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TMI Blog2022 (1) TMI 282X X X X Extracts X X X X X X X X Extracts X X X X ..... pted by the licensor to grant licenses only on the basis of perpetual license cannot be the basis to hold that the expenditure incurred by the assessee is capital expenditure. Notwithstanding the use of the term perpetual, the license agreement between the assessee and Sanchez provides for annual maintenance and upgrade fee also. Therefore it is not possible to look into the clause in the license agreement in isolation to come to a conclusion that because the license is in perpetuity, the expenditure incurred is capital expenditure. We hold that advantage of an enduring benefit, need not be on capital account. If the advantage consists merely in facilitating the assessee's trading operations or enabling him to manage and conduct his business more efficiently or more profitably while leaving the fixed capital untouched, the same cannot be regarded as on capital account. In order to treat any expenditure as capital expenditure, the same should result in accrual of advantage of enduring benefit and such benefit should accrue to the assesses in the capital field. Such accrual of benefit in the capital field would mean that the said benefit should form part of the profit-making a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue. The Tribunal allowed assessee s appeal and dismissed the Revenue s appeal. 3. The Revenue filed appeal before the Hon ble High Court against the order of the Tribunal and in so far as the order of the ITAT allowing relief to the assessee s appeal is concerned, the appeal of the Revenue was numbered as ITA No.4/2015 and against the order of the Tribunal dismissing the Revenue s appeal, the appeal was numbered as ITA No.5/2015. Both the appeals were heard by the Hon ble High Court and common issues were framed in both the appeals. The Hon ble High Court dismissed all the grounds raised by the Revenue by its order dated 02.03.2021 except the ground in ITA No.4/2015 in so far as it relates to the order of the Tribunal in holding that the assessee is eligible to claim deduction of a sum of ₹ 23,05,49,466/- as revenue expenditure incurred on purchase of application software. The substantial question of law framed by the Hon ble High Court in this regard was as follows: (i) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee is eligible for claim of ₹ 23,05,49,466/- asrevenue expenditure wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve for consideration as it has already been decided by the Tribunal and confirmed by the Hon ble High Court. Consequently, ITA No.733/Bang/2011 is dismissed as not required for adjudication. 6. Grounds 7 to 10 in ITA No.748/Bang/2011 which requires to be adjudicated reads thus: 7. The learned CIT(A) has erred on facts and in law in confirming the disallowance made by the Assessing Officer of expenditure on Vysyamulya Project (computerisation of branches) amounting to ₹ 230,549,466, on the ground that the same to be an expense which is capital in nature. 8. The learned CIT (A) has failed to appreciate the fact that the expenditure on account of Vysyamulya Project (computerisation of branches) amounting to ₹ 230,549,466 is revenue in nature. 9. The learned CIT(A) while upholding the order of the learned assessing officer treating the expenditure on Vysyamulya Project as capital expenditure has failed to appreciate that the said expenditure has not brought about any enduring benefit or ownership of the asset to the Appellant and the computerisation of branches has merely facilitated smooth running banking operations. 10. The learned CIT (A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also incurred a sum of ₹ 3,35,16,164/-towards purchase of computer systems from IBM in connection with the above project. This amount was capitalized by the assessee and there is no dispute in this regard. The assessee claimed the expenditure of ₹ 23,05,49,466/- as detailed above, towards purchase of software as Revenue Expenditure. The contention of the assessee was that the bank has only purchased software license and not the ownership. Further, it was the case of the assessee that the software enables smooth running of the business of the assessee. Since the software is an application software, the same is an allowable expenditure u/s 37 of the Act. 10. The AO in the Order of Assessment has made the following observations for denying the claim of the assessee for deduction viz., (a) the computerization project will secure an enduring advantage to the assessee and that the assessee has acquired capital infrastructure i.e., core banking solution in the form of integrated licenced software. According to the AO, the assessee acquired a capital asset which would deliver to the assessee tangible benefits of an enduring nature. The AO referred to the licence agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollows: Differences between System Software and Application Software System software is meant to manage the system resources. It serves as the platform to run application software. Application software helps perform a specific set of functions for which they have been designed. System software is developed in a low-level language (assembly language for example) Application software is developed in a high-level language such as Java. C++, .net and VB. System software automatically starts running once the system is turned on and stops when the system is shut down. Application software runs as and when the user requests it. A system cannot even start without system software Application software is user specific and it is not needed to run the system on the whole. System software is endowed with a general purpose. Application software carries a specific purpose. A typical example for a system software is Windows Operating System ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se in the nature of revenue expenditure. Fine tuning business operations to enable the management to run its business effectively, efficiently and profitably; leaving the fixed assets untouched would be an expenditure in the nature of revenue expenditure even though the advantage would thus collapse in such like cases. It would be only truer in cases which deal with technology and software application which do not in any manner supplant the source of income or added to the fixed capital of the assessee. 