2017 (12) TMI 1127 - HC - Income Tax

Software development charges - nature of expenditure - revenue or capital expenditure - Held that - Tribunal in the impugned order has followed the decision of this High Court in the case of N.J. India Invest Private Limited 2013 (7) TMI 738 - GUJARAT HIGH COURT wherein it has been held that the expenditure of maintenance, backup and support services to the existing hardware and software is revenue in nature. The court, in the above decision, has held that these services were essentially in the nature of maintenance and support services providing essentially backup to the assessee, who had procured software for its purpose. These services, thus essentially, did not give any fresh or new benefit in the nature of a software to be used by the assessee in the course of the business but were more in the nature technical support and maintenance of the existing software and hardware. Thus, all that the Tribunal has done is that it has applied the decision of the jurisdictional High Court to the facts of the present case. In that view of the matter, it is not possible to state that the impugned order passed by the Tribunal gives rise to any question of law

Summary

Issues:
1. Classification of expenditure as capital or revenue.
2. Interpretation of software development charges.
3. Application of High Court decision on maintenance and support services.

Analysis:
1. The appellant revenue challenged the order of the Income Tax Appellate Tribunal regarding the treatment of software development charges as revenue expenditure. The Assessing Officer initially treated the charges as capital expenditure, allowing depreciation. The Commissioner (Appeals) upheld this decision, but the Tribunal ruled in favor of the assessee.

2. The main issue was whether the software development charges should be considered capital or revenue expenditure. The assessee argued that the expenses included maintenance and upgradation charges, not just new software development expenses. They contended that these were recurring expenses with no new enduring asset obtained. The Tribunal relied on a previous High Court decision, stating that expenses for maintenance, backup, and support services for existing hardware and software are revenue in nature.

3. The High Court affirmed the Tribunal's decision, citing the earlier case's rationale. The Court emphasized that the services provided were for maintenance and support, not for acquiring new software. Therefore, these services did not result in a new benefit like new software but were more about technical support and maintenance of existing assets. The Court concluded that the Tribunal correctly applied the High Court decision to the present case, finding no substantial question of law to warrant interference. As a result, the appeal was dismissed.