M/s AXA Business Services Pvt Ltd , Bangalore V. The Deputy Commissioner of Income Tax Circle-1(1)(1), Bangalore

ITA 921/BANG/2018

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 4150 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 7 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 26-10-2020
• Assessment Year: 2013-2014
• Appeal Filed On: 23-03-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Business income; Depreciation; Opportunity of being heard; Revenue expenditure; Capital expenditure
• Section: 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI A K GARODIA , ACCOUNTANT MEMBER IT A NO. 921/BANG/2018 ASSESSMENT YEAR : 2013 - 14 M/S AXA BUSINESS SERVICES PVT. LTD., 1 ST & 2 ND FLOOR, MFAR, MANYATA TECH PARK, PHASE IV, RACHENAHALLI VILLAGE, NAGAWARA PAN: AACCA 5310J VS. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 1(1)(1) BENGALURU APPELLANT RESPONDENT APPELLANT BY : SHRI T. SURYANARAYANA, ADVOCATE RESPONDENT BY : DR. NISCHAL, JCIT (DR), ITAT, BENGALURU. DATE OF HEARING : 26 .1 0.2020 DATE OF PRONOUNCEMENT : 28 . 1 0.2020 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 17.11.2017 OF THE CIT(APPEALS)-1, BENGALURU RELATING TO ASSESS MENT YEAR 2013-14. 2. THE ONLY ISSUE THAT ARISES FOR CONSIDERATION I N THIS APPEAL IS AS TO, WHETHER THE CIT(APPEALS) WAS JUSTIFIED IN SUSTAININ G DISALLOWANCE OF RS.7,21,181 FOR SOFTWARE EXPENSES CLAIMED AS REVENU E EXPENDITURE AND DEDUCTIBLE WHILE COMPUTING BUSINESS INCOME OF THE A SSESSEE. 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF PROVIDING ITES, BPO SERVICES, TRADING ETC. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAD DEBITED A SUM OF RS.2,18,19,129 ITA NO. 921/BANG/2018 PAGE 2 OF 9 TOWARDS SOFTWARE EXPENSES. THE AO CALLED UPON THE ASSESSEE TO SHOW CAUSE AS TO WHY THE AFORESAID EXPENSES SHOULD NOT B E TREATED AS CAPITAL EXPENDITURE AND DISALLOWED AND ADDED TO THE TOTAL I NCOME OF ASSESSEE. THE ASSESSEE CLAIMED THAT THE EXPENSES WERE REVENUE IN NATURE AND ALSO GAVE A BREAK-UP OF THE SOFTWARE EXPENSES WHICH WERE CLAIMED AS DEDUCTION:- PARTICULARS AMOUNT (IN RS.) AXA GS SERVICE CHARGES 1,06,59,75 0 SOFTWARE EXPENSES 1,11,59,379 TOTAL 2,18,19,129 4. THE AO TOOK THE VIEW THAT SINCE SOFTWARE EXPENSE S WERE CLASSIFIED AS A BLOCK OF ASSET UNDER THE HEAD COMPUTER INCLUD ING COMPUTER SOFTWARE, EXPENDITURE ON COMPUTER SOFTWARE HAD TO BE TREATED AS A CAPITAL EXPENDITURE. THE AO, HOWEVER, ALLOWED DEPRECIATION @ 60% ON THE COMPUTER SOFTWARE EXPENSES AND THEREBY DISALLOWED 4 0% OF THE EXPENSES CLAIMED BY THE ASSESSEE, WHICH RESULTED IN AN ADDIT ION OF RS.1,52,73,390 TO THE TOTAL INCOME OF ASSESSEE. 