B. Manohar, J.
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.
4. Being aggrieved by the assessment order dated 30-03-2001, the assessee filed an appeal before the First Appellate Authority contending that the order passed by the Assessing Authority denying the deduction as revenue expenditure in respect of domestic customer database and transfer of human skill and also denying the fluctuation loss towards foreign exchange is contrary to law. The First Appellate Authority after examining the matter in detail dismissed the appeal and upheld the order passed by the Assessing Authority by its order dated 15-6-2005. Being aggrieved by the order passed by the First Appellate Authority, the assessee preferred an appeal before the Appellate Tribunal. The Tribunal relying upon the various judgments of the Hon'ble Supreme Court by its order dated 4-5-2007 partly allowed the appeal holding that the payment made for using domestic customer database is revenue in nature. In respect of payment made towards transfer of human skill is concerned, it should be treated as revenue expenditure further the assessee is entitled for deduction with regard to fluctuation of foreign exchange. Being aggrieved by the order dated 4-5-2007 passed by the Tribunal, the Revenue has preferred this appeal.
5. The above appeal is admitted to consider the following substantial questions of law.
1. Whether the Tribunal was correct in holding that a sum of Rs.5,30,00,000/- ' Domestic Customer Database ' should be treated as a revenue expenditure?
2. Whether the Tribunal was correct in holding that a sum of Rs.9,38,57,925/- 'transfer of human skills' should be treated as a revenue expenditure ?
3. Whether the Tribunal was correct in holding that the foreign exchange fluctuation loss of Rs.8,63,047/- should be allowed?
6. Sri. K.V. Aravind, learned counsel appearing for the appellant contended that the order passed by the Appellate Tribunal is contrary to law. The finding of the Tribunal that the expenditure incurred towards domestic customer database and transfer of Human skill is revenue expenditure is erroneous in law. In view of bifurcation of the software development division from TATA IBM and establishment of assessee-Company, the software division was transferred to the assessee-Company along with various assets of the erstwhile TATA IBM. Virtually there was transfer of software business undertaken by the TATA IBM Limited. The domestic customer database gives the information about various customers who have purchased IBM computers in the past and who continued to have service maintenance contract. This enables the assessee to provide maintenance support service. The database helps the assessee to identify the customers and their needs. The Assessing Officer requested the assessee to furnish the valuation made by the independent Valuer to ascertain the valuation. However, the assessee informed that there is no such valuation of Database. The Database is utilized for the purpose of running the software business as well as providing maintenance support service. The said asset provides an enduring advantage or benefit to the assessee. Without the said database, the effective running of the software business is impossible. Hence, it is a capital asset and the expenditure incurred cannot be treated as revenue expenditure. Further, the transfer of trained employees originally recruited by the TATA IBM to the assessee-Company, the expenditure incurred for training and salary paid for the transferred employees for a period of six months by TATA IBM also provide an enduring advantage. The expenditure incurred for those employees cannot be treated as revenue expenditure. In view of the transfer, they become the permanent employees of the assessee-Company. The transfer of existing business as a going concern naturally includes the employees and the customer data. In such situation, the transactions which are factually capital in nature are the cost paid for acquiring the business itself that includes all capital assets. The finding of the Tribunal that the expenditure incurred is revenue expenditure is totally erroneous in law.
7. With regard to the fluctuation of the foreign exchange rate is concerned, the amount payable by the assessee as on the closing date for the purchase of item has been increased and the increased value has to be taken as the cost of item for the purpose of closing stock valuation. The increased amount has also been debited to the profit and loss account. Hence, deduction of Rs.8,63,047/- as ordered by the Tribunal is contrary to law. In support of his contention, he relied upon the following judgments:
