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TMI Blog2008 (2) TMI 454X X X X Extracts X X X X X X X X Extracts X X X X ..... e of M/s. Amway India Enterprises, a deduction on account of software expenditure incurred amounting to Rs. 20,04,105 was claimed by the assessee company in its return of income filed for assessment year 2001-02. The said expenditure was claimed to be incurred by the assessee company for acquiring the following software for use in its business:- "1. MS Project 2000 Full Packaged Product (FPP): Rs. 19,700.- Microsoft Office Project 2000 is used by project managers who need a desktop tool to manage their projects independently. These project managers do not require strong coordination with other project managers. Project 2000 is designed to improve ability to organize work and communicate effectively and succinctly through familiar, easy-to-use tools. The benefit of the software is to better organize and manage work and people to ensure that projects are delivered on time and within budget. It conveys project plans and status effectively and succinctly. It also enhances productivity and effectiveness by learning and applying project management practices easily. 2. MS Project 2000 Central Open License Program: Rs. 78,600.- The software is basically platform software, this helps in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exchange Server for E-Mail back up, MS Windows Server for MS Windows data base and SQL Server for storage of other data base etc. The basic function is to store the data base in respective space contained under the server. (ii) Windows 2000 Server Microsoft Open License Program (MOLP) - Windows 2000 Server is the multipurpose network operating system for businesses of all sizes. Windows 2000 Server lets the user share files and printers reliably and securely. This software helps in choosing from thousands of business applications compatible to run on Windows 2000 Server and build Web applications and connectivity to the Internet. The Software License grants the right to install Windows 2000 server on the computer after which application software can be installed on it. (iii) Windows 2000 Client Licenses - There are 100 licenses which have been taken for use of Windows 2000 for 100 users. For each user, a separate license is required for Windows 2000 platform. As explained above, Windows 2000 is a platform, which helps in running application software such as MS Office at the computer system. 8. Win XP Software: Rs. 14,456.- Microsoft Windows XP Professional is the next version o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment years 2003-04 onwards, even the computer software was included in the computers to be eligible to claim the depreciation at this higher rate. In assessment year 2002-03 also, the expenditure incurred by the assessee on acquisition of software was treated as capital expenditure by the Assessing Officer as well as by the learned CIT(A) for the similar reasons as given in assessment year 2001-02. However, the depreciation allowed thereon at normal rate of 25 per cent by the Assessing Officer was confirmed by the learned CIT(A) overlooking the fact that the same was allowed by his predecessor in assessee's own case for assessment year 2001-02 at the rate of 60 per cent. 4. Against the order of learned CIT(A), an appeal was filed by the assessee before the Tribunal and when the same came up for hearing initially before the Division Bench, the main contention raised by the learned counsel for the assessee in support of the assessee's case was that by incurring the impugned expenditure, the assessee company had acquired only the license to use the software and there was no outright purchase of software giving ownership to the assessee of the said software so as to treat the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced by the Tribunal on the decision of Hon'ble Supreme Court in the case of Arvind Mills Ltd. v. CIT [1992] 197 ITR 422 wherein it was held that the expenditure incurred on capital asset does not loose the character of capital expenditure and does not become a revenue expenditure on the score that the said capital expenditure also ultimately helps in the effective running of the business. The Tribunal thus held that the software being akin to know-how is an intangible capital asset and the expenditure incurred on purchase of software is a capital expenditure. The Tribunal also referred to the amendment made in the Income-tax Rules, 1962 providing for depreciation on software at the rate of 60 per cent with effect from 1-4-2003 and observed that on the basis of the said amendment providing for higher depreciation on software, it could not be said that prior to 1-4-2003, the expenditure incurred on software, was a revenue expenditure. The Tribunal held that it was always a capital asset entitled to normal rate of depreciation up to31-3-2003which was enhanced to 60 per cent with effect from1-4-2003considering the rapid wear and tear. The decision of Bangalore Bench of ITAT in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of computer software where the pace of advancement is so rapid that whatever technology is installed today becomes obsolete within a short time. 8. Having taken note of the aforesaid decisions of the Tribunal relied upon by both the sides in support of their stand on the issue under consideration, it was found by the Division Bench that there were divergent views expressed on the issue relating to the exact nature of expenditure incurred on software being capital or revenue. It was also felt by the Division Bench that there are various aspects which are relevant and material and having a direct bearing on this issue which have not been specifically/elaborately considered in the said decisions rendered by the different Division Benches of the Tribunal while expressing divergent views on the said