Income Tax Appellate Tribunal - Ahmedabad
Bosch Rexroth (India) Ltd., Ahmedabad vs Assessee on 2 May, 2016
आयकर अपील
य अ धकरण, अहमदाबाद यायपीठ ''बी'' अहमदाबाद।
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH, AHMEDABAD
BEFORE SHRI S.S. GODARA, JUDICIAL MEMBER
AND SHRI MANISH BORAD, ACCOUNTANT MEMBER
आयकर अपील सं./ ITA No. 879/Ahd/2013 & 3189/Ahd/2015
नधा रण वष /Assessment Year: 2007-08
Bosch Rexroth (India) Limited, Vs. Dy. Commissioner of Income-
206/2, 207, 214/P, tax (OSD),
Sanand Viramgam Highway, Range-1,
Mouje Iyava, Taluka Sanand, Ahmedabad
Ahmedabad - 382445
PAN : AAACM 9898 F
[
अपीलाथ / (Appellant) यथ / (Respondent)
Assessee by : Shri Sanjay R. Shah, CA
Revenue by : Shri Narendra Singh, Sr. DR.
सु न वा ई क! ता र
ख/ Date
of Hearing : 21/03/2016
घोषणा क तार ख / Date of Pronouncement: 02/05/2016
आदे श/O R D E R
PER MANISH BORAD, ACCOUNTANT MEMBER:
These two appeals are directed at the instance of the assessee. ITA No.879/Ahd/2013, relating to quantum addition, is directed against the order of the ld. Commissioner of Income-tax (Appeals)-6, Ahmedabad dated 06.02.2013, wherein the assessment u/s 143(3) of the Act for Assessment Year 2007-08 was framed on 20.12.2010 by DCIT (OSD), Range-1, Ahmedabad and ITA No.3189/Ahd/2015, relating to penalty u/s 271(1)(c) of the Act, is directed against the order of the ld. Commissioner of Income-tax (Appeals)-1, Ahmedabad dated 31.08.2015 and penalty order u/s 271(1)(c) was framed on 21.03.2014 by DCIT(OSD), Range-1, Ahmedabad. As these two appeals are related to the same assessee in relation to quantum addition and penalty u/s 271(1)(c), they have been taken up together for the sake of convenience.
ITA No. 879/Ahd/2013 & 3189/Ahd/2015Bosch Rexroth (India) Limited vs. DCIT AY : 2007-08 -2-
2. First we will take up ITA No.879/Ahd/2013. The assessee has raised following grounds of appeal:-
"1. The order passed by the learned Commissioner of Income Tax (Appeals) is erroneous and contrary to the provisions of law & facts and therefore requires to be suitably modified. It is submitted that it be so done now.
2. The learned Commissioner has erred in not allowing the deduction in respect of software expenses of Rs.l4,12,131 paid in respect of purchase of operating software allowable as revenue expenditure u/s 37 of the Act. It is Submitted that it be so held now.
2.1 Learned Commissioner has erred in not allowing the said expenses u/s 37 of the Act by wrongly relying upon the order of Hon'ble CIT(A) for A.Y. 2006- 07 which was based on wrong interpretation of facts that these software are purchased as part of computers and therefore requires capitalization and hence eligible for depreciation. Learned Commissioner has erred in not appreciating the fact that the software are application software and not systems software. It is submitted it be so held now.
2.2 Learned Commissioner has also erred in relying upon the order of Hon'ble CIT(A) for A.Y. 2006-07 which was based on the wrong premise that depreciation schedule includes computer which in turn includes computer software on which 60% depreciation is allowable and therefore deduction of software expenses cannot be allowed. It is submitted it be so held now. 2.3. Learned Commissioner has erred in not giving direction to the learned AO to allow the depreciation at the rate of 60% on the software expenditure disallowed in the AY 2006-07, while computing total income for the year under consideration."
