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TMI Blog2013 (12) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... me Tax Appeal Nos. 25/2012, 287/2008, 417/2009, 447/2009, 461/2009, 683/2009, Income Tax Appeal Nos. 797/2006, 951/2006, 961/2006, 390/2007 - - - Dated:- 25-11-2013 - Sanjiv Khanna And Sanjeev Sachdeva,JJ. For the Appellant : Mr. M.S. Syali, Sr. Advocate with Ms. Husnal Syali Nagi, Mr. Mayank Nagi and Mr. Harkunal Anand, Advocates. For the Respondent : Mr. Sanjeev Sabharwal, Sr. Standing Counsel Mr. Puneet Gupta, Advocate. JUDGMENT Sanjiv Khanna, J. These 10 appeals by the assessees-Oracle India Private Limited and Oracle Software India Limited relating to Assessment Years 1994-95 to 2004-2005 raise a common substantial question of law and are, therefore, being disposed of by this decision. The substantial question of law as admitted for hearing reads:- Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in holding that media cost paid for the import of a master copy of Oracle Software used for duplication and licensing is an expenditure of a capital nature and as such is not an allowable deduction? 2. For the purpose of clarity and to notice facts, ITA No. 797/2006, which relates to Assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was for a period of five years but it appears it was extended for further period relevant to the assessment years in question. 5. In addition to the aforesaid royalty, the appellant had also paid the following amounts to the parent company reflected as expenditure on import of software master copy:- S No. ITA Assessment Year Expenditure on import of software master copy 1 951/06 1994- 95 94,49,041 2 797/ 06 1995-96 1,02,34,099 3 961/06 1996-97 82,39,876 4 390/07 1997-98 49,87,045 5 287/08 1998-99 72,49,066 6 461/09 1999-2000 45,52,944 7 417/09 2000- 01 20,05,860 8 447/09 2001- 02 17,37,557 9 683/09 2002- 03 4,11,177 10 25/ 12 2004- 05 14,40,342 6. The aforesaid payments were not made in lumpsum, but on distinct and separate dates in each assessment year on import of the master media from the holding company. To avoid prolixity, we are not reproducing details of impor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24/11/93 5 14186 11-10-93 535.55 266135 24/11/93 10 Total IEP 26,030.58 Total 1664 7. The Assessing Officer held that the aforesaid payments of Rs.94,49,041/- for the Assessment Year 1994-95 and similar payments for the other years described as software master copy and documentation was capital expenditure and not revenue in nature. He referred to the agreement dated 28th May, 1993, which was for a term of five years and observed on interpreting the terms that the appellant had acquired copyright and all other associated and applicable Intellectual Property Rights. He invoked Section 35A and held that on this amount, the appellant was entitled to deduction equal to 1/14th of the expenditure as it was incurred on acquisition of copyright. He held that there was transfer of copyright, in addition to other associated and applicable Intellectual Property Rights by Oracle Corporation, USA to the appellant company and the appellant had acquired the said rights for the purpose of business. 8. For the Assessment Years 1994-95 to 2004-2005, Commissioner of Income Tax (Appeals) reversed the finding of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred was neither for extension of business nor for substantial replacement of equipment, which related to carrying on or conduct of business and an integral part of profit making process. It was nothing but for procurement of raw material. He overturned the finding of the Assessing Officer that the appellant had acquired right of enduring nature by importing master copies and also rejected the finding that Section 35A was applicable. The price paid for the master copy or royalty payment did not involve transfer of intellectual property rights and no such rights were acquired by the appellant. The price at which the product was sold did not include the cost of intellectual property right. He noticed that the Assessing Officer in the appellate proceedings for the first time had relied upon Section 40(a)(i) and observed that the cost of the master copy does not constitute technical know-how or royalty under Section 9 of the Act. The transaction in question, i.e., import of master copy was separate and could not be inter-linked with payment of royalty. It was held that the payments made for acquisition of the master copy should be allowed as business expenditure under Section 37 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uently reiterated in the case of M/s Alembic Chemical Works (177 ITR 377). It would be pertinent to elaborate these cases which will be useful in understanding the true nature of the expenditure in the instant case. 11. Thereafter, reference was made to the facts and the ratio in the case of Empire Jute Company (1980) 124 ITR 1 (SC) and Alembic Chemical Works (1989) 177 ITR 377 (SC) and it was observed that imported master copy was used for duplicating copies of software and, therefore, a part of the profit earning apparatus. It was not a case where the appellant had imported some