IT : Software license for one year does not confer any enduring benefit; licensing fee held as revenue expenditure
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[2013] 37 taxmann.com 240 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'B'
Deputy Commissioner of Income -tax, Company Circle- I(4)
v.
Danfoss Industries (P.) Ltd.*
DR.O.K. NARAYANAN, VICE-PRESIDENT
AND V. DURGA RAO, JUDICIAL MEMBER
AND V. DURGA RAO, JUDICIAL MEMBER
IT APPEAL NOS. 369 & 370 ( MDS.) OF 2013
[ASSESSMENT YEARS 2007-08 AND 2008-09]
[ASSESSMENT YEARS 2007-08 AND 2008-09]
JUNE 28, 2013
I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Software expenditure] - Assessment year 2008-09 - Assessee claimed expenses incurred towards software licence as revenue expenditure - Assessing Officer disallowed claim of assessee - Whether since license was valid for one year and did not confer any enduring benefit, expenses incurred by assessee to acquire software licence was revenue expenditure - Held, yes [Para 14] [In favour of assessee]
II. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Software expenditure] - Assessment year 2007-08 - Assessing Officer treated software expenses claimed by assessee as capital expenditure and made addition - In assessee's own case for assessment year 2005-06 in IT Appeal No. 612(Mds) of 2011, Tribunal held that software expenses incurred were in nature of revenue expenditure - Commissioner (Appeals) following same deleted addition made by Assessing Officer - Whether since no material had been brought on record to show that said decision of Tribunal was either modified or reversed by any Higher Court, no infirmity was found in order of Commissioner (Appeals) - Held, yes [Para 7] [In favour of assessee]
FACTS - I
| ■ | The assessee had incurred expenses towards software licence of Rs. 58.92 lakhs and claimed the same as revenue expenditure. The assessee had submitted before the Assessing Officer that the license was valid for a period of one year and did not provide any enduring benefit. | |
| ■ | The Assessing Officer disallowed the claim of the assessee on grounds that the software license not only confers enduing benefit to the assessee, but also provides higher functional utility from the point of view of integrating various functions of the assessee like sales, finance, logistics operations and for use of the ERP system. | |
| ■ | On appeal, the Commissioner (Appeals) allowed the claim of the assessee and consider the software license expense as a revenue expenditure. | |
| ■ | On revenue's appeal: |
HELD - I
| ■ | In the instant case, when the assessee has acquired the licence to use the software and the licence is valid only for one year, it may be useful to the assessee for various functions like sales, finance, logistics operations and use of ERP system and it may confer certain benefits to the assessee but it cannot be said that there is enduring benefit to the assessee. Therefore, respectfully following the decision of the Bombay High Court in the case ofCIT v. Raychem RPG Ltd. [2012] 346 ITR 138/21 taxmann.com 507 and taking into consideration of the facts of the case, it is held that the expenses incurred by the assessee to acquire the software licence is of revenue expenses. Accordingly, the appeal filed by the Revenue was dismissed. [Para 14] |
CASE REVIEW - I
CIT v. Raychem RPG Ltd. [2012] 346 ITR 138/21 taxmann.com 507 (Bom.) (para 14) followed.
CASES REFERRED TO
CIT v. Raychem RPG Ltd. [2012] 346 ITR 138/21 taxmann.com 507 (Bom.) (para 12) and CIT v. Asahi India Safety Glass Ltd. [2011] 203 Taxman 277/15 taxmann.com 382 (Delhi) (para 12).
Dr. S. Moharana for the Appellant. T. Banusekar for the Respondent.
ORDER
V. Durga Rao, Judicial Member - These two appeals of the Revenue are directed against separate orders of the Commissioner of Income Tax (Appeals) - IX, Chennai, both dated 27.12.2012 relevant to the assessment years 2007-08 and 2008-09.
I.T.A. No. 369/Mds/2013 [A.Y. 2007-08]
2. The brief facts of the case are that the assessee is a company engaged in the manufacture, marketing and service of automotive controls. The assessee had filed its return declaring income of Rs. 10,06,52,970/- on 30.10.2007 and the case was processed under section 143(1) of the Income-tax Act. The case was selected for scrutiny and notice under section 143(2) was issued on 16.09.2008. Assessment under section 143(3) of the Act was completed on 31.12.2010 determining assessee's total income of Rs. 11,25,90,963/- by capitalizing software expenses of Rs. 3,01,67,907/-. During the year under consideration, the assessee-company has debited software expenses of Rs. 3,01,67,907/- in the profit and loss account. The assessee-company has claimed the above said expenses as revenue expenses. However, the Assessing Officer has treated the above expenditure as capital expenditure.
3. The assessee carried the matter in appeal before the ld. CIT(Appeals). The ld. CIT(Appeals) allowed appeal by following the decision of the Tribunal in assessee's own case for the assessment year 2005-06 and deleted the addition made by the Assessing Officer.
4. On being aggrieved, the Revenue is in appeal before the Tribunal.
5. At the time of the hearing, the ld. Counsel for the assessee has submitted that the issue involved in this appeal is squarely covered by the decision of the Tribunal in assessee's own case in I.T.A. No. 612/Mds/2011 for the assessment year 2005-06 vide order dated 09.05.2012.
