Income Tax Appellate Tribunal - Mumbai
Excel India (P) Ltd., Mumbai vs Department Of Income Tax on 19 August, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
"E" BENCH: MUMBAI
BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER
AND SHRI V D RAO, JUDICIAL MEMBER
ITA No 6451/Mum/2008
(Assessment Year: 2000-01)
Asstt Commissioner of Vs Excel India (P) Ltd,
Income-tax, Central Circle -13, 8th Floor, Lella Galleria,
11th Floor, Andheri-Kurla Road,
Old CGO Bldg, Annexe, Andheri (E),
M K Road, Mumbai
Mumbai -400 020 PAN: AAACM 6824 H
Appellant Respondent
Appellant by: Mrs Vandana Sagar
Respondent by: Shri V D Kothari
ORDER
PER PRAMOD KUMAR
1. By way of this appeal, the AO has called into question the correctness of CIT (A)'s order dated 19th August 2008 for the assessment year 2000-01 on the following grounds which are as follows:
"(i) Whether on the facts and in the circumstances of the case and in law, the ld CIT (A) erred in holding that computer software expenses are revenue expenditure in nature, without considering that, after categorical verification by the AO these expenses were found capital in nature during the assessment proceedings.
2. The appellant craves to leave to add, to amend and/ or to alter any of the grounds of appeal, if need be.
3. The Appellant, therefore, prays that on the grounds stated above, the order of the CIT (A), Central -VII, Mumbai, may be set aside and that of the Assessing Officer restored."
2. The material facts are like this. The assessee is engaged in the business of rendering international freight forwarding and logistics management services. In the course of assessment proceedings AO noted that the assessee had purchased 2 Excel India (P) Ltd computer software aggregating to Rs 13,39,688/-, the details of which are as follows:-
Sr No. Name of the Payee Amount
1 Microsoft Technet Subscription 15,000
2 C D Direct Tax Reckner 2,525
3 Software Maintenance Support 1,90,800
4 TDS Package 57,500
5 Anti Virus Package 1,93,891
6 M S Office 8,88,750
7 Computer Software 500
8 Softlink 27,000
9 Subscription Freight Book 1,431
10 DF 9,900
TOTAL 13,39,688
3. The assessee claimed the above expenditure in the nature of revenue expenditure as, according to the assessee this expenditure had no enduring benefit. It was contended that the software so purchased are either tailor made software for specific usage or as one time utility software. It was also submitted that keeping in mind the limited usefulness and the expenditure incurred on purchase of software are attributable to make running and conducting of business activity, the same is required to be treated as revenue expenditure. The assessee also made elaborate legal submissions in support of his contention that the expenditure was incurred by the assessee on software purchase should be treated as revenue expenditure. None of these submissions, however, impress the AO. He rejected the same and proceed to treat the expenditure as capital expenditure by observing as follows:-
"Assessee's contention that, software are tailor made software for specific usage and has one time utility therefore keeping in mind the limited usefulness and the expenditure incurred on the purchase of software was attributable to the efficient and economical running and conducting of the business activity of the company and therefore the expenditure incurred has been claimed as a revenue expenditure. This contention of the assessee is untrue and by any stretch of imagination it cannot be affirmed that a software was used for clientele basis, even on a prima facie look on the nature of expenses throws clear picture that they are not of tailor made software, rather they are universal software used by any concerns. Thus one judge that the usage is of common in nature and not as contemplated by the assessee.
Similarly the assessee in its submission has agreed that various software undergoes regular up gradations and is not a permanent one time solution.
3 Excel India (P) Ltd The software expense also includes professional charges incurred towards maintenance and installation of system, internet subscription and email facility. In this argument also it can be seen that the initial expenditure is construed to be of capital nature and the subsequent maintenance of software is in nature of upgradation and professional expenses are revenue. In the instant case the expenditure incurred is first time and are in Capital Nature.
To support its contention the assessee further emphasized that assessee acquiring software by way of "Tally Software" for accounting function and that there was no ownership rights attached to such purchase of software. It is a payment, merely for obtaining license for usage of software programs. In this context the assessee's argument is not acceptable for the fact that the accounting package purchased by the assessee could be used for 'n' number of years without any withdrawal of the rights once conferred on the assessee by the software seller company.
The assessee also contended that acquisition of "Capital Assets" for Capital right" means acquiring of any tangible or intangible right which can be used by the purchaser as its assets and it is free to use, modify or dispose off as he feels appropriate. Therefore, it has to be considered as the use charges for the license. The assessee's argument is incorrect as the uninterrupted usage rights is available to the assessee and the benefits accrued is continuous. The right to use the software constitutes a capital nature. The assessee's contention regarding obsolescence or upgradation does not cut any ice because obsolescene/upgradation is not a criterion to determine the capital nature of an asset. Even after introduction of a mere sophisticated variety, the old ones do not loose their utility, though that may be affected to some degree. Besides the option of up gradation is always available with the assessee.
