M/S AXA BUSINESS SERVICES PVT LTD ,BANGALORE vs. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-1(1)(1), BANGALORE

This appeal by the assessee is against the order dated 17.11.2017 of the CIT(Appeals)-1, Bengaluru relating to assessment year 2013-14.

The only issue that arises for consideration in this appeal is as to, whether the CIT(Appeals) was justified in sustaining disallowance of Rs.7,21,181 for software expenses claimed as revenue expenditure and deductible while computing business income of the assessee.

The assessee is a company engaged in the business of providing ITeS, BPO services, trading etc. In the course of assessment proceedings, the AO noticed that the assessee had debited a sum of Rs.2,18,19,129 towards software expenses. The AO called upon the assessee to show cause as to why the aforesaid expenses should not be treated as capital expenditure and disallowed and added to the total income of assessee. The assessee claimed that the expenses were revenue in nature and also gave a break-up of the software expenses which were claimed as deduction:-

The AO took the view that since software expenses were classified as a block of asset under the head ‘Computer including computer software’, expenditure on computer software had to be treated as a capital expenditure. The AO, however, allowed depreciation @ 60% on the computer software expenses and thereby disallowed 40% of the expenses claimed by the assessee, which resulted in an addition of Rs.1,52,73,390 to the total income of assessee.

Before the CIT(Appeals), the assessee gave a break-up of the expenses and details of software purchased which were as follows:-

The assessee relied on certain judicial pronouncements for the proposition that SAP maintenance charges, annual maintenance charges, application maintenance charges, support charges, IT advisory charges and SAP hosting services should be treated as revenue in nature given that the expenditure had been incurred on the maintenance of ERP package. The CIT(A) held that Charges for application support and maintenance of application such as workflow applications and intranet applications and charges for advisory services related to IT should be allowed as revenue expenditure. The CIT(Appeals) took the view that expenditure to the extent of Rs.81,52,209 which was incurred towards Microsoft EAS licence renewal and AXABS for the period from 1.6.2012 to 30.11.2012 was paid towards licence renewal and therefore the said expenditure which was only for part of the relevant financial year would not cause any enduring benefit to the assessee and therefore to this extent has to be regarded as revenue expenditure. This item of expenditure is listed as item No.3 in the chart given above. With regard to the remaining expenditure, the CIT(Appeals) held that they have to be regarded as expenses incurred towards software acquisition with perpetual licence and therefore those expenses have to be capitalized and assessee can claim only depreciation. The CIT(Appeals) thus allowed the claim of assessee in part.

Aggrieved by the action of the CIT(Appeals) in not allowing the entire expenditure as deduction as revenue expenditure, the assessee is in appeal before the Tribunal.

The ld. counsel for the assessee firstly submitted that the assessee had given complete details of the software expenses and in this regard drew our attention to pages 96-97 of assessee’s PB, which is given as Annexure-I to this order. He drew our attention to the Invoice in support of the details of software expenses wherein the description of the nature of expenses have been given. His first submission was that going by the description, the expenditure incurred was in the nature of licence which only helped and facilitated the assessee in carrying out the business operations and does not provide any enduring benefit. It was submitted that the expenses were maintenance & support charges and cannot by any stretch of imagination be treated as capital expenditure.

The ld. DR relied on the order of CIT(Appeals).

We have considered the rival submissions. We find that despite all the details having been filed by the assessee before the CIT(Appeals), the CIT(Appeals) has not considered those submissions with regard to the sum disallowed by the AO, except the sum of Rs.81,52,209 which was incurred towards Microsoft EAS licence renewal of AXABS software. The claim made by the assessee in respect of remaining items of expenditure was that they were of similar nature in the form of licence and support services. This submission has not been dealt with by the CIT(Appeals). In these circumstances, we deem it fit and appropriate to set aside the order of CIT(Appeals) on this issue and remand the same to the ld. CIT(Appeals) for passing a speaking order on the claim of assessee for deduction in the light of evidence filed by assessee. The CIT(Appeals) will afford opportunity of being heard to the assessee.

The appeal of assessee is accordingly treated as allowed for statistical purposes.