Income Tax Appellate Tribunal - Ahmedabad
Multico Exports Pvt.Ltd.,, Ahmedabad vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "B"
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND SHRI N.S.SAINI, ACCOUNTANT MEMBER
Date of hearing: 19.05.10 Drafted on:19.05.10
ITA No.683/AHD/2008
Assessment Year : 2004-2005
Multico Exports Pvt. Vs. The Commissioner of
Ltd. Income Tax, Income Tax
707, Akik Towers, office-4(4), Navjivan
Opp. Rajpath Club, Trust Building, Ashrama
S.G.Highway, Road, Ahmedabad.
Ahmedabad.
PAN/GIR No. : AABCM9058Q
(APPELLANT) .. (RESPONDENT)
Appellant by : Written submission
Respondent by: Smt. Neeta Shah Sr. D.R.
ORDER
PER N.S.SAINI , ACCOUNTANT MEMBER :-
This is an appeal filed by the assessee against the order of the Learned Commissioner of Income Tax(Appeals)-VIII, Ahmedabad, dated 30.11.2007.
2. Although notice of hearing was served on the assessee, the assessee has preferred not to appear in person or through an Authorised Representative and has filed written submission with a request to consider the same while deciding the appeal.
3. Grounds No.1 of the appeal reads as under:-
-2-"1. The C.I.T.(Appeals) erred in law and on fact while confirming addition for disallowance of software expenses of Rs.1,48,000/- and on the basis of facts and law the same is required to be deleted.
4. The Learned Commissioner of Income Tax (Appeals) has decided this issue as under:-
"2. The first ground is against disallowance of software expenses of Rs.1,48,000/-. The appellant claimed that the software development expenses are routine and recurring business expenditure. It was incurred for the purpose of business. Software programmes have to be changed and upgraded every year. As in I.T. Rules it is provided that computer software is eligible for depreciation @ 60%, the A.O. made disallowance of excess depreciation of Rs.1,48,000/- claimed by the appellant.
2.1. Before me the A.R. submitted that the appellant has purchased software for export documentation, product costing, financial accounting, ISO certification and training expenses of staff. The expenditure was recurring in nature and it required ongoing expenses for its upgradation, therefore, one time expenditure on the same cannot give benefit of enduring nature, thus, the same needs to be allowed as revenue expenditure. The A.R. relied upon the following decisions.
(1) Sumitomo Corpo. India (P) Ltd. vs. CIT(2005) - 1 SOT 91 (Delhi) (2) Business Information Processing Services vs. CIT 106 Tax man 116(JD) (3) Naveen Project Ltd. vs. CIT (2005) 1 SOT 232 (Delhi) (4) ITC Classic Finance Ltd. vs. CIT 112 Taxman 155 (Calcutta) (5) Ajit Kumar C. Kamdar vs. CIT (2005) 1 SOT 183 (Mumbai) (6) CIT vs. Citicorp Overseas Software Ltd. 85 TTJ (Mumbai) 87.
2.2. I have carefully considered the submissions made and the decisions cited by the ld. Authorised -3- Representative. As there is a separate depreciation rate for computer softwares in I.T.Rules, the claim of the appellant is rejected and the A.O's finding is confirmed. Further, the purchase of software has been held as capital expenditure in the following decisions:-
i) Escorts Ltd. -104 ITD 427 (Delhi)
ii) Maruti Udyog Ltd. 92 ITD 119 (Delhi)
iii) Aaravali Construction Co.Pvt.Ltd., (Raj) 259 ITR 30"
5. We have heard the Learned Departmental Representative and perused the materials available on record. In the instant case, the undisputed facts are that the assessee has incurred Rs.3,70,000/- for development and acquisition of certain computer software. The assessee claimed the same as revenue expenditure. The lower authorities have held thee same as capital expenditure and accordingly allowed depreciation @ 60% .
6. We find that the issue under consideration is covered by the decision of the Delhi Special Bench of the Tribunal in the case of Amway India Enterprises Vs. Dy.CIT (208) 111 ITD 112(SB)(Del). The Special Bench after going through plethora of decisions on the issue has held as under:-
"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, 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. It is also evident from the amendment to the law w.e.f. 1st April, 2003 granting 60 per cent -4- 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 per cent thereon so as to enable assessee to write off the same to the extent of 84 per cent 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 it 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 the 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 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 businessman ' 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 -5- 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 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 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-
-6-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 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 assessee would become outdated much earlier than expected. The assessee has therefore to upgrade his software. An -7- 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 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."
