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Income Tax Appellate Tribunal, DELHI BENCHES : “I-2” NEW DELHI
Before: SMT DIVA SINGH & SHRI L.P. SAHU
PER SMT. DIVA SINGH, JUDICIAL MEMBER
The present appeal filed by the assessee is arising out of the final assessment order dated 30.09.2010 u/s 143(3) r.w.s 144C in pursuant to the direction of the Dispute Resolution Panel (hereinafter referred to as “DRP”) dated 27.09.2010.
The sole issue which we are called upon to decide is Ground No.26 which reads as under:-
“That on facts and in law, the AO/DRP erred in restricting the depreciation on license fees paid for the use of computer software to 25% of written down value as applicable to intangible assets and holding that such items do not qualify as computer software, thereby reducing the depreciation allowance by Rs.50,78,450/-.” 3. For the sake of completeness, it may be appropriate to bring out that the order dated 8.4.2011 of the Co-ordinate Bench in 17th April, 2014 in MA 103/Del/2011. As would be evident from the para 7 of the following extract of the order passed by the Co-ordinate Bench that the partial recall of the order was not objected to by the Revenue. For ready- reference, the relevant extract is reproduced hereunder for ready-reference:-
“6. Learned counsel of the assessee pointed out that in para 21 and 21.1 of the order of the Tribunal in question, it has been mentioned that no particular argument was made by the Id. counsel of the assessee, hence, ground no. 26 of the assessee was dismissed. The counsel further contended that the assessee submitted detailed oral and written arguments on the issue of ground no. 26 raised by the assessee against the orders of the authorities below which restricted the depreciation on license fees paid for use of computer software to 25% of the written down value but the ground was dismissed by observing that no particular argument has been made by the Id. counsel of the assessee which is factually incorrect and a mistake apparent on record. Ld. counsel of the assessee placed a copy of written arguments submitted during the hearing of the original appeals before IT AT 'G' Bench.
7. Replying to the above, Id. DR submitted that if arguments and submissions of the assessee have not been considered then he is unable to respond to this allegation and if it is found just and proper, then he has no serious objection if order in question of the Tribunal is recalled only for adjudication of this limited issue.
In view of above arguments of both the sides, we are of the considered opinion that despite the fact that written and oral arguments were advanced by the assessee, the author of the order of the Tribunal dated 08.04.2011 (supra) in para 21.1 at page 55 of the order observed that no particular argument has been made by the Id. counsel of the assessee and ground no. 26 of the assessee has been dismissed denying relief for the assessee. This is an apparent mistake cropped in paras 21 and 21.1 of the order of the Tribunal. In the light of this very fact, the Id. counsel of the assessee submitted written and oral arguments during the hearing of the original appeal, which deserves to be rectified by recalling the order for this limited purpose. Therefore, second issue of the assessee is accepted and we order that the observations and findings of the Tribunal in para 21 and 21.1 of the order in regard to ground no. 26 in of the assessee for AY 2006-07 are set aside and order in issue is recalled for this limited purpose and for fresh adjudication by regular bench. Before we part, we again make it clear that we are recalling the order of the Tribunal for the issue involved in ground no. 26 of the assessee for the limited purpose and upto aforementioned extent.”
In the said background inviting attention to ground No. 26 raised by the assessee in the present appeal the Ld. AR submitted that the issues raised may be decided in the light of the order of the Special Bench in the case of the Amway India Enterprises vs. DCIT (2008) (SB) 301 ITR 1 (Del). Specific attention was invited to para 61 and 62 of the said order.
The Ld. CIT(DR) on the other hand submitted that the AO at page 27 of the assessment order vide para 9 in his order passed u/s 143 r.w.s 144 (c) relying on Sudarshan Chemical Industries Limited , 110 ITD 171 has decided the issue against the assessee. Accordingly it was his stand that the issue stands considered.
