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Income Tax Appellate Tribunal, AHMEDABAD ‘D’ BENCH, AHMEDABAD
Per Pramod Kumar, Vice President: 1. By way of this appeal, the assessee appellant has challenged correctness of the order dated 18.07.2014 passed by the learned CIT(A)-I, Baroda in the matter of assessment under section 143(3) of the Income-tax Act, 1961, for the assessment year 2009-10.
Grievances raised by the appellant are as follows :-
The Ld. Commissioner of income Tax (Appeals)-I, Baroda has erred in law and in facts in holding that the expenditure incurred in obtaining the license to use the SAP software programme is a capital asset acquired.
The Ld. CIT(A)-I, Baroda has further erred in law and in facts in rejecting the claim of expenditure of Rs.71,53,809/- incurred on obtaining the license to use the SAP software programme as revenue expenditure and upholding the action of the Ld. A.O. in allowing depreciation on such cost. This has resulted into a disallowance of Rs.28,61,524/-. The claim of the appellant is prayed to be allowed.”
ITA No. 2737/Ahd/2014 Assessment Year: 2009-10 Page 2 of 6 3. The assessee is engaged in the business of manufacturing and trading of water pump, industrial and chemicals pump, and accessories. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed deduction of Rs.71,53,809/- on SAP-ERP (Enterprise Resource Planning) Software developed by IBM. The Assessing Officer was of the view that as it results in enduring advantage, this expenditure should be treated as a capital expenditure and only depreciation can be allowed, as a deduction in computation of business income, in respect of the same. The reasoning adopted by the Assessing Officer was as follows:-
“5.1 I have considered the submissions of the assessee. However, I am not in agreement with the analysis of position of law as appreciated by the assessee company. The utility of the software SAP-ERP, for the up-gradation and development of which, the assessee has incurred an expenditure of Rs.71,53,809/-, is an online application enterprise resource planning (ERP) software which has been developed by IBM (Germany). The said application software provides for standard solution for many of the business processes and operations of the assessee such as manufacturing, material management, sales and distribution, financial management etc. On an appreciation of these facts a clear inference gets drawn that the assessee has acquired a new advantage of enduring nature in such software procured by it.
5.2 However, since with effect from 01.04.2003, computer software has been classified as intangible asset under the head “Plant” in Appendix-I to income- tax Rules, 1962, the assessee is entitled to depreciation at the rate of 60% on the said capital expenses of Rs. 71,53, 809/-. In view of the above discussion, the entire expenditure of Rs.71,53,809/- is treated as capital expenditure for intangible assets. It was also proposed that this expenditure is to be treated as expenditure for acquiring intangible assets (right to use and exploit particular software).”
Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) confirmed the stand of the Assessing Officer, and observed as follows:-
I have considered the facts of the ease as well as the order of the AO and the submission of the AR of the appellant. The only ground of appeal of the appellant is that on the facts and in the circumstances of the case and in law, the Ld. AO has erred in making a disallowance of Rs. 28,61,524/- by treating the revenue expenditure incurred on SAP-ERP up-gradation & maintenance fees of Rs.71,53,809/- as capital expenditure and thereafter allowed depreciation @ 60% treating the same as intangible asset. As per this ground of appeal the impugned disallowance, being made in complete disregard of the available material facts and law, is therefore, prayed to be allowed. With regard to this ground of appeal, the AR of the appellant in his submission dated 14/07/2014 as filed during appellate proceedings and as is also reproduced in earlier paragraph has mainly stated that it is in the business of manufacture of industrial pumps, accessories etc and is a subsidiary of ITT Corporation of USA which is a large Corporation. As per the AR, the company
ITA No. 2737/Ahd/2014 Assessment Year: 2009-10 Page 3 of 6 is a world leader in the segment of water pumps for industrial use etc. As per the AR, the products manufactured by the Appellant Company are also of the best quality standards and have to be constantly upgraded. As per the AR, the Appellant Company has to ensure the compliance with the best norms of manufacturing processes and systems.
5.1 It is submitted by the AR that in the process of constant up-gradation, the appellant has incurred an expenditure of Rs.71,53,809/- on procuring licence for use of ERP Software for use in the manufacturing process by the company. As per the AR, the licence granted to the company is for use of the software and that the software does not become the asset or property of the company. As per the AR moreover, due to constant change and up-gradation in the field of software development, the usefulness of the software is short, lived and that the same is required to be constantly up-graded.
5.2 Considering the above, aspects, it is pleaded by the AR that the expenditure of Rs.28,61,524/- is rightly claimed as revenue as against the action of the Ld. AO in treating the same as capital expenditure. The AR has relied upon decisions of various Hon'ble Courts including the decision of ITAT Ahmedabad in the case of CIT vs. Power Build Ltd in ITA No. 1811/Ahd/2007 dated 05/03/2010.
