Income Tax Appellate Tribunal - Delhi
Honda Siel Cars Ltd., New Delhi vs Department Of Income Tax on 31 October, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI 'C' BENCH
BEFORE SHRI I.C. SUDHIR, JM & SHRI A.N. PAHUJA, AM
ITA no.383 /Del/2012
Assessment year:1999-2000
D.C.I.T.(LTU), V/s. M/s Honda Siel Cars Ltd.,
NBCC Plaza, Pushp Vihar A-1, Sector-40-41, Surajpur,
New Delhi Kasna Road, Greater Noida
[PAN : AAACH 1765 Q]
CO no.264 /Del/2012
Assessment year:1999-2000
M/s Honda Siel Cars V/s. D.C.I.T.(LTU),
Ltd.,A-1,Sector-40-41, NBCC Plaza, Pushp Vihar,
Surajpur, Kasna Road, New Delhi
Greater Noida
(Appellant) (Respondent)
Assessee by Shri Rupesh Jain, AR
Revenue by Shri R.S. Negi, DR
Date of hearing 18-10-2012
Date of pronouncement 09-11-2012
ORDER
A.N.Pahuja:- These cross appeals filed on 24.01.2012 by the Revenue and the corresponding cross-objection[CO] filed on 18.07.2012 by the assessee against an order dated 31.10.2011 of the ld. CIT(A)-LTU, New Delhi ,raise the following grounds:-
I.T.A. No.1074/Del./2008[Revenue]
1. "On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of ``1,09,23,694/- being aggregate amount of expenditure incurred 2 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 as HIPACK-warranty Module HIPACK-Sales Modules and HIPACK-Parts Module.
2. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in holding that the expenditure referred to in ground no.1 above is revenue expenditure.
3. The appellant craves leave to and add to alter, amend or vary from the above grounds of appeal at or before the time of hearing."
I.T.A. No.220/Del./2012[Assessee]
1. "That the CIT(A) erred on facts and in law in confirming the disallowance of ``1,25,11,088/- made by the Assessing Officer, in respect of licence fee paid to Honda Motor Co.Japan(HMCL) for purchase of HIPACK Software Factory Module, Module, holding the same to be capital expenditure.
2. That the CIT(A) erred on facts and in law in holding that functions of the 'Factory Module' part of the software facilitated in production and was directly linked with fixed capital items, without appreciating that said module did not form integral part of the manufacturing process of the assessee.
3. Without prejudice, that the CIT(A) erred on facts and in law in not directing the Assessing Officer to allow depreciation on the aforesaid amount held to be capital expenditure."
2. Facts ,in brief, as per relevant orders are that original assessment in this case was completed on a loss of ``848,61,712/- vide order dated 21.3.2002 u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act) in pursuance to return declaring loss of `14,59,91,000/- filed on 29.12.1999..Inter alia, an amount of `2,34,34,782/- on account of purchase of computer software expenses(HIPACK) was disallowed, being capital expenditure. Subsequently, the assessment was reopened u/s 147 of the Act with the service of a notice issued u/s 148 of the Act on 20.12.2005 and the 3 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 reassessment was completed on a loss of ``5,59,712/-. On appeal, loss was determined at ``53,79,620/- vide order dated 5th March, 2009 in pursuance to order of the ld. CIT(A). On further appeal, the ITAT vide their order dated 26th September, 2008 set aside the issue of software expenses of ``2,34,34,782/- to the file of the AO with the directions to redecide the issue in the light of tests laid down by the Special Bench of the Tribunal in the case of Amway India Enterprises ,111 ITD 112(Delhi)(SB). Accordingly, the assessee pointed out before the AO, the following tests laid down by the Special Bench :-
"(a) where the assessee acquires a computer software/ licence to use such software, the assessee acquires a tangible asset and becomes owner thereof.
(b) where the life of computer software is shorter (say less than two years), it may be treated as revenue expenditure. Any software having its utility to the assessee beyond two years can be considered as accrual of benefit of enduring nature;
(c) Once the test of ownership and enduring benefit is satisfied, the question whether expenditure on computer software is capital or revenue is to be seen on a case to case basis from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business."