We have heard the rival submissions and perused the material available on record. The record shows that the assessee i.e. Sony India Pvt.Ltd. was established in November 1994 as a wholly owned subsidiary of Sony Corporation, Japan. During the year under consideration, the assessee was engaged in assembly and distribution of consumer electronics products in India such as colour televisions, audio products, DVDs, handy cams, Recordable Media Tapes (RME tapes), play stations, projectors, etc.. It had an extensive network of dealers, distributors, services centres and outlets for sale of assembled and imported products and was rendering advisory services and software development services to its associated enterprise. The short issue for consideration in the present proceedings arises from the rejection of assessee’s claim of depreciation of Rs.87,05,914/- @ 60% on “License Fees” was rejected limiting the claim to 25% on the following reasoning:-
Excess claim of depreciation on license fees “It was seen from the appendix II to tax audit report in form 3CD that the assessee had claimed depreciation of Rs.87,05,914/- @ 60% on “License Fees”. ‘License’ is an “intangible assets” as per part B of New APPENDIX I of income Tax Rules (Table of rates at which depreciation is admissible). Depreciation stipulated by this table is 25% as the assessee had claimed excess depreciation @ 35% (60-25%) the same is disallowed. The excess works out to Rs.50,78,450/-. Reliance is also placed on the case assessee “Sudarshan Chemical Industries Limited” [110 ITD 171].” 6.1. In the context of the above finding, the Ld.AR has placed reliance on the decision of the Special Bench in Amway India Enterprises vs DCIT, Circle-1(1), New Page 3 of 9 Delhi [2008] 111 ITD 112 [Del.] (SB). Paras 61 and 62 therefore have specifically been referred to. These are reproduced hereunder:-
“We have already discussed as to how computer software is a tangible property. Though a licensee, the person purchasing the disk or other medium containing the software is owner to the extent of the rights comprised in the license. The decision of the Hon'ble Supreme Court in the case of Tata Consultancy Services (supra) supports the view that software contained in a disk is tangible property by itself. The use by the assessee of such software in his business is enough to allow the claim for depreciation. The rights which an assesses 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. There is therefore no difficulty in allowing depreciation claim at 25 per cent under Section 32(1)(i) read with Appendix-I, Part-A division III (1) to the I.T. Rules, 1962. With effect from 1.4.2003, Computer Software has been classified as a tangible asset under the heading "Plant" in Appendix-I to the IT Rules entitled to depreciation at 60 per cent. The assesses would be entitled to depreciation at 60 per cent from 1.4.2003.
The argument raised on behalf of the assessees in this context was that the rate of depreciation on computer software from 1.4.1999 should be 60 per cent. The basis of this argument was that depreciation on computers was originally allowed treating them as a plant only at 25 per cent. With effect from 1.4.1999, computers were treated as a different class of asset falling within the description of Plant and depreciation was allowed at 60%. With effect from 1.4.2003, computer software was also included along with computers. The argument of the assesses was that the amendment to the rules was merely clarificatory and therefore, even on computer software with effect from 1.4.1999, 60 per cent depreciation should be allowed. We do not agree with the submissions of the assessee in this regard. The amendment is prospective. It is not clarificatory for the reason that computer and computer software are two different items of assets. If the Legislature wanted to allow depreciation at 60 per cent with effect from 1.4.1999 on computer software, it would have said so specifically by making the provisions retrospective. In this regard, we agree with the view expressed by the Delhi Bench of the ITAT in the case of Maruti Udyog Ltd. (supra) wherein similar view has been taken.”
