DCIT 9(1), MUMBAI V. FIRST ADVANTAGE P.LTD, MUMBAI

ITA 6659/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 93090 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2010-2011
• Appeal Filed On: 14-11-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PAWAN KUMAR BIRLA
• Keywords: Depreciation; Revenue expenditure; Capital expenditure

Judgement Text

F IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI BEFORE SHRI A.D. JAIN, JM AND SHRI N.K. BILLAIYA, A M .. , . . , ./ I.T.A. NO. 6659 /MUM/2013 ( / ASSESSMENT YEAR : 2010-2011 D.C.I.T. RG. 9(1), R. NO. 223, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. / VS. M/S FIRST ADVANTAGE PVT. LTD., IST FLOOR, INTERFACE BUILDING NO. 7, LINK ROAD, MALAD (W), MUMBAI 400 064. ./ PAN : AAACQ0706E ( ! / APPELLANT ) .. ( '# ! / RESPONDENT ) A PPELLANT BY SHRI PAWAN KUMAR BIRLA R E SPONDENT BY : SHRI NISHANT THAKKAR & MS. JASMIN AMALSADVALA $ % & ' ( ) / DATE OF HEARING : 29-6-2015 *+,- ' ( ) / DATE OF PRONOUNCEMENT : 30-6-2015 [ . / O R D E R PER A.D. JAIN, J.M . : .. , IN THIS APPEAL, THE ASSESSEE IS CHALLENGING THE ACTION OF T HE LD. CIT(A) IN ALLOWING THE EXPENSES OF RS. 63,92,692/-, INCURRED ON ACCOUNT OF ACQUISITION OF SOFTWARE LICENSE, AS REVENUE EXPENDITURE. 2. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF PRE-EMPLOYMENT SCREENING ON BEHALF OF THE EMPLOYERS. DURING THE YE AR, IT CLAIMED DEDUCTION OF RS. 69,59,572/- ON ACCOUNT OF SOFTWARE LICENSE FEES . THE ASSESSEE MAINTAINED THAT AS PER ITS ACCOUNTING POLICY, THESE FEES WERE TREATED AS DEFERRED REVENUE EXPENDITURE IN THE ASSESSEES BOOKS. DURING THE YEA R, THE ASSESSEE HAD ITA 6659/M/13 2 INCURRED SOFTWARE LICENSE EXPENSES OF RS.67,04,692/ -. OUT OF THIS, RS. 22,64,231/- WERE ACTUALLY DEBITED IN THE BOOKS AS S OFTWARE LICENSE FEES AND THUS THEY WERE INCLUDED IN THE TOTAL AMOUNT OF RS. 69,59,572/- AND THE BALANCE AMOUNTS WERE DEBITED IN THE BOOKS OF ACCOUN T IN THE SUBSEQUENT YEARS. THE ENTIRE EXPENDITURE OF RS. 67,04,692/- HA D, THOUGH, BEEN CLAIMED DURING THE YEAR. THE A.O., HOWEVER, ADDED BACK THE AMOUNT OF RS. 69,59,572/-, DISALLOWING THE DEDUCTION OF RS. 67,04 ,692/-, INCLUDED THEREIN. THE LD. CIT(A) ALLOWED THE EXPENDITURE, BRINING THE DEPARTMENT IN APPEAL BEFORE US. 3. CHALLENGING THE IMPUGNED ORDER, THE LD. D.R. HAS CONTENDED THAT THE LD. CIT(A), WHILE WRONGLY ALLOWING THE EXPENSES ON ACCO UNT OF ACQUISITION OF SOFTWARE LICENSE FEE AS REVENUE EXPENDITURE, HAS ER RED IN NOT TAKING INTO TAKEN INTO CONSIDERATION, THE OBSERVATIONS MADE BY THE A.O. WHILE MAKING THE ADDITION. 4. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSES SEE HAS PLACED STRONG RELIANCE ON THE IMPUGNED ORDER, CONTENDING THAT THE EXPENDITURE IS NOT AT ALL A CAPITAL EXPENDITURE; THAT THE SOFTWARE IN QUESTIO N WAS NOT OWNED BY THE ASSESSEE; THAT IT DID NOT FETCH ANY ENDURING BENEFI T TO THE ASSESSEE, SINCE IT BECAME OBSOLETE WITHIN A SHORT TIME; THAT THE SOFTW ARE LICENSE WAS ACQUIRED TO CARRY OUT ROUTINE OPERATIONS OF THE ASSESSEE MORE E FFICIENTLY; AND THAT ALL THESE FACTORS HAVE BEEN DULY TAKEN INTO CONSIDERATI ON BY THE LD. CIT(A) WHILE CORRECTLY ALLOWING THE EXPENDITURE CLAIMED. THE LD . COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. RAYCHEM RPG LTD., [2012] 346 ITR 138 (BOM). 5. WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE M ATERIAL AVAILABLE ON RECORD. THE DETAILS OF THE EXPENSES CLAIMED DURING THE YEAR ARE AS FOLLOWS:- ITA 6659/M/13 3 SR. NO. PARTICULARS OF THE PARTY (M/S) AMOUNT(RS) TDS DEDUCTE D AND PAID (RS) COVERAGE DETAILS 1 FIRST ADVANTAGE CORPORATION 2,89,841 DECEMBER 2008 TO MARCH 2009 SOFTWARE FOR PROTECTING MICROSOFT EMAIL SERVER FROM SPAM & VIRUSES. 2 FIRST ADVANTAGE CORPORATION 70,648 APRIL 2009 SOFTWARE FOR PROTECTING MICROSOFT EMAIL SERVER FROM SPAM & VIRUSES. 3 FIRST ADVANTAGE CORPORATION 68,957 MAY 2009 SOFTWARE FOR PROTECTING MICROSOFT EMAIL SERVER FROM SPAM & VIRUSES. 4 FIRST ADVANTAGE CORPORATION 70,064 JUNE 2009 SOFTWARE FOR PROTECTING MICROSOFT EMAIL SERVER FROM SPAM & VIRUSES. 5 RELYON SOFTWARE 2,000 APRIL 2009 TO MARCH 2010 UPDATION OF TDS SOFTWARE USED FOR FILING TDS RETURNS. 6 WIPRO LIMITED 65,617 1,619 01-07- 2009 TO 30-06- 2010 SUPPORT SERVICE FOR MAINTENANCE OF SONIC FIREWALL (CHENNAI) 7 WIPRO LIMITED 65,876 1,619 27-06- 2009 TO 30-06- 2010 SUPPORT SERVICE FOR MAINTENANCE OF SONIC FIREWALL (CHENNAI) 8 FIRST INDIAN CORPORATION 3,12,000 38,851 ONE TIME COST SOFTWARE FOR INDEXING OPERATIONS DOCUMENTS 9 FIRST ADVANTAGE BACKGROUND SERVICES 3,87,881 AUGUST 2009 TO JUNE 2010 SOFTWARE LIUCENSE FOR GETTING ACCESS TO SALESFORCE.COM, A WEBSITE USED BY THE SALES TEAM TO PROCURE NEW CLIENTS & BUSINESS 10 FIRST ADVANTAGE CORPORATION 42,39,26 5 JULY 2009 TO OCTOBER 2010 SUPPORT & MAINTENANCE CHARGES FOR MICROSOFT LICENSES. 11 SPECTRUM 10,000 - JULY 2009 ANNUAL LICENSE ITA 6659/M/13 4 BUSINESS SUPPORT LTD. TO JUNE 2010 RENEWAL FEES FOR DATABASE USED FOR OPERATIONAL PURPOSES. 12 CENTRE FOR MONITORING INDIAN ECONOMY PVT. LTD. 1,10,000 12,133 NOVEMBER 2009 TO OCTOBER 2010 ANNUAL LICENSE RENEWAL FEES FOR DATABASE USED FOR OPERATIONAL PURPOSES. 