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Income Tax Appellate Tribunal, DELHI BENCH ‘C’ NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI L.P. SAHU
ORDER
Per L.P. Sahu, Accountant Member:
./2011 is directed by the assessee against the order dated 18.03.2011 passed by the learned CIT(A)-XV, New Delhi for the assessment year 2007-08, whereas ITA No. 2124/Del./2013 has been preferred by the Revenue against the order dated 22.01.2013 of CIT(A)-XV, New Delhi for the assessment year 2008-09. The grounds raised by the assessee and the Revenue in their respective appeals read as under : Grounds raised by Assessee (A.Y. 2007-08) : “1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the disallowance of Rs.2,19,60,467 made in the assessment order dated November 30, 2009 passed by the Deputy Commissioner of Income Tax, Circle 12(1), New Delhi, on account of license fees, connectivity charges and co-ordination charges for the use of Vision plus software by treating the same as capital expenditure. The Ld. CIT(A) has further erred in alleging that the Appellate was the owner of the Vision plus software.
2. Without prejudice to the above, the Ld. CIT(A) has erred in not allowing depreciation @ 25% on above-mentioned payments of Rs.2,19,60,467 under section 32 of the Act.”
Grounds raised by Revenue (A.Y. 2008-09): “1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the aggregate disallowance of Rs.2,42,58,933/- on account of License fee, connectivity charges and co-ordination charges paid to a US based company M/s. GE Capital Corporation for use of ‘vision plus’ software holding the same as revenue in nature and allowable u/s. 37 of the Act.
2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not following the decision of his predecessor CIT(A) for the immediately preceding assessment year 2007-08, who had held the same as capital expenditure.
3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the aggregate disallowance of Rs.2,42,58,933/- on account of License fee, connectivity charges and co-ordination charges paid to a US based company M/s. GE Capital Corporation for use of ‘vision plus’ software holding the same as revenue in nature and allowable u/s. 37 of the Act.
On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing depreciation @ 60% on printers, switches, networking equipments, batteries and pen drives etc.”
Since both the appeals were heard together and common questions of law and facts are involved therein, both these appeals are being disposed of by this consolidated order for the sake of convenience and brevity. We first take up assessee’s appeal.
The brief facts of the case are that the assessee company is engaged in the business of process management services for credit cards. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has shown to have paid a sum of Rs.1,76,76,000/- towards license fee, Rs.33,47,207/- towards connectivity charges and Rs.9,41,260/- towards co-ordination charges to GE Capital Corporation USA [hereinafter referred to as ‘GECC(USA)’] and claimed deduction u/s. 37 of the Act as Revenue Expenditure. The AO vide notice dated 06.11.2009 asked the assessee to show cause as to why said expenditure should not be disallowed treating the same as capital expenditure. In response, the assessee explained that license fee was due to M/s. GECC, USA for use of ‘vision plus software’. The vision / software is an accounts receivable processing software for credit cards transactions developed by pay sys a US based entity. GECC(USA) had entered into an agreement with pay sys international for the use of this software and further entered into end-user license agreement with the assessee company allowing it to use this software. It was also submitted that the license fee has been paid in lieu of only right of usage for limited period of technical know-how; that no ownership rights pass on to the assessee and that no right or advantage of enduring nature arose to the assessee. The Assessing Officer, however, being not satisfied with the reply of assessee, observed that in lieu of acquisition of above technical know-how and exclusive right to operate in territory of India, the assessee was paying fees to GECC(USA) in the name of license fee. He further considering certain terms & Conditions of agreement, found that the assessee had obtained a distinct right of exclusive use of software in the territory of India and even the foreign collaboration is excluded from operating the same in this territory; that the agreement provides enduring benefit to the assessee; that the consideration is in respect of grant of license and that the information was not only in relation to use of license but co-ordination and connectivity services provided by GECC(USA). The AO, therefore, relying upon the decisions of Hon’ble Supreme Court in the case of Jonas Woodhead and Sons (India) Ltd. vs. CIT, 224 ITR 342 and Southern Switch Gear Ltd. vs. CIT, 232 ITR 359, concluded that acquisition of license granted by the licensor in itself is a capital asset being “intangible asset” and the payment made for acquisition of this license having long validity is of capital nature. The AO finally disallowed the deduction of Rs.2,19,60,467/- claimed as revenue expenditure, and added the same to the total income of assessee as capital expenditure vide order dated 30.11.2009.
