TMI Blog2016 (3) TMI 691X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the test of enduring nature cannot always reliably be applied. Software industry is one such field where advancements and changes happen at a lightning pace and it is difficult to attribute any degree of endurability even to system software let alone application software. In view of the aforesaid discussion, question is answered in the negative and in favour of the assessee. - ITA No. 278 of 2007 - - - Dated:- 18-3-2016 - Girish Chandra Gupta And Indrajit Chatterjee, JJ. For the Appellant : Mr. J. P. Khaitan, Sr. Adv. Mr. Avra Mazumder, Adv. For the Respondent : Mr. P. K. Bhowmik, Adv. JUDGMENT Girish Chandra Gupta J. The assessee has come up in appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act ) against the order of the Income Tax Appellate Tribunal, E - Bench, Kolkata dated 15th December, 2006 in ITA No.443/Kol/2003 for the assessment year 1997-98. By the order dated 1st August, 2007 a Division Bench of this Court admitted this appeal on the following substantial questions of law:- (I) Whether on the facts and in the circumstances of the case the Tribunal erred in law in upholding the disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts and amortized ₹ 2,40,000/- by debiting the same to the Profit and Loss Account of the relevant previous year. By the order dated 13th March, 2000, the assessing officer completed the scrutiny assessment under Section 143(3) for the assessment year 1997-98. By the aforesaid order the assessing officer inter alia disallowed the expenditure on account of software development by holding that it was a capital expenditure. To be precise the assessing officer held as follows:- In respect of (d) above, the assessee has also incurred expenditure on Rs..41,08,556/- on account of software development etc. In connection with mining practices and study on Viniculture on biodegradable Wastes on experimental basis. It was submitted on behalf of the assessee that the said package helps them in planning the production and bauxite grade control in mines. This software covers geological data processing, mine field surveying, mine excavation planning and grade control. It is developed on windows NT and is run in a batch- mode, never on line. It is a planning tool in the hands of production department of mines. In short this application package helps in gauging proper control for effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r observed that the time is fast changing day by day, and the new systems are being developed and software is needed like raw material in manufacturing. The Tribunal, therefore held that the software expenses are of purely revenue nature and are allowable in full. I have carefully considered the submissions of the Ld. Representatives and considered the facts of the case. The Assessing Officer has disallowed the claim of the assessee towards software development on the ground that the expenditure related to software development was incurred in connection with mining practices and study of vermiculture on bio-degradable wastes on experimental basis and it was held to be capital expenditure. On consideration of the facts it reveals that nowhere the assessee states that the software development expenditure was on experimental basis. Actually this package helps in planning the production and bauxite grade control in mines. This software covers geological data processing, mine field surveying, mine excavation planning and grade control. Therefore, it is a planning tool in the hands of production department of mines. It helps the assessee in gauging proper control for effective min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention, he has relied upon the following decisions a) Empire Jute Co. Ltd. -vs.- CIT 124 ITR 1 (SC) b) CIT -Vs.- K CO. 181 CTR 378 (Del) c) Sumitomo 'Corpn. India (p) Ltd. -vs.- ACIT [(2005) 1 507' 91 (Del)] d) Business Information Processing Services -vs.- ACIT 73 ITD 304 (JP) e) ITC Classic Finance Ltd. -vs. DCIT 112 Taxman 155 (Cal) We have carefully considered the rival submissions and perused the material placed before us. During the year under consideration, the assessee has incurred expenditure of ₹ 41,08,556/- on account of software development in connection with mining practices and study on verniculture on bio-degradable wastes on experimental basis. The said package helps the assessee in planning the production and bauxite grade control in mines. This software covers geological data processing, mine field surveying, mine excavation, planning and grade control. It is a planning tool in the hands of production department of mines. We find that on the above facts the decision of Hon ble Rajasthan High Court in the case of Arawali Constructions Co. Pvt. Ltd. (supra) relied upon by the Ld. D. R. would be squarely applicable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of law arises. Thus there is no decision on merit by Their Lordships of Delhi High Court. Therefore, the above decision would be of no help to the assessee. The decisions of the ITAT, Delhi Bench in the case of Sumitomo Corpn. India P. Ltd. -Vs.- ACIT (supra) and Jaipur Bench in the case of Business Information Processing Services -Vs.