13 INFLOW TECHNOLOGIES PVT. LTD. 5,46,910 59,870 DECEMBER 2009 TO DECEMBER 2010 SOFTWARE LICENSE USED TO BLOCK RESTRICTED WEBSITES 14 FIRST ADVANTAGE HIRING MANAGEMENT SYSTEMS 3,44,097 - 01-07- 2009 TO 30-06- 2010 ANNUAL HOSTING FEES & MAINTENANCE CHARGE 15 INFLOW TECHNOLOGIES PVT. LTD. 1,21,097 13,352/ - 01-03- 2010 TO 31-12- 2010 SOFTWARE LICENSE USED TO BLOCK RESTRICTED WEBSITES. TOTAL 67,04,692 6. THE EXPENSES, IT IS SEEN, UNDISPUTEDLY, WERE TRE ATED AS DEFERRED REVENUE EXPENDITURE BY THE ASSESSEE IN THE BOOKS OF ACCOUNT . THE TOTAL AMOUNT OF RS. 69,59,572/- COMPRISED OF PART OF THE EXPENDITURE OF THE EARLIER YEAR AND PART OF THE EXPENDITURE FOR THE YEAR UNDER CONSIDERATION , AS FOLLOWS:- YEAR ENDED AMOUNT 31 ST MARCH, 2008 RS. 27,91,692/- 31 ST MARCH, 2009 RS. 19,03,649/- 31 ST MARCH, 2010 RS. 22,64,231/- TOTAL RS. 69,59,572/- 7. DURING THE YEAR, THE ASSESSEE HAD INCURRED TOTAL SOFTWARE LICENSE EXPENSES OF RS. 67,04,692/-. A PART OF THIS AMOUNT, TOTALING RS. 22,64,231/- WAS DEBITED IN THE BOOKS OF ACCOUNT AS SOFTWARE LIC ENSE FEES AND THIS WAS INCLUDED IN THE TOTAL AMOUNT OF RS. 69,59,572/-. T HE BALANCE AMOUNT WAS ITA 6659/M/13 5 DEBITED IN THE BOOKS OF ACCOUNT IN THE SUBSEQUENT Y EARS. THE TOTAL AMOUNT OF RS. 67,04,692/- WAS CLAIMED AS EXPENDITURE. THERE I S NO DISPUTE THAT SUCH ACCOUNTING METHOD HAS BEEN FOLLOWED BY THE ASSESSEE CONSISTENTLY. THE A.O., HOWEVER, HELD THE EXPENDITURE TO BE A CAPITAL EXPEN DITURE AND MADE ADDITION OF RS. 69,59,572/- TWICE AND NO DEDUCTION OF RS. 67 ,04,692/- WAS ALLOWED, NOR ANY DEPRECIATION ON THE AMOUNT OF SOFTWARE LICE NSE FEE TREATED AS CAPITAL EXPENDITURE WAS GRANTED. 8. IN KEEPING WITH THE TESTS AS LAID DOWN BY THE SP ECIAL BENCH OF THE ITAT, IN THE CASE OF CIT VS. AMWAY INDIA ENTERPRISES, 111 ITD 112[SB] (DELHI), THREE TESTS HAVE TO BE MET IN ORDER TO PASS THE EXPENDITU RE INCURRED ON ACCOUNT OF SOFTWARE EXPENSES AS CAPITAL, OR OTHERWISE. THESE A RE THE OWNERSHIP TEST, THE ENDURING BENEFIT TEST AND THE FUNCTIONALITY TEST. IN THE PRESENT CASE, AS RIGHTLY CONSIDERED BY THE LD. CIT(A), NONE OF THESE TESTS FAILS THE CLAIM OF THE ASSESSEE. THE SOFTWARE WAS NOT OWNED BY THE ASSESSE E. THE ASSESSEE ACQUIRED THE LICENSE ONLY TO USE THE SAME. THE LICENSE FEE W AS NOT PAID FOR OBTAINING ANY RIGHT QUA THE TRANSFER OF THE SOFTWARE. THEN, O BSOLESCENCE ALSO DOES NOT PROVE ANY ENDURING BENEFIT TO THE ASSESSEE. IT IS N OT THE CASE OF THE DEPARTMENT THAT THE LONGEVITY