TMI Blog2008 (2) TMI 454X X X X Extracts X X X X X X X X Extracts X X X X ..... ss 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 as discussed above 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. We are of the view that these criteria need to be applied to determine the exact nature of expenditure incurred by the assessees in the present cases for acquiring different softwares. Since this exercise is required to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e no interlinking whatsoever with the issue of expenditure on computer software. We, therefore, deem it proper to refer back the cases to the Hon'ble President for placing the appeals before the regular Division Bench for decision in accordance with the ruling of the Special Bench on the issue of expenditure on software and decision on other issues after hearing the parties. Before parting, it would be our duty to explain the reasons as to why we have not made any reference to the various decisions which are specifically on the issue of expenditure on computer software. We have already noticed the question whether an expenditure is capital or revenue is dependent on facts and circumstances of a given case. We have also noticed that different minds may come to different conclusions with equal propriety. We, therefore, thought it fit to lay down general guidelines to be applied to individual cases. In the decisions of the Tribunal specifically on the issue, different considerations prevailed for the ultimate conclusion. In the case of Maruti Udyog Ltd. [ 2004 (10) TMI 278 - ITAT DELHI-A] , Escorts Ltd.[ 2006 (1) TMI 186 - ITAT DELHI-G] and Hero Honda Motors Ltd. [ 2005 (5) TM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that projects are delivered on time and within budget. It conveys project plans and status effectively and succinctly. It also enhances productivity and effectiveness by learning and applying project management practices easily. 2. MS Project 2000 Central Open License Program: Rs. 78,600.- The software is basically platform software, this helps in operating MS Project 2000 Full Packaged Program software on to the server without which server cannot host MS Project 2000. 3. Macromedia Dream weaver and Flash: Rs. 35,800.- The Macromedia Dream weaver software includes the following: (1) Macromedia Dream weaver version 4.0 on Windows; Macro Media Dream weaver is the industry-leading web development tool, enabling users to efficiently design, develop and maintain standards-based websites and applications. With Dream weaver, web developers go from start to finish, creating and maintaining basic websites to advanced applications that support best practices and the latest technologies. (2) Macromedia Flash version 5.0 on Windows; Web Site designers and developers use Macromedia Flash to accelerate projects while maintaining a high degree of creative control. It provides st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are 100 licenses which have been taken for use of Windows 2000 for 100 users. For each user, a separate license is required for Windows 2000 platform. As explained above, Windows 2000 is a platform, which helps in running application software such as MS Office at the computer system. 8. Win XP Software: Rs. 14,456.- Microsoft Windows XP Professional is the next version of the Windows operating system. Windows XP Professional is designed specifically to optimize productivity using the latest advancements in the digital world and is built on the solid foundation of Windows 2000. Windows XP Professional provides improved reliability, security, performance and ease of use, setting new standard in efficient and dependable computing. Microsoft Windows XP Professional provides an enhanced security infrastructure that defends against viruses, worms, and hackers, along with increased manageability and control for IT professionals and an improved experience for users." 3. It was claimed by the assessee that the expenditure in question has been incurred on obtaining licenses for use of the aforesaid software and since all these software are essentially in the nature of application softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itially before the Division Bench, the main contention raised by the learned counsel for the assessee in support of the assessee's case was that by incurring the impugned expenditure, the assessee company had acquired only the license to use the software and there was no outright purchase of software giving ownership to the assessee of the said software so as to treat the same as a capital expenditure. In support of this contention, reliance was placed on behalf of the assessee on the decision of Delhi Bench 'C' of ITAT in the case of Asahi India Safety Class [IT Appeal Nos. 3280 and 3287 (Delhi) of 2001 and C.O. No. 237 and 238/2004] wherein the expenditure incurred by the assessee on acquisition of application software by way of license to use was allowed as revenue expenditure. It was contended by the learned counsel for the assessee that the purchase of software and acquisition of license to use the software are two different transactions in law which are not inter-changeable. 