issue. Since the said issue was expected to occur regularly in many cases, it was felt by the Division Bench that the same may be referred to the Special Bench for decision after taking into consideration all the aspects referred to above as well as other contentions that might be put forth by the parties. Accordingly, this Special Bench has been constituted by the Hon'ble President ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sector and also becomes redundant with every project undertaken by the assessee for its software development program. He held that the claim of the assessee that it should be allowed as a revenue expenditure, therefore, deserves to be accepted. Accordingly, the claim of the assessee was allowed by the learned CIT(A) and this relief allowed to the assessee by the learned CIT(A) was challenged by the Revenue in an appeal filed before the Tribunal which came to be heard initially by the Division Bench. Having noted that a similar issue relating to allowability of software expenditure has already been referred to the Special Bench in the case of M/s. Amway India Enterprises, it was thought fit by the Division Bench to make a request to the Hon'ble President for referring the case of M/s. SQL Star International Ltd. also to the Special Bench which was duly acceded to. 10. Shri M.S. Syali, Senior Advocate, appearing for the assessee i.e. M/s. Amway India Enterprises opened the arguments. He contended before us that none of the software purchased by the assessee was a custom made software and all of them had been purchased "off the shelf". He submitted that the assessee was merely a lic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the expenditure as revenue and the Tribunal also confirmed the order of the CIT(A). The Hon'ble Rajasthan High Court, however, reversed the order of the Tribunal after concluding that the payment made by the assessee to Hindustan Computers Ltd. was made for outright purchase of computer software which was used as technique in mining operation. The Court further noticed that the Commissioner had held that the acquisition of the software cannot be treated to be an asset of enduring nature. The Court, however, held that if the program is used in one mining to another mining operation, there was no reason why it should not be treated as a capital asset and the expenditure on acquisition thereof a capital expenditure. The Court finally concluded that the assessee had acquired technical know-how and the expenditure incurred on such acquisition was a capital expenditure. According to Shri Syali, the decision in the case of Arawali Constructions Co. (P.) Ltd. thus was given on totally different facts inasmuch as the payment therein was for acquisition of a software which was tailor-made to be used in mining operation which represented its earning apparatus whereas in the present case, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of software is revenue or capital expenditure. 73. Now the only question is whether purchase of software is a capital asset. There is no dispute that software is a capital asset. There is no dispute that software is an intangible asset. Hardware, commonly called as computer, is a tangible asset which by itself cannot function. The computer can function only with the help of software. Software is akin to know-how as held by the Hon'ble Rajasthan High Court in the case of Arawali Constructions Co. (P.) Ltd. In this judgment, it has been clearly held that expenditure on purchase of software is a capital expenditure. There is no contrary judgment on this aspect of issue. Hence, it has to be held that software is an asset. Admittedly, the assessee is not in the business of software. Hence, we are further of the view that software was a capital asset as far as the present assessee is concerned. The Income-tax Rules, 1962 as amended with effect from1-4-2003rather helps the revenue and not the assessee inasmuch as it provides for depreciation on software at the rate of 60 per cent." 13. Shri Syali pointed out that in the aforesaid case, there was thus no dispute that the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee entered into a license agreement with Oracle titled 'Master Software License and Service Agreement'. The Tribunal further noticed that the software which the assessee was to install and implement was neither attached to any machinery used in the production nor was a part of any production process. The Tribunal after examining the various clauses of the agreement pointed out that by acquiring the license, the assessee did not acquire any tangible asset, much less any asset which provides any new source of income or which augments the present source of income. The Tribunal ultimately concluded that the expenditure was not in the nature of a capital expenditure. The Tribunal also distinguished the decision in the case of Maruti Udyog Ltd. 16. Shri Syali then drew our attention to the decision of Delhi Bench of ITAT in the case of Escorts Ltd. v. Asstt. CIT [2006] 8 SOT 167. As pointed out by him, substantial expenditure was incurred by the assessee in the said case on software technological upgradation and computerization which was inclusive of cost of purchase of ERP system. The Tribunal found that the ERP business software was acquired by the assessee with unlimited use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red and treated as part and parcel of computer hardware and a capital asset. However, software acquired under a license on terms and conditions whereby ownership is retained by the licensor and where such software only adds to the efficient running of day to day operation of business, cannot be held to be expenditure of capital nature as they were only copyrighted articles. Reliance was also placed on the decision of Special Bench of Kolkata Tribunal in the case of Peerless Securities Ltd. v. Joint CIT [2005] 94 ITD 89. 