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GE Capital Business Process Management Serves Pvt. Ltd. Versus A.C.I.T., Circle 12 (1) , New Delhi And Vica-Versa

2015 (11) TMI 68 - ITAT DELHI

Addition on account of license fees, connectivity charges and co-ordination charges for the use of Vision plus software - revenue v/s capital expenditure - Software only is not the soul of assessee’s business as argued by the ld. DR. - Held that:- In the case of southern Switchgear Ltd. (1997 (12) TMI 105 - SUPREME Court ), the technical knowledge and information remained with the assessee even after termination of agreement which constituted enduring benefit to the assessee whereas in the prese .....

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new business and the foreign collaborator besides furnishing information and technical know-how, rendered valuable assistance in setting up of the factory itself. No such situation arises in the present case. In view of this discussion and relying on various decisions cited by assessee, we are of the considered opinion that the license fee etc. paid by the assessee to M/s. GECC(USA) is revenue expenditure deductible u/s. 37 of the Act. Decided in favour of assessee.

Depreciation @ 60% .....

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cided in favour of assessee. - ITA No. 2806/Del./2011, ITA No. 2124/Del./2013 - Dated:- 16-10-2015 - Shri I. C. Sudhir, Judicial Member And Shri L. P. Sahu, Accountant Member For the Petitioner : Shri Sanjeev Sabharwal, Sr. Adv For the Respondent : Shri A.K. Saroha, CIT/DR ORDER Per L. P. Sahu, Accountant Member ITA No. 2806/Del./2011 is directed by the assessee against the order dated 18.03.2011 passed by the learned CIT(A)-XV, New Delhi for the assessment year 2007-08, whereas ITA No. 2124/Del .....

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ncome Tax, Circle 12(1), New Delhi, on account of license fees, connectivity charges and co-ordination charges for the use of Vision plus software by treating the same as capital expenditure. The Ld. CIT(A) has further erred in alleging that the Appellate was the owner of the Vision plus software. 2. Without prejudice to the above, the Ld. CIT(A) has erred in not allowing depreciation @ 25% on above-mentioned payments of ₹ 2,19,60,467 under section 32 of the Act. Grounds raised by Revenue .....

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decision of his predecessor CIT(A) for the immediately preceding assessment year 2007-08, who had held the same as capital expenditure. 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the aggregate disallowance of ₹ 2,42,58,933/- on account of License fee, connectivity charges and co-ordination charges paid to a US based company M/s. GE Capital Corporation for use of vision plus software holding the same as revenue in nature and allowable u/s. .....

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assessee company is engaged in the business of process management services for credit cards. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has shown to have paid a sum of ₹ 1,76,76,000/- towards license fee, ₹ 33,47,207/- towards connectivity charges and ₹ 9,41,260/- towards co-ordination charges to GE Capital Corporation USA [hereinafter referred to as GECC(USA) ] and claimed deduction u/s. 37 of the Act as Revenue Expenditure. T .....

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software and further entered into end-user license agreement with the assessee company allowing it to use this software. It was also submitted that the license fee has been paid in lieu of only right of usage for limited period of technical know-how; that no ownership rights pass on to the assessee and that no right or advantage of enduring nature arose to the assessee. The Assessing Officer, however, being not satisfied with the reply of assessee, observed that in lieu of acquisition of above t .....

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respect of grant of license and that the information was not only in relation to use of license but co-ordination and connectivity services provided by GECC(USA). The AO, therefore, relying upon the decisions of Hon ble Supreme Court in the case of Jonas Woodhead and Sons (India) Ltd. vs. CIT, 224 ITR 342 and Southern Switch Gear Ltd. vs. CIT, 232 ITR 359, concluded that acquisition of license granted by the licensor in itself is a capital asset being intangible asset and the payment made for ac .....

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puter provided by ATIS Committee and definition of other accessories like switches, Router, Multiplexer or Mux held that all the networking equipments other than computer are plant and machinery eligible for depreciation @ 15% instead of 60% as claimed by the assessee. Therefore, the excess claim of depreciation to the extent of ₹ 83,49,188/- was added to the income of the assessee. The assessee challenged the assessment order in appeal before the ld. CIT(A), who vide impugned order confir .....

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right purchase of software giving ownership to the assessee. It was submitted that the payments made towards connectivity charges and co-ordination fees payable to GECC(USA) are relatable to facilities/services provided by the assessee to undertake the business operations and are not relatable to acquisition of any know-how and enduring benefit to the assessee. Referring to clauses 2.3 and 5.5 of the end user agreement, under which the license fees were paid, the ld. AR submitted that the assess .....