5. The learned DR, on the other hand, contended before the Division Bench that acquiring a license to use software is the common mode of purchase of software and therefore, the expenditure incurred on s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation on software, it could not be said that prior to 1-4-2003, the expenditure incurred on software, was a revenue expenditure. The Tribunal held that it was always a capital asset entitled to normal rate of depreciation up to31-3-2003which was enhanced to 60 per cent with effect from1-4-2003considering the rapid wear and tear. The decision of Bangalore Bench of ITAT in the case of IAC v. Commission General Agency [1986] 17 ITD 6 was also found by the Division Bench to be of similar effect wherein it was held that cost of software purchased by a computer dealer for the purpose of demonstration and also to provide data processing service to its customers is a capital expenditure. As noted by the Division Bench, it was also held by the Tribunal in the said decision that the software is a technical know-how which has to be purchased by the user of the computer to make effective use of the machine. 7. It was also noted by the Division Bench that in the case of Joint CIT v. City Crop Overseas Software Ltd. [2004] 85 TTJ 87, the Mumbai Bench of ITAT, however, held that the expenditure on application software is an allowable revenue expenditure since a software does not have any degr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue. Since the said issue was expected to occur regularly in many cases, it was felt by the Division Bench that the same may be referred to the Special Bench for decision after taking into consideration all the aspects referred to above as well as other contentions that might be put forth by the parties. Accordingly, this Special Bench has been constituted by the Hon'ble President for deciding the questions as referred to above at the instance of the Division Bench and also for disposing of the appeals filed in the case of Amway India Enterprises. 9. Before the Special Bench constituted by the Hon'ble President could sit and hear the appeals filed in the case of M/s. Amway India Enterprises, a similar issue relating to allowability of software expenditure arose for consideration before the Division Bench of Tribunal i.e. Delhi 'G' Bench, in the case of SQL Star International Ltd. The relevant facts involved in the said case were that the assessee company was engaged in the business of software development as well as running a training centre to impart specialized training to the students in software technology. It purchased computer software and claimed the entire cost as deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Ltd. also to the Special Bench which was duly acceded to. 10. Shri M.S. Syali, Senior Advocate, appearing for the assessee i.e. M/s. Amway India Enterprises opened the arguments. He contended before us that none of the software purchased by the assessee was a custom made software and all of them had been purchased "off the shelf". He submitted that the assessee was merely a licensee and the right to use the software was subject to the conditions mentioned in the license agreement. According to him, all the software acquired by the assessee was in fact upgradation of the existing software and there was no purchase or acquisition of any new software as such. In support of his contention, he relied on the decision of Hon'ble Delhi High Court in the case of CIT v. C.E. Capital Services Ltd. [IT Appeal No. 560 of 2007, dated 10-7-2007] wherein their Lordships of Delhi High Court, while considering the question whether expenditure incurred by an assessee on acquisition of a software was capital or revenue nature, endorsed the view of the Tribunal that in view of technological changes and the need to upgrade software on a regular basis, software cannot be said to be an asset of enduri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture incurred on such acquisition was a capital expenditure. According to Shri Syali, the decision in the case of Arawali Constructions Co. (P.) Ltd. thus was given on totally different facts inasmuch as the payment therein was for acquisition of a software which was tailor-made to be used in mining operation which represented its earning apparatus whereas in the present case, the assessee was merely a licensee of the software which were acquired for efficient use of computers for running day to day business. 11. Shri Syali, also pointed out that in the case of Arawali Constructions Co. (P.) Ltd., the CIT(A) as well as IT AT had relied on the decision of Hon'ble Bombay High Court in the case of CIT v. Borosil Glass Works Ltd. [1986] 161 ITR 286 and Hon'ble Delhi High Court in the case of Shriram Refrigeration Industries Ltd. v. CIT [1981] 127 ITR 746 which were found to be distinguishable on facts by the Hon'ble Rajasthan High Court pointing out that the assessees in the said cases merely had a license to sell particular items and that there was no transfer or parting with secret processes and technical know-how to the assessee. According to him, the final conclusion of theHon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther of the view that software was a capital asset as far as the present assessee is concerned. The Income-tax Rules, 1962 as amended with effect from1-4-2003rather helps the revenue and not the assessee inasmuch as it provides for depreciation on software at the rate of 60 per cent." 13. Shri Syali pointed