1. Jonas Woodhead & Sons Ltd. v. CIT  224 ITR 342/91 Taxman 1 (SC)
2. CIT v. Woodward Governor India (P.) Ltd.  312 ITR 254/179 Taxman 326 (SC).
8. On the other hand, Sri.Percy Pardhiwala, learned Senior counsel appearing for the respondent-assessee argued in support of the order passed by the Tribunal and contended that the assessee-Company is the joint venture of TATA Group and IBM Inc. USA. It was engaged in the business of manufacture and sale of computers, rendering services in connection with the sale as well as development of software. In view of the business exigencies, promoters of the Company decided to bifurcate software development as a separate company and as per the agreement entered into between the parties, the assessee-company was incorporated. The business activities which were hitherto carried on by TATA IBM are transferred to the newly incorporated company in respect of software business as well as development of software. Accordingly database of domestic business of software was transferred to the assessee-Company. For that, the assessee-company had paid Rs.5.3 crores. The said data gives information about various customers who have purchased the IBM computers in the past and who continued to have a service maintenance contract. It enables the assessee to provide maintenance support service. The said data helps the assessee to identify the customers and their needs. Accordingly, the value was determined as Rs. 3 crores. The expenditure incurred to obtain domestic customer data is a revenue expenditure and the assessee has not acquired any capital asset as a consequence of expenditure it has incurred. The order passed by the Assessing Authority as well as the First Appellate Authority declaring the transfer of domestic customer data is an enduring advantage and a capital asset was rightly set aside by the Appellate Tribunal. Further, some of the trained employees have been transferred to the newly incorporated company. The assessee valued the personnel transferred as Rs.18.4 crores both of STP and non-STP Units. The STP units have exemption of payment of income tax. Accordingly, non-STP personnel was valued at Rs.9,38,57,925/- and accordingly paid the said amount to TATA IBM. The said expenditure cannot be treated as the acquiring capital expenditure and it is only a revenue expenditure. Hon'ble Supreme Court in Empire Jute Co. Ltd. v. CIT  124 ITR 1/3 Taxman 69 (SC) held that there may be cases where expenditure even if incurred for obtaining an advantage of enduring benefit, such expenditure is incurred merely to facilitate the assessee's trading operations or enable the management to conduct the business. The said expenditure would be on revenue account even though the advantage may be enduring for an indefinite future.
9. With regard to disallowing the loss on account of foreign exchange fluctuation is concerned, the learned senior counsel submits that the law declared by this Court in ITA Nos.3443-3444/2004 disposed of on 8th September 2006 in YOKOGOWA covers the entire issue. The foreign exchange fluctuation after the date of purchase will not affect the valuation of stock considering the consistent method followed by the assessee. Hence, the assessee is entitled for deduction of loss suffered due to foreign exchange fluctuation. Learned senior advocate further contended that the appellant cannot approbate and reprobate. In case of recipient of the said amount i.e. TATA IBM, the Revenue has contended that the receipt is revenue in nature and assessed for Tax. In respect of the assessee is concerned, they have contended that it is a capital expenditure. In fact, TATA IBM has taken up the matter in appeal in ITA No. 755/2003. The Appellate Tribunal held that the amount received from M/S.IBM Global service is a capital gain and the said order became final. The Revenue cannot take a different stand. He also relied upon the following judgments:
1. CIT v. Madras Auto Service (P) Ltd. 233 ITR 468/99 Taxman 575 (SC)
2. CIT v. Tata Iron & Steel Co. Ltd. 231 ITR 285/98 Taxman 459 (SC)
3. Empire Jute Co. Ltd.'s case (supra).
10. We have carefully considered the arguments addressed by the learned counsel for the parties and perused the orders impugned and the judgments relied upon by the parties.
11. The facts narrated above clearly disclose that a part of the business being handled by the erstwhile TATA IBM has been handed over to the assessee-company in view of bifurcation of the software and hardware business. For the transfer of domestic customer database and the man power, the assessee had paid Rs.5.3 crores and Rs.9.38 crores respectively towards the consideration as per the agreement entered into between the parties. The relevant clauses of the agreement dated 15th August 1997 reads as under:
"(A) Tata IBM Limited (Tata IBM), a company duly established under the laws of the Republic of India, having its registered office at Golden Enclave, Airport Road, Bangalore - 560 017 (which expression shall unless it be repugnant to the context or meaning therefore be deemed to mean and include its successors and assigns) and(B) IBM Global Services India Private Limited (IBM Global), a company duly established under the laws of the Republic of India, having its principal office at Ground Floor, Golden Enclave, Airport Road, Bangalore - 560 017 (which expression shall unless it be repugnant to the context or meaning thereof be deemed to mean and include its successors and assigns)(Tata IBM and IBM Global being sometimes referred to herein as the "Parties")
(1) IBM World Trade Corporation (IBM), Tata Industries Limited and Tata Engineering and Locomotive Company Limited (Tata Industries Limited and its associated company are hereinafter referred to as "Tata") have cooperated with each other in undertaking joint venture operations in India through TATA IBM, for manufacturing and marketing of certain information technology products in India:
(2) India is emerging as major market for IBM products and services in trade and industry particularly in view of increasing recognition of the importance of information technology to the overall economic development of India:
(3) IBM and Tata recognize that Tata IBM's existing highly skilled human resource base needs fuller utilization for meeting the emerging demands for services in India and abroad:
(4) The emerging trends in the international information technology market have underlined the need to set up an independent entity to undertake services activity and in line with IBM's world-wide practices, IBM and Tata have jointly agreed to set up, along with Tata IBM, the IBM Global as to separate organizational base for services subject to the requisite permissions, consents and approvals of the competent authorities in India.