OF THE SOFTWARE IS AN Y MORE THAN TWO YEARS. RATHER, IT HAS NOT BEEN DISPUTED THAT ALL BUT ONE O F THE ITEMS OF EXPENDITURE HAVE A LIFE MUCH LESS THAN TWO YEARS. APROPOS THE F UNCTIONALITY TEST, THE DEPARTMENT AGAIN DOES NOT REFUTE THE FACT THAT THE SOFTWARE LICENSE WAS ACQUIRED BY THE ASSESSEE TO CARRY OUT ITS ROUTINE O PERATIONS IN A MORE EFFICIENT MANNER. FURTHER, THE FIXED CAPITAL OF THE ASSESSEE HAS NOT BEEN SHOWN TO HAVE UNDERGONE ANY CHANGE AS A CONSEQUENCE OF THE ACQUIS ITION OF THE LICENSE. IN FACT, IT WAS EITHER AN ANTIVIRUS SOFTWARE, OR A SOF TWARE FOR FILING TDS RETURN OR PAYMENTS FOR SUPPORT SERVICE FOR MAINTENANCE OF FIR EWALLS, MAINTENANCE CHARGES OF MICROSOFT LICENSES, ANNUAL HOSTING FEES, ETC. THEREFORE, THE NATURE OF THE SOFTWARE ACQUIRED IS THAT OF A REVENUE EXPEN SE, THE LD. CIT(A) HAS RIGHTLY HELD IT TO BE SO. ITA 6659/M/13 6 9. IT IS PERTINENT TO NOTE THAT THE LD. CIT(A) CAPI TALIZED THE EXPENSE FOR SOFTWARE FOR INDEXING OPERATIONS DOCUMENTS. IN FACT , THIS EXPENDITURE OF RS. 3,12,000/-, PAID TO M/S FIRST INDIAN CORPORATION WA S A ONE-TIME COST, EXPENDED FOR THE USE OF THE SOFTWARE TO OVER TWO YE ARS, FETCHING AN ENDURING BENEFIT TO THE ASSESSEE. THE LD. CIT(A) ADDED BACK THIS AMOUNT OF RS. 3,12,000/- AS A CAPITAL EXPENDITURE WHILE GRANTING DEPRECIATION THEREON. THE ASSESSEE HAS NOT CHALLENGED THIS ADD BACK BEFORE US . THUS, THE LD. CIT(A) HAS DULY TAKEN INTO CONSIDERATION ALL THE RELEVANT FACT ORS FOR DECIDING THE EXPENDITURE TO BE A REVENUE EXPENDITURE. IN THIS RE GARD, RELIANCE PLACED BY THE ASSESSEE ON THE CASE OF RAYCHEM RPG LTD. (SUP RA) IS ALSO APPROPRIATE, THEREIN THE HONBLE JURISDICTIONAL HIGH COURT UPHEL D THE DECISION OF THE TRIBUNAL IN ALLOWING SOFTWARE EXPENDITURE AS A REVE NUE EXPENDITURE. 10. IN VIEW OF THE ABOVE, WE FIND NO ERROR IN THE O RDER OF LD. CIT(A) AND AS SUCH, UPHOLD THE SAME WHILE REJECTING THE GRIEVANCE OF THE DEPARTMENT. 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH JUNE, 2015. . ' *+,- $ /0 1 2 30-06-2015 + ' 3& SD/- SD/- (N.K. BILLAIYA) (A.D. JAIN ) ACCOUNTANT MEMBER /J UDICIAL MEMBER / $ & MUMBAI ; 1 DATED 30-06-2015 [ %.../ R.K. R.K. R.K. R.K. , SR. PS ITA 6659/M/13 7 ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. ! / THE APPELLANT 2. '# ! / THE RESPONDENT. 3. $ ?( () / THE CIT(A)-19, MUMBAI 4. $ ?( / CIT-9, MUMBAI 5. B%C 3 '(DE , ) DE- , / $ & / DR, ITAT, MUMBAI G BENCH 6. 3 F G & / GUARD FILE. ! ( / BY ORDER, # B( '( //TRUE COPY// )/(* + ( DY./ASSTT. REGISTRAR) , / $ & / ITAT, MUMBAI