls India (Pvt.) Limited (supra) on this issue. He, however, has contended that issue as to whether assessee in present case has satisfied conditions laid down by Hon ble Supreme Court for allowing deduction on account of provision for warranty requires verification and since same has not been done either by Assessing Officer or by ld. CIT(Appeals), matter may be restored to file of Assessing Officer for limited purpose of such verification. We find merit in this contention of ld. D.R. and since ld. Counsel for assessee has also not raised any objection in this regard, we restore this issue to file of Assessing Officer with direction to decide same in light of decision of Hon ble Supreme Court in case of Rotork Controls India (Pvt.) Limited. Ground No 2 is accordingly treated as allowed for statistical purposes. 9. In view of observations and conditions laid down therein by Hon ble Supreme Court in case of Rotork Controls India (Pvt.) Limited, we restore issue to file AO for verification of provision of warranty,thus, ground no s 2(a) (b) & (c) are allowed for statistical purposes. 10. Ground no s-3(a), (b),(c) & (d) raised questioning disallowance of Rs.12,18,60,300/- made by AO towards expenditure incurred in earning dividend income of Rs.63,18,822/-and applicability of Rule 8D. 11. Brief facts relating to issue are that, assessee earned dividend to extent of Rs.63,18,822/- from mutual funds and shares and claimed as exempt income and offered Rs.1,86,487/-as disallowance on its own being proportionate expenses for earning said exempt income and assessee attributed such disallowance to 20% of total man hours of Treasury 5 ITA No. 712/Kol/2013 Exide Industries Limited Department. AO was of opinion why interest and finance costs as found by him debited at Rs.38,17,24,153/- to P&L account should not be disallowed. assessee explained that all investments made from interest-free own funds and further submitted that it has net cash inflow from operations at Rs.180.45 crores, net proceeds from rights issue at Rs.114.45 crores, besides free reserves generated in previous years are sufficient to make investments on its own. assessee also furnished statement showing free reserve of Rs.253.98 crores as on 01-04-2007 were available for making investments. assessee also filed estimated working of disallowance under section 14A for Rs.7,99,610/- through its letter dated 08-12-2011 and claimed that it had earned dividend of Rs.70.52 laks and Rs.45.11 laks from trade investments and non-trade investments respectively. 12. Considering submissions above, AO was of opinion that assessee could not provide one to one nexus in showing that borrowed fund not been diverted to investments and by providing cumulative figures of balance sheet or gross earnings of year does not establish that borrowed fund has not been used for making investment. AO further found that assessee did not allocate that administrative and miscellaneous charges and direct and indirect expenses properly and proceeded to apply Rule 8D(2)(ii) and (iii). Accordingly, AO computed expenditure of Rs.1,86,487/-, Rs.9,92,67,063/- and Rs. 2,24,06,750/- U/R 8D(2)(i),(ii) and (iii) respectively and disallowed amount of Rs.12,18,60,300/-for purpose of section 14A of Act and added same to total income of Assessee. 13. In first appeal, assesse submitted details of interest paid on term loans, working capital and fund mobilization expenses in tabular form, wherein assesse admits that Rs.16.05 crores where it could not be able to 6 ITA No. 712/Kol/2013 Exide Industries Limited specifically show that such sum utilized for business purpose out of Rs.38,17,24,153/- and in view of order of Kolkata Tribunal urged to restrict disallowance to Rs.6,16,37,232/-. relevant portion of which is reproduced herein below:- 6.2 During course of appeal, appellant has made following submissions:- ..In light of above assessee humbly submits following:- details of Interest shown in Annual Report and considered by AO is Rs.38,17,24,153/- for purpose of computing Rule 8D(ii). Details Amount (Rs.) Nature of interest Page refer Extract of ledger Interest on Term Loans 16,05,61,945 Against Long term loan Ledger pages 1-2 from Citibank HSBC- utilization in earlier years and cannot be easily specified Interest on Others 22,03,66,763 Interest on (Working Capital following: Borrowings) 1. Buyers credit 2. Packing credit and preshipment credit 3. Bill Discounting 4. Channel financing (materials) 5.Interest on LC & material purchases. 