Thus, we find that the Special Bench in the above case has laid down the criteria for determining the nature of expenditure incurred on acquisition of software, whether capital or revenue, which should be applied to determine the -8- exact nature of expenditure incurred by the assessee. Since, all the relevant facts required to apply the above criteria is not available on record, in our considered opinion, the matter requires to be restored back to the file of the Learned Assessing Officer for applying the above criteria laid down by the Special Bench of the Tribunal. We therefore, restore the issue back to the file of the Learned Assessing Officer and direct him to readjudicate the issue in the light of the observations made above after allowing reasonable opportunity of hearing to the assessee. Thus, this ground of appeal of the assessee is allowed for statistical purposes.
7. The ground no.2 of the appeal reads as under:-
"2. The C.I.T.(Appeals) erred in law and on fact while confirming addition on rycehas of deduction claimed u/s 80HHC of Rs.4,60,586/- on conjecture and on the basis of facts and legal situation prevailing in the our case the same is required to be deleted."
8. The Learned Commissioner of Income Tax (Appeals) has decided this issue as under:-
"3. The second ground is against addition to income on account of disallowance of deduction claimed u/s.80HHC of Rs.4,60,583/-. The appellant had claimed deduction u/s.80HHC of Rs.4,60,583/-. The A.O. observed that the appellant has ignored the loss incurred in trading export of Rs.16,55,399/-. A survey under 133A was carried out in the premises of Mission Pharma Logistic (India) Pvt. Ltd., and claim of deduction u/s.10 A of that company was rejected by the department. The appellant had exported through Mission Pharma Logistic (India) Ltd. goods worth of Rs.21,24,598/- and had claimed deduction u/s. 80HHC as per sub section 4C of section 80HHC. As -9- Mission Pharma Logistic (India) Pvt. Ltd. was found to be not eligible for claim of deduction u/s. 10A, according to the A.O. the appellant was not eligible for deduction u/s.80HHC to the extent of goods sold to Mission Pharma and he disallowed the claim of deduction.
3.1. Before me the A.R. submitted that during the year the appellant company had turnover of Rs.3.72 crores which consisted of direct export of Rs.3.51 crores and remaining Rs.21.24 lacs were from indirect export to Mission Pharma Logistic Pvt. Ltd. The appellant submitted that along with trading loss of Rs.16.55 lacs the appellant has got export incentive i.e. profit on sale of import license of Rs.20.99 lacs. According to the provisions of section 80HHC if trading profit is loss no deduction for trading export is available but for export incentive the deduction is available as per the provisions of Act and accordingly for calculation of deduction trading loss is not to be deducted from export incentive and deduction u/s.80HHC is to be calculated on export incentive alone. According to the ld. A.R. the Act is itself clear as the proviso to section 80HHC provided that the profits computed under clause (a), (b) or clause (c) of the said subsection shall be further increased by the amount which bears to ninety percent of any sum referred to in clause (iiia), (iiib) and clause (iiic) of section 28 , the same proportion as the export turnover bears to the total turnover of the business carried on by the appellant. It was submitted that nowhere in the Act it has been provided that export trading loss should be deducted from export incentives for calculation of deduction u/s.
80HHC. Regarding the A.O.'s conclusion for rejection of claim of deduction u/s.80HHC based on survey and rejection of claim u/s.10A in the case of Mission Pharma Logistic Pvt. Ltd., the A.R. submitted that appellant had sold goods to Mission Pharma Logistic Pvt. Ltd., during the year under consideration and at the time of sale the said concern was duly registered as a SEZ under Kandla Port Trust and the appellant has satisfied all the conditions as required under sub- section 4C of 80HHC for sale of goods to an undertaking located in SEZ. The appellant had received
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disclaimer certificate for the said amount from direct exporter M/s. Mission Pharma. The benefit under sub section 4C under section 80HHC is available for the year 2004-05 only and according to the provision of section 10A benefit is available only if a undertaking manufacturing and produces only. But by incorporating the 80HHC (4C), the Act clearly approved the export of trading goods to unit availing benefit 10A in SEZ for the assessment year 2004-05.