5. BEFORE THE CIT(APPEALS), THE ASSESSEE GAVE A BRE AK-UP OF THE EXPENSES AND DETAILS OF SOFTWARE PURCHASED WHICH WE RE AS FOLLOWS:- PARTICULARS AMOUNT (IN RS.) SERVICE CHARGES PAID TO AXA GROUP SOLUTIONS PRIVATE LIMITED 1,06,59,750 SOFTWARE EXPENSES 1,11,59,379 TOTAL 2,18,19,129 THE ASSESSEE SUBMITTED THAT IT HAD ENTERED INTO AGR EEMENT WITH AXA GROUP SOLUTIONS PRIVATE LIMITED ('AXA GROUP SOLUTIONS') F OR RENDITION OF SERVICES IN THE NATURE OF SAP MAINTENANCE CHARGES, ANNUAL MA INTENANCE CHARGES, ITA NO. 921/BANG/2018 PAGE 3 OF 9 APPLICATION MAINTENANCE CHARGES, SUPPORT CHARGES, I T ADVISORY CHARGES AND SAP HOSTING CHARGES ETC. THE NATURE OF EXPENSES W AS SERVICE CHARGES FOR USAGE OF SOFTWARE APPLICATIONS. THE SOFTWARE EXPENS ES INCURRED DOES NOT RELATE TO CHARGES TOWARDS PURCHASE OF SOFTWARE. TH E ASSESSEE SUBMITTED THAT THE EXPENDITURE INCURRED TOWARDS SAP MAINTENANCE CH ARGES, ANNUAL MAINTENANCE CHARGES, APPLICATION MAINTENANCE CHARGE S, SUPPORT CHARGES, IT ADVISORY CHARGES AND SAP HOSTING CHARGES ARE REVENU E IN NATURE AS THE SAME ONLY FACILITATES DAY-TO-DAY OPERATIONS. THE ABOVE E XPENDITURE DOES NOT RESULT IN ENDURING BENEFIT TO THE COMPANY, THE SAME IS BOU ND TO BECOME TECHNICALLY OBSOLETE VERY FAST AND WOULD NEED TO BE UPGRADED/RE PLACED FREQUENTLY AND HENCE, SHOULD BE TREATED AS REVENUE IN NATURE. THE ASSESSEE HIGHLIGHTED THAT SAP ADVANCE BUSINESS APPLICATION PROGRAMMING (ABAP) DEVELOPMENTS ARE RELATED TO UP-GRADATION OF SAP SOFTWARE FOR IMPROVI NG THE SAP CRP PACKAGE FOR DAY TO DAY USE, WHICH PROVIDES AN ADVANTAGE MER ELY IN FACILITATING THE COMPANY'S TRADING OPERATIONS OR ENABLING MANAGEMENT AND CONDUCT OF COMPANY'S BUSINESS TO BE CARRIED ON MORE EFFICIENTL Y OR MORE PROFITABLY. THUS, THIS EXPENDITURE DOES NOT PROVIDE ENDURING BE NEFIT TO THE COMPANY. THE UP-GRADATIONS OF SAP SOFTWARE MAY INCLUDE BETTE R INTERFACES BETWEEN DIFFERENT MODULES, DEVELOPING NEW OR IMPROVING THE REPORTS GENERATED BY SAP. THE SAMPLE OF THE INVOICES RAISED BY AXA GROUP SOLUTIONS AND SAMPLE INVOICES RELATING TO SOFTWARE EXPENSES WERE ALSO FI LED BEFORE CIT(A). THE CHART FILED IN THIS REGARD BEFORE THE CIT(A) GIVES A SUMMARISED FORM OF NATURE OF THE EXPENSES IN QUESTION AND IS AS FOLLOW S: ITA NO. 921/BANG/2018 PAGE 4 OF 9 SERVICES PROVIDED BY AXA TECHNOLOGIES OR AXA GROUP SOLUTIONS ANNEXURE NO. EXPLANATION