Income Tax Appellate Tribunal - Delhi
Addi. Cit vs Asahi India Safety Glass on 20 December, 2005
Equivalent citations: [2006]6SOT656(DELHI)
ORDER
Pradeep Parikh, V.P. The two appeals by the department and the cross objections of the assessee are directed against the combined order of the learned CIT(Appeals) dated 14-5-2001 for assessment years 1997-98 and 1998-99. Since a common issue is involved in the appeals and cross objections, they are being disposed of together by this consolidated order. The common ground raised by the department is against the deletion of addition of Rs. 1,36,77,664 and Rs. 1,70,68,811 respectively made on account of software development expenses.
2. During the years under consideration, the assessee had amortized an expenditure of Rs, 1,36,77,664 and Rs. 1,70,68,811 on account of software and professional expenses as deferred revenue expenditure. However, in its books of account, for assessment year 1997-98, it had not written off any part of the expenditure. In the books for assessment year 1998-99, the assessee had written off a part of this expenditure at Rs. 9,91,228. However, while computing its total income, the assessee had claimed the entire expenditure as revenue in nature in both the years. On inquiring about the details of the expenditure, it was explained by the assessee that software technology was rapidly changing and hence had no enduring benefit. It was further explained that the software had been installed in the financial year 1996-97 but due to various deficiencies it had to be upgraded in the following financial year and an additional expenditure of Rs. 1.71 crores was incurred. It was also explained that the software had been installed for carrying on the business more efficiently, and that the expenditure had not brought into existence any asset from which the assessee could generate any income. The assessing officer looked into the details to notice that the software was installed by Arthur Anderson & Associates vide agreement dated 25-6-1996. The software package related to Oracle applications. After taking note of the objective of the various segments contained in the package, the assessing officer observed that it was an intensive project to overhaul the accounting system of the assessee and to train the accounting staff of the assessee. The project was to be developed over a period of 18 to 24 months. The assessing officer did not agree with the plea of the assessee that the software had no enduring benefit in view of the changing technology. According to him, the expenditure incurred by the assessee in financial year 1997-98 was a part of the ongoing project and it was not an upgradation of the existing project or rectification of its mistakes. He also observed that the expenditure incurred by the assessee on oracle application would serve the assessee for a number of years. Accordingly, he held the expenditure to be of capital nature and disallowed the same. Moreover, depreciation was also not allowed in either of the years on the ground that it was not clear whether the assessee had put to use the software during the relevant year or not. However, in assessment year 1998-99, the assessing officer allowed deduction under section 80-IA of the Act.
3. The learned CIT(Appeals) took note of several decisions of the various High Courts and Tribunal and observed that no case law favouring the department was brought to his notice. The decisions mainly relied upon by him were those of the Kerala High Court in the case of CIT v. Steel Complex Ltd. (2000) 110 Taxman 25 (Ker), of the Supreme Court in the case of Alembic Chemicals Works Co. Ltd. v. CIT(1989) 177 ITR 377 (SC) and of the Jaipur Bench of the Tribunal in the case of Business Information Processing Services v. Assistant Commissioner(2000) 73 ITD 304 (JP). Based on these and many other decisions as also on the basis of the detailed submissions made by the assessee, the CIT(Appeals) allowed the claim of the assessee.
4. The learned DR took us through the assessment order and the order of the CIT(Appeals) to appraise us about the facts of the case. He then extensively referred to the decision of the Delhi Bench of the Tribunal in the case of Maruti Udyog Ltd. v. Dy. CIT(2005) 92 ITD 119 (Del) and tried to draw strong support from the said decision. According to him, expenses on upgradation also were of capital nature and were rightly disallowed.