3.2 I have carefully considered the submissions made and the decisions cited by the ld. Authorised Representative. As the concern Mission Pharma Logistic Pvt. Ltd. has not been allowed claim u/s 10A, the A.O. has rightly rejected claim of deduction u/s.80HHC in respect of sale of goods to the said concern. This ground is dismissed. Further I find that the appellant has got loss from export of trading goods of Rs.18,09,031/- and if 90% of incentive is added i.e. Rs.17,71,211/- still it is loss of Rs.37,820/-. As there is no profit from export as computed by the A.O. it being loss of Rs.37,820/- , no deduction u/s.80HHC is available to the appellant. The Supreme Court in IPCA Laboratory Ltd. vs. CIT (266 ITR 521)(SC)has held that any loss in either component in respect of export of manufactured or trading goods will have to be set off against the other. Where there is a net loss in respect of actual exports without reckoning incentive profits, there will be no right to deduction, though there may be positive profit from exports on account of incentives like profit on sale of import licence, duty draw back etc. This decision was followed in CIT vs. Forbes, Ewart and Piggies (P)Ltd.(269 ITR 94)(Ker). The computation made by the A.O. is found to be correct. Hence the ground of the appellant is dismissed."
9. We have heard the Learned Departmental Representative and perused the materials available on record. In the instant case, the claim of assessee for deduction under section 80HHC was disallowed by the lower authorities. The Learned Commissioner of Income Tax(Appeals) observed that trading loss on export of goods
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Rs.18,09,031/- and even after adjusting of 90% of export incentives of Rs.17,71,211/- there still remains loss of Rs.37,820/-. In view of the above, the Learned Commissioner of Income Tax(Appeals) following the decision of the Hon'ble Supreme Court in the case of IPCA Laboratory Ltd. Vs. DCIT (2004) 266 ITR 521 (SC) and the decision of the Kerala High Court in the case of CIT Vs. Forbes, Ewart & Figgies (P) Ltd. (2004) 269 ITR 94 (Ker) held that no deduction under section 80HHC is allowable to the assessee. We find no material available before us to show that the assessee actually derived any profit from export of goods or merchandise. Thus, we do not find any error in the decision of the Learned Commissioner of Income Tax(Appeals). Therefore, this ground of appeal of the assessee is dismissed.
10. The ground no.3 of the appeal reads as under:-
"3. The C.I.T.(Appeals) erred in law and on fact while confirming disallowance of Foreign Travel Expenses in the tune of Rs.2,42,282/-and on the basis of facts of the case the same is required to be deleted."
11. The Learned Commissioner of Income Tax (Appeals) has decided this issue as under:-
"4. The third ground is against the disallowance of foreign travel expenses of Rs.2,42,282/-. The appellant claimed traveling expenses of Director Mr. Shobhit Tiwary to Mozambique, South Africa for business promotion tour. From the passport the A.O. found that the traveling done by the director was for the period beyond the financial year 2003-04 to the time of Rs.2,42,282/- which was disallowed as not relating to the year under consideration.
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4.1. The A.R. submitted that the same was incurred in the normal course of business and for foreign tour for promotion of company product by company directors. It was submitted that the journey had begun before the end of the accounting year. However as the portion of expenditure related to the subsequent year, the disallowance has rightly been made by the A.O. Hence this ground is dismissed."
12. We have heard the Learned Departmental Representative and perused the materials available on record. In the instant case, Rs.2,42,282/- was disallowed out of foreign travelling expenses by the lower authorities on the ground that the said amounts relates to the travel which was undertaken by the Directors in the subsequent previous year. We find that no material was brought before us to show that expense in question related to the year under appeal. In absence of any such material on record, we do not find any error in the order of the Learned Commissioner of Income Tax(Appeals). Therefore, this ground of appeal of the assessee is dismissed.
13. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order signed, dated and pronounced in the Court on 21st day of May, 2010.
Sd/- Sd/-
(BHAVNESH SAINI) ( N.S. SAINI )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; On this 21st day of May, 2010
Paras
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Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT Concerned
4. The ld. CIT(Appeals), Gandhinagar Ahmedabad.
5. The DR, Ahmedabad Bench
6. The Guard File.
BY ORDER, स᭜यािपत ᮧित //True Copy// (Dy./Asstt.Registrar), ITAT, Ahmedabad Date Initials
1. Draft dictated on 19.05.2010 -----------------
2. Draft Placed before authority20.05.2010 -----------------
3. Draft proposed & placed 20.05.2010 -----------------JM Before the Second Member
4. Draft discussed/approved 20.05.2010 ---------------- JM By Second Member
5. Approved Draft comes to P.S 20.05.2010 ------------------
6. Kept for pronouncement on 21.05.2010 ------------------
7. File sent to the Bench Clerk 21.05.2010 ------------------
8. Date on which file goes to the---------------- ------------------
9. Date of dispatch of Order ---------------- ------------------