out that in the aforesaid case, there was thus no dispute that the expenditure was incurred on acquisition of software by way of purchase and further that the expenditure on upgradation on maintenance of software was considered separately and allowed by the CIT(A) as revenue expenditure. The Tribunal was basically concerned with the case of acquisition of software by purchase. Software being an intangible asset, its acquisition was rightly treated as a capital expenditure. He also highlighted the fact that in view of the admitted position that the software were purchased by the assessee, the Tribunal had no occasion to go into the nature of the right acquired by the assessee. It was submitted by him that the facts of the present case, on the other hand, are entirely different inasmuch as none of the expenditure incurred by the assessee was related to acquisition of a capital a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of Delhi Bench of ITAT in the case of Escorts Ltd. v. Asstt. CIT [2006] 8 SOT 167. As pointed out by him, substantial expenditure was incurred by the assessee in the said case on software technological upgradation and computerization which was inclusive of cost of purchase of ERP system. The Tribunal found that the ERP business software was acquired by the assessee with unlimited user license and therefore, the expenditure incurred on acquisition of software was by way of an outright purchase. The Tribunal rejected the plea of the assessee that it was a case of mere upgradation of an existing software. Thereafter, the Tribunal applied the ratio laid down in Maruti Udyog Ltd. as well as Arawali Constructions Co. (P.) Ltd. He then referred to the decision of Bangalore Bench' of ITAT in the case of IBM India Ltd. v. CIT [2007] 105 ITD 1 wherein the expenditure incurred on application software was held to be a revenue expenditure observing that the said software merely enabled the assessee to carry out its business operation efficiently and smoothly. It was also noted by the Tribunal that the software has to be fitted to a computer system to work and since the same by itself cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s i.e. tangible and intangible assets. He submitted that intangible assets are to be of the nature of any business or commercial rights as per the said provisions and such rights again have to be in the nature of capital asset. He submitted that the terms and conditions of the relevant agreement, therefore, need to be seen in order to ascertain whether the acquisition of software by the assessee on license amounts to acquisition of capital assets within the meaning of section 32(1)(ii). In this regard, he invited our attention to the copy of relevant license agreement placed at page No. 12 of his paper book and took us through the relevant terms and conditions of the said agreement. He pointed out that the software acquired by the assessee from Oracle in terms of the said agreement was an application software/program and the license granted to the assessee was a non-exclusive license to be used only for its own purpose as per clause 2.1.1. He further pointed out that it was also stipulated in the said clause that if there is a limit to the number of users or other restrictions stated on the order form for a program or otherwise imposed upon the license granted pursuant to the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g copies already in circulation; (iii) to perform the work in public, or communicate it to be public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work any of the acts specified in relation to the work in sub-clauses, (i) to (vi); (b) in the case of a computer programme,- (i) to do any of the acts specified in clause (a); (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme: Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental;" It was submitted by him that the assessee in using the computer software under a license cannot do any of the acts specified in section 14(b) of the Copyright Act. Therefore, in law, the assessee did not acquire any intellectual property rights either wholly or partially in the copyright on computer software which, at all material points of time, remain only with the owner of the copyright in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not work on stand alone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Thus, for payment of such application software, though there is an enduring benefit, it does not result into acquisition of any capital asset. The same merely enhances the productivity or efficiency and hence to be treated as revenue expenditure." (iv) Shriram Refrigeration Industries Ltd.'s case "Any payment made for obtaining access to technical information which does not result in the absolute transfer of technical knowledge is allowable as revenue expenditure." (v) CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC) "The contributions made by an assessee to a foreign company to merely enable it to acquire the right to draw for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products upon the technical knowledge available from the foreign company for a limited period with stipulation not to divulge the information to third parties and further the return all information and scientific data on conclusion of the agreement is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ram