TMI Blog2013 (8) TMI 835X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Held or its utility to a businessman which may touch either capital or revenue field - CIT has not mentioned what is the exact span of life of the software and whether it satisfies the functional test to be treated as revenue expenditure - Following decision of Amway India Enterprises Versus Deputy Commissioner of Income-tax, Circle 1(1), New Delhi [2008 (11) TMI 432 - ITAT DELHI] - Matter remitted back - Decided in favour of Revenue. Disallowance of lab development charges - Held that:- assessee has failed to reconcile before the Assessing Officer not only at the time of assessment but also during the remand whether actually the amount of Rs. 48,95,925 was included in the lab maintenance charges of Rs. 1,37,86,523 and has been included in the gross income of the impugned assessment year - Therefore, matter is remitted back to A.O. - Decided in favour of Revenue. - ITA No.1054/Hyd/2012 - - - Dated:- 16-7-2013 - Chandra Poojari and Saktijit Dey, JJ. For the Appellant : Smt Anjana Sahu For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the fact that the payments were made to parties who developed software for the assessee on 'on-site offshore model', the Assessing Officer came to a conclusion that non-deduction of tax at source is in contravention of provisions of section 40(a)(ia) of the Act, and, therefore, disallowed the expenditure claimed and added it to the income of the assessee. The assessee being aggrieved of the disallowance made in the assessment order, preferred an appeal before the CIT(A). 5. In course of hearing before the CIT(A), it was contended by the assessee that the software development expenses had been paid to parties who developed software for the assessee on 'on-site offshore model' which is cost effective. It was submitted that this decision of outsourcing of development of software was taken by the management committee, considering the fact that if development of the same software is undertaken by the assessee, it would have cost more than Rs. 100 lakhs. It was contended that the assessee had purchased the required software for the purpose of business from Origin Global Services Pvt. Ltd., for a consideration of Rs. 76,30,000 and the transaction is that of purchase of software and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contrary to the finding of the CIT(A) to prove the fact that it is not a revenue expenditure. 9. We have considered the submissions of the parties and perused the material on record. On perusal of the CIT(A) order, it can be seen that he has concluded that the expenditure was incurred for purchase of application software which has a limited span of life, unlike system software, hence it could be treated as revenue expenditure. However, on the basis of which material or evidence such conclusion was arrived at by the CIT(A) is not discernible from the material on record. The ITAT Delhi Special Bench in the case of M/s. Amway India Enterprises (supra) after following the ratio laid down by the Supreme Court in the case of TCS AIT-2004-01-SC in 111 ITD 112 has held as under: "55. In our opinion, the ratio laid down by the Hon'ble Supreme Court in the case of TCS AIT-2004-01-SC (supra) holding that computer software put in a medium of disk would be goods can only lead to the conclusion that purchase of such disk is acquiring a tangible asset. If the disk, tape or floppy or other electronic medium in which the software is stored is by itself goods, then the assessee who acquires t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o evident from the amendment to the law w.e.f. 1.4.2003 granting 60% depreciation on computer software that even the legislature considers the life of computer software as about two years by providing the higher rate of depreciation @ 60% thereon so as to enable assessee to write off the same to the extent of 84% even when treated as capital asset within a period of two years. An assessee may own a software outright or be a licensee but the same may operate to confer benefit only in the revenue field and therefore is may have to be regarded as Revenue Expenditure. The decision of the Hon'ble Supreme Court, In the case of Empire Jute Co, Ltd. (supra) lays down that it is not every advantage of enduring nature acquired by an assessee that brings the case within she principle laid down in this test (enduring benefit 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 disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently expenditure on software, capital. Similarly, example of a travel agent can be cited here as an illustration wherein the expenditure incurred on acquisition of a software for the purpose of enabling the assessee to make booking of air tickets would be a capital expenditure because such a software certainly forms part of the profit-making apparatus of the travel agency business inasmuch as the business of air ticket booking is done with the help of that software. Another example which can be considered here is that of acquisition of Turbo Gold software for Rs. 17.61 lakhs by one of the assessee in the present case i.e. M/s Amway India Enterprises. As submitted before us, the said software helps in compression of size of e-mails sent through the Lotus Notes Mailing System and it includes licenses for 150 users who are using Lotus Notes Mailing System and software license for running on its server. If use of this software in the business of the assessee is limited to facilitate merely an effective and fast communication in order to increase its organizational efficiency, the same cannot be treated as forming part of the profitmaking apparatus of the assessee. On the other hand, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er software is shorter (say less 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 Held or its utility to a businessman which may touch either capital or revenue field. 60. Having laid down the criteria for determining the nature of expenditure incurred on acquisition of software, whether capital or revenue, we are of the view that these criteria need to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gned assessment year. 13. The assessee challenged such addition before the CIT(A). It was submitted before the CIT(A) by the assessee that the Assessing Officer without giving an opportunity to the assessee to explain or calling for any clarification in the course of assessment proceedings has made the addition. It was further submitted that the assessee's books of account were audited as per the provisions of section 44AB of the Act and the amount of Rs. 48,95,925 is included and reflected under the head of 'lab maintenance fee' of Rs. 1,37,84,523 which forms part of gross income declared by the assessee amounting to Rs. 6,88,22,800. The CIT(A) on considering the submission of the assessee called for a Remand Report from the Assessing Officer. The Assessing Officer in his Remand Report stated that the addition was made as the assessee has not furnished required information. The CIT(A), however, deleted the addition by observing as under: "7.2 I have considered the submissions made by the appellant, gone through the order of the AO and heard the AR in person. In course of the appellate proceedings, on the last date of hearing, i.e., on 16.02.2012, the AR has filed two Paper ..... X X X X Extracts X X X X X X X X Extracts X X X X
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