The assessee has relied on plethora of case laws in support of its contentions. On reading such cases there appears to be no nexus or coincidence in the assessee's facts and circumstances of the case and therefore such cases are of no help to the assessee.
In its further submission vide letter dated 24.12.2007 the assessee observed that the company undertakes logistic services which involve receipt and distribution of material on behalf of clients. It is further important to note that each consignment of each of the client requires separate configuration and calculation for storage and distribution services and for calculation of storage space. The company during the years has rendered logistic services to various multi nationals and for each of their shipment which ran into large handling of parcels. On analysis of the software expenses no specific software could be identified to correlate the usage for a particular consignment. Software such as Tally, MS Office, Antivirius Package, TDS software are more or less off the shelf and are for use of whole business (This has multiple usage). In the light of the above the assessee's contention is not acceptable.
4 Excel India (P) Ltd Lastly the assessee has sought help of the amendment made in the Income Tax Rules vide Finance Act, 2004 whereby definition of the assets under heard "Computer" have been amended and now it stated as "Computer including computer software". Here it has to be noted that Depreciation Schedule under the Income Tax Act, provides 100% depreciation in respect of a number of assets most of which are presumed to be fully depreciated in one year but that does not render such assets as revenue outgoing. However it appears that the legislature has included software with computer as capital asset and the relevant rate of depreciation should be allowed legally. Thus in view of the common law though not retrospective, the assessee's moot argument at the time of assessment proceedings that these software expenses are also in the nature of replacement cost which are due to crash of old software, the same is taken congnizance, and are treated as capital expenditure, however as discussed above in view of natural justification though not retrospective it is in the fitness of things to allow 60% as depreciation on the software expenses. Accordingly, the total debit on this account in the P&L Account is Rs 13,39,688/- Out of which 29,356 is treated as revenue and the balance 13,10,332/- is treated as capital expenditure and added to the total income however depreciation @ 60% on this which works out to Rs 7,86,199/- is allowed.
4. Aggrieved by the stand so taken, the assessee carried the matter in appeal before the CIT (A). The Learned CIT (A) in very well reasoned and elaborate order discussed the nature of the software so purchased by the assessee, following the Special Bench decision of this Tribunal in a case of Amway India Enterprises vs DCIT (21 SOT 1) and held that the expenditure in question to be revenue expenditure while doing so the Learned CIT (A), inter alia, observed as follows:-
"5. I have carefully considered the above facts and find sufficient merits in the contentions of the appellant. At the outset, it may be stated here that computer software has been treated as capital asset only w e f AY 2004-05 and the amended provisions are not specifically brought into the statute on retrospective basis. Accordingly, the amended provisions are not applicable to the year under consideration.
"5.1 Now coming to the exact nature of the expenditure incurred, it has to be borne in mind that the appellant has been following a consistent accounting practice of treating a part of software expenses, other than amount incurred on acquisition of an operating system which are expenses off in the year of purchase as revenue while the rest are capitalized. For example, expenditure incurred on purchase of Microsoft Windows Operating System has been capitalized and only expenditure in the nature of replacement or the expenditure on the software purchased with a view to one time utility is 5 Excel India (P) Ltd claimed as a revenue expenditure. Such a contention is fortified by the facts and figures stated in the earlier paras above.
5.2 As regards, individual instances of expenses under dispute, it is evident that all such expenses were related to replacement and up gradation of the existing software and do not consist of first time capital acquisition. The appellant has utilized the services of M/s Novella System and Management Consultants Private Limited for software maintenance and as evident from the copies of bills and vouchers, such expenses are clearly in the nature of maintenance and cannot be considered to be capital in nature. It is seen from the copies of bills that they clearly mention charges for software maintenance support, enhancement as per requirements and branch implementation for various months. The appellant has also filed work report for different months which go to show that the job carried out are purely day to day maintenance only done on regular basis. Likewise, software on TDS is required to upgrade the existing software on account of frequent changes and amendments in the provisions pertaining to TDS liabilities of the taxpayers. It is seen from the copy of bill the TDS software was new, in place of the old existing version. It is also noticed from the appellant had already installed Microsoft software such as MS 97,98 etc, capitalized in the past, which have been upgraded to higher versions during the year. It is seen from the copy of bill that the appellant had acquired two software ie MS Office 2000 and Win Nt Wstn 4.0 Molp C for Rs 8.88 lakh and Rs 9.45 lakh respectively, out of which the later was capitalized and other one was claimed as revenue. Thus, the expenditure incurred pertaining to upgradation of the existing technology in the nature of revenue expenditure.
5.3 In this contention, I would like to narrate the observations and findings in the case of Amway India Enterprises vs DCIT (2008) 21 SOT 1(Del) (Special Bench), where it was stated that in order to decide the nature of expenditure as to whether it is capital or revenue, three tests ie ownership, enduring benefit and functional tests have to be done. When the assessee acquires a computer software or for that matter the licence thereof, this question cannot be decided on the basis of ownership alone but has to be seen from the point of utility to the business and how important an economic or functional role it plays in the business. When the software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where life of software is short (say less than two years), it may be treated as revenue expenditure; any software having utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature.