6.2. Considering the above in the context of the decisions relied upon, we find that relevant facts are not available in the facts of the present case. Accordingly, in the absence of discussion on facts in the orders of the authorities below, the issue cannot be decided. The Special bench considering the judicial precedent concluded that there cannot be any specific or precise test which can be applied conclusively or universally for distinguishing between capital and revenue expenditure. It is a blurred and undefined area in which anyone can be get lost. In these circumstances, it has correctly been observed that different minds may come to different conclusions with equal propriety as there is no single definitive criterion which by itself is determinative as to whether a particular outlay is capital or revenue and 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 cardinal rule is that the question whether a certain expenditure is on capital or revenue account should be decided from the practical and business view-point and in accordance with sound accountancy principles and this rule is of special significance in dealing with expenditure on expansion and development of business. The Special Bench has observed that while dealing with this complex issue, three tests are generally applied to decide the nature of expenditure as to whether it is capital or revenue, they are: the test of enduring benefit; ownership test; and functional test; applying the said tests, expenditure is treated as capital expenditure either when it results in acquisition of capital asset by the assessee as owner thereof or when it result in accrual of advantage of enduring nature to the assessee in the capital filed. In the first situation, the ownership test assumes greater significance because the acquisition of capital asset by the assessee as a result of incurring expenditure is a condition. If the expenditure is resulting merely in acquisition or creation of asset without the assessee becoming owner thereof, it cannot be said that the said expenditure is a capital expenditure. The coming into existence of an asset as a result of incurring expenditure along. Thus, it has been summed up that this is not sufficient to treat the said expenditure as of capital nature unless the asset coming into existence is also owned by the assessee.
6.3. Specifically addressing a situation in the case of computer software it has been held that 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 or its utility to a businessman which may touch either capital or revenue field. The manner in which the computer software is used it has been noted 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 an application of the functional test, it is found that the it confers 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. lf 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 enure for an 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 expenditure, 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 to run his business.
6.4. Accordingly it has been held that the advantage which an assessee derives is what has to be seen. The nature of advantage has to be seen in a commercial sense.
If advantage is in the capital field, then the same would be capital expenditure. If the 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 asset/advantage is part of profit-earning apparatus, it is capital.
6.5. We find that this exercise has not been done either by the assessee or by the tax authorities. Accordingly, the issue will need to be remanded back.
6.6. While so holding it would not be out of place to highlight the fact that the Special Bench laid down that 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 'S’ one of the asesssees it was engaged in the business of software development as well as a training centre to impart specialized training to the students in software technology. If the software were used in this 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. Another example which could be considered was that of acquisition of Turbo Gold Software for Rs.17.61 lakhs by the assessee in the instant case. The said software helped in compression of size of e-mails sent through the Lotus Notes Mailing System and it included licenses for 150 users who were using Lotus Notes Mailing System and software license for running on its server. If use of this software in the business of the assesses was limited to facilitate merely an effective and fast communication in order to increase its organizational efficiency, the same could not be treated as forming part of the profit-making apparatus of the assessee. On the other hand, if such software was being used by an assessee engaged in the business of placement agency where the applications from persons seeking jobs were invited through e-mail and were also forwarded to the concerned clients through e-mail, the same might form part of profit- making apparatus of the assessee's business of placement agency and could 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 Page 7 of 9 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 organizational 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 is purchased by an assessee would become outdated much earlier than expected. The assessee has, therefore, to upgrade his software. An 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.
6.7. The following conclusions summarising the issues by the Special bench are extracted hereunder for ready-reference:—
(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. (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 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.”
6.8. The above exercise it is seen has not been done and is required to be done in respect of each and every software independently having regard to the above said criteria, the matter accordingly has to be restored back to the file of the Assessing Officer for doing such an exercise. The Assessing Officer would examine the question Page 8 of 9 whether the expenditure on computer software was capital or revenue in the light of the criteria laid down above after giving an opportunity of being heard to the assessees. If on such examination, the Assessing Officer would come to the conclusion that the expenditure was capital expenditure, then the question regarding allowing depreciation would be decided in accordance with the principles laid down in the subsequent paragraphs.
6.9. Accordingly when considered in the light of the mandate of the Special Bench, we find that the requisite consideration of facts has not been done by the tax authorities as there is no discussion whatsoever on the software. The issue is restored back to the AO for the necessary exercises.
In the result, the appeal of the assessee is allowed for statistical purposes.
The order is pronounced in the open court on 19th of May, 2016.