PAYMENT TO AXA GROUP SOLUTIONS TOWARDS SOFTWARE MAINTENANCE AND SUPPORT (PART OF SERVICE CHARGES PAID TO AXA GROUP SOLUTIONS ) INVOICE ENCLOSED AS ANNEXURE 1 FROM THE INVOICE, IT IS EVIDENT THAT THE PAYMENT IS TOWARDS SOFTWARE MAINTENANCE AND SUPPORT SERVICES AND NOT TOWARDS PURCHASE OF SOFTWARE. THE SUPPORT SERVICES PROVIDED BY AXA GROUP SOLUTIONS DOES NOT PROVIDE ENDURING BENEFIT T O THE COM PANY. PAYMENT TO AXA TECHNOLOGY SERVICES INDIA PRIVATE LIMITED TOWARDS WINRAR SOFTWARE LICENSE (PART OF SOFTWARE EXPENSES) INVOICE ENCLOSED AS ANNEXURE 2 FROM THE INVOICE, IT IS CLEAR THAT THE PAYMENT MADE IS TOWARDS LICENSE FEE IN RESPECT TO WINRAR SOFTWARE. THE LICENSE NEEDS TO BE RENEWED YEAR ON YEAR. HENCE, THE LICENSE FEE IS NOT PROVIDING ENDURING BENEFIT TO THE COMPANY . PAYMENT TO AXA TECHNOLOGIES TOWARDS MICROSOFT EAS LICENSE RENEWAL (PART OF SOFTWARE EXPENSES) INVOICE ENCLOSED AS ANNEXURE 3 FROM THE INVOICE, IT IS CLEAR THAT THE PAYMENT MADE IS TOWARDS LICENSE RENEWAL FEE IN RESPECT TO MICROSOFT OFFICE AND MICROSOFT CORECAL. THE LICENSE RENEWAL FEE IS NOT PROVIDING ENDURING BENEFIT TO THE COMPANY. 6. THE ASSESSEE RELIED ON CERTAIN JUDICIAL PRONOUNC EMENTS FOR THE PROPOSITION THAT SAP MAINTENANCE CHARGES, ANNUAL M AINTENANCE CHARGES, APPLICATION MAINTENANCE CHARGES, SUPPORT CHARGES, I T ADVISORY CHARGES ITA NO. 921/BANG/2018 PAGE 5 OF 9 AND SAP HOSTING SERVICES SHOULD BE TREATED AS REVEN UE IN NATURE GIVEN THAT THE EXPENDITURE HAD BEEN INCURRED ON THE MAINTENANC E OF ERP PACKAGE. THE CIT(A) HELD THAT CHARGES FOR APPLICATION SUPPOR T AND MAINTENANCE OF APPLICATION SUCH AS WORKFLOW APPLICATIONS AND INTRA NET APPLICATIONS AND CHARGES FOR ADVISORY SERVICES RELATED TO IT SHOULD BE ALLOWED AS REVENUE EXPENDITURE. THE CIT(APPEALS) TOOK THE VIEW THAT EX PENDITURE TO THE EXTENT OF RS.81,52,209 WHICH WAS INCURRED TOWARDS MICROSOF T EAS LICENCE RENEWAL AND AXABS FOR THE PERIOD FROM 1.6.2012 TO 30.11.201 2 WAS PAID TOWARDS LICENCE RENEWAL AND THEREFORE THE SAID EXPENDITURE WHICH WAS ONLY FOR PART OF THE RELEVANT FINANCIAL YEAR WOULD NOT CAUSE ANY ENDURING BENEFIT TO THE ASSESSEE AND THEREFORE TO THIS EXTENT HAS TO BE REG ARDED AS REVENUE EXPENDITURE. THIS ITEM OF EXPENDITURE IS LISTED AS ITEM NO.3 IN THE CHART GIVEN ABOVE. WITH REGARD TO THE REMAINING EXPENDIT URE, THE CIT(APPEALS) HELD THAT THEY HAVE TO BE REGARDED AS EXPENSES INCU RRED TOWARDS SOFTWARE ACQUISITION WITH PERPETUAL LICENCE AND THEREFORE TH OSE EXPENSES HAVE TO BE CAPITALIZED AND ASSESSEE