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Income Tax Appellate Tribunal, F Bench, Mumbai
Before: Shri Jason P. Boaz & Shri Sandeep Gosain
These appeals constitute, cross appeals, by the Revenue and the assessee for A.Y. 2009-10 directed against the order of the CIT(A)-19, Mumbai dated 26.07.2012 and by the assessee against another order of the the CIT(A)-19, Mumbai of even date for A.Y. 2005-06. 2. The facts of the case, briefly, are as under: -
2 M/s. First Advantage P. Ltd. 2.1 The assessee is a company in the business of providing professional consultancy regarding screening of individuals for employment and allied services. 2.2.1 For A.Y. 2009-10, the assessee filed its return of income on 29.09.2009 declaring total income of `9,33,69,740/-. The return was processed under section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. The assessment was completed under section 143(3) of the Act vide order dated 28.12.2011, wherein the income of the assessee was determined at `10,25,27,150/- in view of the following disallowances/additions: - i) On account of software Licence Fee `60,35,642/- `32,21,769/- ii) On account of foreign exchange loss 2.2.2 Aggrieved by the order of assessment for A.Y. 2009-10 dated 28.12.2011, the assessee preferred an appeal before the CIT(A)-19, Mumbai. The learned CIT(A) disposed off the appeal vide the impugned order dated 26.07.2012 allowing the assessee partial relief. Both Revenue and the assessee are aggrieved by this order of the CIT(A) and have preferred cross appeals raising the following grounds: -
2.2.3 Assessee’s appeal in ITA No. 6407/Mum/2012 for A.Y. 2009-10 “1) The learned Commissioner of Income Tax (Appeals) erred in treating software licenses of Rs.49,95,808/- (Rs.60,35,642/- less `13,39,834/-) as Capital Expenditure. 2) The Appellant crave leave to alter, amend and/or add any another ground of appeal.” 2.2.4 Revenue’s appeal in A.Y. 2009-10 “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in allowing Rs.13,39,834/- as revenue expenditure quoting the decision of Hon'ble ITAT Delhi (Special Bench) without appreciating the facts that the revenue has not accepted the decision and the matter is pending in Hon'ble Supreme Court.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in allowing Rs.31,21,769/- as expenditure on account of foreign exchange loss without appreciating the fact that this is a notional loss which assessee has not even incurred.
3 M/s. First Advantage P. Ltd.
3. The appellant prays that the order of the CIT(A) on the grounds be set aside and that of the Assessing Officer be restored.
The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
Ground No. 1 (assessee’s appeal)/Ground No. 1 (Revenue’s appeal) - Expenditure on Software Licence Fees 3.1 The facts of the matter are that the assessee-company is engaged in the business of pre-employment screening on behalf of the employers. In the year under consideration, it claimed deduction of `60,35,642/- on account of software licence fees. According to the Assessing Officer (AO), the installation and use of the aforesaid software would result in benefit of enduring nature accruing to the assessee. The AO observed that expenditure incurred to acquire the software applications was for exclusive purposes of operating and managing its own business, were clearly capital in nature and therefore in that view of the matter treated the said expenditure incurred by the assessee towards software licence fees as capital expenditure. On appeal, the learned CIT(A) held that an amount of `13,39,834/- pertains to software licence fees for upto 12 months by applying the functional test laid down in the decision of the ITAT Special Bench, Delhi in the case of Amway India and treated the balance of `46,95,808/- (i.e. `60,35,642/- less `13,39,834/-) as capital expenditure. 3.2.1 We have heard the learned D.R. for Revenue in respect of the grounds raised at S.No. 1 of its appeal. It was contended that the learned CIT(A) ought not to have allowed `13,39,834/- out of expenditure incurred on software licence fees as revenue expenditure since the Department has not accepted the decision of the ITAT Special Bench, Delhi in the case of Amway India Enterprises 111ITD 112 (SB) (Del) which is pending disposal. 3.2.2 In respect of ground No. 1 of the assessee’s appeal, the learned D.R. supported the impugned order of the learned CIT(A) in holding that the expenditure or `46,95,808/- on account of software licence fees was expenditure of capital nature.