2.1 In the light of aforesaid tests laid down by Special Bench, the assessee pointed out the nature of HIPACK software, which had four schedules and according to the assessee, performed following functions:
"1. HIPACK-Factory (User Division- Manufacturing & Purchasing)
a) Bill of Material for car production viz., maintenance of parts list etc.
b) Production scheduling
c) Part ordering for production 4 I.T.A. no.383/Del./2012 & CO no.284/Del./2012
d) Assembly line control
2. HIPACK- Warranty (User Division- After Sales)
a) Customer information
b) Warranty claim processing
3. HIPACK-Sales (User Division- Marketing)
a) finished goods inventory
b) Invoicing to dealers
4. HIPACK-Parts (User Division- Spare Parts)
a) Spare Parts inventory
b) Spare parts procurement
c) Spare parts invoicing"
2.2 The assessee also explained that they had incurred the expenses of ``2,34,34,782/- in connection with the a licensed computer software called HIPACK[Honda Integrated Package] which had been designed by Honda Motors Co. Ltd., Japan[HM] for use by various Honda group companies worldwide. It was explained that thereafter, some modifications were made every year, when ever price was hiked .After considering the submissions of the assessee, the AO concluded as under:-
"........ Thus, it is gathered from the reply of the assessee that (i) assessee acquires a computer software from its holding company M/s Honda Motor Company Limited, Japan and becomes the owner of the package purchased from HMCL like the software being purchased from Microsoft for a consideration. (ii) some modifications were made to the software but the software is not obsolete and (iii) the software is in working in the assessee company and the company ensures it utility in the business as it 5 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 is using since 1999-2000 to 2002-2003 as per reply of assessee. Thus all these conditions has been satisfied for treating the expense as capital expenditure. Beside it, assessee has also cited various case laws, the facts thereof are different from the assessee case. Further, the facts of the assessee company are in commensurate with the guidelines framed by the ITAT Delhi Bench in the case of Amway India Enterprises. Accordingly, the expenses of `.2,34,34,782/- is treated as capital expenditure."
3. On appeal, the ld. CIT(A) adjudicated the issue in the following terms:-
"3. During the course of appellate proceedings the authorized representative of the appellant attended and filed the submissions the gist of which is as under:
"That, during the relevant previous year, an expenditure of Rs.2, 34, 34, 782 was incurred in connection with a licensed computer software called HIPACK (Honda Integrated Package) which had been designed by HMCL (Honda Motor Japan), for use by various Honda group companies world. wide The aforesaid expenditure was claimed as revenue deduction ..
That they had license only to use the aforesaid software and the proprietary, intellectual rights therein continued to vest with HMCL The aforesaid expenditure did not result in acquisition/creation of an asset in the capital field as the appellant had no ownership rights therein The appellant also did not obtain any advantage of enduring nature, since the software was modified by the appellant, right since the beginning, and further, from time to time to suit its needs. Besides, certain new features were added locally in order to make the software relevant/keep the software from becoming obsolete in a fast changing technology scenario. Therefore, there is no case for the said expenditure to be eligible for capital field.
There was no agreement between the appellant and H MCL which binds HMCL to provide upgrades of the aforesaid software, either with or without cost.
That expenditure on software cannot be considered as expenditure in capital field, as the same becomes outdated in a very short span of time in view the rapid changes/advancement in technology, especially 6 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 computer technology. In fact, the HIPACK software being used by the appellant today cannot be said to be the same one as was licensed to the appellant by HMCL during the relevant previous year as it has undergone many changes/modifications/enhancement etc., at the appellant's end.
The appellant submitted various functionalities in detail performed by the use of HIPACK software under its four modules which facilitate appellant daily business operations.