6. On the other hand, the ld. DR has supported the order passed by the Assessing Officer.
7. We have heard both sides, perused the material on record and have gone through the orders of authorities below. The only issue involved in this appeal is whether the software expenses incurred by the assessee are revenue or capital. The very similar issue has already been considered by this Tribunal in assessee's own case for the assessment year 2005-06 in I.T.A. No. 612/Mds/2011, wherein the Tribunal has held that the software expenses incurred were in the nature of revenue expenditure. The ld. CIT (Appeals), by following the above decision of the Tribunal, allowed the appeal filed by the assessee. No material has been brought on record or before us by the Revenue to show that the decision of the Tribunal is either modified or reversed by any higher Court. As such, we find no infirmity in the order passed by the ld. CIT(Appeals). Therefore, we dismiss the appeal filed by the Revenue.
I.T.A. No. 370/Mds/2013 [A.Y. 2008-09]
8. For the assessment year under consideration, both parties have submitted that except expenditure incurred towards software licence of Rs. 58,92,163/-, the remaining software expenditures [i.e. consumables & others, internet, IT help desk charges & servicing] incurred by the assessee are similar as incurred in the assessment year 2007-08. Since, we have decided the said expenditures as revenue expenditure hereinabove for the assessment year 2007-08 by following Tribunal's order in assessee's own case for the assessment year 2005-06 in I.T.A. No. 612/Mds/2011 vide order dated 09.05.2013, the software expenditures [i.e. consumables & others, internet, IT help desk charges & servicing] incurred by the assessee for the assessment year 2008-09 are also in the nature of revenue expenditure.
9. So far as software licence is concerned, during the course of assessment proceedings, the assessee has submitted before the Assessing Officer that the validity of the licence was generally one year or contingent upon upgradation and that the expenses do not provide any enduring benefit and only aids in day-to-day accounting and reporting process of the company. However, the Assessing Officer has not accepted the submissions of the assessee and has observed that the assessee by entering into IT services with Danfoss IY, Denmark, it had acquired the licence to use software which is not only confers an enduring benefit, but also provides higher functional utility for the point of view of generating various functions of the assessee like sales, finance, logistics operations and for use of the ERP system which is uniform/custom-made for use among all the group companies and for support software to supplement routine operations and disallowed the claim of assessee. In appeal, the ld. CIT(Appeals) allowed the claim of the assessee including other expenses and considered it as a revenue expenditure.
10. On being aggrieved, the Revenue preferred an appeal before the Tribunal.
11. The ld. DR has supported the order passed by the Assessing Officer.
12. On the other hand, the ld. Counsel for the assessee has submitted that so far as other expenses are concerned, the expenditure is in the nature of revenue expenditure and covered by the decision of the Hon'ble Bombay High Court in the case of CIT v. Raychem RPG Ltd. [2012] 346 ITR 138/21 taxmann.com 507 (Bom.) and also the decision of Hon'ble Delhi High Court in the case of CIT v. Asahi India Safety Glass Ltd. [2011] 203 Taxman 277/15 taxmann.com 382 (Delhi).
13. We have heard both sides, perused the materials on record and gone through the orders of authorities below. The assessee has incurred expenses towards software licence of Rs. 58,92,163/- and claimed the same as revenue expenditure. It was submitted before the Assessing Officer that the licence is valid for a period of one year and this expenses do not provide any enduring benefit and only aids day-to-day accounting and reporting process of the company. The Assessing Officer was of the opinion that it not only confers enduring benefit to the assessee, but also provides higher functional utility from the point of view of integrating various functions of the assessee like sales, finance, logistics operations and for use of the ERP system. In similar circumstances, the Hon'ble Bombay High Court in the case of Raychem RPG Ltd. (supra) has observed that when it is applied the functional test suggested by the Special Bench of the Tribunal, the impugned software does not form part of the profit-making apparatus of the assessee and hence the same is to be disallowed as revenue expenditure. In the said case, the business of the assessee-company is that of manufacturing of telecommunication and power cable accessories and trading in oil retracing system and other products and the impugned software is an enterprises resources planning (ERP) package and hence it facilitates the assessee's trading operations or enabling the management to conduct the assessee's business more efficiently or more profitably but it is not in the nature of profit-making apparatus. Accordingly, the Hon'ble High Court has decided the issue in favour of the assessee.
14. In the present case, when the assessee has acquired the licence to use the software and the licence is valid only for one year, it may be useful to the assessee for various functions like sales, finance, logistics operations and use of ERP system and it may confer certain benefits to the assessee but it cannot be said that there is enduring benefit to the assessee. Therefore, respectfully following the decision of the Hon'ble Bombay High Court in the case of Raychem RPG Ltd. (supra) and taking into consideration of the facts of the case, we are of the considered opinion that the expenses incurred by the assessee to acquire the software licence is of revenue expenses. Accordingly, we dismiss the appeal filed by the Revenue.
15. In the result, both the appeals filed by the Revenue for the assessment years 2007-08 and 2008-09 are dismissed.
RITESHRegards
Prarthana Jalan
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