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2016 (6) TMI 592 - ITAT MUMBAI

2016 (6) TMI 592 - ITAT MUMBAI - TMI - Expenditure on Software Licence Fees - revenue v/s capital - Held that:- In the light of the factual and legal matrix of the case and respectfully following the ratio of the decisions of the Hon'ble Bombay High Court in the case of Raychem RPG Ltd. (2011 (7) TMI 953 - Bombay High Court ) and Amway India Enterprises (2008 (2) TMI 454 - ITAT DELHI-C ) and the finding of facts rendered in the assessee’s own case for A.Y. 2010-11 we hold and direct that out of .....

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d we direct the AO to allow the assessee eligible depreciation thereon in accordance with law.

Foreign Exchange Loss - Held that:- On an appreciation of the facts of the case on hand, it is seen that the foreign exchange loss has arisen on account of trade transactions entered into by the assessee and is with respect to the revaluation of foreign currency sundry debtors and creditors as on 31.03.2009. In our view, the claim of the assessee in the case on hand in respect of loss on acc .....

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be treated as capital asset and therefore the same is to be treated and allowed as revenue expenditure.- Decided in favour of assessee. - ITA No. 5990/Mum/2012, ITA Nos. 6407 & 6408/Mum/2012 - Dated:- 7-6-2016 - Shri Jason P. Boaz, Accountant Member And Shri Sandeep Gosain, Judicial Member For the Revenue : Shri S. Senthil Kumaran For the Assessee : Shri Nishant Thakkar & Ms. Jasmin Amalsadvala ORDER Per Jason P. Boaz, A. M. These appeals constitute, cross appeals, by the Revenue and the a .....

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me of ₹ 9,33,69,740/-. The return was processed under section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. The assessment was completed under section 143(3) of the Act vide order dated 28.12.2011, wherein the income of the assessee was determined at ₹ 10,25,27,150/- in view of the following disallowances/additions: - i) On account of software Licence Fee ₹ 60,35,642/- ii) On account of foreign exchange loss .....

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ed Commissioner of Income Tax (Appeals) erred in treating software licenses of ₹ 49,95,808/- (Rs.60,35,642/- less ₹ 13,39,834/-) as Capital Expenditure. 2) The Appellant crave leave to alter, amend and/or add any another ground of appeal. 2.2.4 Revenue s appeal in ITA No. 5990/Mum/2012 for A.Y. 2009-10 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in allowing ₹ 13,39,834/- as revenue expenditure quoting the decision of Hon'ble ITAT .....

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aside and that of the Assessing Officer be restored. 4. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 3. Ground No. 1 (assessee s appeal)/Ground No. 1 (Revenue s appeal) - Expenditure on Software Licence Fees 3.1 The facts of the matter are that the assessee-company is engaged in the business of pre-employment screening on behalf of the employers. In the year under consideration, it claimed deduction of ₹ 60,35,642/- on account of softw .....

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nditure. On appeal, the learned CIT(A) held that an amount of ₹ 13,39,834/- pertains to software licence fees for upto 12 months by applying the functional test laid down in the decision of the ITAT Special Bench, Delhi in the case of Amway India and treated the balance of ₹ 46,95,808/- (i.e. ₹ 60,35,642/- less ₹ 13,39,834/-) as capital expenditure. 3.2.1 We have heard the learned D.R. for Revenue in respect of the grounds raised at S.No. 1 of its appeal. It was contended .....

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on account of software licence fees was expenditure of capital nature. 3.3.1 Per contra, the learned A.R. for the assessee, in respect of Revenue s ground No. 1 supported the finding of the learned CIT(A) that an amount of ₹ 13,39,834/- was rightly held to be revenue expenditure by the learned CIT(A) in the impugned order. 3.3.2 In respect of ground No. 1 of the assessee s appeal, the learned A.R. for the assessee submitted that the issue of whether the expenses incurred on software licen .....

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n a very short period and that these were acquired to carry out routine business operation of the assessee more efficiently. In addition to the decision of the Coordinate Bench cited (supra), the learned A.R. for the assessee also placed reliance on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Raychem RPG Ltd. (2012) 346 ITR 138 (Bom.). 3.4.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record. The detail .....

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irewall 1,20,169 21 Jun 2008 - 20 Jun 2009 12 4 Network Tech Lab AMC for Sonicwall firewall 60,084 21 Jun 2008 - 20 Jun 2009 12 5 BSG Salesforce com annual software license renewal 4,42,368 1 Aug 2008 - 21 Jul 2009 12 6 EMS Consultancy Digital Signature for Ashish Dehade 2,450 7 Ashish Dehade Winzip 11.2 Standard Multi Use License 17,171 Sep 2008 - Aug 2009 12 8 Inflow Technologies Pvt. Ltd. Websense Web Security 6,11,292 15 Dec 2008 - 14 Dec 2009 12 9 Fadv Corporation True UP License Fee 4,77,7 .....

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rtially of the year under consideration. 3.4.3 We find that the Coordinate Bench of this Tribunal in the assessee s own case for A.Y. 2010-11 in ITA No. 6659/Mum/2013 has decided this issue in favour of the assessee s claim that the expenditure on software licence fees as being revenue in nature following the decision of the Hon'ble Bombay High Court in Raychem RPG Ltd. (2012) 346 ITR 138 (Bom) and of the Special Bench of the ITAT Delhi in Amway India Enterprises 111 ITD 112 (SB) (Del.). At .....

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d. CIT(A), none of these tests fails the claim of the assessee. The software was not owned by the assessee. The assessee acquired the license only to use the same. The license fee was not paid for obtaining any right qua the transfer of the software. Then, obsolescence also does not prove any enduring benefit to the assessee. It is not the case of the Department that the longevity of the software is any more than two years. Rather, it has not been disputed that all but one of the items of expend .....

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r maintenance of firewalls, maintenance charges of Microsoft licenses, annual hosting fees, etc. Therefore, the nature of the software acquired is that of a revenue expense, the ld. CIT(A) has rightly held it to be so. 9. It is pertinent to note that the ld. CIT(A) capitalized the expense for software for indexing operations documents. In fact, this expenditure of ₹ 3,12,000/-, paid to M/s First Indian Corporation was a onetime cost, expended for the use of the software to over two years, .....

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tional High Court upheld the decision of the Tribunal in allowing software expenditure as a revenue expenditure. 3.4.4 On an appreciation of the breakup of the expenditure of ₹ 60,35,642/- incurred by the assessee on software licence fees and following the tests, i.e. ownership test, functionality test and enduring benefit test laid down by the Special Bench of the ITAT Delhi in the case of Amway India Enterprises (supra), which have to be met in order to decide whether the aforesaid expen .....

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pect of the functionality test, the Revenue has not refuted the fact that the software licences were taken by the assessee to carry out its routine operations in a more efficient manner. In fact, the expenses were either for antivirus software or payments for support service for maintenance of firewalls or software for filing TDS returns, fees for maintenance of licences, etc. 3.4.5 In the light of the factual and legal matrix of the case and respectfully following the ratio of the decisions of .....

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application software acquired which is in the nature of revenue expenses. The remaining expenditure of ₹ 4,77,767/- paid to Fadv Corporation for acquiring True UP Licences Fees being for a period of 36 months is held to be expenditure capital in nature as it results in enduring benefit to the assessee and we direct the AO to allow the assessee eligible depreciation thereon in accordance with law. 3.4.6 Consequently, ground No. 1 of Revenue s appeal is dismissed and Ground No. 1 of the asse .....

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ted the decision of the learned CIT(A) on the issue of being allowed the expenditure claimed on foreign exchange loss on revaluation of foreign currency sundry debtors and creditors in view of the decision of the Hon'ble Apex Court in the case of CIT vs. Woodward Governor India P. Ltd. 312 ITR 254 (SC). 4.3 We have heard the rival contentions of both the parties and perused and carefully considered the material on record. The facts of the matter are that in the course of assessment proceedin .....

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nge loss has arisen on account of trade transactions entered into by the assessee and is with respect to the revaluation of foreign currency sundry debtors and creditors as on 31.03.2009. In our view, the claim of the assessee in the case on hand in respect of loss on account of foreign exchange sundry debtors and creditors is allowable as it is covered in favour of the assessee by the decision of the Hon'ble Apex Court in the case of CIT vs. Woodward Governor India P. Ltd. (supra). Respectf .....

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0 is partly allowed. 7. Assessee s appeal in ITA No. 6408/Mum/2012 for A.Y. 2005-06 7.1 In this appeal, the assessee has raised the following grounds: - 1) The learned Commissioner of Income Tax (Appeals) erred in treating software expenses of 28,62,118/- being expenditure on Windows XP Professional as Capital Expenditure. 2) The Appellant crave leave to alter, amend and/or add any other ground of appeal. 8. Ground No. 1 - Software Expenses 8.1 In this ground, the assessee assails the finding of .....

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t is submitted that Windows being an application software it cannot be treated as capital asset and therefore any expenses incurred for purchase of Windows has to be allowed as revenue as the software has to be updated every year. In support of this proposition, the learned A.R. for the assessee placed reliance on the decisions of the Coordinate Bench of this Tribunal in the case of ACIT vs. Boots Piramal Healthcare Ltd. (2015) 43 CCH 129 Mum Trib dated 18.02.2015 and Pennwalt Ltd. vs. DCIT in I .....

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the assessee on Windows XP Professional software is revenue in nature as claimed by the assessee or capital expenditure as held by the learned CIT(A) in the impugned order. According to the learned A.R. for the assessee, the expenditure incurred for purchase of Windows XP Professional, is an application software, and therefore this expenditure would be revenue in nature and cannot be treated as capital in nature. We have perused the decision of the Coordinate Bench in the case of Boots Piramal H .....

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ftware cannot be treated as capital assets and therefore any license fee paid for the purchase of windows has to be allowed as revenue expenditure as the software has to be updated every year. We accordingly set aside the findings of the ld. CIT(A) and direct the AO to delete the addition. Ground No. 1 is allowed. 8.3.2 We have also carefully perused the decision of another Coordinate Bench of ITAT, Mumbai in the case of Pennwalt Ltd. in ITA No. 1752/Mum2009 dated 24.09.2010, wherein after consi .....

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these expenses are incurred to obtain user licence and confirmed the same. It was the contention of the assessee that these software, MS Windows 98 and MS Word 2000 have become obsolete very fast and the expenditure is revenue in nature and this claim is in line with the principle established by the Hon'ble Special Bench of the ITAT Amway India Enterprise vs. CIT 111 ITD 112 (Del) and also of the judgement of the Hon'ble P & H High Court in the case of Varinder Agro 22 DTR 127. 16. W .....

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