(5) IBM, Tata IBM and Tata have arrived at an understanding with respect to the formation and management of IBM Global, the transferability of their respective interest therein, and other matters.
(6) IBM and Tata have agreed to carry out the following activities through IBM Global: (a) Managed Operations; (b) Processing Services; (c) Desktop Systems Management (d) Business Recovery Services; (e) Customs Software. Training; (f) Systems Integration Services; (g) Project Management; (h) Application Software Services; (i) Network Related Services; (j) Site Services, and (k) Information Kiosk Services, and it is the understanding of IBM, Tata and TATA IBM that such services include but is not limited to (l) software design, (m) hardware design, (n) professional services, (o) information technology consulting (p) international procurement operations, (r) value added network, (s) fee based education, (t) systems integration, (u) availability services, and (v) hardware maintenance and software support :
(C) THEREFORE, for and in consideration of the premises and the mutual covenants and agreements contained herein, and for other good land valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows :
(1) Tata IBM agrees to do the following :
(a) Sell all maintenance spares and accessories comprising inventory of TATA IBM relating to IBM computers ;
(b) Facilitate transfer of its personnel of TATA IBM set out in Annexure I, and
(c) Share the database relating to TATA IBM's clients and customers, list whereof is set out in Annexure III hereto.
(2) The Transfer aforesaid shall be effective from the twenty fifth day of August, 1997.
(3) In consideration of the transfer aforesaid IBM Global shall pay to TATA IBM a sum of :
(a) Rs.28.6 crores for the transfer of the maintenance spares and accessories set out in Annexure I;
(b) Rs.18.4 crores, being consideration, for the value which inheres in the human resources, by reason of training, skills practical experience and work culture of the transfer of the personnel listed in Annexure II hereto, to be remitted within ninety (90) days of the date of receipt of GOI approvals of the application as proposed; and
(c) Rs.5.3 crores for the transfer of the database relating to TATA IBM's clients and customers, including installation and warranty date, the list of which is maintained in the files of TATA IBM, to be remitted within ninety (90) days of the date of receipt of GOI approvals of the application as proposed."
12. As per the agreement entered into between the parties, the assessee had paid consideration to the transferor company. While filing the returns, the said transaction has been disclosed by the assessee and claimed it as revenue expenditure. However, the Revenue found fault with the same and held that the expenditure incurred for getting the enduring advantage is the capital gain. Hence, the expenditure incurred cannot be treated as Revenue expenditure since there is a transfer of business and the amounts paid are capital in nature. The said order was confirmed by the First Appellate Authority. The Appellate Tribunal after re-examining the matter in detail, relying upon the various judgments of the various High Courts as well as the Supreme Court held that the expenditure incurred is revenue in nature. In the instant case, insofar as payment for getting domestic customer database is concerned, it is clear that, assessee has only got right to use that database, the company which has provided such database is not precluded from using such database. Hence the expenditure incurred is for the use of database and not for acquisitions of such database. A similar issue was raised in WIPRO GE MEDICAL SYSTEM case wherein it was held that payment made towards access to information base and for transition of customer order filing is a business consideration. There is no question of acquisition of any assets when the access is made and the payment is made for the same. The said payment cannot be treated as revenue expenditure. There is no infirmity or irregularity in the said finding of the Tribunal.