3.3.1 Per contra, the learned A.R. for the assessee, in respect of Revenue’s ground No. 1 supported the finding of the learned CIT(A) that an amount of `13,39,834/- was rightly held to be revenue expenditure by the learned CIT(A) in the impugned order.
3.3.2 In respect of ground No. 1 of the assessee’s appeal, the learned A.R. for the assessee submitted that the issue of whether the expenses incurred on software licence fees, were revenue or capital in nature was decided by a Coordinate Bench of this Tribunal in the assessee’s own case for A.Y. 2010- 11 in dated 30.06.2015 and prayed that following the same the issue may be decided in favour of the assessee. According to the learned A.R. for the assessee, the expenditure was not incurred for purchase of capital assets/software owned by the assessee and did not result in any enduring benefit to the assessee since it become obsolete within a very short period and that these were acquired to carry out routine business operation of the assessee more efficiently. In addition to the decision of the Coordinate Bench cited (supra), the learned A.R. for the assessee also placed reliance on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Raychem RPG Ltd. (2012) 346 ITR 138 (Bom.).
3.4.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record. The details of expenses on software licence fee of `60,35,642/- claimed by the assessee in the year under consideration and placed before the AO in assessment proceedings vide letter dated 28.06.2011 are as under: -
S. Party Name Description of the Amount Licence Period Period No. software in month 1 Planet India TDS Filing Software 1,300 12 2 Spectrum Business Annual Licence 9,000 1 Jul 2008 - 12 Support Ltd. Renewal chgs for 30 Jun 2009 Grand Jurix 3 Network Tech Lab AMC for Sonicwall 1,20,169 21 Jun 2008 - 12 (1090828) firewall 20 Jun 2009 4 Network Tech Lab AMC for Sonicwall 60,084 21 Jun 2008 - 12 firewall 20 Jun 2009 5 BSG Salesforce com 4,42,368 1 Aug 2008 - 12 annual software 21 Jul 2009 license renewal 6 EMS Consultancy Digital Signature for 2,450 Ashish Dehade 7 Ashish Dehade Winzip 11.2 17,171 Sep 2008 - 12 Standard Multi Use Aug 2009 License 8 Inflow Websense Web 6,11,292 15 Dec 2008 - 12 Technologies Pvt. Security 14 Dec 2009 Ltd. 9 Fadv Corporation True UP License Fee 4,77,767 Jul 2008 - Jun 36 2011 10 Fadv Corporation Software Assurance 42,16,253 Jul 2008 - Jun 12 2009 11 Secure Network Fortigate Firewall 76,000 Solution 12 Fadv Corporation Network Solution 1,788 renewal of Domain Name “Quest Research” 6035,642 3.4.2 It is seen that admittedly, these expenses were treated as deferred revenue expenditure by the assessee in the books of account and the total amount of expenditure of `60,35,642/- comprises partially of the expenditure of the earlier years and partially of the year under consideration.