HIPACK-Factory (User Division- Manufacturing & Purchasing) - Cost Rs.12,511,088
a) Bill of Material for car production viz., maintenance of parts list etc.
b) Production scheduling
c) Part ordering for production
d) Assembly Line Control HIPACK-Warranty (User Division- After Sales) - Cost Rs. 3,888,797.
a) Customer information b) Warranty claim processing
HIPACK-Sales (User Division- Marketing) - Cost Rs.3,952,548
a) Finished goods inventory
b) Invoicing to dealers HIPACK-Parts (User Division- Spare Parts) - Cost Rs. 3,082,350
a) Spare Parts inventory
b) Spare parts procurement
c) Spare parts invoicing It is submitted that all the modules / functions performed by the HIPACK software only helped in carrying out their auxiliary business activities like billing, inventory management, claim processing etc. As the HIPACK software was not used within the shop floor premises. Therefore, the said 7 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 software, does not, directly or indirectly, form the integral part of the manufacturing process itself even though supporting the 'Pre-production', 'Production Control' and the 'After Production' activities. It, thus, cannot by any stretch of imagination be considered to be part of profit making apparatus of the appellant.
It is further submitted that various modifications were done in the various modules of HIPACK software in-house by the appellant from time to time Some of the modifications which were carried out are as under:
HIPACK-Factory module FY 1999-2000
- Part Receipt Tag (PRT) format change
- Cost master tax change FY 2000-2001
- Interface with accounting function FY 2001-2002
- Inventory consumption charging function FY 2002-2003
- B shift Exit control for 2 shift operation The above modifications enabled the appellant in bar code generation part receipt tags, updation of various taxes (incl. new levies) in cost masts maintenance of inventory consumption data in HIPACK software, matching order list with PRT enabling validation of suppliers payment and controlling of exit function during 2nd shift operation.
The appellant has submitted that, based· on production plan, HIPACK Factory module monitors the daily production plan, material availability an fixation of ordering plan in relation thereto. Hence, the HIPACK software does not form an integral part of the designing, engineering or manufacturing operations of the assessee. As the Factory module is not used in the shop floor as such. Therefore, it does not form integral part the manufacturing process of the appellant and cannot be considered a part of profit making apparatus of the appellant.
8 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 HIPACK-Warranty module' FY 1999-2000
- Free service coupon FY 2000-2001
- Price history keeping for warranty claims FY 2001-2002
- Warranty claim format revised FY 2002-2003
- CRV warranty claim function The above modifications in warranty module enabled the appellant in tracking of free service coupon claims issued to customers, reimbursement of claims to dealers based on issue price of parts, maintaining information of claims and tracking claims in relation to traded cars.
That HIPACK's Warranty module facilitated in managing customer detail and claim reimbursement which helped in carrying out routine business functions and cannot be considered a part of profit making apparatus of the appellant.
HIPACK-'Sales module' FY 1999-2000
- Interface with accounting system FY 2000-2001
- Single invoice for 4 cars
- Price master change FY 2001-2002
- Interface with 3SMIS FY 2002-2003
- CRV sales function 9 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 The above modifications in sales module enabled the appellant in posting of cars sales from HIPACK to accounting software, invoicing of upto 4 cars in a single invoice, to ensure invoicing as per prevalent prices, dealer accessing information on dispatches made and invoicing of traded cars.
That HIPACK's Sales module facilitated in managing the management of the Appellant's finished goods apart from the billing to dealers which helped in carrying out routine business functions of the appellant and cannot be considered a part of profit making apparatus of the appellant.
HIPACK-'PARTS MODULE'
- Interface with accounting system FY 2000-2001
- In-house parts sales function FY 2001-2002
- Price master change The above modifications in the parts module enabled the appellant in posting of parts sales from HIPACK to accounting software, identification and maintenance of inventory of traded and factory manufactured parts (FMP) and to ensure invoicing as per prevalent prices.
That HIPACK's Parts module facilitated in supplier delivery schedule, inventory management and billing to dealers which helped in carrying out routine business functions of the appellant and cannot be considered a part of profit making apparatus of the appellant.
It is submitted that software was modified/adapted from time to time in order to make it suitable to the business needs of the appellant. Besides, this software would have largely been unsuitable for the needs of the appellant but for the modifications done by the appellant Thus, the HIPACK software did not continue to be used in its original form and shape as such. Therefore, no enduring benefit whatsoever arose from the use of the said software.
10 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 FINDINGS
4. I have gone through the above submissions of the appellant and have also perused ITAT's decision in the case of Amway India Enterprises (111 ITO 112) and AO's order.
The issue is examined in the light of the tests namely enduring benefits and functional tests.
4.1 On going through the details of the 4 software acquired by the appellant from its parent company and their subsequent notification by the appellant it is seen that the 3 softwares namely, (a) Warranty Module (b) Sales Module and (c) Parts Module- relates to those activities, which doesn't form integral part of manufacturing process. These softwares are directly related to the maintenance of books of account and in generating report for MIS etc. and perform the auxiliary function. But the same is not true in respect of the remaining 4th software namely HIPACK-Factory Module".
4.2 The "Factory Module" software as per the details submitted by the appellant performs the "Pre-Production and Production functions". This software among various other functions perform the basic tasks namely
- maintenance of production calendar.
- Master management (Production capacity, deptt. model linkage etc.).
- Fixing of production plans.
- Production status and inquiry.
- Issuance of Design change.
- Issuance of part list for the purpose of ordering etc. 4.3 From the perusal of some of the above functions of "Factory Module" it is very clear that without this module the appellant's production and controlling production schedule can not be syncronised with the operations. This "Factory Module" software in my humble view cannot be said to operate in vaccum or stand alone, rather it is a sin-quo-non or directly linked with the fixed capital items.
4.4 In view of the above discussions, I hold that on the basis of facts available on records and on the basis of tests laid down in the 11 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 case Amway India Enterprise (Supra) the expenses for acquiring the software at S. No. (i) to (iii) below be treated as revenue in nature and expenditure for acquiring software at S. No. (iv) below be treated as Capital in nature.
I. Warranty Module Rs.38,88,797 Revenue expenditure II. Sales Module Rs.39,52,548 Revenue Expenditure III. Parts Module Rs.30,82,350 Revenue Expenditure IV. Factory Module Rs.1,25,11,088 Capital expenditure 4.5 Thus addition of RS.1 ,25,11,088 is confirmed and appellant gets a relief of RS.1 ,09,23,694 (Rs.2,34,34, 782 minus Rs.1,25,11,088)."
4. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A), holding the expenditure in relation to warranty module, sales module and parts module, revenue in nature while the assessee disputed his findings in respect of expenditure incurred in relation to factory module. At the outset, to a query by Bench, the ld. AR on behalf of the asssesee did not submit a copy of agreement where under the said software was licensed to the assessee and instead, after seeking a number of adjournments submitted a confirmation dated 6.9.2012 from HM. The ld. AR on behalf of the assessee while carrying us through the assessment order dated 21.3.2002 & para 55 and 59 of the decision in the case of Amway India Enterprises(supra) contended that the entire expenditure was revenue in nature, the proprietory rights in the software being vested in HM. While referring to para 12 in the decision in the case of CIT Vs. Asahi India Safety Glass Ltd.,203 Taxman 277 (Delhi). the ld. AR argued that since their software was application software as was the case in the said decision while no enduring benefit was received ,accordingly, expenditure was revenue in nature. It was pointed out that with every price increase, software was suitably modified by the assessee itself. In a confirmation dated 6.9.2012 obtained by the assessee from HM, it is mentioned that after studying the need of assessee company, HM granted a license of HIPACK to HSCI, as per invoice no..561-E985-01 dated 19th June, 1998.The aforesaid HIPACK was specifically developed for the usage of HM and its subsidiaries worldwide and the ownership 12 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 vested in with HM only. It is also stated that fee was charged from the respective licensees, who enjoy only a right to use HIPACK while the ownership, and all other Intellectual Property Rights i.e. Copyrights, patent rights and other such interests therein were vested in HM only. Moreover, HSCI was prohibited from:
(i) making any copy or duplication of HIPACK for the purpose other than using HIPACK in the HSCI's business premises,
(ii) assigning, transferring, or otherwise disposing of, HIPACK or any right to use.
