Income Tax Appellate Tribunal - Delhi
Motorola India Electronics Pvt. Ltd., ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'E' NEW DELHI)
BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER
AND
SHRI T.S. KAPOOR, ACCOUNTANT MEMBER
I.T.A. No.2977/Del/2012
Assessment year : 2003-04
ACIT, Motorola India Electronics Pvt.
Circle -2, Ltd., (now amalgamated with Motorola
Gurgaon. V. Solution India Pvt. Ltd).,
Motorola Excellence Centre, 415/2,
Sector-14, Mehrauli Road, Gurgaon.
(Appellant) (Respondent)
PAN /GIR/No.AAACM
/GIR/No.AAACM-
AAACM-9343-
9343-D
Appellant by : Shri K.V.K. Singh, Sr. DR
Respondent by : Shri Kanchan Kaushal, C.A.
ORDER
PER TS KAPOOR, AM:
This is an appeal filed by the revenue against the order of Ld CIT(A) dated 19.3.2012. The grounds raised by the revenue are as under:-
1. Whether on the facts and in the circumstances of the case, the Ld CIT(A) was right on facts and in law in annulling the assessment. Whereas the Hon'ble Apex Court in the case of CIT v. PVS Beedies Pvt. Ltd. 237 ITR 13 has held that re-opening of assessment on the basis of factual error is permissible under the law.
2. Whether on the facts and in the circumstances of the case, the Ld CIT(A) was in deleting the addition of `.45,94,516/- by merely
2 ITA No2977/Del/2012 observing that I am of the opinion that the expenditure incurred by the appellant on purchase of software was allowable as revenue expenditure and not capital in nature.
3. Whether on the facts and in the circumstances of the case, the Ld CIT(A) was right in treating the expenditure of `.1,14,86,291/- on purchase of software as revenue. Whereas computer software was introduced as a depreciable asset under Rule 5(1) read with appendix-1 of the IT Rules, 1962 with effect from assessment year 2003-04 and the assessee was eligible to claim only depreciation on such purchase of software.
4. That the appellant craves for the permission to add, alter, delete or amend the grounds of appeal before or at the time of hearing of the appeal.
2. The brief facts of the case are that the case of the assessee was reopened u/s 147 of the Income Tax Act, 1961. The reasons recorded for reopening the assessment are as under:-
"It is seen from the record the assessee claimed the expenditure incurred on software purchased during the previous year amounting to `.1,14,86,291/- as revenue expenditure. Computer soft wares were included as depreciable assets u/s 32 of the Income Tax Act, 1961 read with Rule 5(1) and Appendix-1 of IT Rules w.e.f. assessment year 2003-04. The assessee should have treated the above expenditure as capital expenditure and claimed depreciation as per the amendment from the assessment year 2003-04. The assessee relied on judgment of Ld CIT(A) for assessment year 1996-97. Thus the assessee claimed excess deduction. In view of the above, I have reason to believe
3 ITA No2977/Del/2012 that the income chargeable to tax has escaped assessment for assessment year 2003-04. "
3. The assessee filed objections to the reasons recorded and also submitted that the software expenditure incurred by the company was revenue in nature as it was for the payment of license fee which do not bring any capital asset into existence and moreover, the benefit of expenditure would be consumed by the company over a short period. Further it was submitted that software application in the production process for saleable software was similar to raw material/consumable used in manufacturing industries. The Assessing Officer relying upon Rule 5(1) and Appendix-1 of IT Rules, 1962 read with section 32 of Income Tax Act, 1961 arrived at the conclusion that computer software means any computer programme recorded an any disc, tap, perforated media or other information storage device and therefore, he held that the amount spent was capital expenditure and made the addition accordingly and allowed depreciation @ 60% as applicable in the case of computer software.