3.4.3 We find that the Coordinate Bench of this Tribunal in the assessee’s own case for A.Y. 2010-11 in has decided this issue in favour of the assessee’s claim that the expenditure on software licence fees as being revenue in nature following the decision of the Hon'ble Bombay High Court in Raychem RPG Ltd. (2012) 346 ITR 138 (Bom) and of the Special Bench of the ITAT Delhi in Amway India Enterprises 111 ITD 112 (SB) (Del.). At paras 8 and 9 of its order of A.Y. 2010-11 the Coordinate Bench (supra) held as under: -
“8. In keeping with the tests as laid down by the Special Bench of the ITAT, in the case of CIT vs. Amway India Enterprises, 111 ITD 112[SB] (Delhi), three tests have to be met in order to pass the expenditure incurred on account of software expenses as capital, or otherwise. These are the ownership test, the enduring benefit test and the functionality test. In the present case, as rightly considered by the ld. CIT(A), none of these tests fails the claim of the assessee. The software was not owned by the assessee. The assessee acquired the license only to use the same. The license fee was not paid for obtaining any right qua the transfer of the software. Then, obsolescence also does not prove any enduring benefit to the assessee. It is not the case of the Department that the longevity of the software is any more than two years. Rather, it has not been 6 M/s. First Advantage P. Ltd. disputed that all but one of the items of expenditure have a life much less than two years. Apropos the functionality test, the Department again does not refute the fact that the software license was acquired by the assessee to carry out its routine operations in a more efficient manner. Further, the fixed capital of the assessee has not been shown to have undergone any change as a consequence of the acquisition of the license. In fact, it was either an antivirus software, or a software for filing TDS return or payments for support service for maintenance of firewalls, maintenance charges of Microsoft licenses, annual hosting fees, etc. Therefore, the nature of the software acquired is that of a revenue expense, the ld. CIT(A) has rightly held it to be so.
It is pertinent to note that the ld. CIT(A) capitalized the expense for software for indexing operations documents. In fact, this expenditure of Rs. 3,12,000/-, paid to M/s First Indian Corporation was a one- time cost, expended for the use of the software to over two years, fetching an enduring benefit to the assessee. The ld. CIT(A) added back this amount of Rs. 3,12,000/- as a capital expenditure while granting depreciation thereon. The assessee has not challenged this add back before us. Thus, the ld. CIT(A) has duly taken into consideration all the relevant factors for deciding the expenditure to be a revenue expenditure. In this regard, reliance placed by the assessee on the case of “Raychem RPG Ltd.” (supra) is also appropriate, therein the Hon’ble jurisdictional High Court upheld the decision of the Tribunal in allowing software expenditure as a revenue expenditure.” 3.4.4 On an appreciation of the breakup of the expenditure of `60,35,642/- incurred by the assessee on software licence fees and following the tests, i.e. ownership test, functionality test and enduring benefit test laid down by the Special Bench of the ITAT Delhi in the case of Amway India Enterprises (supra), which have to be met in order to decide whether the aforesaid expenditure of `60,35,642/- incurred on account of software (as per the list extracted at para 3.4.1 of this order) is capital or revenue. In the case on hand, the assessee does not have ownership of the software, but only the licence to use the same. As per the second test laid down, obsolescence of these items also do not provide enduring benefit to the assessee, except in the case of licence fee of `4,77,767/- paid to Fadv Corporation which is for a period of beyond two years. In respect of the functionality test, the Revenue has not refuted the fact that the software licences were taken by the assessee to carry out its routine operations in a more efficient manner. In fact, the expenses were either for antivirus 7 M/s. First Advantage P. Ltd. software or payments for support service for maintenance of firewalls or software for filing TDS returns, fees for maintenance of licences, etc. 3.4.5 In the light of the factual and legal matrix of the case and respectfully following the ratio of the decisions of the Hon'ble Bombay High Court in the case of Raychem RPG Ltd. (supra) and of the Special Bench of the ITAT Delhi in Amway India Enterprises (supra) and the finding of facts rendered by the Coordinate Bench of this Tribunal in the assessee’s own case for A.Y. 2010-11 (supra), we hold and direct that out of expenditure claim for software licence fees amounting to `60,35,642/-, the amount of `55,57,875/- (i.e. `60,36,642/- less `4,77,767/-) is incurred in respect of application software acquired which is in the nature of revenue expenses. The remaining expenditure of `4,77,767/- paid to Fadv Corporation for acquiring True UP Licences Fees being for a period of 36 months is held to be expenditure capital in nature as it results in enduring benefit to the assessee and we direct the AO to allow the assessee eligible depreciation thereon in accordance with law. 3.4.6 Consequently, ground No. 1 of Revenue’s appeal is dismissed and Ground No. 1 of the assessee’s appeal is partly allowed.
