M/s. ITT Corporation India Pvt. Ltd., Baroda V. The ACIT, Circle-1(2), Baroda

ITA 2737/AHD/2014

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 2928 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 4 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-03-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2009-2010
• Appeal Filed On: 13-10-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LALIT P JAIN
• Keywords: Business income; Depreciation; Question of law; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

ITA NO. 2737/AHD/2014 ASSESSMENT YEAR: 2009-10 PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH, AHMEDABAD [CORAM: JUSTICE P P BHATT, PRESIDENT AND PRAMOD KUM AR, VICE PRESIDENT] ITA NO.2737/AHD/2014 ASSESSMENT YEAR: 2009-10 ITT CORPORATION INDIA PVT. LTD. .... APPELLANT PLOT NO.713, MANJUSAR GIDC, SAVLI ROAD, SAVLI, VADODARA 391 770. [PAN: AABCI 7013 D] VS. ASSISTANT COMMISSIONER OF INCOME TAX, ...... RESPONDENT CIRCLE 1(2), BARODA. APPEARANCES BY DHINAL SHAH FOR THE APPELLANT LALIT P. JAIN FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : 05.12.2018 DATE OF PRONOUNCEMENT : 04.03.2019 O R D E R PER PRAMOD KUMAR, VICE PRESIDENT: 1. BY WAY OF THIS APPEAL, THE ASSESSEE APPELLANT HA S CHALLENGED CORRECTNESS OF THE ORDER DATED 18.07.2014 PASSED BY THE LEARNED CI T(A)-I, BARODA IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME-TAX A CT, 1961, FOR THE ASSESSMENT YEAR 2009-10. 2. GRIEVANCES RAISED BY THE APPELLANT ARE AS FOLLOW S :- 1. THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-I, BARODA HAS ERRED IN LAW AND IN FACTS IN HOLDING THAT THE EXPENDITURE IN CURRED IN OBTAINING THE LICENSE TO USE THE SAP SOFTWARE PROGRAMME IS A CAPI TAL ASSET ACQUIRED. 2. THE LD. CIT(A)-I, BARODA HAS FURTHER ERRED IN LA W AND IN FACTS IN REJECTING THE CLAIM OF EXPENDITURE OF RS.71,53,809/ - INCURRED ON OBTAINING THE LICENSE TO USE THE SAP SOFTWARE PROGR AMME AS REVENUE EXPENDITURE AND UPHOLDING THE ACTION OF THE LD. A.O . IN ALLOWING DEPRECIATION ON SUCH COST. THIS HAS RESULTED INTO A DISALLOWANCE OF RS.28,61,524/-. THE CLAIM OF THE APPELLANT IS PRAY ED TO BE ALLOWED. ITA NO. 2737/AHD/2014 ASSESSMENT YEAR: 2009-10 PAGE 2 OF 6 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUF ACTURING AND TRADING OF WATER PUMP, INDUSTRIAL AND CHEMICALS PUMP, AND ACCE SSORIES. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFI CER NOTICED THAT THE ASSESSEE HAS CLAIMED DEDUCTION OF RS.71,53,809/- ON SAP-ERP (ENTERPRISE RESOURCE PLANNING) SOFTWARE DEVELOPED BY IBM. THE ASSESSING OFFICER WAS OF THE VIEW THAT AS IT RESULTS IN ENDURING ADVANTAGE, THIS EXPENDITU RE SHOULD BE TREATED AS A CAPITAL EXPENDITURE AND ONLY DEPRECIATION CAN BE ALLOWED, A S A DEDUCTION IN COMPUTATION OF BUSINESS