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TMI Blog2011 (7) TMI 303X X X X Extracts X X X X X X X X Extracts X X X X ..... cause of which the assessee is a market leader - the agreement is valid for a period of 10 years and is further extendable, which shows that the benefit is not restricted only to 10 years - The assessee does not retain any residual right under the agreement - Therefore, exclusive right to manufacture goods in India for 10 years does not lead to inference of benefit of enduring nature in the capital field - At the same time it is seen that the license fee is paid on the basis of net turn over and it has a direct relationship with an item in the revenue field - Therefore, the expenditure is of revenue in nature. X X X X Extracts X X X X X X X X Extracts X X X X ..... on and the decision in the case of Maruti Udyog Limited vs. DCIT, 1922 ITD 119, it has been held that software is a capital asset of intangible nature. The purchase of software has granted benefit of enduring nature to the assessee. No evidence exists on record that the softwares purchased by the assessee have a short span of life. Therefore, the findings of the Assessing Officer have been confirmed. 2.2 Before us, the learned counsel submitted that the assessee purchased softwares of the value of Rs.16,61,402/- in this year. The expenditure of Rs.10,86,782/- in respect of Corporate Data Link (Cards), business card scanner, and software of the value of Rs.10,72,528/-, Rs.6,500/- and Rs.7,700/- respectively has been capitalized. The aggregate value of these softwares amounts to Rs.10,86,728/-. Thus, only the balance amount of 5,74,674/- has been claimed as revenue expenditure. This shows that the assessee has applied mind to the useful life of various softwares and treated the expenses to be revenue in nature only in cases where useful life was short due to obsolescence. The details of these expenses have been placed on page No.36 of the paper book, which are reproduced below:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, anti software virus is purchased to protect other softwares and, therefore, the expenditure is of revenue nature. This leaves us with backup software purchased at the cost of Rs.3,50,000/-. No detail or explanation has been filed about the nature and utility of the software. No evidence exists on record about the useful life span of the software. From the narration, it appears that this software is used to provide necessary support to all other softwares. The burden to prove that expenditure is revenue in nature, is on the assessee, which has to be discharged by filing relevant facts. Such facts are absent in this case. The question of application of decided cases comes only thereafter. In other words, in absence of facts, it cannot be said that the expenditure is revenue in nature. Accordingly, it is held that expenditure of Rs.3,50,000/- only and not Rs.5,74,674/- is capital in nature. The Assessing Officer is directed to revise the order by taking Rs.3,50,000/- only as capital expenditure. The calculation regarding depreciation shall also be revised accordingly. Thus, this appeal is partly allowed. Assessment Year : 2006-07 3. The position of first ground in this appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, an exclusive non-transferable licence, authority, permission to use the licensed trademarks in respect of the licensed products. It has been argued that the assessee did not acquire any tangible or intangible property and the royalty is paid on the basis of a fixed percentage of the turn over. Accordingly, it is argued that the expenditure is revenue in nature. A number of cases were cited before him. The Assessing Officer also found out the cases, which support the view that the expenses of royalty are partly capital in nature. He referred to the decision in the case of CIT vs. Ciba India Ltd., 69 ITR 692, Sriram Pistons and Rings Ltd. vs. CIT 171 Taxman 81; CIT vs. Gujarat Carbon Ltd., 254 ITR 294; and CIT vs. Jyoti Electric Motors Ltd., 255 ITR 345, relied upon by the assessee. He also considered the decision in the case of CIT vs. British India Corporation Limited 165 ITR 51; CIT vs. Indian Oxygen Ltd., 218 ITR 337; CIT vs. IAEC (Pumps) Ltd., 232 ITR 316; CIT vs. Wavin India Limited, 236 ITR 314. On the basis of these decisions, he culled out various propositions, which lead to the conclusion that the expenditure is revenue in nature. These are as under:- i) the right is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contention that the expenditure is revenue in nature. In reply, the learned DR drew our attention to the findings of the Assessing Officer and the learned CIT(A). In particular, it is submitted that the agreement is extendable beyond 10 years. The agreement provides the comprehensive technical know-how to the assessee. Therefore, it is argued that the learned CIT(A) was right in holding that the expenditure is capital in nature. 3.5 In rejoinder, the learned counsel submitted that although the revenue has relied on the decision in the case of Southern Switch Gears Limited (supra), the whole of the expenditure has been held to be capital in nature. At best, only a part of the expenditure could have been taken as capital expenditure. 4. We have considered the facts of the case and submissions made before us. The question as to whether an expenditure is capital or revenue in nature is always a vexed question, which has to be decided on the basis of the facts of each case. When the expenditure leads to acquisition of an asset of fixed nature, it constitutes capital expenditure. Another test is that when an expenditure leads to a benefit of enduring nature to the assessee, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, non-assignable basis to use licensed trademark relating to licensed products during the subsistence of the agreement. The agreement is to remain in force for an initial period of 10 years. It may be mentioned by us at this stage that gross block of fixed assets amounted to about Rs.88 crores and addition of work in progress of about Rs.4.26 crores was made in this year. With these facts, we proceed to examine as to whether the expenditure created any fixed asset are led to a benefit of enduring nature to the assessee in the capital field. 4.2 We have already mentioned that the assessee had been carrying on the business of manufacturing industrial hoses. The gross block of the assets at the beginning of the year amounted to about Rs.88 crores. After depreciation, the value of net block was about Rs.45.47 crores. This clearly establishes that no new business has been set up by the assessee in this year. Accordingly, it is held that the agreement with Gates Corporation is not for setting up a new business. The recital to the agreement states that it is in continuation of the pre existing agreement dated 03.02.1996, which expired on 14.05.2003 and that the instant agreement is dra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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