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2016 (5) TMI 865 - ITAT DELHI

2016 (5) TMI 865 - ITAT DELHI - [2016] 49 ITR (Trib) 686 - Depreciation on license fees paid for the use of computer software @25% of written down value - rejection of assessee’s claim of depreciation @ 60% on “License Fees" - Held that:- Matter restored back to the file of the Assessing Officer to examine the question whether the expenditure on computer software was capital or revenue in the light of the criteria laid down above after giving an opportunity of being heard to the assessees. If on .....

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Shri A.M. Govil, CIT(DR) ORDER Per Smt. Diva Singh, Judicial Member The present appeal filed by the assessee is arising out of the final assessment order dated 30.09.2010 u/s 143(3) r.w.s 144C in pursuant to the direction of the Dispute Resolution Panel (hereinafter referred to as DRP ) dated 27.09.2010. 2. The sole issue which we are called upon to decide is Ground No.26 which reads as under:- 26. That on facts and in law, the AO/DRP erred in restricting the depreciation on license fees paid f .....

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ing extract of the order passed by the Co-ordinate Bench that the partial recall of the order was not objected to by the Revenue. For readyreference, the relevant extract is reproduced hereunder for ready-reference:- 6. Learned counsel of the assessee pointed out that in para 21 and 21.1 of the order of the Tribunal in question, it has been mentioned that no particular argument was made by the Id. counsel of the assessee, hence, ground no. 26 of the assessee was dismissed. The counsel further co .....

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ed a copy of written arguments submitted during the hearing of the original appeals before IT AT 'G' Bench. 7. Replying to the above, Id. DR submitted that if arguments and submissions of the assessee have not been considered then he is unable to respond to this allegation and if it is found just and proper, then he has no serious objection if order in question of the Tribunal is recalled only for adjudication of this limited issue. 8. In view of above arguments of both the sides, we are .....

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act, the Id. counsel of the assessee submitted written and oral arguments during the hearing of the original appeal, which deserves to be rectified by recalling the order for this limited purpose. Therefore, second issue of the assessee is accepted and we order that the observations and findings of the Tribunal in para 21 and 21.1 of the order in regard to ground no. 26 in ITA No. 499I/Del/2010 of the assessee for AY 2006-07 are set aside and order in issue is recalled for this limited purpose a .....

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s. DCIT (2008) (SB) 301 ITR 1 (Del). Specific attention was invited to para 61 and 62 of the said order. 5. The Ld. CIT(DR) on the other hand submitted that the AO at page 27 of the assessment order vide para 9 in his order passed u/s 143 r.w.s 144 (c) relying on Sudarshan Chemical Industries Limited , 110 ITD 171 has decided the issue against the assessee. Accordingly it was his stand that the issue stands considered. 6. We have heard the rival submissions and perused the material available on .....

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lets for sale of assembled and imported products and was rendering advisory services and software development services to its associated enterprise. The short issue for consideration in the present proceedings arises from the rejection of assessee s claim of depreciation of ₹ 87,05,914/- @ 60% on License Fees was rejected limiting the claim to 25% on the following reasoning:- 9. Excess claim of depreciation on license fees It was seen from the appendix II to tax audit report in form 3CD th .....

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6.1. In the context of the above finding, the Ld.AR has placed reliance on the decision of the Special Bench in Amway India Enterprises vs DCIT, Circle-1(1), New Delhi [2008] 111 ITD 112 [Del.] (SB). Paras 61 and 62 therefore have specifically been referred to. These are reproduced hereunder:- 61. We have already discussed as to how computer software is a tangible property. Though a licensee, the person purchasing the disk or other medium containing the software is owner to the extent of the ri .....