18. Mr. O.S. Bajpai, the learned counsel for the assessee i.e. M/s. SQL Star International Ltd., at the outset, invited our attention to the provisions of section 32(1)(ii) and pointed out that as per the said provisions operative from 1-4-1999, assets are classified in two parts i.e. tangible and intangible assets. He submitted that intangible assets are to be of the nature of any business or commercial rights as per the said provisions and such rights again have to be in the nature of capital asset. He submitted that the terms and conditions of the relevant agreement, therefore, need to be seen in order to ascertain whether the acquisition of software by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee should own an asset, the assessee cannot claim depreciation. 19. Shri Bajpai thereafter submitted that computer software is an intangible asset and falls within the ambit of the Copyright Act. Intellectual Property Rights in computer software is recognized and protected by the provisions of the Copyright Act. Section 14(a) defines 'Copyright' as the exclusive right subject to the provisions of the Copyright Act to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof, namely: "(a) in the case of a literary, dramatic or musical work, not being a computer programme, (i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to be public; (iv) to make any cinematograph film or sound recording in respect of the work; (v) to make any translation of the work; (vi) to make any adaptation of the work; (vii) to do, in relation to a translation or an adaptation of the work any of the acts specified in relation to the work in sub-clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring. Therefore, these expenses were purely revenue in nature and they should be allowed in full." (ii) Sonata Information Technology Ltd.'s case "Amount paid by assessee for purchase of software was payment for acquisition of copyrighted article and not for any copyright as the assessee had merely obtained the right to distribute the copyrighted material i.e. software, and no copyright was assigned to the assessee by the vendors and therefore, the payment made to foreign concerns was not royalty within the meaning of section 9(1)(vi) and assessee was not liable to deduct tax under section 195." (iii) IBM India Ltd.'s case "The application software enables the assessee to carry out its business operation efficiently and smoothly. However, such software itself does not work on stand alone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Thus, for payment of such application software, though there is an enduring benefit, it does not result into acquisition of any capital asset. The same merely enhances the productivity or efficiency and hence to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that the right acquired by the assessee was not exclusive and that it was for a limited period which too could be terminated earlier within the period of agreement and payment was dependant on the quantum of the items manufactured Payment towards royalty was therefore revenue expenditure." (ix) Stock Exchange, Ahmedabad v. Asstt. CIT [2001] 248 ITR 209 (SC) "Right of membership of the Stock Exchange is merely a personal privilege granted to a member and it is non-transferable and incapable of alienation; right of nomination of the legal representative and heirs after assessee-member's death having ceased and vested in the Exchange as per the Stock Exchange Rules, it was not the property of the deceased defaulter." 20. Shri Sriram Seshadri, Chartered Accountant appearing on behalf of M/s. Tube Investments of India Limited as Intervener submitted that the assessee in this case is a listed company engaged in the manufacture of cycle, cycle accessories, steel tubes, strips etc. During the previous year relevant to assessment year 2001-02, a total expenditure of Rs. 316.38 lakhs was incurred by it on implementation of ERP software of Oracle. The said expenditure comprised of lice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en to manage the important aspects of the business more efficiently and effectively including product planning, purchasing, inventory control, providing customer service etc. He submitted that all these functions otherwise also would be performed whether or not ERP system is in place and thus by implementing the ERP software package, the existing organization system is replaced in order to increase its efficiency and effectiveness. He contended that the ERP package thus neither enhances the productivity or capacity of the user nor does it bring into existence any asset of enduring nature in the capital field since it is merely a platform where departmental goals and actions are synchronized towards common organizational objectives. He also contended that the ERP software is provided by Oracle to the assessee as a user only on license basis and such license is a non-exclusive one with many restrictions and prohibitions. In this regard, he invited our attention to clause 2.1 of the 'Master Software License and Service Agreement' entered into between the assessee and Oracle and pointed out that the rights granted under the said agreement give the user only the license to use the softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future..." 