4. Dissatisfied with the order the assessee filed appeal before Ld CIT(A) and challenged the reopening of assessment proceedings on the basis that information was already with the Assessing Officer regarding expenses of software and moreover the assessment was completed u/s 143(3) and all necessary information was provided to Assessing Officer during original assessment proceedings. Therefore, reopening after a period of four year was not justified as it amounted to change of opinion. Reliance in this respect was placed on a number of case laws as noted in CIT(A)''s order from pages 11 to 30. On merits of the case, it was submitted that the appellant treats those software purchases as revenue items which are to be utilized in the
4 ITA No2977/Del/2012 development of other softwares. These expenses are in the nature of application software license fees which were payable to the vendors. The expenses representing the software purchase was mainly towards smooth functioning of the business of the assessee and not for acquiring any capital asset. The software was used mainly for updating & rationalizing the existing system and the benefits derived there from were neither permanent nor enduring in nature. The expenditure incurred on software primarily was in the nature of annual renewal of software licenses. The said expenditure pertained to application software tools that were used in regular business of software development and testing. It was further submitted that this can be distinguished from software that may have enduring benefit such as operating platforms that are installed in IT systems and act as a backbone to the IT infrastructure. Applications tools are software that enhances the efficiency of the operations and aids the primary process. It is akin to consumables used for production in the manufacturing industries and did not have any enduring benefit. The expenditure incurred on software written off also included expenditure incurred towards upgrade of certain existing application software. Application software programme have a very short shelf live and have to be upgraded constantly from time to time by adding patches and modules that upgrade the base programme. This does not result in increasing the life of the software but merely increase the capability during the short period of usage. In view of the above submissions it was submitted that for these reasons software expenses were considered as revenue in nature.
5. The Ld CIT(A) on the basis of submissions held that re- assessment proceedings were illegal and also deleted the addition on merits by holding as under:-
5 ITA No2977/Del/2012 "The appellant has filed a copy of assessment order dated 27.3.2006 earlier passed u/s 143(3) of the Income Tax Act, 1961 by ACT, Circle-12- (1), Bangalore. The appellant has filed relevant note enclosed with the return of income of income wherein it was explicitly made clear that expenditure incurred on software purchased during the year amounting to `.1,14,86,291/- has been treated as revenue expenditure. This treatment is in line with the order of Ld CIT(A) dated 13th December, 2000 for the assessment year 1996-97 in the company's own case wherein the Ld CIT(A) had held that the expenditure incurred on software as revenue expenditure. Further vide submission dated 3.3.2006, filed before the Assessing Officer during the course of original assessment proceedings, the appellant had not only submitted that expenditure on purchase of software was claimed as revenue expenditure in nature but had also filed all necessary details as regards copies of accounts for both the Hyderabad Unit and Bangalore Unit showing purchases of software. The reasons recorded by the Assessing Officer prior to issue of notice u/s 148 make it abundantly clear that the Assessing Officer has only referred the claim of expenditure incurred on purchase of software has already disclosed by the appellant in the return of income. It is true that computer software has been treated as depreciable asset under Rule 5(1) of IT Rules, 1962 w.e.f.
assessment year 2003-04 but said rule was already available before the Assessing Officer when the original assessment order was passed on 27.3.2006. The expenditure on software purchased aggregating to `.1,14,86,291/- had been allowed by the Assessing Officer while passing the assessment order u/s 143(3) of the act after due application of his mind and after due 6 ITA No2977/Del/2012 scrutiny of relevant information. Thus all the relevant facts and information were available before the Assessing Officer when the original assessment order was passed and it cannot be inferred that the same had either lost sight of Assessing Officer or there was any failure on the part of appellant to disclose truly and fully all material facts necessary for assessment.
Xxxxxxxxxxxxx xxxxxxxxxxxxx Therefore, on the ground of change of opinion the assessment order under appeal is not legally sustainable and consequently annulled."
6. Regarding merits of the case, the Ld CIT(A) observed that assessee had purchased software for its various units and software purchased were to be utilized in the development of other software and were in the nature of application software license meant for smooth functioning of business and not for acquiring any new capital asset. Application software have a very short life and have to be upgraded constantly from time to time. With effect from 1.4.2003, computers software has been classified as tangible asset under the heading software in Appendix-1 of IT Rules entitled to depreciation @ 60%. The appellant has relied upon large number of decisions in this regard which pertain to the issue whether the expenditure on purchase of software constituted expenditure of capital or revenue in nature and allowable u/s 37 of the Income Tax Act, 1961. All the decisions relied upon pertain to assessment year 2003-04 when the software was not included as plant in Appendix-1. Therefore, a distinction has to be made as to whether software purchased was as initial technology and integral part of purchase of computer, if so, then the expenditure 7 ITA No2977/Del/2012 would be in capital field. Further if the software is purchased for up- gradation as applicable or having user license period of one year then the expenditure would operate in revenue field. I find that the very nature and description of software purchased by the appellant suggest that these were in the nature of application of up-gradation of software. A vital fact which appears to have been over-looked by the Assessing Officer. He further held that since the assessee was eligible for deduction u/s 10B of the Act in respect of Hyderabad Unit and deduction section 80HHE in respect of Bangalore Unit, the making of disallowance would increase the profits from these units and after giving benefits of these sections there will be hardly any amount left which could be any use to the revenue. Therefore, he deleted the addition.