However, other tests have to be applied and the advantage which the assessee derives from its use has to be seen in a commercial sense and if the advantage which the assessee derives from its use has to be seen in a commercial sense and if the advantage consists merely in facilitating the trading operations to enabling the management and conduct of the business to be carried on more efficiently or more profitably while leaving the fixed assets untouched, the expenditure would on revenue account. Seen in the light of such observations and findings, in the present case, it appears that the 6 Excel India (P) Ltd appellant has merely gone for regular up gradation and maintenance of the existing software so as to run the business activities in more efficient and profitable manner.
5.4 In other case of CIT vs G E Capital Services Ltd (2008) 300 ITR 420 (Del) where also the assessee was using MS Office software which required frequent upgradation, the expenditure was held to be revenue in nature. It was observed that technological changes and the need to upgrade software on regular basis cannot be treated as enduring advantage.
5.5 In the light of above discussion, it is held that the Assessing Officer was not justified in treating impugned expenditure on software as capital in nature as the same were clearly revenue in character. The addition made on this account is deleted."
5. Mrs Vandana Sagar, Learned Departmental Representative invited our attention to Hon'ble Rajasthan High Court judgment in a case of CIT vs Aravalli Construction Co Ltd (259 ITR 30) and submitted that in the light of Hon'ble Rajasthan High Court judgment the expenditure on computer software is required to be deducted as capital expenditure. She also submitted that the nature of software purchased also clearly shows that the benefit obtained from such software is spread over longer period and should therefore be held to be capital expenditure in nature. However, when it was pointed out to the Learned Departmental Representative that Hon'ble Rajasthan High Court judgment in the case of Aravalli Construction Co Ltd (supra) have been duly taken note of in the Special Bench decision of this Tribunal in the case of Amway India Enterprises (supra), and that the CIT (A) has done is to follow the Special Bench decision, Learned Departmental Representative placed her reliance on the order of the AO and also on the judgment of Hon'ble Rajasthan High Court in the case of Aravalli Construction Co Ltd (supra). Shri V D Kothari, the Learned Counsel for the assessee, on the other hand submitted that the software which has been claimed to be revenue expenditure is such that it has a short useful life. It was pointed out that the software purchased is primarily in the nature of replacement and renewals. The Learned Counsel submitted that products like anti- virus software, software for tax deduction at source, software for direct taxes, MS Office Software and such other software are good for use only for a limited period and require constant up gradation and renewals. It was submitted that in the light of 7 Excel India (P) Ltd the Special Bench decision of this Tribunal in the case of Amway India Enterprises (supra) such expenditure are required to be treated as revenue expenditure. We are thus urged to uphold the stand taken by the CIT (A) and decline to interfere in the matter.
6. Having given our careful consideration and having perused the material on record we are of the considered view that the findings of the CIT (A) do not call for any interference from us. As Learned CIT (A) has rightly noted when a software becomes obsolete with technological innovation and advancement within a short span of time, i.e. is less than two years, it may be treated as revenue expenditure. It was so held by the Special Bench in the case of Amway India Enterprises (supra). Whether a particular software is in the nature of revenue expenditure or capital expenditure must depend on the facts of each case. Normally, expenditure on software which require constant up gradation or renewal or for a short useful life is to be treated as a revenue expenditure. It is not the case of the revenue that the software purchased by the assessee are of the operating system or as such it has a long useful life or that the tests laid down by the Special Bench in the case of Amway India Enterprises (supra) has been wrongly applied. In view of this discussion and bearing in mind that the CIT (A)'s has merely followed Special Bench decision and has rightly applied the tests of deciding whether the particular software expenditure is revenue expenditure or capital expenditure as envisage in the said Special Bench decision in the case of Amway India Enterprises (supra). We see no reasons to interfere in the matter, the findings of the CIT (A) are confirmed.
7. In the result, the appeal is dismissed.
Pronounced in the Open Court today on the 26th October 2009.
Sd/- Sd/-
(V D RAO) (PRAMOD KUMAR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Date: 26th October 2009
8 Excel India (P) Ltd
Copy to:-
1) The Appellant.
2) The Respondent.
3) The CIT (A) Central-VII, Mumbai.
4) The CIT- Central-1, Mumbai.
5) The D.R. "E" Bench, ITAT, Mumbai.
By order
/ / True Copy / /
Asstt. Registrar
Chavan* I.T.A.T., Mumbai
9 Excel India (P) Ltd
Sr.N. Episode of an order Date Initials Concerned
1 Draft dictated on 22.10.09 Sr.PS
2 Draft placed before author 22.10.09 Sr.PS
3 Draft proposed & placed before the second Member JM/AM
4 Draft discussed/approved by Second Member JM/AM
5 Approved Draft comes to the Sr.PS Sr.PS
6 Kept for pronouncement on Sr.PS
7 File sent to the Bench Clerk Sr.PS
8 Date on which file goes to the Head Clerk
9 Date of dispatch of Order