4. The assessee also claimed depreciation @ 60% on printer, switches, networking equipments, batteries, pen drives etc. keeping the same into the category of computers. The Assessing Officer, after considering the definition of computer provided by ATIS Committee and definition of other accessories like switches, Router, Multiplexer or Mux held that all the networking equipments other than computer are plant and machinery eligible for depreciation @ 15% instead of 60% as claimed by the assessee. Therefore, the excess claim of depreciation to the extent of Rs.83,49,188/- was added to the income of the assessee. The assessee challenged the assessment order in appeal before the ld. CIT(A), who vide impugned order confirmed the addition of Rs.2,19,60,467/- made by the Assessing Officer treating the same as capital expenditure. However, the ld. CIT(A), deleted the addition of Rs.83,89,188/- made by the Assessing Officer on account of excess depreciation claimed by the assessee. Aggrieved, the assessee has come up in this appeal before us.
The ld. AR of the assessee argued that the license was acquired only to use the software for its day to day running of the business activities and there was no outright purchase of software giving ownership to the assessee. It was submitted that the payments made towards connectivity charges and co-ordination fees payable to GECC(USA) are relatable to facilities/services provided by the assessee to undertake the business operations and are not relatable to acquisition of any know-how and enduring benefit to the assessee. Referring to clauses 2.3 and 5.5 of the end user agreement, under which the license fees were paid, the ld. AR submitted that the assessee does not have the right to transfer the licensed program; that the same cannot be used for the purpose other than that permitted under the agreement; that the licensed program cannot be commercially exploited; that the licensed program was for a limited period and after expiry of such period, the same has to be delivered back to GECC(USA); that an officer of assessee has to certify in writing to GECC that all proprietary material relating to the Licensed Program has been delivered back to GECC or purged and that the use of the licensed program and any portion thereof has been discontinued. Reliance was placed on the following decisions : (i). CIT vs. Asahi India Safety Glass Ltd. 203 Taxman 277 (Del.) (ii). SLP(C)CC No. 10108/2012 CIT vs. M/s. Asahi Safety Glass Ltd. (iii). Empire Jute Company vs. CIT, 124 ITR 1 (SC) (iv). CIT vs. Amway India Enterprises, 346 ITR 341 (Del.) (v). CIT vs. IAEC (Pumps) Ltd., 232 ITR 316 (SC) (vi). DCIT vs. Eicher Motors Ltd., 53 Taxman 317 (Delhi Tri.) (vii). CIT vs. Modi Revlon (P) Ltd., 26 Taxman.com 133 (Del.) (viii). CIT vs. G4S Securities System (India) Ltd., 338 ITR 46 (Del) He also contended that the learned CIT(A) in the subsequent assessment years 2008-09, 2010-11 and 2011-12 has decided the issue on the basis of same end-user license agreement in favour of the assessee holding the expenditure of revenue nature. The decisions cited by the Assessing Officer are not applicable being based on different set of facts. He, therefore, urged for allowance of appeal.
The learned DR, on the other hand, relied on the order of authorities below. He also submitted that in the case of Empire Jute Company Ltd. vs. CIT, 124 ITR 1(SC), the Hon’ble Court observed that there have been numerous decisions where the vexed question whether a particular expenditure incurred by the assessee is of a capital or revenue nature, has been debated, but it is not possible to reconcile the reasons given in all of them because general principle cannot be deduced from any decision owing to dissimilarity of facts. He, therefore, contended that regarding the question of an expenditure being of capital or revenue in nature, peculiar circumstances of each case need to be considered. He submitted that holder of intangible asset, i.e., licensor, user of license/service provider, i.e., assessee and receiver of services of the licensed program, i.e., M/s. SBI Cards and Payment Services Pvt. Ltd. are sister concerns. He submitted that the use of software which is subject matter of End-User License Agreement dated 07.07.2000 is vital for the business of assessee, as the vision plus software is the soul of assessee’s business. Referring to clause No. 3.1 of the agreement, the ld. DR contended that lump sum amounts have been agreed to be paid by the assessee quarterly and that the software is not linked with the turnover or actual usage. He submitted that signing of agreement and deciding the rate of payment per quarter were mere paper formalities and significant portion of the payment under consideration is for providing benefits of enduring nature to the assessee and hence, it is capital in nature. The ld. DR has also tried to distinguish the decisions cited by the ld. Counsel for the assessee.