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C or purged and that the use of the licensed program and any portion thereof has been discontinued. Reliance was placed on the following decisions : (i). CIT vs. Asahi India Safety Glass Ltd. 203 Taxman 277 (Del.) (ii). SLP(C)CC No. 10108/2012 CIT vs. M/s. Asahi Safety Glass Ltd. (iii). Empire Jute Company vs. CIT, 124 ITR 1 (SC) (iv). CIT vs. Amway India Enterprises, 346 ITR 341 (Del.) (v). CIT vs. IAEC (Pumps) Ltd., 232 ITR 316 (SC) (vi). DCIT vs. Eicher Motors Ltd., 53 Taxman 317 (Delhi Tri.) .....

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for allowance of appeal. 6. The learned DR, on the other hand, relied on the order of authorities below. He also submitted that in the case of Empire Jute Company Ltd. vs. CIT, 124 ITR 1(SC), the Hon ble Court observed that there have been numerous decisions where the vexed question whether a particular expenditure incurred by the assessee is of a capital or revenue nature, has been debated, but it is not possible to reconcile the reasons given in all of them because general principle cannot be .....

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which is subject matter of End-User License Agreement dated 07.07.2000 is vital for the business of assessee, as the vision plus software is the soul of assessee s business. Referring to clause No. 3.1 of the agreement, the ld. DR contended that lump sum amounts have been agreed to be paid by the assessee quarterly and that the software is not linked with the turnover or actual usage. He submitted that signing of agreement and deciding the rate of payment per quarter were mere paper formalities .....

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ed by both the parties rest on the vital question whether under the facts and circumstances of the case, the payment of license fee, connectivity charges and co-ordination charges amounting to ₹ 2,19,60,467/- made by the assessee to GECC(USA) under the end-user agreement shall fall within the category of capital expenditure or revenue expenditure? The stand of the assessee is that it is in the nature of revenue expenditure and deductible u/s. 37(1) of the Act whereas the ld. Authorities be .....

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provided by GECC(USA). He, therefore, held that the acquisition of license granted by the licensor in itself is a capita asset, being intangible asset , which having long validity is capital in nature. We have gone through the End-User license agreement dated 07.07.2000 and we do not find substance in the conclusion arrived at by the ld. Authorities below. It is notable that in terms of clause 2.2 and 2.3, the assessee company is specifically restricted to make copies of the software and make it .....

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ts business use only in accordance with this agreement. 2.3. GECBPMS undertakes that it shall not; (a) make the licensed program or any part thereof available to any period other than its employees on a need to know basis; (b). copy the Licensed Program or any part thereof, other than for archival backup purposes; (c). use the Licensed Program for any purpose other than as permitted by clause 2.2 of license, sell or otherwise alienate the Licensed Program in any manner whatsoever; or (d). Duplic .....

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quired to deliver the licensed program back immediately to GECC(USA) after removing the same from its systems on termination of agreement. Clause 5.5 of the agreement reads as under : 5.5. Upon termination of this Agreement the right to use the Licensed Program shall end and GECBPMS shall, with immediate effect : (a) deliver to GECC the Licensed Program; and (b) purge all copies of the licensed program stored in any CPU or other storage medium or facility, which for any reason cannot be delivere .....

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renewal and revision every calendar year. No case is made out by the department to assume that the periodic payments made by the assessee were the installments for acquisition of such software and the payment was not for mere usage of software. It is a matter of fact on record that M/s. GECC (USA) itself has received the right to use the software internally including its group entities for its business and it does not have any right to commercially exploit the software. The assessee is vested wi .....

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license agreement in the instance case does not have the effect of any enduring benefit for holding the same as capital in nature. The ld. DR has failed to rebut the contention of the assessee that the impugned software is an application software and is being used for accounting purposes. Such software are used by various banks and financial institutions. Moreover, the ld. CIT(A) in succeeding assessment years 2008-09, 2010-11 and 2011-12 has categorically gave finding of fact that the software .....

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acquire any ownership on the software and after termination of license agreement, all the rights and title remained with GECC (USA). The ld. DR failed to dislodge the findings of the ld. CIT(A) given in the orders passed for subsequent years after considering the same license agreement and various decisions of Hon ble High courts and Supreme Court. It is also a matter of record that the assessee has returned its income for the relevant previous year at ₹ 152.88 crores whereas the amount ex .....

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nation of license agreement, said software was to be delivered back to the licensor and the same cannot be made to use by the assessee in any manner. Similarly in the case of Jones Woodhead and Sons (India) (supra) relied on by the Assessing Officer is also distinguishable on facts inasmuch as in that case the agreement between the assessee and the foreign collaborator was in relation to setting up of a new business and the foreign collaborator besides furnishing information and technical know-h .....

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