17. The learned DR while relying on the order of the CIT(A), pointed out that the assessee by incurring expenses on the project Vysyamulya linked 125 branches with a Centralized Processing Solution. The expenses would provide an enduring benefit to the assessee. He submitted that computerization through utilization of modern know-how would give a permanent benefit to the assessee. He submitted that the assessee was allowed depreciation at 25% of the expenses incurred and would get the benefit of deduction of the entire expenses over a period of 4 years. According to him the legislature in its wisdom has allowed higher depreciation on computers/computer software keeping in min ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the licensed software or any module or other portion thereof, other than for the purpose of replace a worn copy or creating non-production copies. Clause 4.1 of the Agreement makes it clear that Sanchez is the owner of the copyright in the software that is granted on license to the assessee. The software helps in maintaining loan account and or deposit account. 20. M/s. A. T.Kearney (India Branch), New Delhi, a company incorporated in India, who possess the requisite expertise, fully qualified and experienced person to design, develop and implement the assessee s CBS project, was engaged by the assessee under an Agreement dated 21.2.2000 (copy at page 67 to 124 of assessee s paper book). This agreement gives a picture of what problem the assessee faces in its business and the objective behind undertaking the CBS project. The problem statement says that the assessee wants to gain and exploit technology advantage to be able to provide anytime anywhere, any channel banking services to its clients and compete with international banks and new private sector banks operating in India. The technology solution was desired to have (i) customer centric approach to provide full range of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CBS project. Therefore the assessee obtained an advantage of an enduring nature and therefore the expenditure is capital expenditure. The revenue authorities also held that the assessee has itself treated the expenditure as capital expenditure in its books of accounts and therefore the expenditure was to be regarded as capital expenditure. Accordingly, depreciation was allowed to the assessee as per the Act and rules on the expenditure incurred on computer software. Alternatively, the AO held that since the benefit of the expenditure would be available to the assessee for atleast 10 years, the assessee can deduction of the entire expenses in equal amount over a period of 10 Assessment years. 24. Before we specifically deal with the issue in this appeal whether expenditure incurred in implementation of CBS project is to be regarded as Capital Expenditure or Revenue expenditure, it would be relevant to dwell upon the general guidelines and principles laid down by the various higher Courts including the Hon'ble Apex Court for 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 follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. In the case of CIT v. Ciba of India. Ltd. 69 ITR 692, the assessee had acquired under the agreement merely the right to draw for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss company for a limited period and since the Swiss company did not part with any asset of its business nor did the assessee acquire any asset or advantage of enduring nature for the benefits of its business, the payment made by the assessee to Swiss company under the agreement was held by the Hon'ble Supreme Court to be towards revenue expenditure observing that the nature of receipt as capital or revenue is not always determinative of the nature of this outgoing in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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. 28. Tested on the touchstone of the principles laid down as above, we find that the objective of CBS project was to gain and exploit technology advantage to be able to provide anytime anywhere, any channel banking services to its clients and compete with international banks and new private sector banks operating in India. Towards this end the assessee acquired license to use software profile which was to maintain loan and deposit account of customers from Sanchez. It engaged the services of a consultant to design, develop and implement CBS project and the purpose or objectives are already given in paragraph-20 of this order and are not repeated. IBM was engaged to develop a Data Centre and Bangalore Labs Private Limited carried out networking of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the above, the software in question is application software. Every computer or machine has hardware, but that hardware is not enough to run applications like Microsoft Word. One needs system software to run the hardware and operate applications on it. In other words, computer s hardware (the actual physical parts) is useless without system software the Windows OS (Operating System). Application software, on the other hand, is a type of software or program that is designed to complete a specific task. For example, Microsoft Word is application software, and it allows you to write documents. An internet browser like Google Chrome is also an application software because it allows you to complete a specific task like conduct Google searches. The software in respect of which the assessee acquired license from Sanchez is an application software. The Hon ble Karnataka High Court in the case of IBM Ltd. (supra) taken the view that payment of application software though there is an enduring benefit, it does not result into acquisition of any capital asset and merely enhances the productivity or efficiency and hence has to be treated as revenue expenditure. 31. Another important a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich perpetual license agreements were the only ones that existed regarding software. That has since changed, and now many software companies provide subscription services or annual licenses. Therefore the business model adopted by the licensor to grant licenses only on the basis of perpetual license cannot be the basis to hold that the expenditure incurred by the assessee is capital expenditure. Notwithstanding the use of the term perpetual, the license agreement between the assessee and Sanchez provides for annual maintenance and upgrade fee also. Therefore it is not possible to look into the clause in the license agreement in isolation to come to a conclusion that because the license is in perpetuity, the expenditure incurred is capital expenditure. 32. In the light of the above discussion, we hold that advantage of an enduring benefit, need not be on capital account. If the advantage consists merely in facilitating the assessee's trading operations or enabling him to manage and conduct his business more efficiently or more profitably while leaving the fixed capital untouched, the same cannot be regarded as on capital account. In order to treat any expenditure as capita ..... X X X X Extracts X X X X X X X X Extracts X X X X
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