- ACIT (supra) relied Upon by the assessee support the assessee s case. However, the ITAT Kolkata Bench in the assessee s own case for assessment year 2002-03 (supra) has upheld the disallowance made by the A.O. in this regard. Thus, there are contrary decisions of the ITAT on this point. Moreover, whether an expenditure on acquisition of software is a capital expenditure or a revenue expenditure would depend on the facts of each case. Considering the facts of the assessee s case we are of the opinion that the facts in the assessee s case are identical to the facts of Arawali Constructions Co. P. Ltd. (supra) before the Hon ble Rajasthan High Court and therefore the said decision of Hon ble Rajasthan High Court would be squarely applicable. Therefore, respectfully following the same we reverse the order of the CIT (A) on this point and restore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s an aluminum ore, which is obtained by the process of mining, from which pure aluminum is manufactured by various industrial processes. Therefore bauxite is a basic raw material for manufacturing aluminum. The software used by the assessee has the following characteristics:- 1. It is an application package developed on Windows NT. 2. It helps the assessee in planning the production and bauxite grade control in mines. 3. It covers geological data processing, mine field surveying, mine excavation planning, and grade control. 4. It is a planning tool in the hands of the production department of mines. 5. It helps in gauging proper control for effective mining since it gives statistics of Bauxite deposits by way of lithography, surface plane and graphic representation. From the points noted above, it is clear that the software developed by the assessee is an application software and not an operational one. The assessing officer had disallowed the claim of the assessee on the following grounds:- 1. The amount spent on software development was not for the purpose of facilitating the assessee s existing trading and manufacturing operations or enabling management a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of fixed capital for the assessee. It is important to bear in mind that what is required to be seen is not whether the advantage obtained lasts forever but whether the expense incurred does away with a recurring expense(s) defrayed towards running a business as against an expense undertaken for the benefit of the business as a whole. In other words, the expenditure which is incurred, which enables the profit making structure to work more efficiently leaving the source of the profit making structure untouched, would in our view be an expense in the nature of revenue expenditure. Fine tuning business operations to enable the management to run its business effectively, efficiently and profitably; leaving the fixed assets untouched would be an expenditure in the nature of revenue expenditure even though the advantage may last for an indefinite period. Test of enduring benefit or advantage would thus collapse in such like cases. It would in our view be only truer in cases which deal with technology and software application, which do not in any manner supplant the source of income or add to the fixed capital of the assessee. [See Alembic Chemical Works Co. Ltd. v. CIT, (1989) 177 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t page 489). 12. The aforesaid would show that what the assessee acquired through Arthur Anderson and Associates was an application software which, enabled it to execute tasks in the field of accounting, purchases and inventory maintenance. The fact that the application software would have to be updated from time-to-time based on the requirements of the assessee in the context of the advancement of its business and/or its diversification, if any; the changes brought about due to statutory amendments by law or by professional bodies like the Institute of Chartered Accountants of India, which are given the responsibility of conceiving and formulating the accounting standards from time-to-time, and perhaps also, by reason of the fact that expenses may have to be incurred on account of corruption of the software due to unintended or intended ingress into the system - ought not give a colour to the expenditure incurred as one expended on capital account. Given the fact that there are myriad factors which may call for expenses to be incurred in the field of software applications, it cannot be said that either the extent of the expense or the expense being incurred in close proximit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Delhi High Court in the case of Shriram Refrigeration Industries Ltd. v. CIT, [1981] 127 ITR 746, and, allowed the claim of the assessee looking to the nature of expenditure as revenue. In appeal before the Tribunal, the Tribunal has also gone by these decisions and further held that the provisions of section 35AB of the Income-tax Act, 1961, have no application. In Shriram Refrigeration Industries Ltd. v. CIT, [1981] 127 ITR 746 (Delhi), there was a collaboration agreement, a licence was given to the assessee to manufacture and sell particular items, there was no transfer or parting with secret process and technical knowledge to the assessee, a lump sum payment was made in addition to royalty based on the sale price of the manufactured articles, it was treated as revenue expenditure. When the technical know-how has not been transferred in the case of the Delhi High Court that has no application as in the case of technical know-how, i.e., programme of technical know-how, has been transferred by way of feeding of the programme in computer to make use in the mining operation, therefore, the Delhi High Court has no application. In CIT v. Borosil Glass Works Ltd., [1986] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32 of the Income-tax Act, 1961, for each of the assessment years 1970 71, 1971 72 and 1972 73? 3. Whether, on the facts and in the circumstances of the case, the assessee-company is entitled to depreciation on the expenditure of 2,000 incurred by the assessee for the purchase of know-how from Messrs. Ricardo and Co. Engineering Ltd., U.K., while computing its income for the assessment year 1971 72? The Bombay High Court held as follows:- At the outset, it may be mentioned that it was agreed by counsel for the parties that the questions referred to us at the instance of the Revenue, that is, questions Nos. 2 and 3 above, are covered by the decisions of this court. So far as question No. 2 is concerned, it is covered by the decision of this court in the assessee's own case which is reported in Premier Automobiles Ltd. v. CIT, [1984] 150 ITR 28. The entire amount paid by the assessee for acquisition of drawings, blue prints, specifications, process sheets and technical data, etc., in respect of which depreciation has been allowed by the Tribunal in this case to the assessee, has been held in the above case to be revenue expenditure and allowed as a deduction in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset or an advantage for the enduring benefit, the same can be properly classified as capital expenditure. At the same time, even though the expenses are once and for all and may give an advantage for enduring benefit but is not with a view to bringing into existence any asset, the same cannot be always classified as capital expenditure. The test to be applied is, is it a part of the company's working expenses or is it expenditure laid out as a part of the process of profit earning. Is it on the capital layout or is it an expenditure necessary for acquisition of property or of rights of a permanent character, possession of which is condition on carrying on trade at all. The assessee in the course of its business acquired certain application software. The amount is paid for application of software and not system software. The application software enables the assessee to carry out his business operation efficiently and smoothly. However, such software itself does not work on stand alone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Thus, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to carry on its business operations effectively, efficiently, smoothly and profitably. However, such software itself does not work on a stand alone basis. It has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in the manufacturing process rather than the tool itself. Therefore, the payment for such application software, though there is an enduring benefit, does not result in acquisition of any capital asset and it merely enhances the productivity or efficiency and hence, has to be treated as revenue expenditure. The Apex Court in Empire Jute Co. (supra) has cautioned the courts against the application of the test of enduring nature without considering the surrounding circumstances. The Apex Court held as follows:- The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was engaged in the manufacture of antibiotics including penicillin. With a view to increasing the yield of penicillin, the assessee negotiated with M/s Meiji a reputed enterprise engaged in the manufacture of antibiotics in Japan, which agreed to supply to the assessee the requisite technical know-how so as to achieve substantially higher levels of production. The negotiations culminated in an agreement dated 9-10-1963, whereunder Meiji, in consideration of the once for all payment of 50,000 US dollars (then equivalent to ₹ 2,39,625) agreed to supply to the assessee the sub-cultures of the Meiji's most suitable penicillin producing strains , the technical information, know-how and written description of Meiji's process for fermentation of penicillin along with a flow sheet of the process on a pilot plant; the design and specifications of the main equipments in such pilot plant; arrange for the visits to and training at assessee's expense, of technical representatives of the assesee to Meiji's plant at Japan and to advise the assessee in the large scale manufacture of penicillin for a period limited to 2 years from the effective date of the agreement. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovement of the existing business and should, therefore, be held to be a revenue expenditure. Reference may also be made to the observations of this Court in CIT v. CIBA of India Ltd. [AIR 1968 SC 1131 : (1968) 2 SCR 696, 705 : 69 ITR 692] There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or Revenue. The once for all payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities. In a given case, the test of enduring benefit might break down. The Apex Court in Alembic Chemicals has recognised the fact that in a field where advancements are taking place rapidly and where technology which was once the state of the art becomes obsolete in a short time, the test of enduring nature cannot always reliably be applied. Software industry is one such field where advancements and changes happen at a lightning pace and it is difficult to attribute any degree of endurability even to system software let alone application software. In view of the aforesaid discussion, question number ( ..... X X X X Extracts X X X X X X X X Extracts X X X X
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