CAN CLAIM ONLY DEPRECIATIO N. THE CIT(APPEALS) THUS ALLOWED THE CLAIM OF ASSESSEE IN PART. 7. AGGRIEVED BY THE ACTION OF THE CIT(APPEALS) IN N OT ALLOWING THE ENTIRE EXPENDITURE AS DEDUCTION AS REVENUE EXPENDIT URE, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 8. THE LD. COUNSEL FOR THE ASSESSEE FIRSTLY SUBMITT ED THAT THE ASSESSEE HAD GIVEN COMPLETE DETAILS OF THE SOFTWARE EXPENSES AND IN THIS REGARD DREW OUR ATTENTION TO PAGES 96-97 OF ASSESSEES PB, WHICH IS GIVEN AS ANNEXURE-I TO THIS ORDER. HE DREW OUR ATTENTION T O THE INVOICE IN SUPPORT OF THE DETAILS OF SOFTWARE EXPENSES WHEREIN THE DESCRI PTION OF THE NATURE OF EXPENSES HAVE BEEN GIVEN. HIS FIRST SUBMISSION WAS THAT GOING BY THE DESCRIPTION, THE EXPENDITURE INCURRED WAS IN THE NA TURE OF LICENCE WHICH ONLY HELPED AND FACILITATED THE ASSESSEE IN CARRYIN G OUT THE BUSINESS ITA NO. 921/BANG/2018 PAGE 6 OF 9 OPERATIONS AND DOES NOT PROVIDE ANY ENDURING BENEFI T. IT WAS SUBMITTED THAT THE EXPENSES WERE MAINTENANCE & SUPPORT CHARGE S AND CANNOT BY ANY STRETCH OF IMAGINATION BE TREATED AS CAPITAL EXPEND ITURE. 9. THE LD. DR RELIED ON THE ORDER OF CIT(APPEALS). 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE F IND THAT DESPITE ALL THE DETAILS HAVING BEEN FILED BY THE ASSESSEE BEFOR E THE CIT(APPEALS), THE CIT(APPEALS) HAS NOT CONSIDERED THOSE SUBMISSIONS W ITH REGARD TO THE SUM DISALLOWED BY THE AO, EXCEPT THE SUM OF RS.81,52,20 9 WHICH WAS INCURRED TOWARDS MICROSOFT EAS LICENCE RENEWAL OF AXABS SOFT WARE. THE CLAIM MADE BY THE ASSESSEE IN RESPECT OF REMAINING ITEMS OF EXPENDITURE WAS THAT THEY WERE OF SIMILAR NATURE IN THE FORM OF LIC ENCE AND SUPPORT SERVICES. THIS SUBMISSION HAS NOT BEEN DEALT WITH BY THE CIT( APPEALS). IN THESE CIRCUMSTANCES, WE DEEM IT FIT AND APPROPRIATE TO SE T ASIDE THE ORDER OF CIT(APPEALS) ON THIS ISSUE AND REMAND THE SAME TO T HE LD. CIT(APPEALS) FOR PASSING A SPEAKING ORDER ON THE CLAIM OF ASSESS EE FOR DEDUCTION IN THE LIGHT OF EVIDENCE FILED BY ASSESSEE. THE CIT(APPEA LS) WILL AFFORD OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 11. THE APPEAL OF ASSESSEE IS ACCORDINGLY TREATED A S ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF OCTOBER, 2020. SD/- SD/- ( A K GARODIA ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 28 TH OCTOBER, 2020. / DESAI S MURTHY / ITA NO. 921/BANG/2018 PAGE 7 OF 9 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE. ITA NO. 921/BANG/2018 PAGE 8 OF 9 ANNEXURE-I ITA NO. 921/BANG/2018 PAGE 9 OF 9