IN THE INCOME TAX APPELLATE RIBUNAL A BENCH CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER ---------- ITA NO. 1138/MDS/2011 ASSESSMENT YEAR : 2006-07 THE ASSISTANT COMMISSIONER OF INCOME TAX, SALARY CIRCLE-I, COIMBATORE. V. M/S. VIJAYESWARI TEXTILES LTD., 10/400, PALGHAT ROAD, KUNIAMUTHUR, COIMBATORE-641 008. (PAN : AAACV6388F) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SHAJI P. JACOB, ADDL. CIT RESPONDENT BY : SHRI N. DEVANATHAN, ADVOCATE DATE OF HEARING : 27.1 1.2012 DATE OF PRONOUNCEMENT : 27.11.201 2 O R D E R PER V. DURGA RAO, JUDICIAL MEMBER : THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT(APPEALS)-II, COIMBATORE DATED 02-02-2011 FOR THE ASSESSMENT YEAR 2006-07. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY HAD FILED THE RETURN OF INCOME FOR THE ASSESSMENT YEAR UNDER ITA NO.1138/MDS/2011 2 CONSIDERATION BY DECLARING TOTAL INCOME OF ` 1,61,94,819/- WHEREIN THE ASSESSEE HAS CLAIMED ERP SOLUTION SOFTW ARE EXPENDITURE OF ` 50,50,000/- AS REVENUE EXPENDITURE. THE ASSESSING OFFICER CALLED FOR THE EXPLANATION OF THE ASSESSEE AND THE REASONS WHY THE SAME HAS TO BE TREATED AS REVEN UE EXPENDITURE FOR INCOME-TAX PURPOSE WHEN IT IS TREAT ED AS CAPITAL EXPENDITURE IN THE COMPANYS BALANCE SHEET. IT WAS SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE SOFTWARE PROVIDES FOR AN ENTERPRISE WIDE SOLUTION FOR THE ACCOUNTING, INVENT ORY, PRODUCTION, QUALITY CONTROL AND VARIOUS OTHER MODUL ES. IT WAS SUBMITTED THAT THE EXPENDITURE INCURRED ON ERP SOFT WARE DOES NOT RESULT IN ACQUIRING ANY CAPITAL ASSET AND THAT IT FACILITATES MORE EFFICIENT DAY TO DAY FUNCTIONING OF VARIOUS BU SINESS AND ACCOUNTING PROCESSES. HOWEVER, THE ASSESSING OFFIC ER DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE. ACCORDING TO HIM, THE EXPENDITURE INCURRED BY THE ASSESSEE COMPANY FOR TH E PURCHASE OF ERP SOFTWARE IS IN THE NATURE OF CAPITA L EXPENDITURE AND THEREFORE NOT DEDUCTIBLE U/S 37 OF THE ACT. AC CORDINGLY, THE CLAIM OF THE ASSESSEE WAS DISALLOWED. 3. ON BEING AGGRIEVED, THE ASSESSEE CARRIED THE MAT TER IN APPEAL BEFORE THE CIT(APPEALS). IT WAS SUBMITTED BE FORE THE ITA NO.1138/MDS/2011 3 LEARNED CIT(APPEALS) THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IS REVENUE EXPENDITURE AND IT IS ALLOWABLE U/S 37 OF THE ACT. THE LEARNED CIT(APPEALS) AFTER CONSIDERIN G THE SUBMISSIONS OF THE ASSESSEE AND BY FOLLOWING THE DE CISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE O F CIT V. SOUTHERN ROADWAYS LTD. (304 ITR 84) AND ALSO THE OR DER OF THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF IBM IND IA LTD. (290 ITR (AT) 183) (BLR) HELD THAT PURCHASE OF OPERA TIONAL SOFTWARE AS REVENUE EXPENDITURE. THE RELEVANT PORT ION OF THE ORDER OF THE CIT(APPEALS) IS EXTRACTED AS UNDER : 8. I HAVE GONE THROUGH THE SUBMISSIONS MADE BY THE APPELLANT AND ALSO THE ORDER OF THE ASSESSING OFFICER. AS SEEN FROM DETAILS, THE SOFTWARE INVOLV ED IS AN APPLICATION SOFTWARE AND NOT SYSTEM SOFTWARE. THE SOFTWARE ENABLES TO CARRY OUT THE BUSINESS OPERATIONS EFFICIENTLY AND SMOOTHLY. THIS SOFTWARE DOES NOT WORK ON STAND-ALONE