3. Briefly stated facts, as culled out from the assessment records, are that the assessee is a limited Company, engaged in the business of manufacture of hydraulic equipments and parts. It filed its return of income for Assessment Year 2007-08 on 29.10.2007 declaring total income of Rs.29.67 crores. The assessee's case was selected for scrutiny assessment and income was assessed at Rs.30.08 crores, after making following additions:-
1. Software expenses - Rs.14,12,131.00
2. Liquidated damages - Rs. 6,95,481.00
3. Disallowance u/s 40(a)(ia) - Rs.19,28,563.00
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Total Rs.40,36,175.00 ITA No. 879/Ahd/2013 & 3189/Ahd/2015 Bosch Rexroth (India) Limited vs. DCIT AY : 2007-08 -3-
4. Aggrieved, the assessee went in appeal before the ld. CIT(A), who partly allowed the assessee's appeal by deleting the addition of Rs.6,95,481/- and Rs.19,28,563/- made towards liquidated damages and disallowance u/s 40(a)(ia) of the Act; and addition of Rs.14,12,131/- towards Software Expenses was confirmed.
5. Aggrieved, the assessee is now in appeal before the Tribunal.
6. The ld. Authorized Representative submitted that during the year under consideration the revenue expenditure of Rs.35,30,328/- was incurred towards purchasing application software and also towards upgrading the existing software. However, during the assessment proceedings, while verifying these details, ld. Assessing Officer framed assessment by treating Rs.35,30,328/- as capital expenditure, allowed depreciation on the same @ 60% and thereby making an addition of Rs.14,12,131/-. The ld. Authorized Representative submitted that the expenditure of Rs.35,30,328/- was incurred for purchasing application software as well as upgradation of the existing application software and they did not work on standalone basis but required to be fitted to a computer system to work and the software just enhanced the efficiency of the operation and therefore, even if the benefit of the same was available for more than a year, but they did not result into acquisition of any capital asset nor it could be said to be an enduring benefit looking to the rate of obsolescence in the electronic industry. The ld. Authorized Representative further submitted that the relevant tests to decide the nature of software expenditure as to whether it is capital or revenue are the test "enduring benefit" and "functional test". Applying the said tests, expenditure is treated as capital expenditure when it results in accrual of advantage of enduring nature to the assessee in the capital field which is not the case in the facts on hand. For ascertaining as to whether expenditure on computer software gives an enduring benefit to an assessee, the duration of time for which the assessee acquires right to use the software becomes relevant, because the software becomes obsolete with ITA No. 879/Ahd/2013 & 3189/Ahd/2015 Bosch Rexroth (India) Limited vs. DCIT AY : 2007-08 -4- technological innovation and advancement within a short span of time. In the case of the assessee, the impugned software expenditure of Rs.35,30,328/- are either in the form of up-gradation of existing application software availed by the appellant or are in the form of purchase of application software for the purpose of operational efficiency in the operating/revenue field and the same cannot be considered to be of enduring benefit as there are regular upgrades on an annual or even of a shorter period and in any case these are in relation to operating software and therefore the capitalization is uncalled for. The ld.
Authorized Representative further submitted that as far as functional test is concerned with respect to the application software, the nature of advantage has to be seen in a commercial sense and if advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of 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. Accordingly, the result of the above tests of enduring benefit and functional test, it is indicative that expenditure incurred by the assessee of Rs.35,30,328/- are revenue in nature.
6. The ld. Authorized Representative further referred and relied on the decision of the Co-ordinate Bench in assessee's own case for Assessment Year 2006-07 in ITA Nos. 1328 & 1310/Ahd/2011, dated 29.04.2014, and also relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Asahi India Safety Glass Ltd, reported in [2011] 16 taxmann.com 382 (Delhi).
7. On the other hand, ld. Departmental Representative supported the orders of the lower authorities.
8. We have heard the rival contentions and perused the material on record. The sole grievance of the assessee in this appeal is against the action of the ld. CIT(A) in treating the expenditure of Rs.35,30,328/- towards purchasing and upgrading software as capital expenditure which has been claimed by the ITA No. 879/Ahd/2013 & 3189/Ahd/2015 Bosch Rexroth (India) Limited vs. DCIT AY : 2007-08 -5- assessee as revenue expenditure in its return of income. The itemize break-up of the impugned expenditure of Rs.35,30,328/- is as under:-
Sr. No. Particulars Amount (Rs.)
