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2021 (9) TMI 1151 - HC - Income TaxNature of expenses - software expenses incurred by the assessee - capital or revenue expenditure - functionality test - whether claim of license fee on software expenses paid to its parent company was for the utilization of the software which gave a enduring benefit and therefore capital in nature? - HELD THAT - Tribunal was right in confirming the order passed by the CIT(A). We note the decision, which was referred to by the Tribunal in the case of CIT Vs. Raychem RPG Ltd. 2011 (7) TMI 953 - BOMBAY HIGH COURT wherein the ERP package software, which facilitated the assessee's trading operation to conduct its business more efficiently or more profitably but was held to be not in the nature of profit-making apparatus' and the software expenditure was allowable as revenue expenditure. With regard to the license fee, which was for acquiring a software license of shelf life of less than two years was held to be as allowable as revenue expenditure in CIT Vs. Toyota Kirloskar Motors (P.) Ltd. 2013 (2) TMI 108 - KARNATAKA HIGH COURT - Thus substantial questions of law in favour of the assessee by treating the expenses incurred in developing/upgrading the software to be revenue expenditure.In CIT, Trichy Vs. Lakshmi Vilas Bank Ltd. 2018 (9) TMI 1094 - MADRAS HIGH COURT expenditure incurred by the assessee towards software expenses was treated as revenue expenditure as advantage, though endured for an indefinite period, it merely facilitated assessee's trading operation, enabling it to carry on business more efficiently. We hold that the Tibunal was right in dismissing these appeals filed by the revenue. - Decided against revenue.
Issues Involved:
1. Classification of software expenses as revenue or capital expenditure. 2. Treatment of license fee paid for software as revenue or capital expenditure. Issue 1: Classification of Software Expenses: The High Court analyzed whether the software expenses incurred by the assessee were revenue or capital expenditure. The assessee claimed the expenditure to be revenue as it facilitated routine business functions without providing enduring benefits. The Assessing Officer, however, held the expenses to be capital in nature based on functional tests. The CIT(A) allowed the assessee's appeals, noting that the software did not form part of the profit-making apparatus but only facilitated trading operations. The Tribunal concurred, emphasizing that the software expenses were for running the software system and not acquiring new systems. The Court referred to precedents like CIT Vs. Raychem RPG Ltd. and held that the software expenditure was allowable as revenue expenditure. Issue 2: Treatment of License Fee: Regarding the license fee paid for software, the Tribunal found it valid for only one year and useful for various functions but not conferring enduring benefits. The Court referred to cases like CIT Vs. Toyota Kirloskar Motors (P.) Ltd. and CIT, Bangalore Vs. Robert Bosh India Ltd., where similar expenditures were treated as revenue. The Court also cited Oriental Bank of Commerce Vs. Additional CIT, where expenses on software licenses without enduring benefits were allowed as deductions. The Court considered decisions in CIT, Trichy Vs. Lakshmi Vilas Bank Ltd. and KGISL Technologies and Infrastructures Private Limited Vs. Assistant/Deputy Commissioner of Income Tax, supporting the treatment of software expenses as revenue expenditure. Consequently, the Tribunal's decision to dismiss the appeals filed by the revenue was upheld, and the substantial questions of law were answered against the Revenue. In conclusion, the High Court affirmed the Tribunal's decision, holding that the software expenses and license fee paid by the assessee were revenue expenditures. The Court relied on various precedents and functional tests to determine that the expenses did not provide enduring benefits and were necessary for routine business functions. The appeals filed by the revenue were dismissed, and the substantial questions of law were decided in favor of the assessee.
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