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2012 (12) TMI 868 - AT - Income TaxExpenditure incurred on integrated software HIPACK-warranty Module HIPACK-Sales Modules and HIPACK-Parts Module - Revenue v/s Capital - CIT(A) treated as Capital expenditure - Held that - The assessee is stated to have set up its first manufacturing unit at Greater Noida, commencing operations in 1997 as a joint venture between Honda Motor Company and Usha International of Siddharth Shriram Group. The assessee claimed that it was merely a licensee of the integrated software HIPACK and the right to use the software was subject to the conditions mentioned in the license agreement, which agreement despite repeated adjournments has not been placed by the assessee nor any reasons have been adduced as to why the said agreement could not be furnished. In the absence of relevant agreement, it is not known as to whether or not there was transfer or parting with secret processes and technical know-how to the assessee nor the relevant terms and conditions in respect of use of software are known. The ITAT vide their order dated 26th September,2008 set aside the issue to the file of the AO with the directions to redecide the issue in the light of tests laid down in the case of Amway India Enterprises(2008 (2) TMI 454 - ITAT DELHI-C). In the absence of terms and conditions of the license, it is not known as to how the AO or the CIT(A) could ascertain economic and functional role which the integrated software plays in the business of the assessee. Though in a confirmation dated 6.9.2012 Honda Motor Co. Ltd., Japan stated that it granted license to the assessee and its other subsidiaries worldwide to use HIPACK software, it does not spell out any terms and conditions of the license. A number of factors are relevant to determine whether the advantage operates in the capital field or revenue field. The nature of business of the assessee, an understanding of the business functions 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 the business have all bearing on its treatment. Thus in view of the foregoing, especially when the relevant agreement, licensing the aforesaid integrated software has not been placed nor the CIT(A) examined as to how the assessee carried on its functions before acquiring the aforesaid integrated HIPACK software and nor even as to whether or not the said software was part of infrastructure for commencing the business operations in India and whether or not each of the aforesaid four modules could function independently in the light of aforesaid economic and functional test laid down in Amway India Enterprises(supra) while confirmation dated 6.9.2012 of Honda Motors Ltd., Japan was not before the lower authorities, it fair and appropriate to vacate the findings of the CIT(A) and restore the matter to his file with the directions to readjudicate the issue in the light of aforesaid observations. CIT(A) shall pass a speaking order, keeping in mind the mandate of provisions of sec. 250(6) bringing out clearly as to whether or not expenditure on aforesaid integrated HIPACK software is revenue or capital in nature.
Issues Involved:
1. Deletion of the addition of Rs.1,09,23,694/- as revenue expenditure by CIT(A). 2. Confirmation of the disallowance of Rs.1,25,11,088/- as capital expenditure by CIT(A). 3. Determination of whether the expenditure on HIPACK software is capital or revenue in nature. Detailed Analysis: 1. Deletion of the Addition of Rs.1,09,23,694/- as Revenue Expenditure by CIT(A): The Revenue contended that the CIT(A) erred in deleting the addition of Rs.1,09,23,694/-, considering it as revenue expenditure. The CIT(A) concluded that the expenditure on three modules of the HIPACK software (Warranty Module, Sales Module, and Parts Module) was revenue in nature as these modules did not form an integral part of the manufacturing process but were auxiliary functions related to the maintenance of books of accounts and generating reports for MIS. The Tribunal noted that the CIT(A) did not examine whether each of the four modules could function independently, nor did it consider whether the software was part of the infrastructure for commencing business operations in India. The Tribunal vacated the findings of the CIT(A) and directed a re-examination of the issue, emphasizing the need to consider the economic and functional role of the software in the business. 2. Confirmation of the Disallowance of Rs.1,25,11,088/- as Capital Expenditure by CIT(A): The Assessee contended that the CIT(A) erred in confirming the disallowance of Rs.1,25,11,088/- as capital expenditure for the Factory Module of the HIPACK software. The CIT(A) held that the Factory Module facilitated pre-production and production functions, directly linked with fixed capital items, and thus, was capital in nature. The Tribunal observed that the CIT(A) did not sufficiently analyze the role of the Factory Module in the business operations. The Tribunal emphasized the need to apply the functional test from the Special Bench decision in Amway India Enterprises, which considers the utility of the software to the business and its economic or functional role. 3. Determination of Whether the Expenditure on HIPACK Software is Capital or Revenue in Nature: The Tribunal referred to the Special Bench decision in Amway India Enterprises, which laid down tests for determining whether expenditure on computer software is capital or revenue in nature. These tests include assessing the ownership of the software, the enduring benefit it provides, and its functional role in the business. The Tribunal noted that the Assessee did not furnish the license agreement for the HIPACK software, which was crucial for determining the terms and conditions of use and whether there was any transfer of secret processes or technical know-how. The Tribunal directed the CIT(A) to obtain the license agreement and re-adjudicate the issue, considering the economic and functional role of the software in the business. Conclusion: The Tribunal vacated the findings of the CIT(A) and remanded the matter for re-examination. The CIT(A) was directed to obtain the license agreement, consider the economic and functional role of the software, and determine whether the expenditure on the HIPACK software is capital or revenue in nature, in light of the tests laid down in the Amway India Enterprises decision. The appeal of the Revenue and the corresponding cross-objection were allowed for statistical purposes.
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