1. Software License 16,07,497
2. AUTO CAD LT-2007 59,280
3. AUTO CAD Software 118,560
4. AUTO Desk Software 1,274,624
5. Software Subsct Ser 306,400
6. SPC Software 55,120
7. Software Charges 93,847
8. Software Installed 15,0000
Total 35,30,328
The above referred expenditure of Rs.35,30,328/- are mainly relating to the purchase of application software and upgradation of existing software. The ld. Assessing Officer has treated the impugned expenditure of Rs.35,30,328/- as capital expenditure on the only footing that the assessee will receive the benefit for more than a year and has also allowed 60% depreciation on this expenditure of Rs.35,30,328/- and a disallowance of Rs.14,21,131/- has been made. However, from going through the submissions of the ld. Authorized Representative, we are able to understand that the impugned expenditure of Rs.35,30,328/- has not been incurred to purchase any new software but they are either application software to run the existing software installed in the computers and also the expenditure has been incurred towards upgradation of the existing application software, because in the fast changing technology world, the software, which was purchased by the assessee in the previous years, needs to be upgraded or updated so as to be suitable with the current technologies brought in by various competitors as well as required for increasing the operational efficiency of the original software.
9. We also find that the Co-ordinate Bench has dealt with the similar issue in assessee's own case for Assessment Year 2006-07 in ITA Nos. 1328 & 1310/Ahd/2011, dated 29.04.2014, dealing with the software expenditure of ITA No. 879/Ahd/2013 & 3189/Ahd/2015 Bosch Rexroth (India) Limited vs. DCIT AY : 2007-08 -6- Rs.8,73,485/- as to whether it is a capital or revenue expenditure, allowed the assessee's appeal by observing as under:-
"14. We have heard the rival submissions and perused the material on record. It is an admitted fact that Assessee had incurred Rs 8,73,485/- on software expenses and was claimed as revenue expenses. It is the submission of the assessee that the expenses were for the purchase of software application having a short life span. AO has considered the expenses as capital expenditure and eligible for depreciation @60% and granted depreciation of Rs 5,24,091/- and thereby made a disallowance of Rs 3,49,384/-. In the present case, the incurring o f expenses has not been disputed by the Revenue. It is also a fact that the matter pertains to AY 2006-07 and if the impugned expenses is considered to be capital expenditure, the Assessee will have to be granted depreciation @ 60% on WDV basis in A.Y. 06-07 and also in subsequent years. The depreciation of WDV for subsequent years will work out to Rs. 2,09,630/- (for A.Y.07-08), Rs. 83,854 (for A.Y. 08-09), Rs. 33,542(for A.Y. 09-10) and so on. Considering the totality of the facts, the total taxable income of Rs 35.85 crore as determined by the AO, the changes that would be required to be made in subsequent assessments orders if the depreciation is to be allowed in all subsequent years and the peculiar facts of the case, we are of the view that the claim of the assessee be allowed in the present case. We may however add that the allowance of the expenditure in the present case should not be considered as a precedence for allowance of the expenditure. Thus these grounds of the Assessee are allowed."
