2012 (7) TMI 74 - AT - Income Tax

Software expenses - revenue or capital expenditure - Held that - What is required to be seen is the real intent and purpose of expenditure and whether the expenditure results in creation of fixed assets for the assessee. Expenditure which is incurred and which enables the profit making structure to work more efficiently leaving the source of profit making un-touched would be the expense in the nature of revenue expenditure. Therefore, expenditure incurred by the assessee on software is allowable as revenue expenditure. See CIT v. Asahi India Safety Glass Ltd (2011 (11) TMI 2 (HC))- Decided in favor of assessee. Since facts in the present case are identical with the facts of the case pertaining to A.Y. 2006-07, therefore following the order of earlier AY, royalty to M/s Honda Co. Ltd., Japan for providing technical know how, provision for warranty and sales services, cost of air ticket booked by the appellant for technicians and forming part of technical guidance PE, entry tax paid by the assessee under protest and provisional is allowed as revenue expenditure - in favor of assessee.

Issues Involved:
1. Assessment completion under Section 143(3) read with Section 144C.
2. Treatment of royalty expenditure as capital expenditure.
3. Disallowance of provision for warranty and sales service.
4. Disallowance of air ticket costs for technicians as capital expenditure.
5. Deduction of entry tax paid under protest.
6. Deduction of software expenses.
7. Charging of interest under Sections 234B, 234C, and 234D.

Detailed Analysis:

1. Assessment Completion under Section 143(3) read with Section 144C:
The assessee contested the assessment completed at an income of Rs.5,37,66,96,176/- against the returned income of Rs.3,95,15,21,538/-. The Tribunal did not specifically adjudicate on this general ground, considering it as covered under specific issues addressed subsequently.

2. Treatment of Royalty Expenditure as Capital Expenditure:
The Assessing Officer treated the royalty payment of Rs.136,98,96,997/- to Honda Motor Co. Japan as capital expenditure, following the assessment orders of earlier years. The CIT(A) upheld this treatment despite the assessee's contention that similar issues had been decided in their favor by the ITAT in previous years. The Tribunal noted that the facts remained unchanged from earlier years and followed its previous decisions, ruling in favor of the assessee and treating the royalty as revenue expenditure.

3. Disallowance of Provision for Warranty and Sales Service:
The Assessing Officer disallowed Rs.3,43,10,141/- as an unascertained liability. The CIT(A) supported this view, despite the ITAT's previous rulings treating such provisions as ascertained liabilities. The Tribunal followed its earlier decisions, recognizing the provision for warranty as an ascertained liability and allowing the deduction.

4. Disallowance of Air Ticket Costs for Technicians as Capital Expenditure:
The Assessing Officer disallowed Rs.1,71,80,600/- spent on air tickets for technicians, treating it as capital expenditure. The CIT(A) upheld this treatment. The Tribunal, referencing its previous rulings on similar facts, decided in favor of the assessee, allowing the expenditure as revenue in nature.

5. Deduction of Entry Tax Paid Under Protest:
The Assessing Officer disallowed Rs.4,25,398/- paid as entry tax under protest, considering it an unascertained liability. The Tribunal, following its earlier decision, held that the entry tax paid under protest was deductible and ruled in favor of the assessee.

6. Deduction of Software Expenses:
The Assessing Officer disallowed Rs.33,61,502/- of software expenses, treating them as capital expenditure. The CIT(A) supported this view, citing the enduring benefit of the software. The Tribunal referred to the Delhi High Court's judgment in the case of CIT v. Asahi India Safety Glass Ltd., which treated similar software expenses as revenue expenditure. Consequently, the Tribunal ruled in favor of the assessee, allowing the software expenses as revenue expenditure.

7. Charging of Interest under Sections 234B, 234C, and 234D:
The Tribunal noted that the issues related to charging interest under Sections 234B, 234C, and 234D are consequential and did not require specific adjudication at that point.

Conclusion:
The appeal filed by the assessee was allowed, with the Tribunal ruling in favor of the assessee on all specific grounds, following its previous decisions and relevant High Court judgments. The order was pronounced in the open court on 15.6.2012.

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