5.The ld. DR, on the other hand, while carrying us through the impugned order contended that even if the software was licensed by HM, the assessee was the owner of the said software and derived enduring benefit on account of purchase of aforesaid licensed integrated software utilized in manufacturing apparatus of the assessee ,for more than two years in terms of tests laid down in the decision in the case of Amway India Enterprises(supra). Thus, the entire expenditure was capital in nature and the ld. CIT(A) was not justified in reducing the addition. The ld. DR vehemently argued that the assessee having not furnished a copy of the license agreement ,a confirmation from Honda Motors Company, Japan now placed before the Bench should not be admitted in evidence . While distinguishing the decision in Asahi India Safety Glass Ltd.(supra), the ld. DR argued that the entire expenditure incurred on software was capital in nature.
6. In his rejoinder, the ld. AR pointed out that the software was not utilised in the production and designing of cars. Applying the functional test laid down in para 58 of the judgment in Amway India Enterprises(supra), the entire expenditure was revenue in nature, software having not been used in designing of motor cars but only utilized in maintaining and control of raw material.
13 I.T.A. no.383/Del./2012 & CO no.284/Del./2012
7. The ld. DR while referring to page 4 of the impugned order added that factory module is part of profit making apparatus of the company, being utilized, inter alia, in assembling line.
8. We have heard both the parties and gone through the facts of the case as also the decision relied upon by the ld. AR on behalf of the assessee. The issue before us is as to whether the expenditure on integrated software called 'HIPACK', claimed to have been licensed by HM to the assessee ,is revenue or capital in nature. In the first round, a co-ordinate Bench vide their order dated 26th September, 2008 set aside the issue to the file of the AO with the directions to redecide the issue in the light of tests laid down by the Special Bench of the Tribunal in the case of Amway India Enterprises (supra). In the facts of the said decision, the expenditure had been incurred on obtaining licenses for use of the certain software, claimed to be in the nature of application software. The assessee claimed expenditure to be of revenue nature as the same only facilitated in its day to day operations and it did not result in enduring benefit. The AO rejected the claim, treating the software as part of the plant and machinery and thus, gave enduring benefit to it, inter alia, due to the fact that all the application software purchased by the assessee had long-lasting use of more than three-four years and the same, according to him, thus ,resulted in enduring benefit to it. On appeal, the ld. CIT(A) upheld the action of the AO. On further appeal, the matter was referred to Special Bench. The ITAT(SB) on perusal of various judicial pronouncements observed that there cannot be any specific or precise test, which could be applied conclusively or universally for distinguishing between capital and revenue expenditure. While referring to decisions of the Hon'ble Apex Court in Tata Consultancy Services v. State of Andhra Pradesh [2004] 271 ITR 40 & Associated Cement Co. Ltd. v. Commissioner of Customs 2001 (4) SCC 593, the Special Bench observed that a software, whether customised or non-customised, satisfies all the attributes of being a 'goods' and as such, the same is capable of being bought and sold and becomes an object of trade and commerce. It was further observed that though an assessee 14 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 purchasing 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 , 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 possible use in different areas of business touching 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 assessee. While referring to amendment in the law, with effect from 1-4-2003, granting 60 per cent depreciation on computer software, the Special Bench summarized their conclusions 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.
(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 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 field or its utility to a businessman which may touch either capital or revenue field.