10. We further observe that the Hon'ble Delhi High Court in the case of CIT vs. Asahi India Safety Glass Ltd (supra) has also dealt with the similar issue, wherein the assessee incurred revenue expenditure towards application software to be run on 'oracle' application and the decision was given in favour of the assessee by observing as under:-
"The test of enduring benefit is not a certain or a conclusive test which the Courts can apply almost by rote. What is required to be seen is the real intent and purpose of the expenditure and whether the expenditure results in creation affixed capital for the assessee. It is important to bear in mind that what is required to be seen is not whether the advantage obtained lasts forever but whether the expense incurred does away with a recurring expense(s) defrayed towards running a business as against an expense undertaken for the benefit of the business as a whole. In other words, the expenditure which is incurred, which enables the profit making structure to work more efficiently leaving the source of the profit making structure untouched, would be an expense in the nature of revenue expenditure. Fine tuning business operations to enable the management to run its business effectively, efficiently and profitably, leaving the fixed assets untouched, would be an expenditure in the nature of revenue ITA No. 879/Ahd/2013 & 3189/Ahd/2015 Bosch Rexroth (India) Limited vs. DCIT AY : 2007-08 -7- expenditure even though the advantage may last for an indefinite period. Test of enduring benefit or advantage would, thus, collapse in such like cases. It would be only truer in cases which deal with technology and software application, which do not in any manner supplant the source of income or added to the fixed capital of the assessee. [Para 9] This is the approach which the Supreme Court has applied even in cases where there is a once for all or a lump sum payment. What is to be seen in the facts of the instant case, is that the Assessing Officer, as a matter of fact, has returned a finding that the expenditure undertaken was for overhauling the accountancy of the assessee and to efficiently train the accounting staff of the assessee. The Tribunal, which is decidedly the final fact finding authority, has after noticing the material on record observed that the expenditure was incurred under various sub-heads, which included licence fee, annual technical support fee, professional charges, data entry operator charges, training charges and travelling expenses. The final figure was a consolidation of expenses incurred under these sub-heads. The Tribunal rightly came to the conclusion that none of these resulted in either creation of a new asset or brought forth a new source of income for the assessee. The Tribunal classified the said expenses as being recurring in nature to upgrade and/or to run the system. [Para 9.1] In the background of the aforementioned findings, it cannot be said that the expenses brought about in an enduring benefit to the assessee. The Assessing Officer was perhaps swayed by the fact that in the succeeding financial year, i.e., 1997-98 (assessment year 1998-99), the amount spent was large. First of all, the extent of the expenditure cannot be a decisive factor in determining its nature. As observed by the Tribunal, the assessee in the relevant assessment year had a turnover of Rs 150 crores and that even without this expenditure it would have continued to achieve the said turnover, though the expenditure in issue would have enabled it to run its business more efficiently. Therefore, the rationale supplied by the Assessing Officer in support of its order is flawed and, hence, it would have to be rejected. [Para 10] Secondly, the mere fact that the Assessing Officer records that the expenditure, in financial year 1997-98 (assessment year 1998-99), was incurred towards what he terms as an 'on-going project' would not ipso facto give it a colour of capital expenditure. A careful reading of the Tribunal's judgment shows that after noticing the submission of the assessee that the expenditure incurred in the said assessment year was for removing deficiencies which were found in the software installed in the earlier assessment year, and that out of a sum of Rs. 1.71 crores, a sum of Rs. 49 lakhs was incurred to modify, customize and upgrade the software installed, while the balance expenditure was used for development and implementation, it returned a finding that the expenses were incurred to upgrade and run the system. In view of these findings, the Assessing Officer discovered an erroneous principle on the basis of which he denied the exemption to the assessee. [Para 10.1] ITA No. 879/Ahd/2013 & 3189/Ahd/2015 Bosch Rexroth (India) Limited vs. DCIT AY : 2007-08 -8- Software is nothing bui another word for computer programmes, i.e., instructions, that make the hardware work. Software is broadly of two types, i.e., the systems software, which is also known as the operating system which controls the working of the computer: while the other being applications such as word processing programs, spread sheets and database which perform the tasks for which people use computers. Besides these, there