Income Tax Appellate Tribunal - Mumbai
Quest Screening Services P. Ltd ( Now ... vs Assessee on 26 October, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" Bench, Mumbai
Before Shri R.S. Padvekar, Judicial Member
and Shri B. Ramakotaiah, Accountant Member
ITA No. 384/Mum/2010
(Assessment Year: 2005-06)
Quest Screening Services P. Ltd. Addl. C.I.T., Range 9(3)
(now known as First Advantage P. Ltd.) Vs. Mumbai
Interface, 1st Floor, Block No. 7
Link Road, Malad (W), Mumbai 400064
PAN - AAACQ 0706 E
Appellant Respondent
Appellant by: Shri R.R. Vora
Respondent by: Shri Surendra Kumar
ORDER
Per B. Ramakotaiah, A.M.
This appeal by the assessee is against the order of the CIT(A)- XX, Mumbai dated 26.10.2009 in which the assessee is contesting the following two grounds: -
"1) The learned Commissioner of Income Tax (Appeals) erred in confirming the treatment of Software Expenses of Rs.47,36,199/- as Capital Expenditure.
2) The learned Commissioner of Income Tax (Appeals) erred in confirming the treatment of web-hosting expenses of Rs.1,29,598/- as Capital Expenditure.
3) Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) erred in not granting depreciation on the web-hosting expenses, in spite of being treated as Capital Expenditure."
2. Ground No. 1 pertains to the issue of disallowance made on software expenses of `47,36,199/- on which the A.O. capitalised the amount and allowed depreciation at 60%. The CIT(A), after analysing the nature of expenditure under the Rules in which software also included in depreciation schedule for allowance of depreciation, confirmed the action of the A.O. The learned AR referred to the nature of expenditure from the paper book page No. 9 to 11 and submitted that the expenditure in the list upto Item No. 28 pertain to expenditure which was claimed in earlier year but shown in the 2 ITA No. 384/Mum/2010 Quest Screening Services P. Ltd.
books of account as opening balance and the expenditure pertaining to Item No. 29 to 56 pertain to the year of expenditure. It was his submission that the expenditure pertains to the purchase of licences /packages of computer programs which are application programmes/ upgrading the programs. He referred to the details of the nature of expenditure stating that most of the expenditure pertain to M/s. Windows XP Professional and Anti Virus software, Office Win 32, Office 2003, etc. to submit that the nature of expenditure is revenue only and not capital expenditure. Then he referred to the findings of the Special Bench in the case of Amway India Enterprises 111 ITD 112 (Del) to submit that in order to examine the expenditure, as held by the Special Bench, certain guidelines were framed and on the basis of the functional test the expenditure was allowable as revenue expenditure. He then referred to the decision of the Hon'ble Delhi High Court in the case of CIT vs. G.E. Capital Services Ltd. 214 CTR 551 to submit that MS Office software not being a customised software the expenditure incurred by the assessee on purchase of computer software or regular upgradation is revenue expenditure in nature. He also referred to the Hon'ble Madras High Court in the case of CIT vs. Southern Roadways Ltd. 304 ITR 84 on the issue of expenditure incurred for software packages wherein the Hon'ble High Court held it as revenue expenditure and deductible. He also referred to the ITAT judgement in the case of ITO vs. Spice Communications Ltd. 35 SOT 78 (Del) that software expenditure incurred requiring regular upgradation and licence charges for use of software are revenue in nature. Similar view was also expressed by the ITAT in the case of Angel Capital & Debt Market Ltd. vs. ACIT 118 TTJ (Mum) 351. In view of this it was the submission of the learned counsel that the expenditure is revenue in nature hence allowable as revenue expenditure.
3. The learned D.R., however, relied on the order of the A.O. to submit that the expenditure has enduring advantage and as per Rules its depreciation was rightly allowed. He referred to para 4 of the CIT(A)'s order in confirming the action of the A.O.
4. We have considered the issue. As seen from the records the assessee is following the consistent practice of writing off the software for a period of 3 ITA No. 384/Mum/2010 Quest Screening Services P. Ltd.
12 to 24 months in the business of 'comprehensive, systematic, consistent, object, well documented quest research pre-employment screening program'. From the details furnished in the paper book it is noticed that most of the expenditure is towards acquiring licences of Micro Soft XP application packages including some Windows 2000 packages, Office Packages and Anti Virus Packages. It is also noticed that certain licences packages acquired are more than 20 in numbers, which, we were informed that they are purchased for different locations of computers used for assessee's business. It is also further submitted that assessee is writing off the amount as differed revenue expenditure in the books and claiming as revenue expenditure in the year of incurring the expenditure in its income tax computation. As seen from the above details it is noticed that there are certain OS licences as well as application licences. However, the complete details of nature of original OS packages which might have been acquired with computers could not be ascertained as details of acquisition of computers were not on record and the A.O. also has not made up the case that this software is a package alongwith the computer for its installation and operation. As far as the law and principles are concerned the system software expenditure is considered by the Special Bench in the case of Amway India Enterprises 111 ITD 112 (Del) were and summarised as under: -
"The 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.
(ii) Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, 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 also needs to be satisfied.
(iii) Once the test 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 4 ITA No. 384/Mum/2010 Quest Screening Services P. Ltd.
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 field or its utility to a businessman which may touch either capital or revenue field."
5. The same principles were also considered by the various decisions relied upon by the learned counsel in his argument. Without going into examining the principles laid down to the expenditure incurred, we are of the view this aspect require fresh examination by the A.O. to consider the amount whether they are original software packages purchased alongwith the computer for its operation or only additional/upgradation packages for day-to-day operation. Since the functionality test is to be examined with reference to the items of licensed software purchased/ expenditure claimed in the interest of justice, we restore the matter back to the file of the A.O. to examine this aspect in the light of the principles laid down by the Special Bench. He should also keep in mind assessee's consistent accounting practice followed and in case similar expenditure was allowed in earlier years, on consistency principle also the expenditure becomes allowable as the assessee is treating the expenditure as differed revenue expenditure having life of one or two years. The A.O. is free to examine and determine the issue both on facts and on law. Needless to say that the assessee should be given an opportunity to explain the nature of the expenditure incurred. The issue is restored to the file of the A.O. to consider it afresh. Ground is considered allowed for statistical purpose.
6. Ground No. 2 pertains to the treatment of web-hosting expenditure of Rs1,29,598/- as capital expenditure. The A.O. considered that that expenditure is capital in nature but since no asset was created depreciation was not allowed. Before the CIT(A) it was contended that it has not acquired any ownership right in respect of this item as it is merely a licence to use a particular space of server and put its data on the space provided to use it in the business and the amount is allowable as revenue expenditure under section 37(1) of the I.T. Act. The CIT(A) considered that the expenditures were incurred of a particular space of server without which the web-site 5 ITA No. 384/Mum/2010 Quest Screening Services P. Ltd.
cannot be hosted and this amount brings advantage of enduring nature and these expenses are on internet gateway and accordingly depreciation cannot be allowed as no tangible assets have been formed. Accordingly he confirmed the action of treating the expenditure as capital expenditure and also not allowed depreciation.
7. The learned counsel submitted that the assessee is in the recruitment business and online interaction is important for dissemination of information for which web-site was hosted. He then referred to the nature of expenditure, which is mostly pertaining to the expenditure on data transfer and maintenance charges which are in revenue fields. He relied on the decision of the Hon'ble Delhi High Court in the case of Indian Visit. Com 219 CTR 603 wherein the expenditure was treated as revenue expenditure.
8. The learned D.R., however, relied on the orders of the A.O. and the CIT(A) and supported the contentions of the Revenue.
9. We have examined the issue. As seen from the details of expenditure placed on record in the paper book at page 12 and 13 server hosting expenditure paid on 03.08.2004 was only an amount of `3,750/-. After that there are payments of `52,000/- for configuration setup, maintenance, hosting fee and band width data transfer for first quarter paid/payable on 07.12.2004. Another amount of `57,240/- was paid for 4 GB data transfer to M/s. Net 4 India Ltd. on 01.12.2005. There was charges for revamping of website of `13,275/-. In the month of March small amounts were paid towards firewall and server hosting, etc. including maintenance charges. Thus, as can be seen except the amounts of `3,750/- and `13,275/- which directly pertain to the web hosting expenses balance of the expense is revenue in nature being charges paid for maintenance, antivirus and band width charges which cannot be considered as capital in nature. Now even with reference to the web hosting expenditure, Hon'ble Delhi High Court has considered the expenditure whether it is revenue or capital and held as under: -
"Just because a particular expenditure may result in an enduring benefit would not make such an expenditure of a capital nature. What is to be seen is what is the real intent and purpose of the expenditure 6 ITA No. 384/Mum/2010 Quest Screening Services P. Ltd.
and as to whether there is any accretion to the fixed capital of the assessee. In the case of expenditure on a website, there is no change in the fixed capital of the assessee. Although the website may provide an enduring benefit to an assessee, the intent and purpose behind development of a website is not to create an asset but only to provide a means for disseminating the information about the assessee. The same could very well have been achieved and, indeed, in the past, it was achieved by printing travel brochures and other published materials and pamphlets. The advance of technology and the wide spread use of the internet has provided a very powerful medium to companies to publicize their activities to a larger spectrum of people at a much lower cost. Websites enable companies to do what the printed brochures did but, in a much more efficient manner as well as in a much shorter period of time and covering a much large set of people worldwide. The Tribunal has correctly appreciated the facts as well as the law on the subject and has come to the conclusion that the expenditure on the website was of a revenue nature and not of a capital nature. No substantial question of law arises for consideration."
10. In view of this, we are in agreement with assessee's contention that the web hosting expenses does not give rise to any capital asset and the expenditure is in the nature of revenue expenditure. Since the details of expenditure were not examined by the A.O., we are of the opinion that he might have considered the entire expenditure towards web hosting expenditure. As seen from the details of expenditure, most the expenditures pertain to band width and maintenance of website but not website creation as such. Eventhough there is some enduring benefit in establishing a website but this expenditure is revenue in nature as held by the Hon'ble Delhi High Court. In view of this the A.O. is directed to allow the expenditure as revenue expenditure. This ground is allowed.
11. In the result, appeal is allowed for statistical purpose.
Order pronounced in the open court on 22nd December 2010.
Sd/- Sd/-
(R.S. Padvekar) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, Dated: 22nd December 2010
7 ITA No. 384/Mum/2010
Quest Screening Services P. Ltd.
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) - XX, Mumbai
4. The CIT- IX, Mumbai City
5. The DR, "C" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.