Seshadri, Chartered Accountant appearing on behalf of M/s. Tube Investments of India Limited as Intervener submitted that the assessee in this case is a listed company engaged in the manufacture of cycle, cycle accessories, steel tubes, strips etc. During the previous year relevant to assessment year 2001-02, a total expenditure of Rs. 316.38 lakhs was incurred by it on implementation of ERP software of Oracle. The said expenditure comprised of license fees of Rs. 104.16 lakhs paid for software to Oracle and the remaining amount of Rs. 212.22 lakhs spent on consultancy payments for implementation of the ERP software package acquired from Oracle on license. He then explained the concept of ERP package by pointing out its usage as well as functioning as follows:- "(i) Enterprise Resource Planning (ERP) is a software system designed to manage most or all aspects of a manufacturing or distribution enterprise. ERP systems are usually broken down into modules such as financials, sales, purchasing, inventory management, manufacturing, etc. The modules are designed to work seamlessly with the rest of the system and should provide a consistent user interface between them. These system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. He also contended that the ERP software is provided by Oracle to the assessee as a user only on license basis and such license is a non-exclusive one with many restrictions and prohibitions. In this regard, he invited our attention to clause 2.1 of the 'Master Software License and Service Agreement' entered into between the assessee and Oracle and pointed out that the rights granted under the said agreement give the user only the license to use the software which cannot be treated as acquisition of any capital asset. He contended that the user thus does not get any right from Oracle except the right to use the software/program as a licensee. He contended that the expenditure incurred on acquisition of the ERP package thus is purely a revenue expenditure firstly because the expenses so incurred are only for improving the effective management of day to day operations and secondly because the assessee is provided with a limited right by way of a user license for a product with conditions attached to its use. In support of this contention, he relied on the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 wherein it was held that if the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture. He drew our attention to the fact that the assessee acquired the software under an agreement from SAP which specifically lays down that the assessee was merely a licensee. He contended that the assessee was not the owner of the software and did not have a dominion or control over the same. He laid emphasis on the fact that to be regarded as owner of the software, the assessee should have right of disposition. Since the assessee in the present case did not have any such right of disposition, he could not be considered as having acquired any enduring advantage. He submitted that the software in question was installed for the purpose of better structuring of the organization and therefore, no benefit in the capital field was accrued to the assessee. Another contention of Shri Vohra was that in view of the above principles explained, it will not make any difference whether the software in question was application software or system software. It has to be seen in each case as to what right the assessee acquired irrespective of the nature of business of the assessee. Shri Vohra drew our attention to the provisions of section 14 of the Copyright Act and submitted that to be regarde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... modification of the computer program; or (iv) The provision of know-how relating to computer programming techniques. Transactions involving the transfer of a computer program (alternatives (i) and (ii) may be distinguished as follows: -Transfers of a copyrighted article are transactions in which no copyright right is transferred; in such a case, the transfer is regarded as: (a) a sale or exchange, if all benefits and burdens of ownership are transferred; or (b) a lease of a copyrighted article, if insufficient benefits and burdens of ownership are transferred. The granting of a shrink-wrap licence would normally fall under (a) above, thus being considered a sale of a copyrighted article if it is perpetual, whereas it would be regarded as the lease of a copyrighted article if it is limited in time. -Transfers of a copyright right are transactions in which a copyright right is transferred; only the following are regarded as copyright rights: (a) The right to make copies of the computer program for the purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending; (b) The right to prepare derivative computer programs based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith regard to any income arising from the sale of such software. In addition to the above, the Ruling provides the characteristics of standardized software and the characteristics of customized software, as well as a broad definition for shrink-wrapped and packaged software, as follows: -Standardized software refers to software which is readymade and available for sale to general users and its program is not made or modified for a specific