15 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 8.1 The Special Bench further observed that the rights which an assessee acquires by purchasing the disk or magnetic medium containing the computer software with limited or absolute right to use the same by itself would satisfy the requirements of the Plant. The assessee's ownership of limited right over the tangible asset is sufficient to conclude that the assessee is the owner of the Plant. It was also observed that in the case of Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 , Radha Krishna Foodland Ltd. ; Escorts Ltd. v. Asstt. CIT [2006] 8 SOT 167 and Hero Honda Motors Ltd., the conclusion that the expenditure on purchase of computer software was capital proceeded on the footing that the purchase was an outright purchase and that Software was an intangible asset. In the decision in the case of Asahi India Safety Glass Ltd.(supra), Sonata Information Technology Ltd. and IBM India Ltd., however it was held that expenditure on purchase of Computer Software was revenue in nature. Such a conclusion was arrived at by the Tribunal on the basis that the assessees were merely licensees of the Software and had not acquired any ownership rights therein. Inter alia, it was pointed out that various decisions of the Hon'ble High Courts have to be considered as laying down general guidelines and in each case the facts and other surrounding circumstances have to be taken into account before applying the ratio laid down therein.
8.2 Now in the instant case, the assessee is stated to have set up its first manufacturing unit at Greater Noida, commencing operations in 1997 as a joint venture between Honda Motor Company and Usha International of Siddharth Shriram Group. The assessee claimed that it was merely a licensee of the integrated software HIPACK and the right to use the software was subject to the conditions mentioned in the license agreement, which agreement despite repeated adjournments has not been placed before us by the ld. AR on behalf of the assessee nor any reasons have been adduced as to why the said agreement could not be furnished. In the absence of relevant agreement , it is not known as to whether or not there was transfer or parting with secret processes and technical know-how to the assessee nor the relevant terms and conditions in 16 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 respect of use of software are known. The ITAT vide their order dated 26th September,2008 set aside the issue to the file of the AO with the directions to redecide the issue in the light of tests laid down by the Special Bench of the Tribunal in the case of Amway India Enterprises(supra) . In the absence of terms and conditions of the license, it is not known as to how the AO or the ld. CIT(A) could ascertain economic and functional role which the integrated software plays in the business of the assessee. In terms of the tests laid down in the aforesaid decision, no doubt the assessee when purchased a computer software/ licence to use such software, it acquired a tangible asset and became owner thereof. The assessee claimed that the said integrated software had four modules; the impugned order does not reveal nor the ld. AR threw light as to whether or not each of these four modules could function independently. The ld. CIT(A) without examining this aspect concluded that expenditure incurred on three modules other than factory module was revenue in nature while expenditure incurred on factory module was capital. The ld. AR also claimed that the assessee had carried out some modifications. Whether or not the modifications were such that original software lost its utility and if so, what was the role of supplier HM in such modifications ,is also not known. . It has been claimed that, the HIPACK software is integrated that is it contained several applications rolled into one. As already stated whether or not each of the four modules could function independently, has not been examined in the light of tests laid down in the aforesaid decision in Amway India Enterprises.(supra). This software is not available off the shelf. It has been specifically designed by HM for internal use of the said company & its subsidiaries worldwide. The assessee claimed to have commenced operations in 1997 while software was purchased in June 1998.It is not known whether the software was part of process of setting up of the business of manufacturing cars in India. There is no dispute that software is a capital asset. There is no dispute that software is an intangible asset. Hardware, commonly called as computer, is a tangible asset which by itself cannot function. The computer can function only with the help of software. Software is akin to know-how as held by the Hon'ble Rajasthan High Court in the case of CIT v.
17 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 Arawali Constructions Co. (P.) Ltd. [2003] 259 ITR 30(Raj). In this judgment, it has been clearly held that expenditure on purchase of software is a capital expenditure. It may be pointed out that 'computer software', was included in the Table in Appendix I to r. 5 of the IT Rules, 1962, for and from the AY 2003-04 and the said rule provides for depreciation on software at the rate of 60 per cent.