23. Shri Vohra laid emphasis on the fact that the assessee should obtain an advantage of enduring nature and in addition to getting such an advantage, the capital structure of the assessee should also be enhanced. Only then the expenditure can be considered as a capital expenditure. He drew our attention to the fact that the assessee acquired the software under an agreement from SAP which specifically lays down that the assessee was merely a licensee. He contended that the assessee was not the owner of the software and did not have a dominion or control over the same. He laid emphasis on the fact that to be regarded as owner of the software, the assessee should have right of disposition. Since the assessee in the present case did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribed to computer software used by an assessee in the context of Income-tax law. 24. Shri Ajay Vohra then drew our attention to U.S. Regulations on the classification of transactions involving computer programs which are to the following effect:- "TheU.S.Regs. envisage four alternatives for the characterisation of software and payments derived therefrom. Transfers of software are characterised by the rights transferred. Depending on the rights transferred, a transfer of software will fall into one of the following categories: (i) A transfer of a copyright right in the computer program; (ii) A transfer of a copy of the computer program (a copyrighted article); (iii) The provision of services for the development or the modification of the computer program; or (iv) The provision of know-how relating to computer programming techniques. Transactions involving the transfer of a computer program (alternatives (i) and (ii) may be distinguished as follows: -Transfers of a copyrighted article are transactions in which no copyright right is transferred; in such a case, the transfer is regarded as: (a) a sale or exchange, if all benefits and burdens of ownership are transferred; or (b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a sale of goods and the income will be treated in accordance to international trade principles; and --sell standard unmodified software, via domestic Taiwanese distributors, including programmes downloaded online or installed on compact discs and the domestic distributor installs the software on to hardware in accordance to the instructions of the final purchaser, the sale is to be regarded as a sale of goods and the income will be treated in accordance to international trade principles. In this situation, the purchaser is not permitted to reproduce, modify, transfer or publicly display the software. It should be noted that the domestic distributor is subject to Taiwanese tax and reporting requirements with regard to any income arising from the sale of such software. In addition to the above, the Ruling provides the characteristics of standardized software and the characteristics of customized software, as well as a broad definition for shrink-wrapped and packaged software, as follows: -Standardized software refers to software which is readymade and available for sale to general users and its program is not made or modified for a specific user. Additionally, the purchaser of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R.P. Tools Ltd. v. CIT [1999] 237 ITR 684 (Mad.) -CIT v. Southern Pressings (P.) Ltd. [1999] 242 ITR 67 (Mad.) -CIT v. Gujarat Carbon Ltd. [2002] 254 ITR 294 (Guj.) -CIT v. Eicher Motors Ltd. [2007] 293 ITR 464 (MP) -CIT v. Kirloskar Tracators Ltd. [1998] 231 ITR 849 (Bom.) -Goodyear India Ltd. v. ITO [2007] 73 ITD 189 (Delhi) (TM). His further submission was that a mere right to use software is as good as a right to use know-how and therefore expenditure on acquiring computer software is to be considered as revenue expenditure. He also brought to our notice the judicial pronouncements of the Hon'ble Madras High Court the case of CIT v. Southern Roadways Ltd. [2006] 282 ITR 379 wherein the Hon'ble Madras High Court has held that expenditure incurred on software packages was revenue expenditure and that such software enhances the efficiency of the operation and was not an aid in the manufacturing process and therefore there is no enduring benefit or acquisition of any capital asset by an assessee. Reference was made to the decision of the Madras High Court in the case of CIT v. Southern Roadways Ltd. [2007] 288 ITR 15 laying down identical proposition. Further attention was dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ten by enslaving it. The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasis the element of a sufficient degree of durability appropriate to the context. There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The "once for all" payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common-sense way having regard to the business realities. In a given case, the test of "enduring benefit" might break down." According to Shri Vohra, the test of enduring benefit would break down in the case of acquisition of a licence to use software because by acquiring a license to use computer software, assessee does not get any enduring benefit. In this regard he also drew at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Scientific Works and Arvind Mills by pointing out that in those cases assessee acquired rights of ownership. In conclusion, Shri Ajay Vohra submitted that on the facts of his assessee's case implementation fee paid for installation of SAP system can never be considered as capital expenditure. In this regard he relied on the decision of the Chandigarh Bench of the Tribunal the case of Glaxo Smithkline Consumer Healthcare v. Asstt. CIT [IT Appeal No. 379/Chd. of 2004. 