user. Additionally, the purchaser of standardized software is can only acquire the right to install and use the program on an identifiable personal computer or number of computers, and is not permitted to reproduce, modify, reverse engineer, de-compile or disassemble the programme; Shrink-wrapped software refers to software where the software's owner has drafted a unilateral licensing agreement for the sake of user convenience and the terms are placed on a tangible medium (e.g. the packaging). Should a user accept the terms, they merely have to unwrap the packaging to have access to the software. Generally, the software is standardized and available for general public use without any modifications; and -Pursuant to this Ruling, payments for s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein the Hon'ble Madras High Court has held that expenditure incurred on software packages was revenue expenditure and that such software enhances the efficiency of the operation and was not an aid in the manufacturing process and therefore there is no enduring benefit or acquisition of any capital asset by an assessee. Reference was made to the decision of the Madras High Court in the case of CIT v. Southern Roadways Ltd. [2007] 288 ITR 15 laying down identical proposition. Further attention was drawn to the following decisions K Co.'s case, Business Information Processing Services' case Sumitomo Corpn.India(P.) Ltd. v. Asstt. CIT [2005] 1 SOT 91 (Delhi), Citicrop Overseas Software Ltd.'s case and IBM India Ltd.'s case. In all the above decisions, it has been held that expenditure on license to use computer software is allowable as revenue expenditure. 27. Explaining the arguments that there was no enduring benefit in the capital field by virtue of expenditure incurred on computer software, Shri Vohra submitted that in view of the technological changes in the present world no enduring benefit can be said to accrue to an assessee. In this regard, he drew attention to the fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t test is also inconclusive. 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. In a given case, the test of "enduring benefit" might break down." According to Shri Vohra, the test of enduring benefit would break down in the case of acquisition of a licence to use software because by acquiring a license to use computer software, assessee does not get any enduring benefit. In this regard he also drew attention to the decision of the Hon'ble Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 wherein it was held that a tenant effecting improvements to a building with no right of ownership to the improvements and where the owner was to get the benefit of improvement by the tenant, capital expenditure incurred by tenant was held to an expenditure of revenue nature. He pointed out that in the aforesaid decision the tenant had right to enjoy the premises for 39 years but still the court considered the period of use as irrelevant. According to him it was ownership that was material and this has been highlighted in the aforesaid judgment. He thus submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of section 32, she submitted that with effect from1-4-1998depreciation was to be allowed on both tangible and intangible assets. With effect from1-4-2003computer and computer software have been treated as plant and tangible assets. According to her, the expression "computer software" is defined in the rules to mean "any computer programme recorded on any disk, tape, perforated media or any other storage device". It was submitted by her that the intent of the Legislature was to make the ambit of the words "computer software" as wide as possible without leaving any room for any doubt. Strong reliance was placed by her on the decision of the Delhi Bench of ITAT in the case of Maruti Udyog where expenditure on purchase of computer software was treated as capital expenditure. She also drew attention to the provision of sub-clause (xi) of section 36(1) introduced with effect from 1-4-1999 which enabled assessee to claim expenses in the nature of software to make their computer systems Y2K compliant as revenue expenditure. It was submitted by her that but for this amendment, the said expenditure would be only capital expenditure. She highlighted the fact that in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als v. CIT [1999] 239 ITR 775 and the Delhi High Court in the case of CIT v. Bharat Aluminium Co. Ltd. [2007] 292 ITR 600 (Delhi). Attention was drawn to the decision of the Pune Bench of the Tribunal in the case of Sudharshan Chemical Industries v. Asstt. CIT [2007] 17 SOT 43 (URO) wherein purchase of ERP software was treated as capital expenditure. 30. Shri Devender Shanker, Ld. CIT-DR appeared for the revenue and made submissions in the light of the provisions of the Copyright Act, 1957. His submission was that the definition of capital asset as given in section 2(14) of the Act was wide enough to include property of any kind. When an assessee acquires computer software he acquires a capital asset and therefore the expenditure would only be a capital expenditure. Referring to the provision of section 14 of the Copyright Act, he submitted that reproduction of any literary work in any material form including the storing of it in any medium by electronic means would be part of the bundle of rights comprised in the larger right of Copyright. According to him when an assessee purchases computer software even on a license basis he would reproduce the work by storing it in his comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e real sense but is acquisition of a new software. 