4. Ground No. 2 (Revenue’s appeal) - Foreign Exchange Loss 4.1 In this ground Revenue assails the impugned order of the learned CIT(A) as erroneous for allowing an amount of `31,21,769/- as expenditure on account of foreign exchange loss without appreciating the fact that this is a notional loss which the assessee has not even incurred. The learned D.R. for Revenue was heard in support of this ground. 4.2 Pe contra, the learned A.R. for the assessee supported the decision of the learned CIT(A) on the issue of being allowed the expenditure claimed on foreign exchange loss on revaluation of foreign currency sundry debtors and creditors in view of the decision of the Hon'ble Apex Court in the case of CIT vs. Woodward Governor India P. Ltd. 312 ITR 254 (SC). 4.3 We have heard the rival contentions of both the parties and perused and carefully considered the material on record. The facts of the matter are 8 M/s. First Advantage P. Ltd. that in the course of assessment proceedings the AO noticed that the assessee had claimed loss of `31,21,769/- on revaluation of foreign currency sundry creditors and debtors as on 31.03.2009. The AO being of the view that such loss was notional and was not admissible. On appeal, the learned CIT(A) following the decision of the Hon'ble Apex Court in the case of Woodward Governor India P. Ltd. (312 ITR 254) (SC) allowed the assessee’s claim. On an appreciation of the facts of the case on hand, it is seen that the foreign exchange loss has arisen on account of trade transactions entered into by the assessee and is with respect to the revaluation of foreign currency sundry debtors and creditors as on 31.03.2009. In our view, the claim of the assessee in the case on hand in respect of loss on account of foreign exchange sundry debtors and creditors is allowable as it is covered in favour of the assessee by the decision of the Hon'ble Apex Court in the case of CIT vs. Woodward Governor India P. Ltd. (supra). Respectfully following this aforesaid decision of the Hon'ble Apex Court (supra) we uphold the impugned order of the learned CIT(A) on this issue. Consequently, ground No. 2 of Revenue’s appeal is dismissed.
The grounds at S.No. 2 of the assessee’s appeal and grounds at S.Nos. 3 & 4 of Revenue’s appeal for A.Y. 2009-10 being general in nature, no adjudication is called for thereon.
In the result, Revenue’s appeal for A.Y. 2009-10 is dismissed and the assessee’s cross appeal for A.Y. 2009-10 is partly allowed.
Assessee’s appeal in ITA No. 6408/Mum/2012 for A.Y. 2005-06 7.1 In this appeal, the assessee has raised the following grounds: - “
1) The learned Commissioner of Income Tax (Appeals) erred in treating software expenses of 28,62,118/- being expenditure on Windows XP Professional as Capital Expenditure. 2) The Appellant crave leave to alter, amend and/or add any other ground of appeal.”