29. Smt. Smita Jhingran Ld. CIT-DR firstly drew our attention to the scheme of the Act whereby deduction of expenses in acquiring capital assets are to be allowed in a staggered manner. Referring to the provisions of section 32, she submitted that with effect from1-4-1998depreciation was to be allowed on both tangible and intangible assets. With effect from1-4-2003computer and computer software have been treated as plant and tangible assets. According to her, the expression "computer software" is defined in the rules to mean "any computer programme recorded on any disk, tape, perforated media or any other storage device". It was submitted by her that the intent of the Legislature was to make the ambit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would also be a case of acquisition of software and the distinction sought to be made by the assessee cannot be accepted. It was also submitted by her that the distinction between a copyright and a copyrighted article is not recognized by l h e Income- tax Act and therefore both copyright and copyrighted articles are covered under section 32(1) of the Act. It was also submitted by her that the expression "wholly or partly" used in section 32(1) would also include within its ambit, a person owing license to use software. It was also submitted by her that to claim depreciation even ownership is not a condition as laid down by the Hon'ble Supreme Court in the case of Mysore Minerals v. CIT [1999] 239 ITR 775 and the Delhi High Court in the case of CIT v. Bharat Aluminium Co. Ltd. [2007] 292 ITR 600 (Delhi). Attention was drawn to the decision of the Pune Bench of the Tribunal in the case of Sudharshan Chemical Industries v. Asstt. CIT [2007] 17 SOT 43 (URO) wherein purchase of ERP software was treated as capital expenditure. 30. Shri Devender Shanker, Ld. CIT-DR appeared for the revenue and made submissions in the light of the provisions of the Copyright Act, 1957. His submission wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articular software may have to be seen whether it tantamount to acquisition of a new software or increasing or improving the speed, efficiency, capacity or overall performance of the software. For example if a person who is already using a disk operating system software windows 97 and wants to upgrade to windows 2003 or windows 2005 he will have to discard the existing windows 97 and upload windows 2003/2005 on his computer by acquiring it a fresh. Similar will be a case when new application software like Office 97, Office 2000 or any such other software is installed by replacing the existing older version. Thus, this kind of upgradation does not lead to upgradation in the real sense but is acquisition of a new software. 33. Shri Devender Shanker further submitted that in case of software like ERP, SAP, Oracle (which are not in the nature of shrink wrap), any upgradation to a newer version has to be carried out by the original supplier who has the source code of the software with him. If this upgradation results in higher efficiency, higher speed, higher memory and data handling capacity then it will be an acquisition of an enduring benefit and will be in the nature of capital ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a first step one has to see if the expenditure was capital expenditure or revenue expenditure. Our attention, was drawn to the decision of the Hon'ble Karnataka High Court in the case of CIT v. Rex Talkies [1984] 148 ITR 560 and CIT v. Haridas Bhagat & Co. (P.) Ltd. [1999] 240 ITR 169 (Mad.) for the above proposition. In the case of computer software also one has to see whether the expenditure on Computer Software was capital or Revenue only then the applicability of provision of section 32(1)(ii) should be seen. 36. It was also submitted by Shri Syali that amendment to the provisions of section 36(1)(ix) presupposes that expenditure in question was complete restructuring of computer hardware and software as explained by Board in its Circular No. 779, dated 14-9-1999. In this regard he also submitted that Explanation (a) to section 36(1)(ix) also justifies such interpretation. It was further submitted by him that software does not provide any new advantage to an assessee, which is of an enduring nature. It does not result in acquisition of any new asset. It was submitted by him that the Hon'ble SC in case of Tata Consultancy Service at page 421 of ITR 271 clearly held that softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is revenue or capital in nature. Before we specifically deal with this issue, it would be relevant to dwell upon the general guidelines and principles laid down by the various higher Courts including theHon'ble Apex Courtfor deciding the nature of any expenditure whether capital or revenue. Lord Denning in Heather v. P.E. Consulting Group Ltd [1972] 48 TC 293 made the following still very pertinent observations at page 321A: "The question - revenue expenditure or capital expenditure - is a question which is being repeatedly asked by men of business, by accountants and by lawyers. In many cases the answer is easy; but in others it is difficult. The difficulty arises because of the nature of the question. It assumes that all expenditure can be put correctly into one category or the other; but this is simply not possible. Some cases lie on the border between the two; a ad this border is not a line clearly marked out; it is a blurred and undefined area in which anyone can get lost. Different minds may come to different conclusions with equal propriety. It is like the border between day and night, or between red and orange. Everyone can tell the difference except in marginal cases; an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was also held that the aim and object of the expenditure thus would determine the character of the expenditure, whether it is a capital expenditure or revenue expenditure. In the case of Sun Newspaper Ltd. & Associated Newspaper Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337, Dixon J. observed that there are three matters to be considered to decide the nature of any expenditure - (a) the character of the advantage sought and in this its lasting qualities may playa part, (b) the manner in which it is to be used relied upon or enjoyed and in this and under the former head, recurrence may play its part and, (c) the means adopted to obtain it i.e. by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment. As observed by Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may nonetheless be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly for distinguishing between capital and revenue expenditure. It is a blurred and undefined area in which anyone can get lost. Different minds may come to different conclusions with equal propriety. The cardinal rule is that the question whether a certain expenditure is on capital or revenue account should be decided from the practical and business view point and in accordance with sound accountancy principles and this rule is of special significance in dealing with expenditure on expansion and development of business. While dealing with this complex issue, three tests generally applied to decide the nature of expenditure as to whether it is capital or revenue, are the test of enduring benefit, ownership test and functional test. Applying the said tests, expenditure is treated as capital expenditure either when it results in acquisition of capital asset by the assessee as owner thereof or when it results in accrual of advantage of enduring nature to the assessee in the capital field. In the first situation, the ownership test assumes greater significance because the acquisition of capital asset by the assessee as a result of incurring expenditure is a condition. If the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e computer software for their own purpose and there is as such no acquisition of any asset, much less a capital asset. It has also been contended that intellectual property rights in computer software is recognized and protected by the Copyright Act and as per the provisions of section 14(b) of the said statute, the use of a computer software under a licence is not exercise of a copyright. It has been contended that the acquisition of computer software under licence at the most could be considered as a purchase of a copyrighted article wherein no copyright right is transferred either as per the Copyright Act or even as per the U.S. Regulations on this subject. As regards the decision of Hon'ble Supreme Court in the case of Tata Consultancy Services, it has been contended that the same was rendered in the context of levy of sales tax and transfer of right to use the software was held to be a sale of goods exigible to sales tax in the light of extended definition of "sale" as given in Explanation (iv) to section 2(n) of the Sales Tax Law. It has been contended that the said decision of the Hon'ble Supreme Court especially rendered in the context of extended definition given in the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the punch cards, magnetic tapes, etc., the logic or intelligence of the program remains intangible property. It is held that it is this intangible property right which is acquired when computer software is purchased or leased. It has been held that what is created and sold is information and the magnetic tapes or the discs are only the means of transmitting these intellectual creations from the originator to the user. It has been held that the same information could have been transmitted from the originator to the user by way of telephone lines or fed directly into the user's computer by the originator of the programme and that as there would be no tax in those cases merely because the method of transmission is by means of a tape or a disc, it remains intangible personal property. It has been held that what the customer paid for is the intangible knowledge which cannot be subjected to the personal property tax." 47. Thereafter, a different view taken by the American Courts in other cases as brought to the notice of Hon'ble Supreme Court on behalf of the assessee was also taken note of and the proposition propounded while taking such a view in the cases of South Central Bell Telep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l right to the software is not transferred. It is held that the incorporeal right to software is the copyright which remains with the originator. What is sold is a copy of the software. It is held that the original copyright version is not the one which operates the computer of the customer but the physical copy of that software which has been transferred to the buyer. It has been held that when one buys a copy of a copyrighted novel in a bookstore or recording of a copyrighted song in a record store, one only acquires ownership of that particular copy of the novel or song but not the intellectual property in the novel or song." 48. The decision in the case of Commissioner of Sales Tax v. M.P. Electricity Board 1968 (1) SCC 200 was also considered by theHon'ble Apex Court. The question in that case was whether Electricity was goods for the purpose of imposition of Sales Tax under the M.P. General Sales Tax Act, 1959 under which the definition of the term "goods" was given to mean all kinds of movable property and included all materials, articles and commodities. It was held in the case of M.P. Electricity Board in this context that the term "goods" for the purposes of Sales Tax, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the matter, as well as the Court's own decisions in this context rendered, inter alia, in the case of Associated Cement Co. Ltd. wherein the similar issue was decided in the context of Customs Act in which the definition of the term "goods" given was not as wide or as exhaustive as the definition of the term "goods" given in A.P. Sales Tax Act, its conclusion was recorded by the Hon'ble Supreme Court finally as under:- "In our view, the term "goods" as used in article 366(12) of the Constitution of India as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd 2001 (4) SCC 593; [2001] 124 STC 59. A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s bought and sold. It is an article of value. It is sold in various forms like - floppies, disks, CDROMs, punch cards, magnetic tapes, etc. Each one of the mediums in which the intellectual property is contained is a marketable commodity. They are visible to senses. They may be a medium through which the intellectual property is transferred but