Income Tax Appellate Tribunal - Hyderabad
Euroflex Trasnsmissions (India) ... vs Assessee on 12 January, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH ' B ', HYDERABAD
BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND
SHRI CHANDRA POOJARI ACCOUNTANT MEMBER
ITA.159/Hyd/2010
Assessment Year 2006-07
M/s Euroflex Transmissions (I) P Vs The ADIT, Range 2, Hyderabad
Ltd., Hyderabad
(PAN AAA CE 5313 K)
(Appellant) (Respondent)
Appellant by : Shri B.R. Ramesh
Respondent by : Shri A. Tripathy
ORDER
Per Chandra Poojari, Accountant Member:
This appeal preferred by the assessee is directed against the order passed by the CIT(A) -III, Hyderabad dated 12.1.2010 and pertains to the assessment year 2006-07.
2. The assessee raised ground in its appeal is with regard to holding the expenditure incurred on software development as capital expenditure.
3. Brief facts of the case are that the assessee is a company, engaged in manufacture and sale of transmission shaft couplings and spares for the same. It has filed the return of income for the assessment 2006-07 on 22.10.2006 showing income of Rs.6,64,70,480/-. During scrutiny of the return, the assessing officer noticed that the assessee has claimed a sum of Rs.33,55,000/- towards software development charges. In response to query raised by him for furnishing details of such claim, the 2 assessee while stating that the said amount was paid to Sark Systems (I) Ltd., furnished details thereof as under:
1. Towards ERP package implementation charges for customers Master and vendor masters details Rs.3 lakhs
2. Towards ERP package implementation charges for product Masters and component masters details Rs.4.3 lakhs
3. Towards ERP package implementation charges for equity Quotations and sales orders Rs.2 lakhs
4. Towards ERP package implementation charges for packing Slip and delivery note Rs.6.8 lakhs
5. Towards ERP package implementation charges for Quotations, purchase orders and goods receipts Rs.5 lakhs
6. Towards ERP package implementation charges for sales, Engineering and material handling Rs.9.7 lakhs
4. On query raised by the assessing officer, proposing for treating such expenditure as of capital nature, the assessee has submitted that such expenditure is primarily incurred for up gradation of existing software and implementation, in correlation with ERP package. Briefly explaining about the activities carried out by the assessee, the authorised representative submitted that the said expenditure is revenue in nature and is incurred for constant up gradation of software used in CNC machines for manufacture and supply of turbine blades. Stating that there is no scope of getting any enduring benefit in this type of expenditure , the assessee has requested the assessing officer for allowing the same as a revenue expenditure. However, the assessing officer has not accepted such submissions of the assessee. He noted that ERP software integrates various functions of the organization and thus increases the productivity of an organization having a lasting endurable advantage. The authorised representative relied on the decision of Hon'ble ITAT Delhi Bench in the case of Maruti Udyog Ltd. (92 ITD 119) and the decision of Hon'ble Rajasthan High Court in CIT Vs. Arawali Construction Co. (P) Ltd. in ITR 259 ITR 30 and held that such expenditure incurred by the assessee on 2 3 acquisition of software is of capital nature. Accordingly, while disallowing the said claim of the assessee, he held that eligible depreciation thereon shall be allowed to the assessee. He further submitted that for the default on the part of the assessee in remitting the TDS made during the previous year to the Govt. Account. Further, while verifying the claim of depreciation on assets, the assessing officer noticed that the assessee has claimed excess depreciation of Rs.3,826/- on office equipments. Accordingly, he held that the same shall be disallowed. Finally, he arrived at the gross figure after disallowances towards software development charges and excess depreciation claimed on office equipment, at Rs.6,98,29,306. After allowing deduction of Rs.10,06,500/- therefrom, towards depreciation on the software acquired during the year, he computed the income of the assessee at Rs.6,88,22,806/- and completed the assessment u/s 143(3) of the Act.
5. On appeal, CIT(A) observed that computers including computer software constitutes capital asset, allowed the depreciation at specified rate thereon and also observed that there is no merit in the contention of the assessee that the same is not fixed asset involved in manufacturing process and the benefit from the software is for longer period which is of enduring nature. Accordingly, he dismissed the appeal of the assessee. Against this, the assessee is in appeal before us.
6. The learned authorised representative for the assessee relied on the judgement in the case of CIT Vs. Southern Roadways Ltd. (304 ITR
84) (MDS), and submitted that the expenditure incurred on software is a Revenue expenditure and it is to be allowed in full.
7. On the other hand, the learned departmental representative relied on the judgement in the case of CIT Vs. Arawali Constructions Co. (P) Ltd. (Raj.) ( 259 ITR 30) and the order of the Tribunal in the case of 3 4 Maruti Udyog Ltd. Vs. DCIT (92 ITD 119) (Delhi) and according to him it is a capital expenditure and only depreciation is to be granted.
8. We have heard both the parties and perused the materials available on record. In this case, the claim of the assessee was denied only on the reason that the assessee is having benefit of enduring nature from the impugned expenditure. The concept of enduring benefit must be seen with reference to changing economic realities of the business. The expenditure incurred by the assessee on software development is with an intention to carry on its business effectively, efficiently and smoothly and profitability. The software could not work on its own. It has to be fitted to a computer system to work. Such software enhances the efficiency of the operation of the computers. It is an aid in the manufacturing process rather than the tools itself. Therefore, the payment for such application software, though there is enduring benefit, does not result in acquisition of any capital asset and it merely enhances the productivity or efficiency and hence, has to be treated as Revenue expenditure. This view of ours is supported by the recent judgement of the Madras High Court in the case of CIT Vs. Southern Roadways Ltd. (supra.). Hence, we are not considering the other judgement cited by the learned departmental representative. In our opinion, the expenditure on software development in this case is to be considered as Revenue expenditure. Accordingly, we allow the appeal of the assessee.
9. In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court 29. 10.2010
Sd/- sd/-
N.R.S. GANESAN CHANDRA POOJARI
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 29th October, 2010
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Copy forwarded to:
1. M/s Mahesh, Virender & Sriram, CAs, 6-3-788/36&37, Ameerpet, Hyderabad
2. The ACIT, Range 2, Hyderabad
3. CIT(A)-IV Hyderabad.
4. CIT, Hyderabad
5. The D.R., ITAT, Hyderabad.
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