13. In respect of payment made towards transfer of human skill is concerned, as per the agreement, total payment made is about Rs.18.4 crores. Out of which, Rs.9.01 crores was attributable to STP Unit, for which the payment of tax is exempted. The payment has been made towards the expenses incurred for training and on recruitment. Such expenses were under revenue field, and therefore the payments have been made to save such revenue expenses as per the agreement. TATA IBM has spent lot of money to give training to those employees who were transferred to the assessee-company. They are trained in the field of software. They have opted for employment with assessee-company and for their past services in TATA IBM, expenditure has been incurred. Such expenditure cannot be termed as expenditure laid for carrying on the business. The advantages obtained by TATA IBM can be treated as services rendered by those employees to TATA IBM. The concept of payment made once and for all and of the enduring benefit respond to the changing economic realities of business and hence the expenditure incurred on processing domestic customer database and transfer of human skill is a revenue, though the benefit may be of enduring in nature. Hence, the said expenditure has to be treated as revenue expenditure. The order passed by the Assessing Officer to disallow the expenditure as revenue expenditure is erroneous in law.
14. Sri.K.V.Aravind, learned counsel appearing for the Revenue relying upon the judgment Jonas Woodhead & Sons Ltd.'s case (supra) contended that the question whether the particular payment made by the assessee under the terms of agreement forms part of the capital expenditure or revenue expenditure depend upon several factors even though it is enduring in nature. The payment made once for all cannot be termed as revenue expenditure. He placed reliance upon the following paragraph of the judgment:
'The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal varieties but must needs be flexible so as to the respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.
There is no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The "once for all" payment test is also inconclusive. What is relevant is the purpose of the outlay an its intended object and effect, considering in a common sense way having regard to the business realities. In a given case, the test of "enduring benefit" might break down.'
He further contended that the loss suffered by the assessee on account fluctuation in the rate of foreign exchange, as on the date of balance sheet, is an item of expenditure under Section 37(1) of the Income Tax Act. Therefore the assessee is not entitled for any deduction. In support of this contention, he relied upon the judgment in Woodward Governor India (P.) Ltd.'s case (supra). The relevant paragraph read thus:
"In order to find out if an expenditure is deductible the following have to be taken into account (i) whether the system of accounting followed by the assessee is the mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was change in the system, whether the change was bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv)whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation."
15. On the other hand, Sri.Percy Pardhiwala, learned senior counsel appearing for the assessee relying upon in the judgment in Madras Auto Service (P.) Ltd.'s case (supra) contended that though the amount has been paid for getting the domestic customer database and transfer of human skill, instead of appointing the employees and training them, they utilized the services of the employees recruited by TATA IBM which had given training to them after spending considerable amount. Those employees were transferred to the assessee-Company. Hence, the amount paid is a revenue and the same cannot be treated as capital expenditure. He relied upon the judgment in Madras Auto Service (P.) Ltd.'s case (supra). The relevant paragraph reads thus:
"In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such construction ? The assessee got a long lease of a newly constructed building suitable to its own bus
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iness at a very concessional rent. The expenditure, therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial saving in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was a saving in revenue expenditure in the form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, the assessee in the present case did not get any capital asset by spending the said amounts. The assessee, therefore, could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, the expenditure appears to be revenue expenditure." In similar lines, he also relied upon the judgment of the Supreme Court in Empire Jute Co. Ltd.'s case (supra) and Tata Iron & Steel Co. Ltd. (supra). 16. In Empire Jute Co. Ltd. case, the Hon'ble Supreme Court has observed as under: 'When dealing with cases of this kind where the question is whether expenditure incurred by an assessee is capital or revenue expenditure, it is necessary to bear in mind what Dixon J. said in Hallstorm's Property Ltd. v. Federal Commissioner of Taxation (72 CLR 634): " What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process." The question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.' 17. The Appellate Tribunal after considering the matter in detail passed the order impugned. We find no infirmity in the said finding. Accordingly, the substantial questions of law 1 and 2 are held against the Revenue and in favour of the assessee. 18. Insofar as third substantial question of law is concerned, the issue is covered by the judgment in ITA Nos.3443-3444/2005 disposed of on 8th September 2006 in YOKOGAWA case. We are in respectful agreement with the said finding. The assessee is entitled for deduction of loss due to foreign exchange fluctuation. Hence, the said question is also held against the revenue and in favour of the assessee. 19. Accordingly, the appeal is dismissed. No order as to costs.