7. Aggrieved, the revenue Is in appeal before us.
8. At the outset, the Ld DR submitted that there was change in law wherein the software has been made a depreciable asset in Rule 5(1) and assessee should have claimed depreciation only instead of claiming software expenses as revenue expenses. He further argued that assessee did not fully disclose the full and correct particulars as assessee knew that w.e.f. assessment year 2003-04 software was a capital asset and therefore he should have disclosed it as a capital asset instead of revenue expenditure. In view of the above argument, the Ld DR argued that the reopening u/s 147/148 was rightly done as assessee had not fully disclosed the complete facts. Regarding merits of the case, he relied upon the order of Assessing Officer.
9. The Ld AR, on the other hand, took us to page 28 of paper book and invited our attention to Note-2 wherein assessee had disclosed the 8 ITA No2977/Del/2012 treatment of software as revenue expenditure. He also invited our attention to page 62 and invited our attention to Point No.3 of letter dated 3.3.2006 written to ACIT, Bangalore in which in reply to the query during original assessment proceedings the assessee had explained the claim of software as revenue expenditure. Our attention was also invited to paper book pages 64 to 67 wherein break up of various software tool purchased during the year was placed. In view of the above, the Ld AR argued that payments were revenue in nature as was evident from the number of payments which were made for various software tools. He further argued that after completion of original assessment proceedings the assessee was issued rectification notice u/s 154 for rectification of mistake and for making disallowance of such software expenses and reply to that was submitted on 26.3.2008. Our attention was also invited to page 72 of paper book and it was argued that after assessee's reply nothing was heard from the Department and suddenly notice u/s 148 was issued. In view of the above arguments, it was submitted that Ld CIT(A) had rightly deleted the additions.
10. We have heard the rival submissions of both the parties and have gone through the material available on record. We observe that original assessment was completed u/s 143(3) and assessee at its own vide note No.2 attached with the return of income had explained the treatment of software expenses as revenue expenses and during assessment proceedings the assessee vide letter dated 3.3.2006 also had replied to the Assessing Officer's query regarding software expenses and had submitted complete details of various software expenses and software tools. From the assessment records, it is apparent that assessee had submitted complete information to Assessing Officer regarding software expenses claimed as revenue 9 ITA No2977/Del/2012 expenses and Assessing Officer after due application of mind had accepted the contentions of assessee. Therefore, reopening after a period of four years without failure on the part of assessee was unjustified and illegal and therefore Ld CIT(A) has rightly held the assessment order as null and void. The reliance of the revenue on the case law of CIT v. PVS Beedies Pvt. Ltd., is not applicable to the facts and circumstances of the present appeal as in that case a fact was overlooked by the Assessing Officer and therefore Hon'ble Supreme Court has held that internal audit party had pointed out a fact and therefore reopening was held to be justified, whereas in the present case nothing was overlooked by Assessing Officer and Assessing Officer on the basis of explanations by assessee had taken a particular view. Regarding merits of the case, we find a number of payments has been made for purchase of software tools and amount ranged from `.10,000/- to `.75,000/-. The number of entries for purchase of software tools is running into 170 as is placed at paper book page 64 to 67. Therefore, on merits also, we are of the considered opinion that expenditure incurred by the assessee was revenue in nature. In view of the above, we do not find any infirmity in the order of ld CIT(A) and hence the appeal filed by the revenue is dismissed.
11. In the result, the appeal filed by the revenue is dismissed.
12. Order pronounced in the open court on 28th day of June, 2013.
Sd/- Sd/-
(RAJPAL YADAV) (T.S. KAPOOR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dt. 28.6.2013.
HMS
10 ITA No2977/Del/2012
Copy forwarded to:-
1. The appellant
2. The respondent
3. The CIT
4. The CIT (A)-, New Delhi.
5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy.
(ITAT, New Delhi).
Date of hearing 1.5.2013 Date of Dictation 24.6.2013 Date of Typing 24.6.2013 Date of order signed by 28.6.2013 both the Members & pronouncement. Date of order uploaded on net & sent to the Bench concerned.