know-how device or device by which copying of software was done more efficiently. Once master copies were held to be a part of profit earning apparatus or source of income, it was immaterial whether the appellant had ownership rights or only right to duplication. Decisions of the tribunal in the cases of sound tracks of film songs and the film music were distinguished as they related to payment of yearly royalty, based on sales of cassettes obtained from master plates. In the said cases, the expenditure was relating to trading operation and no lumpsum payment was made. In the present case also, on roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware was created on the internal storage device. This virtual image was replicated to produce or duplicate the software. The virtual image was too large to be shown on screen. The Supreme Court has further observed that softwares were goods as held in Tata Consultancy Services versus State of Andhra Pradesh, (2004) 271 ITR 401 (SC). The software copyright might remain with the originator of the programme but the moment copies were made and sold, they would be termed as goods. There was no difference between sale of software programme on CD and sale of music on cassettes/CDs. The intellectual copyrights had got incorporated on the media for the purpose of transfer and, therefore, media cannot be split up. Reference was made to the decision in Gramophone Company of India Limited versus Collector of Customs, (1999) 114 ELT 770 (SC) and it was observed that duplication or recording of audio cassettes amounts to manufacture as goods were produced. 14. Before proceeding further, we would like to reproduce the exact reply given by the appellant as recorded in the assessment order for Assessment Year 1994-95 on the issue in question. The same reads as under:- 1. Imports master copy of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporation, USA, a new product offerings, which had high accelerated obsolescence and even at the point of time of import it was difficult whether the version would be replaced by a new or updated version after one day or a month. The life cycle of the version released was limited and improvements and further developments were constant and intermittent. The earlier version had a high degree of obsolescence and the master copy, documentation and policy adopted by the appellant recognised that the master copy did not have enduring or long- term benefit. 18. The Right to duplication and import of master copy though connected, cannot and does not show that the expenditure in question was capital in nature. The import of master copy was for the purpose of creating virtual image for the purpose of duplication. The right to duplication was given to the appellant under the agreement dated 28th May, 1993 and was subject to payment of royalty. The payments in question were not for acquiring the right to duplication. This is not the case of the Revenue or the finding of the Assessing Officer or the Tribunal. We have also quoted above the sample data for Assessment Year 1994-95, which shows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income has historically received somewhat derisory and derisive interpretation but as a theoretical as well as practical concept means the income generated during two particular points of time by a person without impoverishment of oneself. (see J.R. Hicks Value and Capital- An inquiry into some fundamental principles of economic theory, Oxford University Press, London, Second Edition 1946). Alexander making reference to the term income in corporate context has stated: income is the amount which [a] company can distribute to the shareholders and be as well off at the end of the year as it was at the beginning . It was observed:- The net income of an entity for any period is the maximum amount that can be distributed to its owners during the period and still allow the entity to have the same net worth at the end of the period as at the beginning, after adjusting for the owner s contributions. In other words, capital must be maintained before an entity can earn income. 20. The aforesaid definitions are improvements on the conceptualization of the term income as assigned by the German economist Georg Von Schanz in 1896, who held that income means the economic power accrued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill flow to the entity and the asset had a cost or value that can be measured reliably. The words income and expenditure have been defined in the said framework as under:- Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants 23. The word expense in the said Framework has been defined as decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities other than those relating to distribution to equity participants. The Framework recognised the principle of matching of costs with the revenues in preparation of financial statements and has stipulated:- Expenses are recognised in the income statement on the basis of a direct association between the costs incurred and the earning of specific items of income. This process is commonly referred to as the matching of costs with revenues........ When economic benefits are expected to arise over several accounting periods and the association with income can be only bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income and also includes various components of expenses making up the cost of goods. The term depreciation has been defined in the Accounting Standard VI, as a measure of wearing out, consumption or loss of value arising from use of any type, efflux of time, of obsolescence through technology and market changes. But depreciable items are those which are used for more than accounting period and its useful life is over a period during which a depreciable item is expected to be used by the enterprise or number of production of similar units expected to be obtained from use of the asset by the enterprise. Assessment of depreciation is done based upon the three criterions: (1) historical cost or other amounts substituted when the asset has been revalued; (2) expected useful life of the depreciable asset; and (3) estimated residual value. Useful life of depreciable asset may be shorter than its physical life and is determined by several factors including obsolescence due to technological changes, improvements, change in market demand or service output etc. Useful life of depreciable asset is a matter of estimation and is mainly based upon experience with similar type of assets. Determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified period. The said determination would be fair, just and equitable both to the appellant and the revenue. An asset is not normally created when a liability is incurred and it does not give benefit or advantage in future accounting periods or beyond a short/ small length of time, in view of the past practice and practical/ commercial reality. The expenses will be revenue in nature if its usefulness will come to an end within the financial year itself or is for limited time and would not have any residual value thereafter. Therefore, while determining whether expenditure is capital or revenue in nature, we must also dwell into the question whether the expenditure, would create an asset which is of value in further assessment periods and should be amortised ( i.e. depreciated) as long as it has value. (The last portion is obviously subject to the statutory mandate of an enactment, which may prescribe amortization or depreciation rates. These being fixed by law will override the accounting principles). Thus, when an expenditure incurred does lead to creation of an asset but of a limited or short life, it has to be treated as a liability and not as a fixed asset. The said expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual or everlasting but it refers and indicates that the right acquired must have enough durability to justify it being treated as a capital asset. 29. The view we have taken find support and is in consonance with the view taken by the Delhi High Court in Commissioner of Income Tax versus Ashahi India Safety Glass Limited, (2012) 346 ITR 329 (Del) wherein appellant had procured software which was amortised in the books as deferred revenue expenditure but was claimed as a deduction in the income tax income statement. It was observed that the said expenditure along with other expenditures neither created a new asset nor brought forth a new source of income. The expenditure incurred was to upgrade or to run the existing set up. It was to remove deficiencies in the software installed in the earlier years, to modify, customise or upgrade the software. Similarly, in Commissioner of Income Tax versus G.E. Capital Services Limited, (2008) 300 ITR 420 (Del) it was observed that the software procured by the assessee in question was not customised software and the software in question required regular upgradation and, therefore, was not of enduring benefit. 30. The Punjab and Haryana High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1998) 232 ITR 316 upheld the decision of the tribunal that payment towards royalty was revenue expenditure and was allowable after observing that the licence for use of patents and designs was for a duration of 10 years with the parties having option to renew or extend the licence. The assessee had been only allowed use and there was no transfer of rights. The rights acquired by the assessee were not exclusive and were for a limited period which could be determined earlier also. Payment was dependent upon quantum of items manufactured. 32. Decision in the case of Commissioner of Income Tax versus Denso India Limited, (2009) 318 ITR 140 (Del) and submission relying upon Section 35A of the Act is misconceived. The said provision comes into play only when the expenditure incurred is of capital nature and is on the acquisition of patent rights and copyrights. Merely because expenditure has been incurred for material for duplication without acquisition of proprietary and when the expenditure is not of capital nature, the said Section would not be applicable. In any case, the said provision is not applicable with effect from the 1st day of April, 1998. The view we have taken finds aff ..... X X X X Extracts X X X X X X X X Extracts X X X X
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