2019 (6) TMI 1000 - HC - Income Tax

Nature of expenditure - expenditure incurred towards software installed in their computer system - revenue or capital expenditure - CIT(A) held that the assessee acquired only a right to use the software (CTCL), that the software renewal expenditure was incurred every year based on the number of licenses used and that the intellectual property rights of the software were held by the software vendor (FTIL) confirmed by ITAT - HELD THAT - In the case on hand, we test the correctness of the order passed by the Tribunal confirming the order passed by the CIT(A), who examined the terms and conditions of the license and on facts, recorded a finding that the assessee acquired only a right to use the software and that there was no enduring benefit acquired by the assessee on account of the license promoted by them on payment of annual fee. Thus, in our considered opinion, no substantial question of law arises for consideration in this appeal. - Decided against revenue

Summary

Issues:
1. Determination of whether the expenditure incurred for the purchase of computer to computer link software is a revenue or capital expenditure.
2. Assessment of the enduring benefit derived from the software installation and its impact on the nature of the expenditure.

Issue 1:
The appeal before the High Court concerned the classification of an expenditure of ?16.16 lakhs by the assessee towards software installed in their computer system as a revenue or capital expenditure. The Revenue contended that the software, licensed to the assessee, was a new software enhancing business activities and income earning capacity, thus qualifying as capital in nature. The CIT(A) had allowed the assessee's appeal, considering the terms and conditions of the license granted by Financial Technologies (India) Limited (FTIL). The CIT(A) concluded that the assessee acquired only a right to use the software, did not derive any enduring benefit, and was authorized to use the software on payment of an annual fee for business purposes.

Issue 2:
The High Court analyzed the terms and conditions of the license agreement between the assessee and FTIL. The license agreement stated that the software was the intellectual property of FTIL, and the assessee acquired a limited right to use the software without ownership rights. The CIT(A) found that the software renewal expenditure was incurred annually based on the number of licenses used, and the intellectual property rights of the software remained with FTIL. The High Court observed that the assessee did not acquire any enduring benefit from the software, as they were authorized to use it for business purposes upon payment of an annual fee. The Court distinguished the case from a precedent involving the replacement of old machinery, emphasizing that in the present case, no enduring benefit was acquired by the assessee due to the software license.

In conclusion, the High Court dismissed the tax case appeal, upholding the decision of the CIT(A) and the Tribunal. The Court found that the software expenditure was revenue in nature as the assessee acquired only a right to use the software without any enduring benefit, leading to the expenditure being classified as revenue rather than capital. The judgment highlighted the importance of analyzing the terms of the license agreement to determine the nature of the expenditure and emphasized that no substantial question of law arose for consideration in the appeal.