TMI Blog2006 (12) TMI 191X X X X Extracts X X X X X X X X Extracts X X X X ..... ely, that the purchase of computer software amounted to acquisition of technical know-how. It is this part of the decision of the Rajasthan High Court which is relevant for deciding the issue in this case. The expressions 'a know-how', 'a patent', 'a copyright' and 'a trademark,' are examples of 'intellectual property' and are included in clause (ii) of section 32(1) as 'intangible assets'. The aforesaid 'intellectual properties', or a licence acquired in respect of such a property, are all 'intangible assets' under clause (ii) of section 32(1). Therefore, taking guidance from the decision of the Rajasthan High Court, we are of the view the impugned R/3 software has to be treated as an 'intangible asset' within the meaning of clause (ii) of section 32(1) of the Act. And, consequently, a licence acquired by the assessee to use the same will also come within the ambit of clause (ii) of section 32(1). Therefore, we hold that, on the facts of the present case, the expenditure incurred for acquiring the impugned licence, was rightly treated by the Assessing Officer and the CIT(A) as capital expenditure, eligib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 2. Briefly stated, the facts of the case are these: In the course of assessment proceedings, the assessee was required to furnish complete inventory of closing stock of the raw materials and the basis of valuation of the same. As per the learned counsel for the assessee, the assessee used to value the closing stock of the raw materials on the basis of the lowest rate of purchase of the raw materials in the last quarter of the year i.e., commencing from 1st January to 31st March. It was also stated that all the inward expenses were loaded while computing the cost of the raw materials for the purpose of value of the stock. It was also stated that this method was being adopted for the last 40 years and therefore, should not have been disturbed. However, the Assessing Officer was not satisfied with the method of the valuation adopted by the assessee. The Assessing Officer made the addition of Rs. 5,75,099 by adopting the highest rate of purchase of the raw materials in the last quarter of the year. The Assessing Officer also referred to the Supreme Court judgment in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 for the proposition that the principles of res judic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Investment Corpn. Ltd v. CIT [1997] 225 ITR 802 (SC); (vii) Asstt. CIT v. Bauckau Wolf New India Engg. Works Ltd [1986] 157 ITR 751 (Bom); (viii) CIT v. Tata Engg. Locomotive Co. (P.) Ltd. [1980] 123 ITR 538 (Bom.). 5. The facts of the case in brief are that the assessee-company entered into a licence agreement dated 4-3-1999 with SAP India, Systems, Applications Products in Data Processing (P.) Ltd. ('SAP India' for short) for installation of R/3 software, which is an ERP package. The assessee paid Rs. 1 crore as per clause 4.1 of the said agreement and claimed it as revenue expenditure. The Assessing Officer while rejecting the assessee's claim held in para 7.6 of his order that the ERP package was a capital asset under the category of 'intangible asset in the form of licence' and he allowed depreciation at 25 per cent. The CIT(A) upheld the Assessing Officer's action and his order has been challenged by the assessee in the present appeal. 6. Shri S.N. Inamdar, the learned Authorised Representative reiterated the arguments put forward on behalf of the assessee before the Assessing Officer and the CIT(A). The submissions made by him are summ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er in the following modules of SAP /R3: - Finance accounts - Inventory control and management - Materials management - Sales and distribution - Supply chain management - Production planning and control logistics - Quality management - Human resource management - Plant maintenance - Project management - Treasury management 9.2 The advantages of ERP implementation, inter alia, are: - Considerable reduction in operating cycle time of the business by pruning lead time in all the business functions. - Drastic reduction in inventory carrying cost. - Improved vendor performance in terms of timing, consistence, quality and innovation. - Greater flexibility of operations, thereby ensuring moderate and fantastic return on investments. - Reliance on timely and updated critical management information, improved system and procedures, and, hence, faster decision making. Effective cost control and bench marking against pre-determined budgets would then become part of a routine. - Becoming more customer-driven and being consistently goal-oriented through best business practice. 9.3 The ERP implementation involves networking the entire organi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as described in paragraphs 9 to 9.4. 11. It is seen that for and from assessment year 1999-2000 section 32(1) of the Act allows depreciation also on 'intangible assets', such as know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, owned wholly or partly by an assessee, acquired on or after 1-4-1998, and used by him during the relevant year for the purposes of his business or profession. The clause (ii) to sub-section (1) of section 32 as introduced by the Finance (No. 2) Act, 1998 reads as under: (ii) know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after 1-4-1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed. 11.1 And, the Income-tax (Twelfth Amendment) Rules, 1998 inserted Part B, in respect of such 'intangible assets', in the table of rates at which depreciation was admissible, in Appendix-I under Rule 5 of Income-tax Rules, 1962, providing for depreciation at 25 per cent, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenditure incurred for acquiring technical know-how was capital expenditure and was eligible for depreciation under section 32 of the Act. The decision of the Bombay High Court was silent, insofar as the first part of the decision of the Rajasthan High Court, namely, that the purchase of computer software amounted to acquisition of technical know-how. It is this part of the decision of the Rajasthan High Court which is relevant for deciding the issue in this case. 15. It needs to be mentioned that the matter before the Bombay High Court related to assessment years 1970-71, 1971-72 and 1972-73 and that before the Rajasthan High Court, related to assessment year 1984-85. The expression 'know-how' was introduced in clause (ii) of section 32(1) for and from assessment year 1999-2000. And, for and from assessment year 2003-04, a new entry was introduced as S. No. III(5) in Part-A of the table of rates for depreciation in Appendix-I in respect of 'computers including computer softwares'. 16. There is another way of looking at the above issue. The expressions 'a know-how', 'a patent', 'a copyright' and 'a trademark,' are examples ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s own case in ITA No. 103/PN/2000 for assessment year 1996-97 dated 10-2-2006 in paragraph 15(d) of its order, the Tribunal observed as under: (d) The fourth issue is regarding reduction of 90 per cent of the profits of Environment Management Division (hereinafter called the 'EMD') from the profits and its inclusion in total turnover. In this connection, the assessee referred to p. 23 of the paper book which deals with the activities of the EMD. The division provides services in the fields of waste water management, anaerobic treatment, gaseous emission control, safety and microbial cultures. The total receipts by way of consultancy fees, turnkey contracts and laboratory testing fees were Rs. 58,41,705. The profit after deducting expenditure was Rs. 40,80,823. Having considered the facts of the case and submission made before us, we are of the view that provision of sub-clause (1) of clause (baa) of the Explanation are not applicable to the profit even in terms of the statutory language. Therefore, the whole of the profits is includible in the term 'profit of the business'. It is also equally true that the receipts form part of the total turnover of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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