Income Tax Appellate Tribunal - Delhi
Bharti Cellular Ltd.,, vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'C' : NEW DELHI
BEFORE SHRI C.L.SETHI AND SHRI R.D.RANJAN
ITA No.395/Del/2004
Assessment Year : 1998-99
Bharti Cellular Limited Vs. Jt. Commissioner of Income Tax,
D-184, Okhla Industrial Area Special Range 14,New Delhi.
Phase-1, New Delhi.
PAN AAACB0874C
(Appellant) (Respondent)
Appellant by : Shri J.C.Bhalla, A.R.
Respondent by : Shri L.M.Pandey, CIT DR
ORDER
PER RANJAN, AM :
This appeal by the assessee for the Assessment Year 1998-99 arises out of order of ld. CIT(A)-V, New Delhi.
2. The only issue for consideration relates to disallowing the computer software expenses amounting to Rs. 2,75,62,703/- on the ground that the same were capital in nature. The Assessing Officer while completing the assessment relying on the order for Assessment Year 1997-98 observed that the software purchased by assessee had been used as part of technology required for billing and on Oracle for financial accounting. Such a large expenditure could not be incurred for a short period of time, therefore, the expenditure incurred was capital in nature.
3. On appeal, the ld. CIT(A) upheld the disallowance by observing that softwares were not as temporary as had been made out by the assessee. The software remained in service for several years. He observed that the assessee had incurred expenditure on acquisition of sophisticated software and, therefore, their use was for more than a year and hence, the same was capital in nature.
24. Before us, the ld. A.R. of assessee submitted that the issue has been decided by the I.T.A.T. in the light of decision of Special Bench in the case of Amway India Enterprises v. DCIT 111 ITD 112. He further submitted that the I.T.A.T. Delhi Bench-B for Assessment Year 1997-98 while deciding the issue has examined each and every item and has decided whether they were expenditure in revenue field or in capital field. Only in respect of certain amount, the matter was remanded to Assessing Officer with the directions to examine the case in the light of decision of Special Bench in the case of Amway India Enterprises (supra). On the other hand, the ld. Sr. D.R. supported the order of ld. CIT(A).
5. We have heard both the parties and gone through the material available on record. The I.T.A.T. Special Bench Delhi in the case of Amway India Enterprises v. DCIT (supra) in para 58 and 59 has laid down the criteria as to whether the expenditure was revenue in nature or capital expenditure. Para 58 and 59 are reproduced as under:
"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 cenrtrality 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 assesses in the cases referred to the 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 3 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 assessees 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 more it is likely to be 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 organizational 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 4 capital. These changes are likely to be most radical when operations previously carried on manually are computerized.
(iv) It has to be borne in mind that computer software industry is of a fast changing nature. Therefore whatever software purchased by an assessee would become outdated much earlier than expected. The assessee has therefore to upgrade his software. An element 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, it an 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 function test becomes more important and relevant because o the peculiar nature of the computer software and its possible use in different areas of business touching either capital or revenue field or its utility 5 to a businessman which may touch either capital or revenue field."
Since the issue is covered by the decision of Special Bench, we set aside the matter to the file of the Assessing Officer with the direction to examine the nature of expenditure in the light of decision of Special Bench in the case of Amway India Enterprises (supra). The Assessing Officer will also keep in mind the decision of I.T.A.T. for Assessment Year 1997-98 while arriving at the conclusion whether the particular expenditure is in revenue field or in the capital field but the decision has to be in the line with the decision of Special Bench(supra). The Assessing Officer will decide the issue after affording the assessee a reasonable opportunity of being heard.
6. In the result, appeal filed by the assessee is allowed for statistical purposes.
Decision pronounced in the open Court on 27th November, 2009.
Sd/- Sd/-
(C.L.SETHI) (K.D.RANJAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 27.11.2009.
PSP
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
Deputy Registrar