6.Gain/loss on Interest/loan 7.Foreign currency and working capital demand loan-short term financing of expenses or shortage of recovery Fund Mobilisation 7,95,405 Bank Charges for Expense arranging short term financing 38,17,24,153 On perusal of above table and ledger accounts of interest your kindself would observe that Rs.16.05 crores are only amounts which cannot be 7 ITA No. 712/Kol/2013 Exide Industries Limited specifically stated to be used for business purpose. rest interest clearly shows that amount of interest is arising from various borrowings which are linked to normal purchase and sale of goods and other routine services and expenses like salary, wages and other expenses, revenue proceeds of which are directly linked to taxable income namely sales. Therefore in view of above and in light of decision of Hon ble Kolkata Tribunal, we have computed disallowance under Rule 8D to following extent:- Expenditure during relating to Identified by assessee in tax 1,86,487 income which does not form audit report and duly approved part of total income by AO under Rule 8D(i) In case assessee has Under Rule 8D(ii) AO 3,99,90,245 incurred expenditure by way of considered Rs.38.17 crores. Of interest during previous year which Rs.22.04 crores and which is not directly attributable Rs.0.07 crores can be to any particular income identified to be directly linked with regular business needs and generating taxable income. Hence, Interest can be apportioned to: 16,05,61,945 x 429.21/ 1723.27 Amount equal to % of avg. % x 429.21 under Rule 2,14,60,500 investment 8D(iii) TOTAL 6,16,37,232 Average of total value of investments, income from which does not or shall not form part of total income:- Rs. In crores 31.3.2007 31.3.2008 Total investments 378.00 518.27 Less: Investment in foreign companies whose dividends are taxable Chloride Batteries SE Asia Pte Ltd 10.35 10.35 Expex Batteries Ltd 0.77 0.77 Associated Battery Mfg (Ceylon) 7.30 7.30 CELL Motive Power Pty - 1.02 Investments which would yield Tax free income 359.58 498.83 8 ITA No. 712/Kol/2013 Exide Industries Limited Average ==={359.58 + 498.83}/2=429.21 Our humble request your kindself would be to approve above in principle and restrict disallowance to Rs.6.16 crores. 14. CIT-A did not agree with submissions of Assessee, but however, taking into consideration of foreign investments to extent of Rs.19.44 crores and Rs.18.44 crores as standing on 31-03-2008 and 31-03- 2007 respectively and directed AO to restrict average value of investments to Rs.429.21 crores instead of Rs.448.135 crores as computed by AO. 15. Assessee before this Tribunal questioned order of CIT-A. Ld.AR submits that disallowance may be restricted to disallowance as made by Assessee before CIT-A and referred para 4.4.1 at page 27 of written submission and argued that assessee has surplus reserves at Rs.253.98 crores as on 1.4.2007 as compared to investment at Rs.140.26 crores during year. Ld. DR relied on order of AO. 16. Heard rival submissions and perused material on record.During course of assessment proceedings, AO found loans availed by assessee of Rs.324.70 crores as on 31-03-2007 and Rs.349.81 crores as on 31-03-2008 from balance sheet, according to him that there is increase to extent of Rs.25.11 crores. AO further found that assessee debited amount of Rs.38,17,24,153/- from profit and loss account towards payment of interest. It was also observed by AO investments made by assessee in various companies increased to extent of Rs.140.27 crores as compared to 31-03-2007. AO disallowed amount as computed by applying Rule 8D(2)(i),(ii) and (iii) of Rs.12,18,60,300/- only on ground that assessee could not provide one to one nexus in showing 9 ITA No. 712/Kol/2013 Exide Industries Limited that borrowed fund not been diverted to investments. We find from order of CIT-A, that Assessee submitted details of interest shown in Annual Report by way of tabular form wherein assesse admitted that it could not able to show amount of Rs.16,05,61,945/- has one to one nexus with business purpose and Assessee itself recomputed disallowance U/Rule 8D(2)(i),(ii) and (iii) to extent of Rs.6,16,37,232/- and urged therein to restrict same to that extent.The case of AO that Assessee could not explain and produce anything during course of assessment proceedings showing one to one nexus date wise investments and source of fund thereon and in view of tabular forms as submitted by Assessee and discussed by CIT-A as same were not in file of AO and it is appropriate, in our view, to remand issue to file of AO for verification of details of payment of interest as shown in annual report as discussed in para-6.2 of impugned order and to pass order by taking into consideration of same. Accordingly, grounds and additional grounds raised therewith are allowed for statistical purposes. 17. Ground no-4 is about questioning disallowance of Rs.1,36,32,019/- made by Assessing Officer and confirmed by CIT -A on account of payments made by assessee to various vendors on account of software repairs and maintenance expenses. 18. During course of hearing before us, Ld.AR submits that issue squarely covered by consolidated order dt:20-01-16 of Coordinate Bench in Assessee s own case for A.Y 2003-04 & 2004-05 in ITA 189/Kol/2007 and ITA 1414/Kol/2007 respectively. Ld. DR relied on orders of CIT-A and AO. 10 ITA No. 712/Kol/2013 Exide Industries Limited 19. Heard rival submissions and perused material on record. We find that consolidated order supra as placed on record by Ld.AR, Tribunal decided issue therein is similar to issue on hand covering ground as raised in ground no-4 and relevant portion of which is reproduced herein below: 21. Grounds Nos. 5(c) & 6 involve issue relating to disallowance of Rs.69.21 lakhs and Rs.2.05 crores made by Assessing Officer and confirmed by ld. CIT(Appeals) on account of payment made by assessee to Sonata Information Technology and on account of ERP expenses respectively. 