INCOME, IN RESPECT OF THE SAME. THE REASO NING ADOPTED BY THE ASSESSING OFFICER WAS AS FOLLOWS:- 5.1 I HAVE CONSIDERED THE SUBMISSIONS OF THE ASSES SEE. HOWEVER, I AM NOT IN AGREEMENT WITH THE ANALYSIS OF POSITION OF LAW AS A PPRECIATED BY THE ASSESSEE COMPANY. THE UTILITY OF THE SOFTWARE SAP-ERP, FOR T HE UP-GRADATION AND DEVELOPMENT OF WHICH, THE ASSESSEE HAS INCURRED AN EXPENDITURE OF RS.71,53,809/-, IS AN ONLINE APPLICATION ENTERPRISE RESOURCE PLANNING (ERP) SOFTWARE WHICH HAS BEEN DEVELOPED BY IBM (GERMANY). THE SAID APPLICATION SOFTWARE PROVIDES FOR STANDARD SOLUTION FOR MANY OF THE BUSINESS PROCESSES AND OPERATIONS OF THE ASSESSEE SUCH AS MANUFACTURIN G, MATERIAL MANAGEMENT, SALES AND DISTRIBUTION, FINANCIAL MANAG EMENT ETC. ON AN APPRECIATION OF THESE FACTS A CLEAR INFERENCE GETS DRAWN THAT THE ASSESSEE HAS ACQUIRED A NEW ADVANTAGE OF ENDURING NATURE IN SUCH SOFTWARE PROCURED BY IT. 5.2 HOWEVER, SINCE WITH EFFECT FROM 01.04.2003, CO MPUTER SOFTWARE HAS BEEN CLASSIFIED AS INTANGIBLE ASSET UNDER THE HEAD PLAN T IN APPENDIX-I TO INCOME- TAX RULES, 1962, THE ASSESSEE IS ENTITLED TO DEPREC IATION AT THE RATE OF 60% ON THE SAID CAPITAL EXPENSES OF RS. 71,53, 809/-. IN VIEW OF THE ABOVE DISCUSSION, THE ENTIRE EXPENDITURE OF RS.71,53,809/ - IS TREATED AS CAPITAL EXPENDITURE FOR INTANGIBLE ASSETS. IT WAS ALSO PROP OSED THAT THIS EXPENDITURE IS TO BE TREATED AS EXPENDITURE FOR ACQUIRING INTANGIB LE ASSETS (RIGHT TO USE AND EXPLOIT PARTICULAR SOFTWARE). 4. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS. LEARNED CIT(A) CONFIRMED THE STAND OF THE ASSESSING OFFICER, AND OBSERVED AS FOLLOWS:- 5. I HAVE CONSIDERED THE FACTS OF THE EASE AS WELL AS THE ORDER OF THE AO AND THE SUBMISSION OF THE AR OF THE APPELLANT. THE ONLY GROUND OF APPEAL OF THE APPELLANT IS THAT ON THE FACTS AND IN THE CIRCUMSTA NCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN MAKING A DISALLOWANCE OF RS . 28,61,524/- BY TREATING THE REVENUE EXPENDITURE INCURRED ON SAP-ERP UP-GRAD ATION & MAINTENANCE FEES OF RS.71,53,809/- AS CAPITAL EXPENDITURE AND T HEREAFTER ALLOWED DEPRECIATION @ 60% TREATING THE SAME AS INTANGIBLE ASSET. AS PER THIS GROUND OF APPEAL THE IMPUGNED DISALLOWANCE, BEING MADE IN COMPLETE DISREGARD OF THE AVAILABLE MATERIAL FACTS AND LAW, IS THEREFORE, PRAYED TO BE ALLOWED. WITH REGARD TO THIS GROUND OF APPEAL, THE AR OF THE APPE LLANT IN HIS SUBMISSION DATED 14/07/2014 AS FILED DURING APPELLATE PROCEEDI NGS AND AS IS ALSO REPRODUCED IN EARLIER PARAGRAPH HAS MAINLY STATED T HAT IT IS IN THE BUSINESS OF MANUFACTURE OF INDUSTRIAL PUMPS, ACCESSORIES ETC AN D IS A SUBSIDIARY OF ITT CORPORATION OF USA WHICH IS A LARGE CORPORATION. AS PER THE AR, THE COMPANY ITA NO. 2737/AHD/2014 ASSESSMENT YEAR: 2009-10 PAGE 3 OF 6 IS A WORLD LEADER IN THE SEGMENT OF WATER PUMPS FOR INDUSTRIAL USE ETC. AS PER THE AR, THE PRODUCTS MANUFACTURED BY THE APPELLANT COMPANY ARE ALSO OF THE BEST QUALITY STANDARDS AND HAVE TO BE CONSTANTLY UP GRADED. AS PER THE AR, THE APPELLANT COMPANY HAS TO ENSURE THE COMPLIANCE WITH THE BEST NORMS OF MANUFACTURING PROCESSES AND SYSTEMS. 