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TMI Blog2012 (12) TMI 868X X X X Extracts X X X X X X X X Extracts X X X X ..... he issue to the file of the AO with the directions to redecide the issue in the light of tests laid down in the case of Amway India Enterprises(2008 (2) TMI 454 - ITAT DELHI-C). In the absence of terms and conditions of the license, it is not known as to how the AO or the CIT(A) could ascertain economic and functional role which the integrated software plays in the business of the assessee. Though in a confirmation dated 6.9.2012 Honda Motor Co. Ltd., Japan stated that it granted license to the assessee and its other subsidiaries worldwide to use HIPACK software, it does not spell out any terms and conditions of the license. A number of factors are relevant to determine whether the advantage operates in the capital field or revenue field. The nature of business of the assessee, an understanding of the business functions or effect of a concern's software. Software normally functions as a tool enabling business to be carried on more efficiently. The scope, power, longevity of such a tool and its centrality to the functions of the business have all bearing on its treatment. Thus in view of the foregoing, especially when the relevant agreement, licensing the aforesaid integrated so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on facts and in law in holding that functions of the Factory Module part of the software facilitated in production and was directly linked with fixed capital items, without appreciating that said module did not form integral part of the manufacturing process of the assessee. 3. Without prejudice, that the CIT(A) erred on facts and in law in not directing the Assessing Officer to allow depreciation on the aforesaid amount held to be capital expenditure. 2. Facts, in brief, as per relevant orders are that original assessment in this case was completed on a loss of Rs.848,61,712/- vide order dated 21.3.2002 u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act) in pursuance to return declaring loss of Rs.14,59,91,000/- filed on 29.12.1999. Inter alia, an amount of Rs.2,34,34,782/- on account of purchase of computer software expenses(HIPACK) was disallowed, being capital expenditure. Subsequently, the assessment was reopened u/s 147 of the Act with the service of a notice issued u/s 148 of the Act on 20.12.2005 and the reassessment was completed on a loss of Rs.5,59,712/-. On appeal, loss was determined at Rs.53,79,620/- vide order dated 5th March, 2009 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t thereafter, some modifications were made every year, whenever price was hiked .After considering the submissions of the assessee, the AO concluded as under:- .. Thus, it is gathered from the reply of the assessee that (i) assessee acquires a computer software from its holding company M/s Honda Motor Company Limited, Japan and becomes the owner of the package purchased from HMCL like the software being purchased from Microsoft for a consideration. (ii) some modifications were made to the software but the software is not obsolete and (iii) the software is in working in the assessee company and the company ensures it utility in the business as it is using since 1999-2000 to 2002-2003 as per reply of assessee. Thus all these conditions has been satisfied for treating the expense as capital expenditure. Beside it, assessee has also cited various case laws, the facts thereof are different from the assessee case. Further, the facts of the assessee company are in commensurate with the guidelines framed by the ITAT Delhi Bench in the case of Amway India Enterprises. Accordingly, the expenses of Rs.2,34,34,782/- is treated as capital expenditure. 3. On appeal, the ld. CIT(A) ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Line Control HIPACK-Warranty (User Division- After Sales) - Cost Rs. 3,888,797. a) Customer information b) Warranty claim processing HIPACK-Sales (User Division- Marketing) - Cost Rs.3,952,548 a) Finished goods inventory b) Invoicing to dealers HIPACK-Parts (User Division- Spare Parts) - Cost Rs. 3,082,350 a) Spare Parts inventory b) Spare parts procurement c) Spare parts invoicing It is submitted that all the modules / functions performed by the HIPACK software only helped in carrying out their auxiliary business activities like billing, inventory management, claim processing etc. As the HIPACK software was not used within the shop floor premises. Therefore, the said software, does not, directly or indirectly, form the integral part of the manufacturing process itself even though supporting the 'Pre-production', 'Production Control' and the 'After Production' activities. It, thus, cannot by any stretch of imagination be considered to be part of profit making apparatus of the appellant. It is further submitted that various modifications were done in the various modules of HIPACK so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in sales module enabled the appellant in posting of cars sales from HIPACK to accounting software, invoicing of upto 4 cars in a single invoice, to ensure invoicing as per prevalent prices, dealer accessing information on dispatches made and invoicing of traded cars. That HIPACK's Sales module facilitated in managing the management of the Appellant's finished goods apart from the billing to dealers which helped in carrying out routine business functions of the appellant and cannot be considered a part of profit making apparatus of the appellant. HIPACK- PARTS MODULE - Interface with accounting system FY 2000-2001 - In-house parts sales function FY 2001-2002 - Price master change The above modifications in the parts module enabled the appellant in posting of parts sales from HIPACK to accounting software, identification and maintenance of inventory of traded and factory manufactured parts (FMP) and to ensure invoicing as per prevalent prices. That HIPACK's Parts module facilitated in supplier delivery schedule, inventory management and billing to dealers which helped in carrying out routine business functions of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f facts available on records and on the basis of tests laid down in the case Amway India Enterprise (Supra) the expenses for acquiring the software at S. No. (i) to (iii) below be treated as revenue in nature and expenditure for acquiring software at S. No. (iv) below be treated as Capital in nature. I. Warranty Module Rs.38,88,797 Revenue expenditure II. Sales Module Rs.39,52,548 Revenue Expenditure III. Parts Module Rs.30,82,350 Revenue Expenditure IV. Factory Module Rs.1,25,11,088 Capital expenditure 4.5 Thus addition of Rs.1 ,25,11,088 is confirmed and appellant gets a relief of Rs.1,09,23,694 (Rs.2,34,34, 782 minus Rs.1,25,11,088). 4. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A), holding the expenditure in relation to warranty module, sales module and parts module, revenue in nature while the assessee disputed his findings in respect of expenditure incurred in relation to factory module. At the outset, to a query by Bench, the ld. AR on behalf of the asssesee did not submit a copy of agreement where under the said software was licensed to the assessee and instead, after seeking a number of adjournments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e distinguishing the decision in Asahi India Safety Glass Ltd.(supra), the ld. DR argued that the entire expenditure incurred on software was capital in nature. 6. In his rejoinder, the ld. AR pointed out that the software was not utilised in the production and designing of cars. Applying the functional test laid down in para 58 of the judgment in Amway India Enterprises(supra), the entire expenditure was revenue in nature, software having not been used in designing of motor cars but only utilized in maintaining and control of raw material. 7. The ld. DR while referring to page 4 of the impugned order added that factory module is part of profit making apparatus of the company, being utilized, inter alia, in assembling line. 8. We have heard both the parties and gone through the facts of the case as also the decision relied upon by the ld. AR on behalf of the assessee. The issue before us is as to whether the expenditure on integrated software called HIPACK , claimed to have been licensed by HM to the assessee, is revenue or capital in nature. In the first round, a co-ordinate Bench vide their order dated 26th September, 2008 set aside the issue to the file of the AO with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture, if on application of the functional test, it is found that the expenditure operates to confer a benefit in the capital field. On the other hand, some computer software may have a very limited economic life so as to be treated as capital expenditure, though owned by an assessee. While referring to amendment in the law, with effect from 1-4-2003, granting 60 per cent depreciation on computer software, the Special Bench summarized their conclusions as under: (i) When the assessee acquires a computer software or for that matter the license to use such software, he acquires a tangible asset and becomes owner thereof as held above relying on the decision of Hon'ble Supreme Court in the case of TCS. (ii) Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. Any software having its utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make the expenditure incurred o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee claimed that it was merely a licensee of the integrated software HIPACK and the right to use the software was subject to the conditions mentioned in the license agreement, which agreement despite repeated adjournments has not been placed before us by the ld. AR on behalf of the assessee nor any reasons have been adduced as to why the said agreement could not be furnished. In the absence of relevant agreement, it is not known as to whether or not there was transfer or parting with secret processes and technical know-how to the assessee nor the relevant terms and conditions in respect of use of software are known. The ITAT vide their order dated 26th September,2008 set aside the issue to the file of the AO with the directions to redecide the issue in the light of tests laid down by the Special Bench of the Tribunal in the case of Amway India Enterprises(supra). In the absence of terms and conditions of the license, it is not known as to how the AO or the ld. CIT(A) could ascertain economic and functional role which the integrated software plays in the business of the assessee. In terms of the tests laid down in the aforesaid decision, no doubt the assessee when purchased a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The ld. AR on behalf of the assessee heavily relied on the decision in Asahi India Safety Glass(supra). In that decision the assessee in the said case acquired a software package prepared by globally known Oracle Corporation, USA. The software covers areas of financial accounting, inventory and purchase. The assessee entered into a license agreement with Oracle titled 'Master Software License and Service Agreement'. It was 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 provided 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. Hon ble High Court upheld the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unction independently in the light of aforesaid economic and functional test laid down in Amway India Enterprises(supra) while confirmation dated 6.9.2012 of Honda Motors Ltd., Japan was not before the lower authorities, we consider it fair and appropriate to vacate the findings of the ld. CIT(A) and restore the matter to his file with the directions to readjudicate the issue in the light of our aforesaid observations after obtaining a copy of license agreement from the assessee of course after allowing sufficient opportunity to both the parties. Needless to say that the ld. CIT(A) shall pass a speaking order, keeping in mind the mandate of provisions of sec. 250(6) of the Act, bringing out clearly as to whether or not expenditure on aforesaid integrated HIPACK software is revenue or capital in nature, in the light of various judicial pronouncements, including those referred to above. With these observations, ground nos. 1 2 in the appeal of the Revenue as also ground nos. 1 2 in the CO are disposed of while ground no.3 in the CO does not survive for our adjudication at this stage. 9. No additional ground having been raised before us in terms of residuary ground no. 3 in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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