22. During year under consideration, assessee had incurred expenditure of Rs.2.05 crores for upgradation of ERP. sum of Rs.69.21 lakhs was also paid by assessee to M/s. Sonata Information Technology for software and hardware support as well as consultancy services in connection with implementation of upgraded ERP. This entire expenditure incurred by assessee for upgradation of ERP as well as implementation thereof was claimed as deduction being revenue in nature. Assessing Officer as well as ld. CIT(Appeals), however, treated same as capital in nature on ground that same resulted in enduring benefit to assessee and accordingly allowed only depreciation thereon. 23. We have heard arguments of both sides and also perused relevant material available on record. It is not in dispute that ERP package was originally purchased and installed by assessee in earlier years and expenditure incurred thereon in earlier years was finally treated as capital in nature. During year under consideration, said ERP package was upgraded by assessee and expenditure in question thus was incurred by assessee on upgradation of ERP as well as implementation thereon. As rightly submitted by ld. Counsel for assessee, expenses incurred on upgradation of ERP has already been held as revenue expenditure allowable as deduction in various decisions rendered by Hon ble High Courts as well as different Benches of this Tribunal. In one of such decisions rendered in case of CIT vs.- Amway India Enterprises, this issue has been elaborately dealt with by Special Bench of this Tribunal and after discussing all relevant aspects, it is held that expenditure incurred on upgradation of ERP module would be allowable as deduction being revenue in nature. At time of hearing before us, ld. D.R. has contended that upgradation of ERP is nothing but replacement of ERP package as earlier version of ERP becomes completely useless after upgradation. We are unable to agree with contention of ld. D.R. In our opinion, there is difference between upgradation of ERP Software and purchase of ERP Software, inasmuch as benefit of upgradation is only incremental, which is to extent of additional features provided in new version, while same in case of acquisition of new ERP package 11 ITA No. 712/Kol/2013 Exide Industries Limited is full and completely new. Even this benefit is reflected in price charge, inasmuch as price charged for upgradation is only marginal equivalent to incremental benefit available in new version while it is full in case of acquisition of new ERP package. upgradation of ERP, in our opinion, therefore, cannot be equated with replacement as contended by ld. D.R. and advantage being only incremental to extent of additional features in new version, same cannot be treated as replacement of entire ERP package so as to treat expenditure incurred on upgradation as capital expenditure. Moreover, use of any ERP package in case of manufacturer like assesese- Company is generally for coordinating and rationalizing its functions and business process in order to ensure that business is carried on more efficiently and effectively and by applying functional test, expenditure incurred on ERP package, in our opinion, cannot be treated as capital expenditure as it does not result in creation of any new asset or advantage of enduring nature in capital field. We, therefore, direct Assessing Officer to allow deduction claimed by assessee on account of expenditure incurred on upgradation of ERP and implementation thereof treating same as revenue in nature. 20. In present issue, assessee incurred expenditure of Rs.3,40,80,049/- for routine maintenance and for procuring license for SAP and M.S. Office. Accordingly assessee paid to many vendors i.e SAP India, ERP, TATA Technologies, ONE APPS, Oracle, WIPRO,ETVL and M/s. Sonata Information Technology for software and consultancy services. assessee claimed said expenditure as deduction by treating same as revenue in nature. According to AO, as new software installed improves efficiency of computers and it is capital expenditure. CIT-A confirmed said finding. Taking into consideration, finding of coordinate Bench supra, we are of view, expenditure incurred towards for routine maintenance and for procuring license of software cannot be treated as capital in nature as it would not create new asset and accordingly, we hold assesse is entitled to claim such expenditure as revenue in nature. Thus, ground no-4 is allowed. 12 ITA No. 712/Kol/2013 Exide Industries Limited 21. In result, appeal of assessee is partly allowed as indicated above. Order pronounced in open Court on 19th October, 2016. Sd/- Sd/- M.Balaganesh S.S. Viswanethra Ravi Accountant Member Judicial Member Dt: 19 -10-2016 Copies of order forwarded to : (1) Exide Industries Limited, 59E, Chowringhee Road, Kolkata-700 020 (2) Additional /Deputy Commissioner of Income Tax, Range-I, Kolkata, Aayakar Bhawan, P-7, Chowringhee Square, Kolkata-700 069 (3) Commissioner of Income-tax (Appeals)-I, Kolkata (4) Commissioner of Income Tax, Kolkata (5) Departmental Representative (6) Guard File **PP/SPS By order Assistant Registrar, Income Tax Appellate Tribunal Kolkata 13 ITA No. 712/Kol/2013 Exide Industries Limited Exide Industries Limited v. Deputy Commissioner of Income-tax, Kolkata