TMI Blog2011 (7) TMI 303X X X X Extracts X X X X X X X X Extracts X X X X ..... tendable, which shows that the benefit is not restricted only to 10 years - The assessee does not retain any residual right under the agreement - Therefore, exclusive right to manufacture goods in India for 10 years does not lead to inference of benefit of enduring nature in the capital field - At the same time it is seen that the license fee is paid on the basis of net turn over and it has a direct relationship with an item in the revenue field - Therefore, the expenditure is of revenue in nature. - ITA Nos. 2534 and 2535/Del/2011 - - - Dated:- 29-7-2011 - C.L. Sethi, K.G. Bansal, JJ. K.L. Chandak, FCA for the Appellant Salil Mishra Sr. DR for the Respondent ORDER K.G. Bansal: These two appeals of the assessee for two different years were argued in a consolidated manner by the learned counsel for the assessee and the learned Sr. DR. Therefore, we find it convenient to pass a consolidated order. Assessment year 2005-06 1.1 The assessee has taken up only one ground in this appeal in respect of capitalization of the expenditure incurred on purchase of softwares. The ground contains averment of facts and the cases sought to be relied upon. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Maruti Udyog Limited vs. DCIT, 1922 ITD 119, it has been held that software is a capital asset of intangible nature. The purchase of software has granted benefit of enduring nature to the assessee. No evidence exists on record that the softwares purchased by the assessee have a short span of life. Therefore, the findings of the Assessing Officer have been confirmed. 2.2 Before us, the learned counsel submitted that the assessee purchased softwares of the value of Rs.16,61,402/- in this year. The expenditure of Rs.10,86,782/- in respect of Corporate Data Link (Cards), business card scanner, and software of the value of Rs.10,72,528/-, Rs.6,500/- and Rs.7,700/- respectively has been capitalized. The aggregate value of these softwares amounts to Rs.10,86,728/-. Thus, only the balance amount of 5,74,674/- has been claimed as revenue expenditure. This shows that the assessee has applied mind to the useful life of various softwares and treated the expenses to be revenue in nature only in cases where useful life was short due to obsolescence. The details of these expenses have been placed on page No.36 of the paper book, which are reproduced below:- Particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. The expenditure incurred in respect of support charges is obviously revenue in nature. The TDS software is not used in the process of manufacture. Therefore, it can be said on functional basis that the expenditure is revenue in nature. Further, anti software virus is purchased to protect other softwares and, therefore, the expenditure is of revenue nature. This leaves us with backup software purchased at the cost of Rs.3,50,000/-. No detail or explanation has been filed about the nature and utility of the software. No evidence exists on record about the useful life span of the software. From the narration, it appears that this software is used to provide necessary support to all other softwares. The burden to prove that expenditure is revenue in nature, is on the assessee, which has to be discharged by filing relevant facts. Such facts are absent in this case. The question of application of decided cases comes only thereafter. In other words, in absence of facts, it cannot be said that the expenditure is revenue in nature. Accordingly, it is held that expenditure of Rs.3,50,000/- only and not Rs.5,74,674/- is capital in nature. The Assessing Officer is directed to revise the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d products using the industrial property right and technical information furnished to the assessee in pursuance of a non-exclusive right to sell the products throughout the world. Under the agreement, the Gates Corporation has supplied technical services, an exclusive non-transferable licence, authority, permission to use the licensed trademarks in respect of the licensed products. It has been argued that the assessee did not acquire any tangible or intangible property and the royalty is paid on the basis of a fixed percentage of the turn over. Accordingly, it is argued that the expenditure is revenue in nature. A number of cases were cited before him. The Assessing Officer also found out the cases, which support the view that the expenses of royalty are partly capital in nature. He referred to the decision in the case of CIT vs. Ciba India Ltd., 69 ITR 692, Sriram Pistons and Rings Ltd. vs. CIT 171 Taxman 81; CIT vs. Gujarat Carbon Ltd., 254 ITR 294; and CIT vs. Jyoti Electric Motors Ltd., 255 ITR 345, relied upon by the assessee. He also considered the decision in the case of CIT vs. British India Corporation Limited 165 ITR 51; CIT vs. Indian Oxygen Ltd., 218 ITR 337; CIT vs. IA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining has been held to be revenue in nature. 3.4 The learned counsel took up through the royalty agreement dated 24.08.2004, a copy of which has been placed on record. It is argued that on the facts, various cases relied upon by him before the lower authorities support the contention that the expenditure is revenue in nature. In reply, the learned DR drew our attention to the findings of the Assessing Officer and the learned CIT(A). In particular, it is submitted that the agreement is extendable beyond 10 years. The agreement provides the comprehensive technical know-how to the assessee. Therefore, it is argued that the learned CIT(A) was right in holding that the expenditure is capital in nature. 3.5 In rejoinder, the learned counsel submitted that although the revenue has relied on the decision in the case of Southern Switch Gears Limited (supra), the whole of the expenditure has been held to be capital in nature. At best, only a part of the expenditure could have been taken as capital expenditure. 4. We have considered the facts of the case and submissions made before us. The question as to whether an expenditure is capital or revenue in nature is always a vexed quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... centage of the net selling price for each sale of the licensed product as set fourth in the appendix to the agreement. The percentage is 1%. The formula for computing net selling price has been specified. Under article 10, the assessee has also been granted license on an exclusive, non-assignable basis to use licensed trademark relating to licensed products during the subsistence of the agreement. The agreement is to remain in force for an initial period of 10 years. It may be mentioned by us at this stage that gross block of fixed assets amounted to about Rs.88 crores and addition of work in progress of about Rs.4.26 crores was made in this year. With these facts, we proceed to examine as to whether the expenditure created any fixed asset are led to a benefit of enduring nature to the assessee in the capital field. 4.2 We have already mentioned that the assessee had been carrying on the business of manufacturing industrial hoses. The gross block of the assets at the beginning of the year amounted to about Rs.88 crores. After depreciation, the value of net block was about Rs.45.47 crores. This clearly establishes that no new business has been set up by the assessee in this year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer for royalty to be revenue expenditure, the only point surviving against the assessee is that the agreement subsists over a long period of 10 years. According to us, this point by itself does not lead to inference of capital expenditure because no advantage has been received in the capital field. On the other hand, the expenditure or any part thereof has not been incurred for setting up the business. The assessee does not retain any residual right under the agreement. Therefore, exclusive right to manufacture goods in India for 10 years does not lead to inference of benefit of enduring nature in the capital field. At the same time it is seen that the license fee is paid on the basis of net turn over and it has a direct relationship with an item in the revenue field. Therefore, we are of the view that the expenditure is of revenue in nature. Accordingly, ground No.2 of the appeal is allowed. Since the expenditure has been held to be revenue in nature, there will be no question of grant of depreciation thereon. 5. The result of aforesaid is that both the appeals are partly allowed. This order was pronounced in open court on 29.7.2011. - - TaxTMI - TMITax - Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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