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e requirements of the Plant. The assessee's ownership of limited right over the tangible asset is sufficient to conclude that the assessee is the owner of the Plant. There is therefore no difficulty in allowing depreciation claim at 25 per cent under Section 32(1)(i) read with Appendix-I, Part-A division III (1) to the I.T. Rules, 1962. With effect from 1.4.2003, Computer Software has been classified as a tangible asset under the heading "Plant" in Appendix-I to the IT Rules entitl .....

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description of Plant and depreciation was allowed at 60%. With effect from 1.4.2003, computer software was also included along with computers. The argument of the assesses was that the amendment to the rules was merely clarificatory and therefore, even on computer software with effect from 1.4.1999, 60 per cent depreciation should be allowed. We do not agree with the submissions of the assessee in this regard. The amendment is prospective. It is not clarificatory for the reason that computer an .....

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re not available in the facts of the present case. Accordingly, in the absence of discussion on facts in the orders of the authorities below, the issue cannot be decided. The Special bench considering the judicial precedent concluded that there cannot be any specific or precise test which can be applied conclusively or universally for distinguishing between capital and revenue expenditure. It is a blurred and undefined area in which anyone can be get lost. In these circumstances, it has correctl .....

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ed from the practical and business view-point and in accordance with sound accountancy principles and this rule is of special significance in dealing with expenditure on expansion and development of business. The Special Bench has observed that while dealing with this complex issue, three tests are generally applied to decide the nature of expenditure as to whether it is capital or revenue, they are: the test of enduring benefit; ownership test; and functional test; applying the said tests, expe .....

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sessee becoming owner thereof, it cannot be said that the said expenditure is a capital expenditure. The coming into existence of an asset as a result of incurring expenditure along. Thus, it has been summed up that this is not sufficient to treat the said expenditure as of capital nature unless the asset coming into existence is also owned by the assessee. 6.3. Specifically addressing a situation in the case of computer software it has been held that the functional test becomes more important a .....

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cation of the functional test, it is found that the it confers a benefit in the capital field. On the other hand, some computer software may have a very limited economic life so as to be treated as capital expenditure, though owned by an assessee. lf 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 on more efficiently or more profitably while leaving the fixed capital untouched, .....

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rom the point of view of different assets or advantage like tenancy or use of know-how because software is a business tool enabling a businessman to run his business. 6.4. Accordingly it has been held that the advantage which an assessee derives is what has to be seen. The nature of advantage has to be seen in a commercial sense. If advantage is in the capital field, then the same would be capital expenditure. If the advantage consists merely in facilitating the assessee's trading operations .....

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hlight the fact that the Special Bench laid down that the following factors would be relevant to determine whether the advantage operates in the capital field or revenue field :- (i) Nature of business of the assessee : It is necessary to obtain an understanding of the business function or effect of a concern's software. Software normally functions as a tool enabling business to be carried on more efficiently. The scope, power, longevity of such a tool and its centrality to the functions of .....

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of acquisition of Turbo Gold Software for ₹ 17.61 lakhs by the assessee in the instant case. The said software helped in compression of size of e-mails sent through the Lotus Notes Mailing System and it included licenses for 150 users who were using Lotus Notes Mailing System and software license for running on its server. If use of this software in the business of the assesses was limited to facilitate merely an effective and fast communication in order to increase its organizational eff .....

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i) As a general rule, it may be stated that the more expensive the computer software the more it is likely to be a central tool of the business and the more enduring is likely, to be its effect adding to the profit-earning apparatus. If there are associated capital expenditure like purchase of new computer equipment for running the software developed under a project, then it can be considered as capital expenditure. This is especially the case where the new hardware is not merely desirable but n .....

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e computerised. (iv) It has to be borne in mind that computer software industry is of a fast changing nature. Therefore, whatever software is purchased by an assessee would become outdated much earlier than expected. The assessee has, therefore, to upgrade his software. An element of upgrading does not automatically make the expenditure capital. The presence of an element of upgrading, therefore, will not necessarily cause the expenditure in question to be capital. 6.7. The following conclusions .....

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d 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 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 .....

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