5. The learned counsel took us through the various clauses of the agreement between Oracle Software India Pvt. Ltd. ('Oracle') and the assessee. By referring to the various clauses of the agreement, the learned counsel wanted to stress upon the fact that the assessee had never acquired the software in its own right and that it was not the owner of the software in any manner. He referred to the letter dated 25-6-1996 written by Arthur Anderson & Associates to the assessee explaining what the package was all about. The learned counsel then drew our attention to the break-up of the expenditure of Rs. 1,36,77,664 incurred in assessment year 1997-98 to show that no payment was made to acquire any software and the major components of the expenditure comprised of license fee for the use of software, annual technical support fee, documentation charges of technical reference manual and professional charges. According to the learned counsel, the assessee was upgrading its accounting software but in his opinion even the conversion of the system from manual to computerized system was also an upgradation. Referring to the decision in the case of Maruti Udyog Ltd. (supra), it was stated that in that case the expenditure which was disallowed was for the acquisition of software and hence the said decision could not be applied to the facts of the present case. It was argued that in any such expenditure, there may be some enduring benefit but that does not necessarily make the expenditure of capital nature. The expenses in the present case were incurred to help the assessee run its business more efficiently. With regard to the difference of expenditure incurred in the two years under consideration, the learned counsel drew our attention to the submissions made before the CIT(Appeals). As per these submissions, the expenditure of Rs. 1.37 crores was incurred for the first time in assessment year 1997-98 to implement Oracle Software Technology to meet the company's information requirements and to provide for final accounting. The expenditure of Rs. 1.71 crores incurred in assessment year 1998-99 was to remove certain deficiencies which were found in the software already provided to the assessee. Out of the said sum of Rs. 1.71 crores, Rs. 49,00,000 were incurred to modify, customize and upgrade the software installed in assessment year 1997-98. The balance expenditure of Rs. 1.22 crores was incurred for software developed and implemented in assessment year 1998-99 for various accounting purposes. Thus, in nutshell, the case of the assessee was that it had not acquired any capital asset through which it could generate any income and the expenditure being merely to improve the efficiency, it was of revenue nature and hence rightly allowed by the CIT(Appeals). Coming to the cross -objections of the assessee, alternatively, it was contended that if the expenses are treated as of capital nature, then depreciation be granted on the same.
6. We have duly considered the rival contentions and the material on record. First the facts. The assessee company is the manufacturer of automotive safety glass of two types viz. tempered and laminated. Income from this activity is the main source of income, rather the only source of income of the assessee. During the financial year 1996-97, the assessee company embarked on a major computerization programme in the areas of financial accounting purchases, inventory and production planning and control. For this, Arthur Andersen & Associates, the accounting and management consultancy firm was approached. They presented a software package prepared by the globally known Oracle Corporation, USA, distributed through its associate Oracle Software India (P.) Ltd. (Oracle for short). The offer letter of Arthur Andersen (page 24 of the paper book) gives a complete picture of what the package contains. Broadly speaking, it covers the areas of financial accounting, inventory and purchase. For this offer, the assessee was to pay professional charges to Arthur Andersen. On accepting the offer of Arthur Andersen, the assessee entered into an agreement with Oracle on 28-6-1996. The agreement is titled as 'Master Software License & Services Agreement'. The facts so far narrated, indicate that the software which the assessee was to instal and implement was neither attached to any machinery used in the production nor was it a part of any production process. The company is already in this business since 1987 and has grown over a number of years. Book keeping and accounting is no doubt an integral part of any business organization. But certainly it is not the activity through which it earns its income. Proper accounting always helps the management in making policy decisions and taking strategic decisions. Through it, it comes to know whether it had earned or lost and what actually it has earned or lost. in other words, it tells the management whether the business is doing well or not. The better and faster can be the important management decisions, the more the accounting systems and management information systems are sophisticated. The point we are trying to drive home is that with the use of sophisticated computerized applications the assessee can improve its efficiency in terms of taking strategic decisions. We have to be clear on the fact that manufacturing activity of the assessee is the main source of its income. Purchase and sales activities go to fulfil this basic objective of the company whereas accounting and management information systems only helps the assessee to know its own state of affairs on which rest the decisions to be taken.
To further clarify the matter, at the cost of repetition we may state that sophisticated accounting and management systems do not actually generate income for the assessee but it only aids the management in taking important decisions.
7. Now, we may examine the various clauses of the agreement between the assessee and Oracle. The title of the agreement itself suggests that it is an agreement of licensing the software and for providing services. In other words, it is not a supply agreement whereby the assessee has purchased the software from Oracle. The preamble to the agreement is also to this effect. Clause 2.1.6 provides that the assessee has acquired only the right to use the programme and has not acquired any right of ownership over the software. All rights, title and interest in the programme remain with Oracle. The consideration for getting the right to use the software is in the form of licence fees and not in the form of any purchase price. Over and above the licence fees, since the agreement is also for providing maintenance services, the assessee is liable to pay fees for support and maintenance to Oracle. The licence given under the agreement is liable to be terminated under the provisions of the agreement. Thus, from the various clauses of the agreement, we find that the assessee has not acquired the software in its own right but has acquired only the right to use the software. in other words, what we are trying to emphasize is the fact that by paying the impugned amount, the assessee has not acquired any tangible asset, much less any asset which provides any new source of income or which augments the present source of income. Therefore, the expenses incurred by the assessee cannot be said to be of capital nature.