8.3 Here it may be pointed out that there is no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The "once for all" payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common-sense way having regard to the business realities. The ld. AR on behalf of the assessee heavily relied on the decision in Asahi India Safety Glass(supra).In that decision the assessee in the said case acquired a software package prepared by globally known Oracle Corporation, USA. The software covers areas of financial accounting, inventory and purchase. The assessee entered into a license agreement with Oracle titled 'Master Software License and Service Agreement'. It was noticed that the software which the assessee was to install and implement was neither attached to any machinery used in the production nor was a part of any production process. The Tribunal after examining the various clauses of the agreement pointed out that by acquiring the license, the assessee did not acquire any tangible asset, much less any asset which provided any new source of income or which augments the present source of income. The Tribunal ultimately concluded that the expenditure was not in the nature of a capital expenditure. Hon'ble High Court upheld the findings of the Tribunal. As is apparent from the facts in the said decision, the Tribunal analysed various clauses of the agreement and thereafter alone recorded their findings. But in the instant case, despite specific request, the ld. AR did not place a copy of the relevant license agreement before us nor seems to have been submitted before the lower authorities for their examination. In this fact situation, the aforesaid decision in Asahi India Safety Glass(supra) ,in our opinion, does not further the case of the assessee.
18 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 8.4 In Amway India Enterprises(supra) , the Special Bench laid down that the advantage which an assessee derives has to be seen in a commercial sense. Though in a confirmation dated 6.9.2012,submitted before us, Honda Motor Co. Ltd.,Japan stated that it granted license to the assessee and its other subsidiaries worldwide to use HIPACK software, it does not spell out any terms and conditions of the license. In our view ,a number of factors are relevant to determine whether the advantage operates in the capital field or revenue field. The nature of business of the assessee, an understanding of the business functions 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 have all bearing on its treatment. Generally, the more expensive the computer software, the 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. Similarly, the degree of change intended in the way operations are carried out as a result of the computer software. The more radical the changes, the more likely the expenditure will be capital. But all these factors have not examined in the impugned order in the light of decision in Amway India Enterprises(supra).
8.5 In view of the foregoing, especially when the relevant agreement , licensing the aforesaid integrated software has not been placed before us nor the ld. CIT(A) examined as to how the assessee carried on its functions before acquiring the aforesaid integrated HIPACK software and nor even as to whether or not the said software was part of infrastructure for commencing the business operations in India and whether or not each of the aforesaid four modules could function independently in the light of aforesaid economic and functional test laid down in Amway India Enterprises(supra) while confirmation dated 6.9.2012 of Honda Motors Ltd.,Japan was not before the lower authorities, we consider it fair and appropriate to vacate the findings of the ld. CIT(A) and restore the matter to his file with the directions to readjudicate the issue in the light of our aforesaid observations after obtaining a copy of license agreement from the assessee & 19 I.T.A. no.383/Del./2012 & CO no.284/Del./2012 of course after allowing sufficient opportunity to both the parties. Needless to say that the ld. CIT(A) shall pass a speaking order ,keeping in mind the mandate of provisions of sec. 250(6) of the Act, bringing out clearly as to whether or not expenditure on aforesaid integrated HIPACK software is revenue or capital in nature, in the light of various judicial pronouncements, including those referred to above. With these observations, ground nos . 1 &2 in the appeal of the Revenue as also ground nos. 1 & 2 in the CO are disposed of while ground no.3 in the CO does not survive for our adjudication at this stage.
9. No additional ground having been raised before us in terms of residuary ground no. 3 in the appeal of the Revenue, accordingly, this ground is dismissed.
10. No other plea or argument was made before us.
11. In the result, both the appeal of the Revenue and the corresponding CO are allowed but for statistical purposes.
Order pronounced in open Court
Sd/- Sd/-
( I.C. SUDHIR) (A.N. PAHUJA)
(Judicial Member) (Accountant Member)
NS
Copy of the Order forwarded to:-
1. Assessee
2. D.C.I.T.(LTU),NBCC Plaza, Pushp Vihar,New Delhi
3. CIT concerned.
4. CIT (A)-LTU, New Delhi
5. DR, ITAT,'C' Bench, New Delhi
6. Guard File.
By Order, Deputy/Asstt.Registrar ITAT, Delhi