COMPUTERS LIKE SYSTEM SOFTWARE. AS SEEN FROM THE TURN KEY AGREEMENT ITSE LF ARTICLE 9 PRICE AND PAYMENT TERMS PROVIDED THAT THE COST OF IMPLEMENTATION DELIVERABLE WILL BE ` 35,00,000 AND COST OF SOFTWARE ALONG WITH MODULES FOR 75 USERS WILL BE ` 27,50,000/- THE LD A.R. SUBMITTED THAT THE TOTAL AMOUNT NEGOTIATED AT ` 50,50,000. IT IS CLEAR FROM THIS THAT THE COST OF ITA NO.1138/MDS/2011 4 SOFTWARE IS ONLY THE AMOUNT SUPPLIED FOR 75 USERS. THE COST OF IMPLEMENTATION DELIVERABLES IS TO BE TREATED AS REVENUE EXPENDITURE. HOWEVER THE A.R. WAS ASKED TO FURNISH DETAILS OF TDS MADE ON THE PAYMENTS MADE TO INFINITE INDIS PVT. LTD. REGARDING COST OF IMPLEMENTATION DELIVERABLES. THE A.R. COUL D NOT PRODUCE PROPER EVIDENCES REGARDING TDS MADE AND THE DEPOSIT INTO GOVERNMENT ACCOUNT. SINCE THESE ARE TECHNICAL SERVICES RENDERED, THE A.R. AGREED THAT TDS HAD TO BE DEDUCTED BUT THE APPELLANT COMPANY HAS NOT DEDUCTED ANY TDS FOR THE PAYMENT MADE ON THE AMOUNT OF COST OF IMPLEMENTATION DELIVERABLE. HENCE THE ASSESSING OFFICER IS DIRECTED TO DISALLOW THIS AMOUNT AS PER SEC. 40(A)(IA). REGARDING THE COST OF SOFTWARE, THE JURISDICTIONAL HIGH COURT IN CIT VS. SOUTHERN ROADWAYS LTD. (304 ITR 84) HELD SOFTWARE AS REVENUE EXPENDITURE AND ALSO BANGALORE TRIBUNAL IN IBM INDIA LTD. V. CIT(A) IN 290 ITR (AT) 183 (BLR) HELD SOFTWARE AS REVENUE EXPENDITURE. SINCE THE APPELLANT PURCHASED OPERATIONAL SOFTWARE, WHICH REQUIRES PERIODICAL PAYMENTS FOR LICENSE, THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE COST OF SOFTWARE AS REVENUE EXPENDITURE U/S 37(1). 4. ON BEING AGGRIEVED, THE REVENUE HAS CARRIED THE MATTER BEFORE THE TRIBUNAL. THE LEARNED DR SUBMITTED THAT THE ITA NO.1138/MDS/2011 5 EXPENDITURE INCURRED ON PURCHASE OF ERP SOFTWARE IS CAPITAL IN NATURE. 5. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE A SSESSEE SUBMITTED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE O F CIT V. SOUTHERN ROADWAYS LTD. (SUPRA) AND ALSO THE DECISIO N OF THE DECISION OF THE BANGALORE BENCH OF THE TRIBUNAL IN TH E CASE OF IBM INDIA LTD.(SUPRA) AND SUBMITTED THAT IT IS A REV ENUE EXPENDITURE. 6. WE HAVE HEARD BOTH THE SIDES, PERUSED THE RECORD S AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. T HE ONLY ISSUE INVOLVED IN THIS APPEAL IS WHETHER THE PURCHA SE OF ERP SOFTWARE AMOUNTS TO CAPITAL OR REVENUE EXPENDITURE. THE LEARNED CIT(APPEALS) BY FOLLOWING THE DECISION OF T HE JURISDICTIONAL HIGH COURT IN THE CASE OF SOUTHERN R OADWAYS LTD. (SUPRA) AND THE DECISION OF THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF IBM INDIA LTD. (SUPRA) HAS HELD THAT IT IS A REVENUE EXPENDITURE. WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LEARNED CIT(APPEALS). THEREFORE, THI S GROUND OF APPEAL RAISED BY THE REVENUE IS DISMISSED. ITA NO.1138/MDS/2011 6 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT AT THE TIME OF HEARING ON TUESDAY, THE 27 TH OF NOVEMBER, 2012, AT CHENNAI. SD/- SD/- (ABRAHAM P. GEORGE) (V.DURGA RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 27 TH NOVEMBER, 2012. H. COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE