2015 (6) TMI 1052 - AT - Income Tax

Allowance of expenses incurred on account of acquisition of software license - revenue v/s capital expenditure - Held that - Keeping with the tests as laid down by the Special Bench of the ITAT, in the case of CIT vs. Amway India Enterprises, (2008 (2) TMI 454 - ITAT DELHI-C ), three tests have to be met in order to pass the expenditure incurred on account of software expenses as capital, or otherwise. These are the ownership test, the enduring benefit test and the functionality test. In the present case, as rightly considered by the ld. 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 expenditure have a life much less than two years. Apropos the functionality test, the Department again does not refute the fact that the software license was acquired by the assessee to carry out its routine operations in a more efficient manner. Further, the fixed capital of the assessee has not been shown to have undergone any change as a consequence of the acquisition of the license. In fact, it was either an antivirus software, or a software for filing TDS return or payments for support service for 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. CIT(A) capitalized the expense for software for indexing operations documents. In fact, this expenditure paid to M/s First Indian Corporation was a one-time cost, expended for the use of the software to over two years, fetching an enduring benefit to the assessee. The ld. CIT(A) added back this amount as a capital expenditure while granting depreciation thereon. The assessee has not challenged this add back before us. Thus, the ld. CIT(A) has duly taken into consideration all the relevant factors for deciding the expenditure to be a revenue expenditure. In this regard, reliance placed by the assessee on the case of Raychem RPG Ltd. (2011 (7) TMI 953 - Bombay High Court ) is also appropriate, therein the Hon ble jurisdictional High Court upheld the decision of the Tribunal in allowing software expenditure as a revenue expenditure. - Decided in favour of assessee

Summary

Issues:
Challenge to the action of the ld. CIT(A) in allowing software license expenses as revenue expenditure.

Analysis:
In this appeal, the assessee contested the action of the ld. CIT(A) in permitting the expenses of &8377; 63,92,692/-, spent on software license acquisition, as revenue expenditure. The assessee, engaged in pre-employment screening, claimed deduction of &8377; 69,59,572/- for software license fees, treating them as deferred revenue expenditure in its books. The A.O. disallowed this deduction, but the ld. CIT(A) allowed it, leading to the Department's appeal. The Department argued that the ld. CIT(A) erred in not considering the A.O.'s observations. Conversely, the assessee's counsel contended that the software expenditure was not capital, did not provide enduring benefit, and was essential for routine operations, citing a relevant High Court decision.

The expenses claimed during the year were detailed, showing a total of &8377; 67,04,692/- incurred. The assessee treated these expenses as deferred revenue expenditure, part of which was from earlier years. The A.O. considered it capital expenditure, disallowing the deduction and depreciation. The Special Bench's tests for capital expenditure were discussed, and it was found that the software did not meet the ownership, enduring benefit, or functionality test for capitalization. The software was not owned, did not provide lasting benefit, and was essential for efficient operations, not altering the fixed capital. The ld. CIT(A) correctly held it as revenue expense, except for one-time software for indexing operations, which was treated as capital expenditure.

The ld. CIT(A) correctly analyzed the factors, including the enduring benefit and nature of the software, in line with relevant case law. The Tribunal upheld the ld. CIT(A)'s decision, dismissing the Revenue's appeal. The order was pronounced on 30th June, 2015.