5.1 IT IS SUBMITTED BY THE AR THAT IN THE PROCES S OF CONSTANT UP-GRADATION, THE APPELLANT HAS INCURRED AN EXPENDITURE OF RS.71, 53,809/- ON PROCURING LICENCE FOR USE OF ERP SOFTWARE FOR USE IN THE MANU FACTURING PROCESS BY THE COMPANY. AS PER THE AR, THE LICENCE GRANTED TO THE COMPANY IS FOR USE OF THE SOFTWARE AND THAT THE SOFTWARE DOES NOT BECOME THE ASSET OR PROPERTY OF THE COMPANY. AS PER THE AR MOREOVER, DUE TO CONSTANT CH ANGE AND UP-GRADATION IN THE FIELD OF SOFTWARE DEVELOPMENT, THE USEFULNES S OF THE SOFTWARE IS SHORT, LIVED AND THAT THE SAME IS REQUIRED TO BE CONSTANT LY UP-GRADED. 5.2 CONSIDERING THE ABOVE, ASPECTS, IT IS PLEAD ED BY THE AR THAT THE EXPENDITURE OF RS.28,61,524/- IS RIGHTLY CLAIMED AS REVENUE AS AGAINST THE ACTION OF THE LD. AO IN TREATING THE SAME AS CAPITA L EXPENDITURE. THE AR HAS RELIED UPON DECISIONS OF VARIOUS HON'BLE COURTS INC LUDING THE DECISION OF ITAT AHMEDABAD IN THE CASE OF CIT VS. POWER BUILD LTD IN ITA NO. 1811/AHD/2007 DATED 05/03/2010. 5.3 BUT THE ABOVE ENTIRE SUBMISSION OF AR OF THE APPELLANT IS NOT FOUND TO BE TENABLE. IT IS HELD THAT W.E.F. 01/04/2003 COMPUTE R SOFTWARE HAS BEEN CLASSIFIED AS TANGIBLE ASSET UNDER THE HEAD 'PLANT' IN APPENDIX-I TO INCOME TAX RULE 1962. AS PER APPENDIX-I, TABLE OF RATES AT WHI CH DEPRECIATION IS ADMISSIBLE WHICH INCLUDES COMPUTER INCLUDING SOFTWA RE, AS PER NOTES, BELOW THE TABLE OF RATES AT WHICH DEPRECIATION IS ADMISSI BLE ON TANGIBLE ASSETS (I.E. AS PER APPENDIX-I) IT IS CLARIFIED THAT 'COMPUTER S OFTWARE MEANS ANY COMPUTER PROGRAM RECORDED ON ANY DISC, TAPE, PERFORMED MEDIA OR OTHER INFORMATION STORAGE DEVICE. IN VIEW OF THIS THE CLAIM OF THE AP PELLANT THAT EXPENDITURE OF RS.71,53,809/- ON SAP R-3 BE ALLOWED AS REVENUE EXP ENDITURE IS NOT ACCEPTABLE. THUS, THE ACTION OF THE AO TREATING THI S EXPENDITURE OF RS.28,61,524/- AS CAPITAL EXPENDITURE IS HEREBY CON FIRMED. THUS, THE GROUND OF APPEAL OF THE APPELLANT IS DISMISSED. 5. THE ASSESSEE IS NOT SATISFIED AND IS IN APPEAL BEFORE US. 6. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. 