8. Ground No. 1 - Software Expenses 8.1 In this ground, the assessee assails the finding of the learned CIT(A) in the impugned order in holding that the software expenses of 9 M/s. First Advantage P. Ltd. `28,62,118/- expended on Windows XP Professional as capital in nature, for the reason that it is an operating system which provided enduring benefit to the assessee as it is not required to be renewed every year. According to the learned A.R. for the assessee, the aforesaid expenditure is incurred for purchase of Windows XP Professional which is an application software and therefore are revenue in nature. It is submitted that ‘Windows’ being an application software it cannot be treated as capital asset and therefore any expenses incurred for purchase of ‘Windows’ has to be allowed as revenue as the software has to be updated every year. In support of this proposition, the learned A.R. for the assessee placed reliance on the decisions of the Coordinate Bench of this Tribunal in the case of ACIT vs. Boots Piramal Healthcare Ltd. (2015) 43 CCH 129 Mum Trib dated 18.02.2015 and Pennwalt Ltd. vs. DCIT in ITA No. 1752/Mum/2009 dated 24.09.2010. It is prayed that the assessee’s appeal on this issue be allowed. 8.2 Per contra, the learned D.R. placed reliance on the finding of the learned CIT(A) in the impugned order on this issue. 8.3.1 We have heard the rival contentions of both the parties and and perused and carefully considered the material on record; including the judicial pronouncements cited. The issue for consideration before us is whether the expenditure of `28,62,118/- incurred by the assessee on Windows XP Professional software is revenue in nature as claimed by the assessee or capital expenditure as held by the learned CIT(A) in the impugned order. According to the learned A.R. for the assessee, the expenditure incurred for purchase of Windows XP Professional, is an application software, and therefore this expenditure would be revenue in nature and cannot be treated as capital in nature. We have perused the decision of the Coordinate Bench in the case of Boots Piramal Healthcare Ltd. (supra) and find that the Coordinate Bench has considered identical issue and held that the expenditure incurred for purchase of Windows, which is an application software, has to be allowed as revenue expenditure. At para 4 of its order the Coordinate Bench held as under: - 10 M/s. First Advantage P. Ltd. “4. We have carefully perused the orders of authorities below. We find that the expenditure are incurred for the purchase of application software and therefore are revenue in nature. Windows being application software cannot be treated as capital assets and therefore any license fee paid for the purchase of windows has to be allowed as revenue expenditure as the software has to be updated every year. We accordingly set aside the findings of the ld. CIT(A) and direct the AO to delete the addition. Ground No. 1 is allowed.” 8.3.2 We have also carefully perused the decision of another Coordinate Bench of ITAT, Mumbai in the case of Pennwalt Ltd. in ITA No. 1752/Mum2009 dated 24.09.2010, wherein after considering identical issue in respect of expenditure incurred for purchase of MS Windows 98, and MS Word 2000 had held that this expenditure is revenue in nature. At paras 15 and 16 of its order, the Coordinate Bench held as under: - “15. Ground No. 5 pertains to the issue of disallowance of software expenditure. Assessee purchased MS Windows 98 and MS Word 2000 packages for its software purposes and the A.O. disallowed the same holding it as capital expenditure. The CIT(A) agreed with the A.O. that these expenses are incurred to obtain user licence and confirmed the same. It was the contention of the assessee that these software, MS Windows 98 and MS Word 2000 have become obsolete very fast and the expenditure is revenue in nature and this claim is in line with the principle established by the Hon'ble Special Bench of the ITAT Amway India Enterprise vs. CIT 111 ITD 112 (Del) and also of the judgement of the Hon'ble P & H High Court in the case of Varinder Agro 22 DTR 127.
16. We have considered the issue. As seen from the nature of expenditure these were amounts paid for obtaining MS Windows 98 and MS Word 2000 software for its office use and not a new software purchased alongwith computer. Since the nature of expenditure is revenue, in line with the principles established by the above two decisions (supra) the software expenditures are to be held revenue in nature. The A.O. is directed to allow the same and withdraw the depreciation granted, if any. Ground is considered allowed.” 8.3.3 Following the aforesaid decision of the Coordinate Bench of this Tribunal, in the case of Boots Piramal Healthcare Ltd. (supra) and Pennwalt Ltd. (supra) and following the tests laid down by the Special Bench of ITAT Delhi in Amway India Enterprise (supra), we hold that since the expenditure of `28,62,118/- was incurred for purchase of Windows XP Professional, an application software for its office use and becomes obsolete very fast, it cannot be treated as capital asset and therefore the 11 M/s. First Advantage P. Ltd. same is to be treated and allowed as revenue expenditure. In this view of the matter, we reverse the finding of the learned CIT(A) and direct the AO to delete the disallowance of `28,62,118/-. Ground No. 1 of the assessee’s appeal is allowed.
9. Ground No. 2 of the assessee’s appeal is general in nature and therefore no adjudication is called for thereon.
In the result, the assessee’s appeal for A.Y. 2005-06 is allowed.