We have considered the rival submissions, perused the orders of the authorities below, material available on record and gone through the case laws cited by both the parties. From the above narration of facts, we find that the arguments advanced by both the parties rest on the vital question whether under the facts and circumstances of the case, the payment of license fee, connectivity charges and co-ordination charges amounting to Rs.2,19,60,467/- made by the assessee to GECC(USA) under the end-user agreement shall fall within the category of capital expenditure or revenue expenditure? The stand of the assessee is that it is in the nature of revenue expenditure and deductible u/s. 37(1) of the Act whereas the ld. Authorities below have put it in the category of capital expenditure and disallowed the claim of assessee. The basic reasons of Assessing Officer for giving the license fee a treatment of capital expenditure are that the agreement provides exclusive right to use vision plus software which provides enduring benefits to the assessee; that the consideration is in respect of grant of license and that the information was not only in relation to use of license, but co-ordination and connectivity services were also provided by GECC(USA). He, therefore, held that the acquisition of license granted by the licensor in itself is a capita asset, being “intangible asset”, which having long validity is capital in nature. We have gone through the End-User license agreement dated 07.07.2000 and we do not find substance in the conclusion arrived at by the ld. Authorities below. It is notable that in terms of clause 2.2 and 2.3, the assessee company is specifically restricted to make copies of the software and make it available to any other period. There is also a bar on the assessee for use of software for the purpose other than that mentioned in clause 2.2 of the agreement. In terms of clause 2.3, the assessee does possess no right either to sell it or alienate in any other manner. The relevant clauses No. 2.2 and 2.3 of the license agreement are reproduced as under : “2.2. GECC shall provide the Licensed Program, any revisions to the Licensed Program and any updates to the Licensed Program to GECBPMS for its business use only in accordance with this agreement.” 2.3. GECBPMS undertakes that it shall not; (a) make the licensed program or any part thereof available to any period other than its employees on a “need to know” basis; (b). copy the Licensed Program or any part thereof, other than for archival backup purposes; (c). use the Licensed Program for any purpose other than as permitted by clause 2.2 of license, sell or otherwise alienate the Licensed Program in any manner whatsoever; or (d). Duplicate, market, license or develop software programs that compete with the Licensed Program and/or exploit commercially the Licensed Program in any manner whatsoever.”
Similarly, clause 5 and its sub-clauses give the right of termination of license agreement to either parties under various circumstances. It is worthwhile to note that in case of default, if any, committed by the assessee, the rights of assessee to use the software would stand terminated forthwith. Under clause 5.5, the assessee is required to deliver the licensed program back immediately to GECC(USA) after removing the same from its systems on termination of agreement. Clause 5.5 of the agreement reads as under : “5.5. Upon termination of this Agreement the right to use the Licensed Program shall end and GECBPMS shall, with immediate effect : (a) deliver to GECC the Licensed Program; and (b) purge all copies of the licensed program stored in any CPU or other storage medium or facility, which for any reason cannot be delivered to GECC. In addition, an officer of GECBPMS shall certify in writing to GECC that all proprietary material relating to the Licensed Program has been delivered to GECC or purged and that the use of the Licensed Program and any portion thereof has been discontinued.”
