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TMI Blog2007 (1) TMI 494X X X X Extracts X X X X X X X X Extracts X X X X ..... this count is required to be deleted and it be deleted accordingly. The Assessing Officer has noted in paragraph 3 of his order that the assessee was valuing its stock of raw materials on the basis of the lowest price of the raw material in the last quarter of the year, that this method was not accepted by the Department in the past and the raw material was valued at the highest rate of purchases during the last quarter of the year, that in the assessment year 2000-01 the assessee changed its method of valuation to average inventory method, that in the assessment year 1999-2000 the value of inventory was increased by Rs. 22,42,508, that the difference in inventory was worked out at Rs. 26,63,104 and that after accepting the alternative plea of the assessee a net addition of Rs. 4,20,597 was made. The Assessing Officer s action was upheld by the Commissioner of Income-tax (Appeals). It was pointed out by Shri S. N. Inamdar, the learned authorised representative, that this issue was covered by the decision of the Incometax Appellate Tribunal, Pune, in the assessee s own case in I. T. A. No. 1125/PN/1994 for the assessment year 1990-91, dated July 13, 2004. The observations made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mme as capital expenditure as laid down in section 32(1)(ii) and considering the terms of the agreement with SAP India Systems, Applications Products in Data Processing (P.) Ltd. The provisions of section 32(1)(ii) are, to be read on the principles of ejusdem generis by which such licence fees for user of a computer programme paid are not covered by that provision and it be held accordingly. 5. The learned Commissioner of Income-tax (Appeals) ought to have held that the essence of terms of agreement shows that such licence fees were paid for use of the software system sans ownership, control and are different and distinguishable from the phraseology used as licences acquire and, therefore, was a revenue expenditure which was correctly claimed and it be held accordingly. 6. The learned Commissioner of Income-tax (Appeals) ought to have held that alternatively, the assessee-company is entitled to depreciation at 60 per cent. and not at 25 per cent. as allowed by the Assessing Officer and it be allowed accordingly. (i) Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) ; (ii) CIT v. Arawali Constructions Co. P. Ltd. [2003] 259 ITR 30 (Raj) ; (iii) CIT v. Premier Auto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1)(ii) of the Act and submitted that in the case of CIT v. Arawali Constructions Co. P. Ltd. [2003] 259 ITR 30, the Rajasthan High Court had held that the purchase of software was acquisition of know-how. He vehemently argued saying that the order of the Commissioner of Income-tax (Appeals) needed to be upheld. We have considered the rival submissions in the light of the material on record and the precedents cited. The assessee-company acquired a licence from SAP India, vide agreement dated March 4, 1999, for a period of 25 years for use of its proprietary R/3 software-an ERP package, for the purposes of its business and paid Rs. 1 crore for the same. In the aforesaid agreement dated March 4, 1999, the opening part of the recital reads as under : Whereas, SAP desires to grant to licensee and licensee desires to accept from SAP, a licence to use (as defined herein) SAP s proprietary R/3 software (as defined herein) upon the terms and conditions hereinafter set forth ; The assessee has filed a detailed note explaining the nature and the scope of the software used for the ERP implementation. ERP is an acronym for Enterprise Resource Planning which is a complex computer based sys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture of Rs. 1 crore as revenue expenditure. Before proceeding further, it may be useful to describe a computer software, in brief and in a layman s language. A software is an integral part of a computer system. A typical/basic Personal Computer (PC) has a Central Processing Unit (CPU), a monitor, and a key board. The CPU is an electronic device and it requires a set of instructions to do computing. These set of instructions are collectively known as programme and several languages have been developed to write these programmes. These programmes have, collectively, come to be known as software in order to contra distinguish them from the other part of the computer system-the hardware. In other words, a computer system is comprised of two parts-a software and a hardware. The hardware is the tangible part and the software is the intangible part. The software enables the hardware, i.e., the CPU, to perform the designated functions. A very simple example of a software that is widely used in a PC is MS Office which enables the user to use the hardware, inter alia, for writing letters, preparing spreadsheets, preparing power point presentations, etc. This is a very simplistic p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 30, submitted that a software was a know-how within the meaning of section 32(1)(ii) of the Act. He pointed out that the Rajsthan High Court had, in turn had placed reliance on the decision of the Bombay High Court in the case of CIT v. Premier Automobiles Ltd. [1994] 206 ITR 1. Shri Inamdar, the learned authorised representative submitted that the decision of the Bombay High Court was not appreciated by the Rajasthan High Court in right perspective. The Rajasthan High Court, in the case of Arawali Constructions Co. P. Ltd. [2003] 259 ITR 30, after taking into consideration the decision of the Bombay High Court in Premier Automobiles Ltd. [1994] 206 ITR 1, held that the outright purchase of computer software was acquisition of knowhow and the relevant expenditure of Rs. 1,38,360 incurred during the assessment year 1984-85 was capital expenditure. The decision of the Rajasthan High Court had two parts-one, the purchase of computer software amounted to acquisition of technical know-how and two, that the expenditure incurred on acquiring technical know-how was capital expenditure. It is seen that the decision of the Bombay High Court in the case of Premier Automobiles Ltd. [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure of Rs. 1 crore incurred for acquiring the impugned licence, was rightly treated by the Assessing Officer and the Commissioner of Income-tax (Appeals) as capital expenditure, eligible for depreciation under section 32(1). The Assessing Officer treated the aforesaid licence acquired vide agreement dated March 4, 1999, as an intangible asset qualifying for depreciation under the provisions of clause (ii) of section 32(1) of the Act. He allowed depreciation at 25 per cent. which is the rate mentioned in Part B of the table of rates in Appendix I applicable to intangible assets. The rate of 60 per cent. applicable in respect of computers including computer software was introduced for and from the assessment year 2003-04. Therefore, the alternative plea claiming depreciation at the rate of 60 per cent. has no merit and is rejected. Grounds Nos. 4, 5 and 6 are accordingly rejected. Ground No. 7(1) The EMD gross receipts of Rs. 40,75,145 is income from business and which is outside the purview of Explanation (baa) of section 80HHC(4B) of the Act. It was pointed out by Shri S. N. Inamdar, the learned authorised representative, that this issue was covered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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