33. Shri Devender Shanker further submitted that in case of software like ERP, SAP, Oracle (which are not in the nature of shrink wrap), any upgradation to a newer version has to be carried out by the original supplier who has the source code of the software with him. If this upgradation results in higher efficiency, higher speed, higher memory and data handling capacity then it will be an acquisition of an enduring benefit and will be in the nature of capital asset. He made a simple comparison to a building where new floors are added to accommodate more people or offices or a case where extra berths/seats are added to any train or bus to be able to carry more passengers. Such an expenditure incurred will result in enduring benefit with regard to a capital asset and be a capital expenditure to be treated in terms of section 32 or section 35A of the Income-tax Act as the case be. 34. According to Shri Devender Shanker, some of the software installed on servers which mayor may have many end users across very large geographical area like software used for central reservation systems, airline booking, railway booking, banking, inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cturing of computer hardware and software as explained by Board in its Circular No. 779, dated 14-9-1999. In this regard he also submitted that Explanation (a) to section 36(1)(ix) also justifies such interpretation. It was further submitted by him that software does not provide any new advantage to an assessee, which is of an enduring nature. It does not result in acquisition of any new asset. It was submitted by him that the Hon'ble SC in case of Tata Consultancy Service at page 421 of ITR 271 clearly held that software were "goods" only in the context of the extended definition of "goods" as given in the relevant Sales Tax Law. He submitted that in the case of IBM India Ltd. the Bangalore Bench of ITAT has held that computer software merely enhances the productivity or efficiency and therefore is revenue expenditure. Reference in this regard was made to the fact that the Bench rightly distinguished the case of Arawali Constructions Co. (P.) Ltd. by saying that the said decision was a case of acquisition of know-how. He submitted that the Pune Bench in the case of Sudharshan Chemicals Industries in the context of ERP software followed the decision of Arawali Constructions Co. (P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses because of the nature of the question. It assumes that all expenditure can be put correctly into one category or the other; but this is simply not possible. Some cases lie on the border between the two; a ad this border is not a line clearly marked out; it is a blurred and undefined area in which anyone can get lost. Different minds may come to different conclusions with equal propriety. It is like the border between day and night, or between red and orange. Everyone can tell the difference except in marginal cases; and then everyone is in doubt. Each can come down either way. When these marginal cases arise, then the practitioners - be they accountants or lawyers - must of necessity put them in one category or another. And then, by custom or by law, by practice or by precept, the border is staked out with more certainty. In this area at least, where no decision can be said to be right or wrong, the only safe rule is to go by precedent. So the thing to do is to search through the cases and see whether the instant problem has come up before. If so, go by it. If not, go by the nearest you can find." 40. As observed by Hon'ble Supreme Court in the case of Alembic Chemical Works ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viding a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment. As observed by Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may nonetheless be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallow able on an application of this test. 42. In the case of Ciba of India Ltd., the assessee had acquired under the agreement merely the right to draw for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss company for a limited period and since the Swiss company did not part with any asset of its business nor did the assessee acquire any asset or advantage of enduring nature for the benefits of its business, the payment m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 results in accrual of advantage of enduring nature to the assessee in the capital field. 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 alone thus is not sufficient to treat the said expenditure as of capital nature unless the asset coming into existence is also owned by the assessee. 44. In other situation, the expenditure can be treated as capital expenditure only when it results in accrual of advantage of enduring nature to the assessee in the capital field. The relevant tests applied to determine the nature of expenditure in such a situation are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. As regards the decision of Hon'ble Supreme Court in the case of Tata Consultancy Services, it has been contended that the same was rendered in the context of levy of sales tax and transfer of right to use the software was held to be a sale of goods exigible to sales tax in the light of extended definition of "sale" as given in Explanation (iv) to section 2(n) of the Sales Tax Law. It has been contended that the said decision of the Hon'ble Supreme Court especially rendered in the context of extended definition given in the relevant statute cannot be applied in the context of Income-tax Law. 46. After having carefully perused the judgment of Hon'ble Supreme Court in the case of Tata Consultancy Services, we find it difficult to agree with the contention raised on behalf of the assessee. It is no doubt true that a transaction of sale of computer software package off the shelf was held to be a sale of "goods" by the Hon'ble Supreme Court in the case of Tata Consultancy Services relying, inter alia, on the extended definition given in section 2(n) of the Andhra Pradesh General Sales Tax Act, 1957. But it was not the only basis on which the decision of theHon'ble Apex Courtwas excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those cases merely because the method of transmission is by means of a tape or a disc, it remains intangible personal property. It has been held that what the customer paid for is the intangible knowledge which cannot be subjected to the personal property tax." 47. Thereafter, a different view taken by the American Courts in other cases as brought to the notice of Hon'ble Supreme Court on behalf of the assessee was also taken note of and the proposition propounded while taking such a view in the cases of South Central Bell Telephone Co. v. Sidney J. Barthelemy 643 So. 2d 1240, Comptroller of the Treasury v. Equitable Trust Co. 464 A. 2d 248, Chittenden Trust Co. v. Commissioner of Taxes 465 A. 2d 1100, University Computing Company v. Commissioner of Revenue for the State of Tennessee 677 S.W. 2d 445 and Hasbro Industries, Inc. v. John H. Norberg, Tax Administrator 487 A. 2d 124 was summarized by the Hon'ble Supreme Court at Page Nos. 410 411 of the report as follows: "In these cases, the courts have held that when stored on magnetic tape, disc or computer chip, this software or set of instructions is physically manifested in machine readable form by arranging electrons, by u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Commissioner of Sales Tax v. M.P. Electricity Board 1968 (1) SCC 200 was also considered by theHon'ble Apex Court. The question in that case was whether Electricity was goods for the purpose of imposition of Sales Tax under the M.P. General Sales Tax Act, 1959 under which the definition of the term "goods" was given to mean all kinds of movable property and included all materials, articles and commodities. It was held in the case of M.P. Electricity Board in this context that the term "goods" for the purposes of Sales Tax, cannot be given a narrow meaning and the properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed etc., are "goods", for the purposes of Sales Tax. In this regard, it was contended before the Hon'ble Supreme Court on behalf of the assessee in an attempt to distinguish the decision in the case of M.P. Electricity Board that Software is different from Electricity, inasmuch as, Software is intellectual incorporeal property, whereas Electricity is not. This contention of the assessee, however, was not accepted by the Hon'ble Supreme Court observing that in India, the test, to determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd 2001 (4) SCC 593; [2001] 124 STC 59. A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become "goods". We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. All is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media, i.e., the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are, viz., the computer in an effective manner so as to enable him to obtain the desired results. It indisputably becomes an object of trade and commerce. These mediums containing the intellectual property are not only easily available in the market for a price but are circulated as a commodity in the market. Only because an instruction manual designed to instruct use and installation of the supplier programme is supplied with the software, the same would not necessarily mean that it would cease to be a 'goods'. Such instructions contained in the manual are supplied with several other goods including electronic ones. What is essential for an article to become goods is its marketability." 