for the purpose of determining the question as regard leviability of the tax under a fiscal statute, it may not make a difference. A programme containing instructions in computer language is subject-matter of a licence. It has its value to the buyer. It is useful to the person who intends to use the hardware, viz., the computer in an effective manner so as to enable him to obtain the desired results. It indisputably becomes an object of trade and commerce. These mediums containing the intellectual property are not only easily available in the market for a price but are circulated as a commodity in the market. Only because an instruction manual designed to instruct use and installation of the supplier programme is supplied with the software, the same would not necessarily mean that it would cease to be a 'goods'. Such instructions contained i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act was taken into account and relied upon by the Hon'ble Supreme Court to hold that a software, whether customised or non-customised, satisfies all the attributes of being a 'goods' and as such, the same is capable of being bought and sold and becomes an object of trade and commerce. 55. In our opinion, the ratio laid down by the Hon'ble Supreme Court in the case of Tata Consultancy Services holding that computer software put in a medium of disk would be goods can only lead to the conclusion that purchase of such disk is acquiring a tangible asset. If the disk, tape or floppy or other electronic medium in which the software is stored is by itself goods, then the assessee who acquires the same, acquires a tangible asset. Computer Software has not been defined in the Act, but in Note-7 to Appendix-I to the Income-tax Rules, it has been explained to include computer programme recorded on any disc, tape, perforated media or other information storage device. Therefore computer software (whether in canned form or uncanned form) is goods and a tangible asset by itself. The question whether an assessee by purchase of a disk containing software has purchased a capital asset or not should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit only in the revenue field and therefore it may have to be regarded as revenue expenditure. The decision of the Hon'ble Supreme Court, in the case of Empire Jute Co. Ltd. lays down that it is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test (enduring benefit test). What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. In other words, the functional test would become material and if on application of the same it is found that the expenditure operates to confer benefit in the revenue field, then the same would be revenue, irrespective of the duration of time for which the assessee acquires rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be considered here is that of acquisition of Turbo Gold software for Rs. 17.61 lakhs by one of the assessees in the present case i.e. M/s. Amway India Enterprises. As submitted before us, the said software helps in compression of size of e-mails sent through the Lotus Notes Mailing System and it includes licenses for 150 users who are using Lotus Notes Mailing System and software license for running on its server. If use of this software in the business of the assessee is limited to facilitate merely an effective and fast communication in order to increase its organizational efficiency, the same cannot be treated as forming part of the profit- making apparatus of the assessee. On the other hand, if such software is being used by an assessee engaged in the business of placement agency where the applications from persons seeking jobs are invited through e-mail and are also forwarded to the concerned clients through e-mail, the same may form part of profit-making apparatus of the assessee's business of placement agency and can be treated as a capital asset. (ii) As a general rule it may be stated that the more expensive the computer software the more it is likely to be a central to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue 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. 60. Having laid down the criteria for determining the nature of expenditure incurred on acquisition of software, whether capital or revenue, 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 above, 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 abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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 from1-4-1999on 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. 63. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e finding of fact by the Tribunal was that the expenditure in question was for upgradation and that the software had a very limited life. It was on these facts that the Hon'ble Delhi High Court concurred with the view expressed by the Tribunal that the expenditure was of a revenue nature. In the case of K. & Co. decided by the Hon'ble Delhi High Court, the expenditure in question was on maintenance and upgradation and was held to be revenue in nature. In the case of Southern Roadways Ltd., the expenditure in question was on upgradation of Computer Software and the finding of fact was that the expenditure was incurred only for improving the efficiency of the existing system. The Court has also reiterated the law that there was no single rigid formula to find out whether expenditure was capital or revenue. These decisions of the Hon'ble High Courts have to be considered as laying down general guidelines but in each case the facts and other surrounding circumstances have to be taken into account before applying the ratio laid down therein. 66. The learned counsel for assessee Mr. Ajay Vohra relied on some judicial pronouncements wherein it was held that expenditure on acquisition of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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