7. WE FIND THAT THE ISSUE IN APPEAL IS NOW COVERED IN FAVOUR OF THE ASSESSEE, BY HONBLE MADRAS HIGH COURTS JUDGMENT IN THE CASE OF CIT VS. LAKSHMI VILAS BANK LTD [(2018) 97 TAXMANN.COM 105 (MAD)] WHEREIN THEIR LOR DSHIPS HAVE, INTER ALIA , OBSERVED AS FOLLOWS:- 2. THE FOLLOWING SUBSTANTIAL QUESTION OF LAW HAS B EEN FRAMED IN BOTH THE APPEALS: ITA NO. 2737/AHD/2014 ASSESSMENT YEAR: 2009-10 PAGE 4 OF 6 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE THE TRIBUNAL WAS RIGHT IN HOLDING THAT SOFTWARE EXPENDITURE IS TO BE TREATED AS A REVENUE EXPENDITURE AND NOT AS A CAPITAL EXPENDITURE? ' 3. THE ASSESSEE CLAIMED THAT THEY HAD USED SOFTWARE AS AN APPARATUS AND WITH THAT CARRIED THE BUSINESS OF BANKING AND THEY CLAIMED IT AS REVENUE EXPENDITURE. THE ASSESSING OFFICER REJECTED THE CLA IM OF THE ASSESSEE STATING THAT THE EXPENDITURE IS CAPITAL IN NATURE AS IT GIV E AN ENDURING BENEFIT. FOR THE ASSESSMENT YEARS 2000-01 AND 2001-02, THE ASSESSING OFFICER HAS REFERRED TO A LETTER GIVEN BY THE ASSESSEE STATING THAT THE SOFTWARE USED WOULD BENEFIT THE ASSESSEE IN ENHANCING THE PERFORMANCE AND THAT TOO, FOR A CONSIDERABLE PERIOD OF TIME. ON APPEAL BEFORE THE TRIBUNAL, THE ASSESSEE CONTENDED THAT IN VIEW OF THE ADVANCED TECHNOLOGY, THE SOFTWARE BECOM ES OBSOLETE WITHIN SHORT INTERVALS. FURTHER THE SOFTWARE PURCHASED WERE NOT CUSTOMER MADE BUT ONE AS COULD BE USED BY ANYONE AND THE ASSESSEE HAS ONLY A RIGHT TO USE. THE ASSESSEE MADE AN ALTERNATE SUBMISSION THAT IF IT IS TREATED AS CAPITAL EXPENDITURE, DEPRECIATION AS APPLICABLE TO COMPUTER S ALSO SHOULD BE GRANTED. THE TRIBUNAL, ON AN APPEAL FILED BY THE REVENUE, FO LLOWED THE DECISION OF HONOURABLE DIVISION BENCH OF THIS COURT IN CIT V. S OUTHERN ROADWAYS LTD. [2008] 304 ITR 84/[2009] 183 TAXMAN 234 (MAD.) . 4. MR. T. RAVIKUMAR, LEARNED STANDING COUNSEL FOR T HE REVENUE, PLACED RELIANCE ON THE DECISION OF THE DELHI HIGH COURT IN BHARTI TELEVENTURES LTD. V. ADDL. JT. CIT [2013] 29 TAXMANN.COM 326/213 TAXMAN 320. 5. WE HAVE GONE THROUGH THE FACTS OF THE SAID CASE AND WE FIND THAT IN THE SAID CASE, THE ASSESSEE WAS A TELECOM OPERATOR. AFT ER SCRUTINIZING THE LEASE AGREEMENT, THE ASSESSING OFFICER NOTED THAT THE COS T OF PLANT AND MACHINERY GIVEN ON LEASE BY THE ASSESSEE WAS REFLECTED IN THE BALANCE SHEET OF THE ASSESSEE UNDER THE HEAD 'PLANT AND MACHINERY GIVEN ON LEASE' AND THAT APART, THE ASSESSEE HAS INCURRED EXPENDITURE TOWARDS INSTA LLATION OF PLANT AND MACHINERY AND IN ADDITION TO IT, IT HAD INCURRED EX PENDITURE TOWARDS SOFTWARE EXPENSES. THE ASSESSEE CLAIMED THE INSTALLATION EXP ENSES AS DEDUCTION DEBITING IT TO THE PROFIT AND LOSS ACCOUNT AND THE SOFTWARE EXPENSES WERE TREATED IN THE ACCOUNTS AS DEFERRED REVENUE EXPENDI TURE, WHICH WAS WRITTEN OFF IN THE PREVIOUS ORDER. THE QUESTION AROSE AS TO WHETHER THE EXPENDITURE HAS TO BE TREATED AS REVENUE EXPENDITURE OR CAPITAL . THE ASSESSEE CONTENDED THAT THE SOFTWARE WAS A PRE-DESIGNED SOFTWARE AND N OT CUSTOMIZED TO SUIT ITS PARTICULAR REQUIREMENT. CONSIDERING THE SAID FACTUA L POSITION, THE TRIBUNAL ANALYSED THE TERMS OF THE CONTRACT AND FOUND THAT T HE SOFTWARE AS WELL AS HARDWARE