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2013 (12) TMI 11 - HC - Income TaxMedia cost for import of software - Capital expenditure or revenue - Software used for duplication and licensing - Held that - The appellant was granted non-exclusive non-assignable right and authority to duplicate on appropriate carrier media software products - The appellant could enter into enforceable sub-licensing and services agreement in the prescribed form with third parties users - The holding company retained ownership of the copyright in the software and all associated and applicable intellectual property rights in the products. Following CIT versus IAEC Pumps limited 1997 (4) TMI 14 - SUPREME Court - Payment towards royalty was revenue expenditure and was allowable after observing that the licence for use of software. The assessee had been only allowed use and there was no transfer of licence - Following CIT v. Sharda Motors Industrial Ltd 2009 (9) TMI 159 - DELHI HIGH COURT - Depreciation claim in respect of intangible assets would arise only when it is first determined that the expenditure was capital in nature - Decided in favour of assessee.
Issues Involved:
1. Whether the media cost paid for the import of a master copy of Oracle Software used for duplication and licensing is an expenditure of a capital nature and thus not an allowable deduction. 2. Whether the Assessing Officer could have charged interest under Section 234B of the Income Tax Act, 1961 without a specific order. 3. Whether interest under Section 234B should be charged on the assessed income or the returned income of the Assessee. Detailed Analysis: 1. Nature of Media Cost Expenditure: The primary issue was whether the media cost paid for importing a master copy of Oracle Software for duplication and licensing is a capital expenditure or a revenue expenditure. The appellant, a subsidiary of Oracle Corporation, USA, entered into a license agreement allowing it to duplicate and sub-license Oracle Software in India. The Assessing Officer treated the payments for importing the master copy as capital expenditure, invoking Section 35A of the Income Tax Act, which allows amortization of such expenditure over 14 years. The Commissioner of Income Tax (Appeals) reversed this, considering the high obsolescence rate in the software industry and the recurring nature of the expenditure. The Tribunal, however, restored the Assessing Officer's view, considering the master copy an asset of enduring benefit. The High Court, after reviewing the facts and legal principles, concluded that the master copies had a limited life due to frequent updates and obsolescence, and thus, the expenditure was revenue in nature. The Court emphasized the importance of matching principles in accounting, determining that the expenditure did not create an enduring asset and should be allowed as a business expenditure under Section 37 of the Act. 2. Charging Interest under Section 234B: The appellant contended that the Assessing Officer could not charge interest under Section 234B without a specific order. The Court, referencing the Supreme Court decision in Commissioner of Income Tax, Mumbai vs. Anjum M.H. Ghaswala and Others, held that interest under Section 234B is mandatory when statutory conditions are met and should be charged on the assessed income. The Tribunal's direction to determine interest under Section 234B after ascertaining taxability was upheld. 3. Basis for Charging Interest under Section 234B: The appellant questioned whether interest under Section 234B should be charged on the assessed income or the returned income. The Court clarified that interest under Section 234B must be charged on the assessed income, consistent with the mandatory nature of the provision. Conclusion: The High Court ruled in favor of the appellant on the primary issue, determining that the media cost for importing the master copy of the software was a revenue expenditure and thus deductible. On the issues related to interest under Section 234B, the Court ruled in favor of the Revenue, affirming that interest is mandatory and should be calculated on the assessed income. The appeals were disposed of accordingly, with no orders as to costs.
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