Under clause 3.1, the license agreement allows GECC to receive license fee from assessee on quarterly basis as mutually agreed upon. The agreement provides for periodic payment for use of software to GECC, which is subject matter of renewal and revision every calendar year. No case is made out by the department to assume that the periodic payments made by the assessee were the installments for acquisition of such software and the payment was not for mere usage of software. It is a matter of fact on record that M/s. GECC (USA) itself has received the right to use the software internally including its group entities for its business and it does not have any right to commercially exploit the software. The assessee is vested with limited right to use the licensed program during the currency of license agreement. The agreement nowhere provides any exclusive right to the assessee, but the assessee was vested with the right to use the licensed program for facilitating its business operations enabling the assessee day-to-day management of business and to work with more efficiency. In view of all these terms of agreement and the facts & circumstances attending to the case, we are of the considered opinion that end user license agreement in the instance case does not have the effect of any enduring benefit for holding the same as capital in nature. The ld. DR has failed to rebut the contention of the assessee that the impugned software is an application software and is being used for accounting purposes. Such software are used by various banks and financial institutions. Moreover, the ld. CIT(A) in succeeding assessment years 2008-09, 2010-11 and 2011-12 has categorically gave finding of fact that the software is a application software which is routine in nature and used for accounting purposes. Therefore, in view of decisions in the case of CIT vs. Asahi India Safety Glass Ltd (supra) and CIT vs. Amway India Enterprises (supra), we are of the considered opinion that the right to use the vision plus software program does not have any effect of providing enduring benefit and the payment made to GECC(USA) is only the license fees and not the price for acquisition of capital asset. The assessee did not acquire any ownership on the software and after termination of license agreement, all the rights and title remained with GECC (USA). The ld. DR failed to dislodge the findings of the ld. CIT(A) given in the orders passed for subsequent years after considering the same license agreement and various decisions of Hon’ble High courts and Supreme Court. It is also a matter of record that the assessee has returned its income for the relevant previous year at Rs.152.88 crores whereas the amount expended towards use of routine application software is Rs.2.19 croes which is 1.43%. This shows that implies that this software only is not the soul of assessee’s business as argued by the ld. DR. In the case of southern Switchgear Ltd. (supra), the technical knowledge and information remained with the assessee even after termination of agreement which constituted enduring benefit to the assessee whereas in the present case, the software in question is an application software and after termination of license agreement, said software was to be delivered back to the licensor and the same cannot be made to use by the assessee in any manner. Similarly in the case of Jones Woodhead and Sons (India) (supra) relied on by the Assessing Officer is also distinguishable on facts inasmuch as in that case the agreement between the assessee and the foreign collaborator was in relation to setting up of a new business and the foreign collaborator besides furnishing information and technical know-how, rendered valuable assistance in setting up of the factory itself. No such situation arises in the present case. In view of this discussion and relying on various decisions cited by assessee, we are of the considered opinion that the license fee etc. paid by the assessee to M/s. GECC(USA) is revenue expenditure deductible u/s. 37 of the Act. The appeal of the assessee is accordingly allowed. ./2013 (By Revenue): 8. The vital issue involved in this appeal is deletion of disallowance of Rs.2,42,58,933/- made by the Assessing Officer on account of license fee, connectivity charges and co-ordination charges paid to US based company M/s. GE Capital Corporation for use of vision plus software holding the same as capital expenditure. This issue has been decided in favour of the assessee while deciding the appeal of the assessee for the assessment year 2007-08 in the foregoing part of this order. There being no change in the facts and circumstances of the case and the disallowance being based on the same license agreement, we decide the issue in favour of the assessee in this appeal also after following our conclusions given in appeal of assessee for the year 2007-08. Accordingly, the appeal of the Revenue is liable to be dismissed on this count.
The next issue in this appeal is with respect to allowing depreciation @ 60% on printers, switches, networking equipments, batteries, pen drives etc. as against 15% allowed by the Assessing Officer. A perusal of impugned order shows that the ld. CIT(A) after following direct decision of jurisdictional High Court in the case of M/s. BSES Rajdhani Powers Ltd. (ITA No. 1266/2010, has observed that the matter is already settled and the printers, switches, networking equipments, UPS and pen drives are held as integral part of the computer system and hence eligible for depreciation @ 60%. No contrary law or material is placed by the Revenue. We, therefore, find no infirmity in the impugned order on this ground.