WERE MADE AN INTEGRAL PART OF THE ARRANGEM ENT AND THE SOFTWARE APPARENTLY CATERS TO THE HARDWARE AND IT IS NECESSA RY FOR THE KIND OF SOFTWARE TO CATER TO DIVERSE ACTIVITIES SUCH AS BILLING REGA RDING USER AND ANALYZING SUCH LIKE ACTIVITIES TO PROMOTE SPEED AND EFFICIENCY AND THE PARTIES CHOSE TO HAVE A COMPOSITE ARRANGEMENT IS ONE FACTOR WHICH THE TRIBU NAL WAS ENTITLED TO TAKE INTO CONSIDERATION. IN OUR CONSIDERED VIEW, THE DEC ISION IN BHARTI TELEVENTURES LTD. (SUPRA) IS NOT APPLICABLE TO THE CASE ON HAND AS THERE IS NO MATERIAL BEFORE THE TRIBUNAL OR BEFORE THE ASSESSIN G OFFICER AS WAS POINTED OUT IN THE SAID CASE. AS HELD BY THE HONOURABLE SUP REME COURT IN EMPIRE ITA NO. 2737/AHD/2014 ASSESSMENT YEAR: 2009-10 PAGE 5 OF 6 JUTE CO. LTD. V. CIT [1980] 124 ITR 1/3 TAXMAN 69 T HERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBTAINING ADVANTA GE, OF ENDURING BENEFIT, MAY, NONE-THE-LESS, BE ON REVENUE ACCOUNT AND THE T EST OF ENDURING BENEFIT MAY BREAK DOWN. IT IS FURTHER HELD THAT IT IS NOT E VERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN ASSESSEES THAT BRINGS THE CAS E WITHIN THE PRINCIPLE LAID DOWN IN THIS TEST AND WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHER E THE ADVANTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLO WABLE ON AN APPLICATION OF THIS TEST. IF THE ADVANTAGE CONSISTS MERELY IN FACI LITATING THE ASSESSEE'S TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT O F THE ASSESSEE'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE O N REVENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE F UTURE. WE ARE INCLINED TO ACCEPT THE SUBMISSION MADE BY THE ASSESSEE BEFORE T HE TRIBUNAL THAT IN VIEW OF THE ADVANCED TECHNOLOGY SOFTWARE BECOME OBSOLETE WITHIN SHORT INTERVALS. THEREFORE, THE TRIBUNAL RIGHTLY APPLIED THE DECISIO N IN THE CASE OF SOUTHERN ROADWAYS LTD. THE APPEALS ARE DISMISSED. THE SUBSTANTIAL QUESTION OF LAW IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. NO COSTS. CONNECTED MISCELLANEOUS PETITIONS ARE CLOSED. 8. NO CONTRARY VIEWS FROM HONBLE COURTS ABOVE HAVE BEEN BROUGHT TO OUR NOTICE. RESPECTFULLY FOLLOWING THE ESTEEMED VIEWS OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF LAKSHMI VILAS BANK (SUPRA), WE DELET E THE IMPUGNED DISALLOWANCE OF SOFTWARE EXPENSES. THE ASSESSEE GETS THE RELIEF ACC ORDINGLY. 9. IN THE RESULT, THE APPEAL IS ALLOWED IN THE TERM S INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON THE 4 TH DAY OF MARCH, 2019. SD/- SD/- JUSTICE P P BHATT PRAMOD KUMAR (PRESIDENT) (VICE PRESIDENT) AHMEDABAD, DATED THE 4 TH DAY OF MARCH, 2019 BT* COPIES TO: (1) THE APPELLANT (2) THE RESPOND ENT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER TRUE COPY ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD