TMI Blog2005 (12) TMI 454X X X X Extracts X X X X X X X X Extracts X X X X ..... and not in the form of any purchase price. Over and above the licence fees, since the agreement is also for providing maintenance services, the assessee is liable to pay fees for support and maintenance to Oracle. The licence given under the agreement is liable to be terminated under the provisions of the agreement. Thus, from the various clauses of the agreement, we find that the assessee has not acquired the software in its own right but has acquired only the right to use the software. In other words, what we are trying to emphasize is the fact that by paying the impugned amount, the assessee has not acquired any tangible asset, much less any asset which provides any new source of income or which augments the present source of income. Therefore, the expenses incurred by the assessee cannot be said to be of capital nature. If we look at the break-up of the expenditure for the two years, we find that the major heads under which the payment is made are license fees, annual technical support fees, professional charges, data entry operator charges, training charges and travelling expenses. This goes to show that by incurring these expenses, no new asset has come into existence nor an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d professional expenses as deferred revenue expenditure. However, in its books of account, for assessment year 1997-98, it had not written off any part of the expenditure. In the books for assessment year 1998-99, the assessee had written off a part of this expenditure at Rs. 9,91,228. However, while computing its total income, the assessee had claimed the entire expenditure as revenue in nature in both the years. On inquiring about the details of the expenditure, it was explained by the assessee that software technology was rapidly changing and hence had no enduring benefit. It was further explained that the software had been installed in the financial year 1996-97 but due to various deficiencies it had to be upgraded in the following financial year and an additional expenditure of Rs. 1.71 crores was incurred. It was also explained that the software had been installed for carrying on the business more efficiently, and that the expenditure had not brought into existence any asset from which the assessee could generate any income. The Assessing Officer looked into the details to notice that the software was installed by Arthur Anderson Associates vide agreement dated 25-6-1996. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us through the various clauses of the agreement between Oracle Software India Pvt. Ltd. ( Oracle ) and the assessee. By referring to the various clauses of the agreement, the learned counsel wanted to stress upon the fact that the assessee had never acquired the software in its own right and that it was not the owner of the software in any manner. He referred to the letter dated 25-6-1996 written by Arthur Anderson Associates to the assessee explaining what the package was all about. The learned counsel then drew our attention to the break-up of the expenditure of Rs. 1,36,77,664 incurred in assessment year 1997-98 to show that no payment was made to acquire any software and the major components of the expenditure comprised of license fee for the use of software, annual technical support fee, documentation charges of technical reference manual and professional charges. According to the learned counsel, the assessee was upgrading its accounting software but in his opinion even the conversion of the system from manual to computerized system was also an upgradation. Referring to the decision in the case of Maruti Udyog Ltd. ( supra ), it was stated that in that case the expenditure w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally known Oracle Corporation, USA, distributed through its associate Oracle Software India (P.) Ltd. (Oracle for short). The offer letter of Arthur Andersen (page 24 of the paper book) gives a complete picture of what the package contains. Broadly speaking, it covers the areas of financial accounting, inventory and purchase. For this offer, the assessee was to pay professional charges to Arthur Andersen. On accepting the offer of Arthur Andersen, the assessee entered into an agreement with Oracle on 28-6-1996. The agreement is titled as Master Software License Services Agreement . The facts so far narrated, indicate that the software which the assessee was to instal and implement was neither attached to any machinery used in the production nor was it a part of any production process. The company is already in this business since 1987 and has grown over a number of years. Book keeping and accounting is no doubt an integral part of any business organization. But certainly it is not the activity through which it earns its income. Proper accounting always helps the management in making policy decisions and taking strategic decisions. Through it, it comes to know whether it had earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s any new source of income or which augments the present source of income. Therefore, the expenses incurred by the assessee cannot be said to be of capital nature. 8. The stand of the revenue for treating the expenditure as capital is that the expenditure has brought enduring benefit to the assessee. Well, there may be many expenses which may bring enduring benefit, yet, the test of enduring benefit may break down. It has been held by the Calcutta High Court in the case of CIT v. Cominco Binani Zinc Ltd. [1993] 204 ITR 56 that the test of enduring benefit is not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. This is exactly what we feel in the present case. The revenue authorities have applied the test quite mechanically. But it needs to be understood as to why this test breaks down in the present case. It has been held by the Madras High Court in the case of CIT v. Pioneer Engineering Syndicate [1989] 175 ITR 93 that if the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed either to upgrade the systems or to run the systems. Therefore, there is no substance in the argument of the revenue that these expenses have brought in benefit of enduring nature to the assessee. 11. Lastly, but not in the least, it was way back in 1989 that the Supreme Court took cognizance of the rapid advances in research in antibiotic medical microbiology. Their Lordships observed as follows in the case of Alembic Chemical Works Co. Ltd. ( supra ) : "It would, in our opinion, be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast-changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and nonephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holing an outlay such as this as capital. The circumstance that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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