5.3 But the above entire submission of AR of the appellant is not found to be tenable. It is held that w.e.f. 01/04/2003 computer software has been classified as tangible asset under the head "Plant" in Appendix-I to Income tax Rule 1962. As per Appendix-I, table of rates at which depreciation is admissible which includes computer including software, As per Notes, below the table of rates at which depreciation is admissible on tangible assets (i.e. as per Appendix-I) it is clarified that 'Computer software means any computer program recorded on any disc, tape, performed media or other Information storage device. In view of this the claim of the appellant that expenditure of Rs.71,53,809/- on SAP R-3 be allowed as revenue expenditure is not acceptable. Thus, the action of the AO treating this expenditure of Rs.28,61,524/- as capital expenditure is hereby confirmed. Thus, the ground of appeal of the appellant is dismissed.”
The assessee is not satisfied and is in appeal before us.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
We find that the issue in appeal is now covered in favour of the assessee, by Hon’ble Madras High Court’s judgment in the case of CIT vs. Lakshmi Vilas Bank Ltd [(2018) 97 taxmann.com 105 (Mad)] wherein Their Lordships have, inter alia, observed as follows:- “2. The following substantial question of law has been framed in both the appeals:
ITA No. 2737/Ahd/2014 Assessment Year: 2009-10 Page 4 of 6 'Whether on the facts and in the circumstances of the case the tribunal was right in holding that software expenditure is to be treated as a revenue expenditure and not as a capital expenditure? '
The assessee claimed that they had used software as an apparatus and with that carried the business of banking and they claimed it as revenue expenditure. The Assessing Officer rejected the claim of the assessee stating that the expenditure is capital in nature as it give an enduring benefit. For the Assessment Years 2000-01 and 2001-02, the Assessing Officer has referred to a letter given by the assessee stating that the software used would benefit the assessee in enhancing the performance and that too, for a considerable period of time. On appeal before the Tribunal, the assessee contended that in view of the advanced technology, the software becomes obsolete within short intervals. Further the software purchased were not customer made but one as could be used by anyone and the assessee has only a right to use. The assessee made an alternate submission that if it is treated as capital expenditure, depreciation as applicable to computers also should be granted. The Tribunal, on an appeal filed by the Revenue, followed the decision of Honourable Division Bench of this Court in CIT v. Southern Roadways Ltd. [2008] 304 ITR 84/[2009] 183 Taxman 234 (Mad.).
Mr. T. Ravikumar, learned Standing Counsel for the Revenue, placed reliance on the decision of the Delhi High Court in Bharti Televentures Ltd. v. Addl. Jt. CIT [2013] 29 taxmann.com 326/213 Taxman 320.
We have gone through the facts of the said case and we find that in the said case, the assessee was a telecom operator. After scrutinizing the lease agreement, the Assessing Officer noted that the cost of plant and machinery given on lease by the assessee was reflected in the balance sheet of the assessee under the head 'plant and machinery given on lease' and that apart, the assessee has incurred expenditure towards installation of plant and machinery and in addition to it, it had incurred expenditure towards software expenses. The assessee claimed the installation expenses as deduction debiting it to the profit and loss account and the software expenses were treated in the accounts as deferred revenue expenditure, which was written off in the previous order. The question arose as to whether the expenditure has to be treated as revenue expenditure or capital. The assessee contended that the software was a pre-designed software and not customized to suit its particular requirement. Considering the said factual position, the Tribunal analysed the terms of the contract and found that the software as well as hardware were made an integral part of the arrangement and the software apparently caters to the hardware and it is necessary for the kind of software to cater to diverse activities such as billing regarding user and analyzing such like activities to promote speed and efficiency and the parties chose to have a composite arrangement is one factor which the Tribunal was entitled to take into consideration. In our considered view, the decision in Bharti Televentures Ltd. (supra) is not applicable to the case on hand as there is no material before the Tribunal or before the Assessing Officer as was pointed out in the said case. As held by the Honourable Supreme Court in Empire
ITA No. 2737/Ahd/2014 Assessment Year: 2009-10 Page 5 of 6 Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 there may be cases where expenditure, even if incurred for obtaining advantage, of enduring benefit, may, none-the-less, be on revenue account and the test of enduring benefit may break down. It is further held that it is not every advantage of enduring nature acquired by an assessees that brings the case within the principle laid down in this test and 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 an indefinite future. We are inclined to accept the submission made by the assessee before the Tribunal that in view of the advanced technology software become obsolete within short intervals. Therefore, the Tribunal rightly applied the decision in the case of Southern Roadways Ltd.
The appeals are dismissed. The substantial question of law is answered in favour of the assessee and against the revenue. No costs. Connected miscellaneous petitions are closed.”
No contrary views from Hon’ble Courts above have been brought to our notice. Respectfully following the esteemed views of the Hon’ble Madras High Court in the case of Lakshmi Vilas Bank (supra), we delete the impugned disallowance of software expenses. The assessee gets the relief accordingly.
In the result, the appeal is allowed in the terms indicated above. Pronounced in the open Court today on the 4th day of March, 2019.
Sd/- Sd/-
Justice P P Bhatt Pramod Kumar (President) (Vice President) Ahmedabad, dated the 4th day of March, 2019 Bt*
Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) DR (6) Guard File
By order True Copy
Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad