Income Tax Appellate Tribunal - Hyderabad
Reliance Global Services (P) Ltd.,, ... vs Department Of Income Tax on 16 July, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'A', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
and
SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 1054/Hyd/2012
Assessment year - 2006-07
The DCIT vs. M/s. Reliance Global
Circle-3(1) Services (P) Ltd.,
Hyderabad Hyderabad
PAN: AABCR5943H
Appellant Respondent
Appellant by: Smt. Anjana Sahu
Respondent by: Sri Mohd. Afzal
Date of hearing: 16.07.2013
Date of pronouncement: 16.07.2013
ORDER
PER SAKTIJIT DEY, JM:
The appeal by the Revenue is directed against the order of the CIT(A), Guntur dated 28.02.2012 for A.Y. 2006-07.
2. The Department raised the following grounds of appeal:
1. The learned CIT(A) erred both in law and on facts of the case.
2. The learned CIT(A) ought to have noticed that the original invoices clearly indicate that the software development expenditure of Rs. 76,30,000 is incurred towards project development, which will have a long and enduring benefit to the assessee and should have held that the said expenditure is capital expenditure.
3. The learned CIT(A) should have upheld the disallowance of lab development charges of Rs.
48,95,925 as the assessee failed to substantiate with documentary evidence that the said expenditure is included in lab maintenance 2 ITA No. 1054/Hyd/2012 M/s. Reliance Global Services (P) Ltd.
============================= charges. The learned CIT(A) ought not to have relied on mere paper books.
3. Ground Nos. 1 and 4 being general grounds do not require any adjudication. In ground No. 2 the Department has challenged deletion by the CIT(A) of an amount of Rs. 76,30,000 added by the Assessing Officer.
4. Briefly, the facts relevant to the issue in dispute are that the assessee is a private limited company engaged in the business of software development export of computer software and in-house training business consultancy. A survey u/s. 133A of the Act was conducted in assessee's own case on 23.1.2006. During the post survey proceedings, the assessee came forward to declare an additional income of Rs. 1 crore for the impugned assessment year. As a consequence of such declaration made, the assessee filed return of income for the assessment year under dispute on 22.6.2006 declaring total income of Rs. 2,46,57,980 after claiming deduction u/s. 10B of the Act of an amount of Rs. 1,37,44,264. The return of income filed by the assessee was initially processed u/s. 143(1) of the Act. Subsequently, however, the assessee's case was selected for scrutiny assessment. In course of the scrutiny assessment proceedings, the Assessing Officer noted that during the year under dispute, the assessee has debited an amount of Rs. 76,30,000 for the first time towards software development expenses. The Assessing Officer further noticing that the assessee has not deducted tax at source on the aforesaid amount claimed as expenditure and further noticing the fact that the payments were made to parties who developed software for the assessee on 'on-site offshore model', the Assessing Officer came to a conclusion that non-deduction of tax at source is in contravention of provisions of section 40(a)(ia) of the Act, 3 ITA No. 1054/Hyd/2012 M/s. Reliance Global Services (P) Ltd.
============================= and, therefore, disallowed the expenditure claimed and added it to the income of the assessee. The assessee being aggrieved of the disallowance made in the assessment order, preferred an appeal before the CIT(A).
5. In course of hearing before the CIT(A), it was contended by the assessee that the software development expenses had been paid to parties who developed software for the assessee on 'on-site offshore model' which is cost effective. It was submitted that this decision of outsourcing of development of software was taken by the management committee, considering the fact that if development of the same software is undertaken by the assessee, it would have cost more than Rs. 100 lakhs. It was contended that the assessee had purchased the required software for the purpose of business from Origin Global Services Pvt. Ltd., for a consideration of Rs. 76,30,000 and the transaction is that of purchase of software and it is not an order for work contract. Hence, the provisions of section 194C are not applicable. It was further submitted that the software purchased is revenue expenditure hence it was correctly debited to Profit and Loss A/c. In support of its contention that the expenditure incurred towards purchase of software is revenue expenditure, it was contended that the software was purchased to enhance productivity and efficiency of the systems and the software acquired gets obsolete in a short span of time and needs to be updated frequently as it is an application software which has a limited span of life, unlike system software. It was submitted that the software acquired by the assessee merely enhances efficiency of the computers used in production by the assessee. In support of such contention, the assessee relied on various judicial precedents.
4 ITA No. 1054/Hyd/2012M/s. Reliance Global Services (P) Ltd.
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6. The CIT(A) on considering the submissions made by the assessee, called for a Remand Report from the Assessing Officer. As can be seen from the discussion made by the CIT(A), in the Remand Report the Assessing Officer agreed with the contention of the assessee that the amount was spent for purchase of software. Hence, the provisions of section 40(a)(ia) of the Act are not applicable. However, the Assessing Officer was of the view that the expenditure incurred is in the nature of capital expenditure, hence cannot be allowed. The CIT(A), however, accepting the contention of the assessee came to a conclusion that since the amount was spent for purchase of application software which has a limited span of life, unlike system software, it has to be allowed as a revenue expenditure.
7. The learned DR submitted before us that the conclusion arrived at by the CIT(A) is bereft of any reason and without any basis, as he has arrived at the conclusion that the software is application software without considering any material or evidence. The learned DR further submitted that the issue is squarely covered by the decision of the ITAT Delhi Special Bench in the case of M/s. Amway India Enterprises vs. DCIT (111 ITD 112) wherein the Special Bench has laid out certain criteria for deciding whether expenditure incurred for acquiring software is revenue or capital expenditure.
8. The learned AR, on the other hand, while strongly supporting the order of the CIT(A), submitted that the Department has not brought on record any material contrary to the finding of the CIT(A) to prove the fact that it is not a revenue expenditure.
9. We have considered the submissions of the parties and perused the material on record. On perusal of the CIT(A) order, 5 ITA No. 1054/Hyd/2012 M/s. Reliance Global Services (P) Ltd.
============================= it can be seen that he has concluded that the expenditure was incurred for purchase of application software which has a limited span of life, unlike system software, hence it could be treated as revenue expenditure. However, on the basis of which material or evidence such conclusion was arrived at by the CIT(A) is not discernible from the material on record. The ITAT Delhi Special Bench in the case of M/s. Amway India Enterprises (supra) after following the ratio laid down by the Supreme Court in the case of TCS AIT-2004-01-SC in 111 ITD 112 has held as under:
"55. In our opinion, the ratio laid down by the Hon'ble Supreme Court in the case of TCS AIT-2004- 01-SC (supra) holding that computer software put in a medium of disk would be goods can only lead to the conclusion that purchase of such disk is acquiring a tangible asset. If the disk, tape or floppy or other electronic medium in which the software is stored is by itself goods, then the assessee who acquires the same, acquires a tangible asset. Computer Software has not been defined in the Act, but in Note-7 to Appendix-I to the I.T. Rules, it has been explained to include computer programme recorded on any disc, tape, perforated media or other information storage device. Therefore computer software (whether in canned form or uncanned form) is goods and a tangible asset by itself. The question whether an assessee by purchase of a disk containing software has purchased a capital asset or not should not, therefore, be viewed from the angle of acquisition of any copyright or any of the bundle of rights comprised in such copy right. An assesses purchasing such a software becomes owner thereof. But the test of ownership in the computer software in the light of the question whether the same is capital or revenue cannot be decided on the basis of ownership test alone but has to be seen from the point of its utility to businessman and to see how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of a computer software and its 6 ITA No. 1054/Hyd/2012 M/s. Reliance Global Services (P) Ltd. ============================= possible use in different areas of business teaching either capital or revenue field or its utility to a businessmen which may touch either capital or revenue field. The manner in which the computer software is used is again peculiar, General mode is to acquire computer software on a license. That by itself will not be sufficient to conclude that the said expenditure is revenue expenditure, if on application of the functional test, it is found that the expenditure operates to confer a benefit in the capital field. On the other hand, some computer software may have a very limited economic life so as to be treated as capital expenditure, though owned by an assesses. Whether expenditure on computer software gives an enduring benefit to an assessee:
56. 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. Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, if can be said that that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. It is also evident from the amendment to the law w.e.f. 1.4.2003 granting 60% depreciation on computer software that even the legislature considers the life of computer software as about two years by providing the higher rate of depreciation @ 60% thereon so as to enable assessee to write off the same to the extent of 84% even when treated as capital asset within a period of two years.
An assessee may own a software outright or be a licensee but the same may operate to confer benefit only in the revenue field and therefore is may have to be regarded as Revenue Expenditure. The decision of the Hon'ble Supreme Court, In the case of Empire Jute Co, Ltd. (supra) lays down that it is not every advantage of enduring nature acquired by an assessee that brings the case within she principle laid down in this test (enduring benefit test). What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the 7 ITA No. 1054/Hyd/2012 M/s. Reliance Global Services (P) Ltd.
============================= 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 on indefinite future. In other words, the functional test would become material and if on application of the same it is found that the expenditure operates to confer benefit in the revenue field, then the same would be revenue, irrespective of the duration of time for which the assessee acquires rights in a software. The period of advantage in the context of computer software should not be viewed from the point of view of different assets or advantage like tenancy or use of know-how because Software is a business tool enabling a businessmen's ability to run his business. Whether the expenditure operates to add the profit earning apparatus of the assessee (Functional Test):
57. The advantage which an assessee derives has to be seen. The nature of advantage has to be seen in a commercial sense. If the advantage is in the capital field then the same would be capital expenditure. If the 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, however, if assets/advantage is part of profit earning apparatus, it is capital.
58. The following factors would be relevant to determine whether the advantage Operates in the capital field or revenue field.
(i) Nature of Business of the assessee. It is necessary to obtain an understanding of the business function or effect of a concern's software. Software normally functions as a tool enabling business to be carried on more efficiently. The scope, power, longevity of such a tool and its centrality to the functions of the business will all bear on its treatment. In the case of M/s SQL Star international Ltd. one of the assessees in the cases referred to the 8 ITA No. 1054/Hyd/2012 M/s. Reliance Global Services (P) Ltd.
============================= Special Bench, the assessee company is engaged in the business of software development as well as running a training center to impart specialized training to the students in software technology. If the software were used in such business to impart training to the students, then the same would be part of the profit making apparatus of the assessee and consequently expenditure on software, capital. Similarly, example of a travel agent can be cited here as an illustration wherein the expenditure incurred on acquisition of a software for the purpose of enabling the assessee to make booking of air tickets would be a capital expenditure because such a software certainly forms part of the profit-making apparatus of the travel agency business inasmuch as the business of air ticket booking is done with the help of that software. Another example which can be considered here is that of acquisition of Turbo Gold software for Rs. 17.61 lakhs by one of the assessee in the present case i.e. M/s Amway India Enterprises. As submitted before us, the said software helps in compression of size of e-mails sent through the Lotus Notes Mailing System and it includes licenses for 150 users who are using Lotus Notes Mailing System and software license for running on its server. If use of this software in the business of the assessee is limited to facilitate merely an effective and fast communication in order to increase its organizational efficiency, the same cannot be treated as forming part of the profit- making apparatus of the assessee. On the other hand, if such software is being used by an assessee engaged in the business of placement agency where the applications from persons seeking jobs are invited through e- mail and are also forwarded to the concerned clients through e- mail, the same may form part of profit-making apparatus of the assessee's business of placement agency and can be treated as a capital asset.
(ii) As a general rule it may be stated that the more expensive the computer software the 9 ITA No. 1054/Hyd/2012 M/s. Reliance Global Services (P) Ltd.
============================= more it is likely to be a central tool of the business and the more enduring is likely to be its effect adding to the profit earning apparatus. If there are associated capital expenditure like purchase of new computer equipment for running the software developed under a project, then it can be considered as capital expenditure. This is especially the case where the new hardware is not merely desirable but necessary for this purpose.
(iii) Degree of associated organisational change;
Similarly the degree of change intended in the way operations are carried out as a result of the Computer software, for example, savings in the number, and changes in the location, of staff used to provide services to customers will have a bearing. The more radical the changes, the more likely the expenditure will be capital. These changes are likely to be most radical when operations previously carried on manually are computerised.
(iv) It has to be borne in mind that computer software industry is of a fast changing nature. Therefore whatever software purchased by an assesses would become outdated much earlier than expected. The assessee has therefore to upgrade his software. An clement of upgrading does not automatically make the expenditure capital. The presence of an element of upgrading, therefore, will not necessarily cause the expenditure in question to be capital.
59. Our conclusions on the issue under consideration thus can be summarized, as under:-
(i) When the assessee acquires a computer software or for that matter the license to use such software, he acquires a tangible asset and becomes owner thereof as held above relying on the decision of Hon'ble Supreme Court in the case of TCS (supra).
(ii) Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time.10 ITA No. 1054/Hyd/2012
M/s. Reliance Global Services (P) Ltd.
============================= It can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. Any software having its utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make the expenditure incurred on software as capital in nature and the functional test as discussed above also needs to be satisfied.
(iii) Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business touching either capital, or revenue Held or its utility to a businessman which may touch either capital or revenue field.
60. Having laid down the criteria for determining the nature of expenditure incurred on acquisition of software, whether capital or revenue, we are of the view that these criteria need to be applied to determine the exact nature of expenditure incurred by the assessees in the present cases for acquiring different softwares. Since this exercise is required to be done in respect of each and every software independently having regard to the criteria laid down above, we are of the view that the matter needs to be restored back to the file of the Assessing Officer for doing such exercise. The AO shall examine the question whether expenditure on computer software is capital or revenue in the light of the criteria laid down above after giving an opportunity of being heard to the assessees. ..."
10. As can be seen from the extracted portion above, the ITAT Special Bench has laid down certain criteria for deciding whether a particular expenditure incurred for acquiring 11 ITA No. 1054/Hyd/2012 M/s. Reliance Global Services (P) Ltd.
============================= computer software is revenue or capital. It is very much evident that the CIT(A) has not decided the issue keeping in view the aforesaid criteria laid down by the ITAT Delhi Special Bench. He has not mentioned what is the exact span of life of the software and whether it satisfies the functional test to be treated as revenue expenditure. We, therefore, considering the totality of the facts and circumstances in the light of the ratio laid down by the ITAT Delhi Special Bench in the case of M/s. Amway India Enterprises (supra), remit this issue back to the file of the Assessing Officer who shall decide the same keeping in view the criteria laid down by the ITAT Delhi Special Bench, as above. Needless to mention, the Assessing Officer shall afford a reasonable opportunity of being heard to the assessee.
11. In ground No. 3, the Department has assailed deletion of an amount of Rs. 48,95,925 by the CIT(A) which was added by the Assessing Officer on account of receipt towards lab development charges.
12. Briefly, the facts are that during the assessment proceedings, the Assessing Officer noticed that during the course of survey, the assessee has submitted certain computer extracted statements as per which the assessee was in receipt of lab development charges of Rs. 48,95,925. In course of assessment proceedings it was noticed by the Assessing Officer that this amount of receipt of Rs. 48,95,925 has not been shown by the assessee as income for the assessment year under dispute. He, therefore, treated the same as undisclosed income of the assessee and added to the total income of the impugned assessment year.
13. The assessee challenged such addition before the CIT(A). It was submitted before the CIT(A) by the assessee that the 12 ITA No. 1054/Hyd/2012 M/s. Reliance Global Services (P) Ltd.
============================= Assessing Officer without giving an opportunity to the assessee to explain or calling for any clarification in the course of assessment proceedings has made the addition. It was further submitted that the assessee's books of account were audited as per the provisions of section 44AB of the Act and the amount of Rs. 48,95,925 is included and reflected under the head of 'lab maintenance fee' of Rs. 1,37,84,523 which forms part of gross income declared by the assessee amounting to Rs. 6,88,22,800. The CIT(A) on considering the submission of the assessee called for a Remand Report from the Assessing Officer. The Assessing Officer in his Remand Report stated that the addition was made as the assessee has not furnished required information. The CIT(A), however, deleted the addition by observing as under:
"7.2 I have considered the submissions made by the appellant, gone through the order of the AO and heard the AR in person. In course of the appellate proceedings, on the last date of hearing, i.e., on 16.02.2012, the AR has filed two Paper Books indicating that lab development charges of Rs. 48,95,925/- is part of lab maintenance charges of Rs. 1,37,86,523 and as such the lab development charges being part of lab maintenance charges, separate addition is not warranted. In the Remand Report the AO has commented that the required information was not provided. Now that the information has been provided, I am of the opinion that the impugned addition was not warranted and as such the AO is directed accordingly."
14. We have heard submissions of the parties and perused the material on record. From the facts and materials on record it is clear that the addition of Rs. 48,95,925 was made as the assessee was not able to substantiate its claim that the said amount has already been included in the gross income declared for the impugned assessment year. In the Remand Report also the Assessing Officer has stated that no information was submitted by the assessee in this regard. The CIT(A), however, 13 ITA No. 1054/Hyd/2012 M/s. Reliance Global Services (P) Ltd.
============================= has deleted the addition by simply accepting the claim of the assessee by observing that the Paper Book filed by the assessee indicates that lab development charges of Rs. 48,95,925 is part of lab maintenance charges of Rs. 1,37,86,523. In our view, the conclusion arrived at by the CIT(A) is not correct as the assessee has failed to reconcile before the Assessing Officer not only at the time of assessment but also during the remand whether actually the amount of Rs. 48,95,925 was included in the lab maintenance charges of Rs. 1,37,86,523 and has been included in the gross income of the impugned assessment year. In aforesaid view of the matter, we deem it just and proper to remit the issue to the file of the Assessing Officer who shall consider the issue afresh after examining the facts and materials on record and that may be produced by the assessee. On examination of the evidence on record, if ultimately the Assessing Officer finds that the sum of Rs. 48,95,925 has actually been shown as income of the year, then no further addition can be made at the hands of the assessee. The Assessing Officer shall afford a reasonable opportunity of hearing to the assessee.
15. In the result, appeal of the Revenue is allowed for statistical purposes.
Order pronounced in the open court on 16th July, 2013.
Sd/- Sd/-
(CHANDRA POOJARI) (SAKTIJIT DEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, dated 16th July, 2013
tprao
14
ITA No. 1054/Hyd/2012
M/s. Reliance Global Services (P) Ltd.
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Copy forwarded to:
1. The DCIT, Circle-3(1), 7th Floor, 'B' Block, IT Towers, AC Guards, Hyderabad.
2. M/s. Reliance Global Services (P) Ltd., Flat No. 26, Reliance Global House, Durga Nagar Colony, Ameerpet, Hyderabad-500 016.
3. The CIT(A), Guntur.
4. The CIT-III, Hyderabad
5. The DR - 'A' Bench, ITAT, Hyderabad