8. The stand of the revenue for treating the expenditure as capital is that the expenditure has brought enduring benefit to the assessee. Well, there may be many expenses which may bring enduring benefit, yet, the test of enduring benefit may break down. It has been held by the Calcutta High Court in the case of CIT v. Corninco Binani Zinc Ltd.(1993) 204 ITR 56 (Cal) that the test of enduring benefit is not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. This is exactly what we feel in the present case. The revenue authorities have applied the test quite mechanically. But it needs to be understood as to why this test breaks down in the present case. It has been held by the Madras High Court in the case of CIT v. Pioneer Engineering Syndicate (1989) 175 ITR 931 (Mad) that if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. In the present case, as we have mentioned in the earlier paragraph, the expenses were incurred by the assessee to facilitate the management as to what the conduct of its business should be. if this be the case, there is no way the expenditure can be said to be of capital nature. In the case of CIT v. Abbott Laboratories India (P) Ltd. (1993) 202 ITR 818 (Bom.), the assessee had paid consultation fees for relocation of plant and equipment and utility services at existing facilities to increase efficiency and output. The Bombay High Court held it to be revenue expenditure as it was not in connection with a new plant or a new project or a new product. In the present case also, accounting has to be done by the assessee and it had been doing so for all these years. With Oracle applications, the assessee would be doing it more efficiently and perhaps more profitably.
9. The decision in the case of Maruti Udyog Ltd. (supra) which is relied upon by the learned DR, in fact, supports the case of the assessee. In that case, the expenditure incurred on upgradation and maintenance of software were allowed by the revenue authorities. As regards the expenditure on purchase of new software, the same stood disallowed because the assessee, unlike the present case, had actually purchased the software. In the present case, the assessee has only acquired the right to use the software. Moreover, though the expenses incurred in assessment year 1997-98 are to acquire this right, yet it will not be capital expenditure because, as discussed earlier, it is only for facilitating the assessee's business. The expenditure incurred in assessment year 1998-99 is for upgradation and hence all the more reason to treat it as revenue expenditure.
10. If we look at the break-up of the expenditure for the two years, we find that the major heads under which the payment is made are license fees, annual technical support fees, professional charges, data entry operator charges, training charges and travelling expenses. This goes to show that by incurring these expenses, no new asset has come into existence nor any new source of income has arisen to the assessee. All the expenses are of recurring nature required either to upgrade the systems or to run the systems. Therefore, there is no substance in the argument of the revenue that these expenses have brought in benefit of enduring nature to the assessee.
11. Lastly, but not in the least, it was way back in 1989 that the Supreme Court took cognizance of the rapid advances in research in antibiotic medical microbiology. Their Lordships observed as follows in the case of Alembic Chemical Works Co. Ltd. (supra) :
"it would, in our opinion, be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how atany particular stage in this fast-changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and nonephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holing an outlay such as this as capital. The circumstance that the agreement in so far as it placed limitations on the right of the assessee in dealing with the know-how and the conditions as to nonpartibility, confidentiality and secrecy of the know-how inclined towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition". (p. 390) The above observations of the Supreme Court hold equally true for the rapid strides made in the information technology sector. In fact, the pace of advancement is so rapid that whatever technology we install today becomes obsolete within a wink of the eye. Irf other words, the test of enduring benefit is more prone to failure in the present days than it was when the above observations were made. Therefore, upgradation of technology is the order of the day and to treat the outlay on such upgradation in the realm of capital would not be proper. It would be like taking a step backward on a conveyor belt which is moving ahead. The observations of the Supreme Court with regard to non-partibility, confidentiality and secrecy and also with regard to the mere right to use are equally applicable to the facts of the present case. Thus, in the light of the foregoing discussion, we allow the claim of the asscssee on software development expenses as revenue expenditure, We need not re-emphasize that the turnover of the company which hovered around Rs. 150 crores during those years would have reached at that level even without this outlay. It has only benefited the company to run its business more efficiently.
12. We need not discuss in detail about the entries passed by the assessee in its books of account vis-a-vis its claim for deduction because by now it is trite that entries in the books of account do not decide the allowability or otherwise of the expenditure, but it is the real nature of the expenditure that go to decide the claim of the assessee.
13. In its cross-objections, the assessee has raised an alternative plea for grant of depreciation if the claim for the above expenses are held to be of capital nature. Since we have allowed them as revenue expenditure, this plea of the assessee does not survive.
14. In the result, both the appeals of the department are dismissed and the cross-objections of the assessee for both the years are dismissed as in fructuous.