53. It is also observed that a contention was also raised on behalf of the assessee in the case of Tata Consultancy Services that the only property in the literary work of computer software is the source code i.e. the code in which the programmer writes the software which is subsequently converted in machine code for use in physical form. It was contended that the software code and the media on which it happens to be stored have to be viewed differently and the source code being an information wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y itself goods, then the assessee who acquires the same, acquires a tangible asset. Computer Software has not been defined in the Act, but in Note-7 to Appendix-I to the Income-tax Rules, it has been explained to include computer programme recorded on any disc, tape, perforated media or other information storage device. Therefore computer software (whether in canned form or uncanned form) is goods and a tangible asset by itself. The question whether an assessee by purchase of a disk containing software has purchased a capital asset or not should not, therefore, be viewed from the angle of acquisition of any copyright or any of the bundle of rights comprised in such copyright. An assessee purchasing such a software becomes owner thereof. But the test of ownership in the computer software in the light of the question whether the same is capital or revenue cannot be decided on the basis of ownership test alone but has to be seen from the point of its utility to businessman and to see 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 a computer software and its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 endure 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, 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's ability to run his business. Whether the expenditure operates to add the profit earning apparatus of the assessee (Functional Test): 57. The advantage which an assessee derives has to be seen. The nature of advantage has to be seen in a commercial sense. If the advantage is in the capital field then the same would be capital expenditure. If the advantage consists merely in facilitating the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit- making apparatus of the assessee. On the other hand, if such software is being used by an assessee engaged in the business of placement agency where the applications from persons seeking jobs are invited through e-mail and are also forwarded to the concerned clients through e-mail, the same may form part of profit-making apparatus of the assessee's business of placement agency and can 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 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 organisational 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be applied to determine the exact nature of expenditure incurred by the assessees in the present cases for acquiring different softwares. Since this exercise is required to be done in respect of each and every software independently having regard to the criteria laid down above, we are of the view that the matter needs to be restored back to the file of the Assessing Officer for doing such exercise. The Assessing Officer shall examine the question whether expenditure on computer software is 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 comes to the conclusion that the expenditure is capital expenditure, then the question regarding allowing depreciation will be decided in accordance with the principles laid down in the subsequent paragraphs. 61. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determination by the Special Bench. The arguments were heard only with regard to the issue of expenditure on Computer Software. There are other issues arising for consideration in these appeals. The same, however, are entirely different and have no interlinking whatsoever with the issue of expenditure on computer software. We, therefore, deem it proper to refer back the cases to the Hon'ble President for placing the appeals before the regular Division Bench for decision in accordance with the ruling of the Special Bench on the issue of expenditure on software and decision on other issues after hearing the parties. 64. Before parting, it would be our duty to explain the reasons as to why we have not made any reference to the various decisions which are specifically on the issue of expenditure on computer software. We have already noticed the question whether an expenditure is capital or revenue is dependent on facts and circumstances of a given case. We have also noticed that different minds may come to different conclusions with equal propriety. We, therefore, thought it fit to lay down general guidelines to be applied to individual cases. In the decisions of the Tribunal specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r improving the efficiency of the existing system. The Court has also reiterated the law that there was no single rigid formula to find out whether expenditure was capital or revenue. These decisions of the Hon'ble High Courts have to be considered as laying down general guidelines but in each case the facts and other surrounding circumstances have to be taken into account before applying the ratio laid down therein. 66. The learned counsel for assessee Mr. Ajay Vohra relied on some judicial pronouncements wherein it was held that expenditure on acquisition of know-how was considered as expenditure of a revenue nature. His submission was that computer software is akin to know-how and therefore, expenditure on acquisition of computer software should also be considered as revenue expenditure. We are of the view that different considerations will apply in testing the nature of expenditure in the context of acquisition of know-how compared to expenditure on acquisition of software because know-how is an intangible asset whereas as held by Hon'ble Supreme Court in the case of TCS, software is a tangible asset. 67. The questions referred to this Special Bench thus are answered accord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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