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2008 (2) TMI 454 - AT - Income TaxExpenditure on acquire of computer software Revenue Or Capital Expenditure - tangible property - acquisition of know-how - business expenditure u/s. 37 - tests of ownership and enduring benefit - depreciation u/s 32 - HELD THAT - Our conclusions on the issue under consideration thus can be summarized as under - (i) When the assessee acquires a computer software or for that matter the license to use such software he acquires a tangible asset and becomes owner thereof as held relying on the decision of Hon ble Supreme Court in the case of TCS 2004 (11) TMI 11 - SUPREME COURT . (ii) Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time it can be said that where the life of the computer software is shorter (say less than 2 years) it may be treated as revenue expenditure. Any software having its utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature . However that by itself will not make the expenditure incurred on software as capital in nature and the functional test as discussed above also needs to be satisfied. (iii) Once the tests of ownership and enduring benefit are satisfied the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business touching either capital or revenue field or its utility to a businessman which may touch either capital or revenue field. We are of the view that these criteria need to be applied to determine the exact nature of expenditure incurred by the assessees in the present cases for acquiring different softwares. Since this exercise is required to be done in respect of each and every software independently having regard to the criteria laid down we are of the view that the matter needs to be restored back to the file of the Assessing Officer for doing such exercise. The Assessing Officer shall examine the question whether expenditure on computer software is capital or revenue in the light of the criteria laid down above after giving an opportunity of being heard to the assessees. If on such examination the Assessing Officer comes to the conclusion that the expenditure is capital expenditure then the question regarding allowing depreciation will be decided in accordance with the principles laid down in the subsequent paragraphs. The assessee s ownership of limited right over the tangible asset is sufficient to conclude that the assessee is the owner of the Plant. There is therefore no difficulty in allowing depreciation claim at 25 per cent u/s 32(1)(i) read with Appendix-I Part-A Division III (1) to the IT Rules 1962. With effect from1-4-2003 Computer Software has been classified as a tangible asset under the heading Plant in Appendix-I to the IT Rules entitled to depreciation at 60 per cent. The assessee would be entitled to depreciation at 60 per cent from1-4-2003. The argument of the assessee was that the amendment to the rules was merely clarificatory and therefore even on computer software with effect from 1-41999 60 per cent depreciation should be allowed. We do not agree with the submissions of the assessee in this regard. The amendment is prospective. It is not clarificatory for the reason that computer and computer software are two different items of assets. If the Legislature wanted to allow depreciation at 60 per cent with effect from1-4-1999 on computer software it would have said so specifically by making the provisions retrospective. In this regard we agree with the view expressed by the Delhi Bench of the ITAT in the case of Maruti Udyog Ltd. wherein similar view has been taken. By the order of reference the entire appeals in the case of M/s. Amway India Enterprises and M/s. SQL Star International Ltd. were referred for determination by the Special Bench. The arguments were heard only with regard to the issue of expenditure on Computer Software. There are other issues arising for consideration in these appeals. The same however are entirely different and have no interlinking whatsoever with the issue of expenditure on computer software. We therefore deem it proper to refer back the cases to the Hon ble President for placing the appeals before the regular Division Bench for decision in accordance with the ruling of the Special Bench on the issue of expenditure on software and decision on other issues after hearing the parties. Before parting it would be our duty to explain the reasons as to why we have not made any reference to the various decisions which are specifically on the issue of expenditure on computer software. We have already noticed the question whether an expenditure is capital or revenue is dependent on facts and circumstances of a given case. We have also noticed that different minds may come to different conclusions with equal propriety. We therefore thought it fit to lay down general guidelines to be applied to individual cases. In the decisions of the Tribunal specifically on the issue different considerations prevailed for the ultimate conclusion. In the case of Maruti Udyog Ltd. 2004 (10) TMI 278 - ITAT DELHI-A Escorts Ltd. 2006 (1) TMI 186 - ITAT DELHI-G and Hero Honda Motors Ltd. 2005 (5) TMI 265 - ITAT DELHI-G the conclusion that the expenditure on purchase of computer software was capital proceeded on the footing that the purchase was an outright purchase and that Software was an intangible asset. We are of the view that different considerations will apply in testing the nature of expenditure in the context of acquisition of know-how compared to expenditure on acquisition of software because know-how is an intangible asset whereas as held by Hon ble Supreme Court in the case of TCS software is a tangible asset. The questions referred to this Special Bench thus are answered accordingly as indicated above. The respective appeals will now be placed for consideration before the regular Bench.
Issues Involved:
1. Nature of expenditure on computer software (revenue or capital). 2. Applicable rate of depreciation if expenditure is capital in nature. Detailed Analysis: 1. Nature of Expenditure on Computer Software (Revenue or Capital): Background and Claims: - The assessee claimed software expenditure as revenue, arguing it facilitated day-to-day operations and did not provide enduring benefits due to rapid obsolescence. - The Assessing Officer (AO) treated the expenditure as capital, granting depreciation at 25%, later corrected to 60% by CIT(A) for certain years. Tribunal's Observations: - The Tribunal noted divergent views in previous cases regarding software expenditure. - Revenue's Argument: Acquisition of software, even by license, provides enduring benefits, thus capital in nature. - Assessee's Argument: Licenses to use software do not confer ownership, making the expenditure revenue. Legal Precedents and Functional Test: - Ownership Test: Software, whether customized or off-the-shelf, is considered a tangible asset (Tata Consultancy Services case). - Enduring Benefit Test: Software's rapid obsolescence implies shorter life, often less than two years, suggesting revenue expenditure. - Functional Test: The software's role in business operations determines its nature. If it forms part of the profit-making apparatus, it is capital; if it enhances operational efficiency, it is revenue. Conclusion: - The Tribunal emphasized the functional test, suggesting software expenditure is capital if it forms part of the profit-making apparatus. - The matter was remanded to the AO to apply these criteria to each software independently. 2. Applicable Rate of Depreciation if Expenditure is Capital in Nature: Depreciation Rates: - Pre-1-4-2003: Depreciation at 25% for software treated as part of plant and machinery. - Post-1-4-2003: Depreciation at 60% for computer software, aligning with the rate for computers. Arguments and Tribunal's Decision: - Assessee's Argument: Depreciation at 60% should apply from 1-4-1999, treating the amendment as clarificatory. - Tribunal's Decision: The amendment is prospective, not clarificatory. Depreciation at 60% applies only from 1-4-2003. Summary: The Tribunal laid down criteria to determine the nature of software expenditure, emphasizing the functional test. The matter was remanded to the AO for applying these criteria. Depreciation at 60% for software applies prospectively from 1-4-2003.
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