are two other categories of software, these being: network software and language software. The network software enables groups of computers to communicate with each other, while language software provides with tools required to write programmes. [Para 11] The aforesaid would show that what the assessee acquired through A was an application software which enabled it to execute tasks in the field of accounting, purchases and inventory maintenance. The fact that the application software would have to be updated from time to time based on the requirements of the assessee in the context of the advancement of its business and/or its diversification, if any; the changes brought about due to statutory amendments by law or by professional bodies like the Institute of Chartered Accountants of India, which are given the responsibility of conceiving and formulating the accounting standards from time to time, and perhaps also, by reason of the fact that expenses may have to be incurred on account of corruption of the software due to unintended or intended ingress into the system - ought not give a colour to the expenditure incurred as one expended on capital account. Given the fact that there are myriad factors which may call for expenses to be incurred in the field of software I applications, it cannot be said that either the extent of the expense or the expense being incurred in close proximity, in the subsequent years, would be conclusively determinative of its nature. The Assessing Officer has erred precisely for these very reasons. [Para 12] The contention of the revenue that in the books of account, the assessee had not written off the expense in issue, while in the succeeding assessment year only a part of the expense had been written off and, therefore, the assessee's own understanding of the nature of the expense involved was that it was expended on capital account is be rejected. The reason being: that the treatment of a particular expense or a provision in the books of account can never be conclusively determinative of the nature of the expense. An assessee cannot be denied a claim for deduction which is otherwise tenable in law on the ground that the assessee had treated it differently in its books. [Para 13 & 13.1] Therefore, the aforesaid contention is of no avail to the revenue. [Para 13.2] Therefore, the Tribunal was correct in law in holding that the expenditure incurred by the assessee on account of software and professional expenses was a revenue expenditure. [Para 14]"
11. Applying the ratio of above decision of Hon'ble Delhi High Court as well as decision of Co-ordinate Bench in assessee's own case, we are of the view that ITA No. 879/Ahd/2013 & 3189/Ahd/2015 Bosch Rexroth (India) Limited vs. DCIT AY : 2007-08 -9- the impugned expenditure of Rs.35,30,328/- incurred by the assessee is revenue expenditure, because the same has been incurred towards the purchase of application software and upgradation charges which were required to run efficiently the existing software as well as license charges for using the existing software uninterruptly so as to run the business efficiently. We are, therefore, of the view that the ld. CIT(A) was not correct in confirming the disallowance of Rs.14,21,131/- and we accordingly delete this disallowance. Thus, the assessee's appeal is allowed.
12. Now we take up ITA No.3189/Ahd/2015. The assessee has filed this appeal against the order of the ld. CIT(A)-1, Ahmedabad dated 31.08.2015 confirming the penalty of Rs.4,78,355/- imposed u/s 271(1)(c) by the ld. Assessing Officer on the addition of Rs.14,12,131/-. As we have already deleted the quantum addition of Rs.14,12,131/- while deciding the assessee's appeal in ITA No.879/Ahd/2013, then in such situation, the penalty u/s 271(1)(c) will not survive and we accordingly delete the same.
13. In the result, both the appeals filed by the assessee are allowed.
Order pronounced in the Court on 2nd May, 2016 at Ahmedabad.
Sd/- Sd/-
(S.S. GODARA) (MANISH BORAD)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated, 2/5/2016
आदे श क! &त'ल(प अ)े(षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. संबं धत आयकर आय, ु त / Concerned CIT
4. आयकर आय, ु त (अपील)/ The CIT(A)-
5. (वभागीय &त&न ध,आयकर अपील य अ धकरण ,राजोकट/DR,ITAT, Ahmedabad,
6. गाड5 फाईल /Guard file.
आदे शानस ु ार/ BY ORDER, TRUE COPY सहायक पंजीकार (Asstt.Registrar) आयकर अपील य अ धकरण ITA No. 879/Ahd/2013 & 3189/Ahd/2015 Bosch Rexroth (India) Limited vs. DCIT AY : 2007-08
- 10 -
ITAT, Ahmedabad
1. Date of dictation ......19.04.2016...........
2. Date on which the typed draft is placed before the Dictating Member : ......19.04.2016......
3. Other Member...........
4. Date on which the approved draft comes to the Sr.P.S./P.S.............
5. Date on which the fair order is placed before the Dictating Member for pronouncement...........
6. Date on which the fair order comes back to the Sr.P.S./P.S..........
7. Date on which the file goes to the Bench Clerk.........2/5/2016
8. Date on which the file goes to the Head Clerk...
9. The date on which the file goes to the Assistant Registrar for signature on the order..........................
10. Date of Despatch of the Order..................