Expenditure on Software where biling is done on basis of actual use is a revenue expense
IN THE INCOME TAX APPELLATE TRIBUNAL
The Relevant Text of the Order as follows :
22. In the result, appeal by the Assessee is treated as partly allowed.
23. Now we shall take up the appeal of the revenue https://ift.tt/3gIHS9Hrevenue-expenditure.htmlfor consideration. Gr.No.1 and 6 are general in nature and calls for no specific adjudication. Gr.No.4 & 5 are with regard determination of ALP in respect of an international transaction between the Assessee and it’s AE. The issue has already been settled between the Assessee and the Revenue in Mutual Agreement Procedure (MAP) under the Double Taxation Avoidance Agreement between India and USA. Hence, these grounds are dismissed as infructuous. Gr.No.2 & 3 alone remain to be adjudicated.
24. As far as Gr.No.2 raised by the revenue is concerned, the same relates to the action of the CIT(A) in holding that payment of lease rental on finance lease of cars will not attract Tax Deduction at Source (TDS) provisions and thereby deleting the addition made by the AO u/s.40(a)(i) & 40(a)(ia) of the Act. The facts with regard to this ground of appeal are that the Assessee obtained certain vehicles on lease on a finance lease arrangement. On payment of lease rents under finance lease arrangement of Rs.7,87,93,536/-, the Assessee did not deduct tax at source. It was the plea of the Assessee that the payment in question was not in the nature of “Rent” within the meaning of the term u/s.194-I of the Act and therefore no tax was deducted at source at the time of making payment to the finance company. The AO however held that the payment was in the nature of a payment to a contractor for execution of a work and the Assessee ought to have deducted tax at source u/s.194-C of the Act. Since no tax was deducted at source, the AO disallowed deduction of a sum of Rs.7,87,93,536/- by invoking the provisions of Sec.40(a)(ia) of the Act.
25. On appeal by the Assessee the CIT(A) held that provisions of Sec.194-C of the Act were not applicable to payment of lease rentals as the payment cannot be considered as payment to a contractor for carrying out any “Work”. Explanation III.to Sec.194C of the Act defines Work for the purpose of Sec.194C of the Act as follows:
“For the purposes of this section, the expression “work” shall also include—
(a) advertising;
(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c) carriage of goods and passengers by any mode of transport other than by railways;
(d) catering.”
26. The CIT(A) relied on decision of Delhi bench of the tribunal in ACIT Vs Sanjay Kumar (2011) 15 Taxmann.com 230 (Delhi) and Mumbai Bench of ITAT in the case of Bhail Bulk Carriers Vs. ITO (2011) 20 Taxmann.com 87 (Mum) in which it has been held that the payment made by the assessee for taking cranes and ships on lease on time basis, did not constitute payment with regard to ‘works contract’ as defined in sec. 194C and hence the assessee was not required to deduct tax at source under this action.
27. Aggrieved by the order of the CIT(A) the revenue has raised Gr.No.2 before the Tribunal. The learned DR relied on the order of the AO and further submitted that the applicability of provisions of Sec.194-I of the Act has not been considered by the CIT(A). We are of the view that the AO made the addition only on the basis of provisions of Sec.194C of the Act and he did not invoke the provisions of Sec.194I of the Act. As far as provisions of Sec.194C of the Act is concerned, we are of the view that the CIT(A) has rightly come to the conclusion that payment of lease rentals under a finance lease will not attract the provisions of Sec.194C of the Act. We find no grounds to interfere with the order of the CIT(A). Accordingly Gr.No.2 raised by the revenue is dismissed.
28. Gr.No.3 raised by the revenue is with regard to the grievance of the revenue in treating amount paid towards automation software as revenue expenditure. The facts with regard to this ground of appeal are that the Assessee claimed deduction of a sum of Rs.135,52,51,594/- while computing income from business under the head “Data Automation software Expenses”. The AO called upon the Assessee to explain the nature of the aforesaid expenditure. The Assessee vide its letter dated 28.7.2011 explained to the AO that the software in question were “Electronic Design Automation”(EDA) which are used by the Assessee’s designers for product design and verification. The Assessee pointed out that EDA software license is acquired by the Texas Instruments Inc. USA under a global agreement from vendors of such software like Synopsis, Cadence, Mathwork, Magma, Rational etc., and the Assessee is allowed to use such software and billed on the basis of actual hours the Assessee uses the software. The Assessee therefore submitted that the expenditure was a payment for license to use software and the Assessee never acquired any right or interest in the software and therefore the payment made for right to use such software was purely revenue expenditure and should be allowed as deduction. The AO however did not allow the claim of the Assessee by concluding that the expenditure was capital expenditure and therefore only depreciation at 60% would be allowed and not the entire expenditure. The following were the relevant observations of the AO:-
“5.3 The assessee‘s submission is carefully considered. The Data Automation Software is a computer software which is being used by the assessee for designing its products. Electronic design automation (EDA) is a category of software tools for designing electronic systems such as printed circuit boards and integrated circuits. The tools work together in a design flow that chip designers use to design and analyze entire semiconductor chips. The expenditure on computer software under the head. “Data Automation Software expenses” is necessarily an expenditure which is required to be capitalized by the assessee. Assessee‘s relies on the Hon’ble Supreme court decision in the case of Empire Jute Co Ltd Vs CIT [124 ITR 1] is misplaced since the decision was given by the Hon’ble Court in a different set of facts and circumstances. The assessee has not stated or clarified in its submission dated 28.07.2011 as to how it has applied the judgment in the case of Empire Jute Co Ltd in its case.
5.4 The computer software expenses have been held to be capital in nature by the Hon’ble Rajasthan High Court in the case of CIT Vs Arawali Construction Co. (P) Ltd. (259 ITR 30). The Hon’ble Court held as under:
“The fact on record is that the payment of Rs 1,38,360/- was not made as consultancy fee to Hindustan Computers Ltd_ in fact, the payment was made for outright sale of ‘computer software’ which is used as technique in mining operations. The finding of the Commissioner (Appeals) was that the acquisition of software cannot be treated to be an asset of endurable nature. If the programme is used in one mining to another mining operation, why it should not be treated as capital asset and expenditure on that, capital expenditure. Considering these facts and decision of their Lordships and later decision of the Bombay High Court, in our view, the acquisition of technical know-how is a capital expenditure, therefore, the assessing officer has rightly treated the expenditure on acquiring the computer software as expenditure of capital nature and rightly allowed depreciation as per rules.”
5.5 Reliance is also placed on the decision in the case of Amway India Enterprises Vs. DCIT (ITAT, Del-Special Bench) [111 ITD 112]. In this case the Hon’ble ITAT held that computer software was tangible asset eligible for depreciation @ 60%.
In the result, the Automation software expenses of Rs. 135,52,51,594/- are held to be capital in nature. The amount as claimed in P 86 L a/c is disallowed and added back. Instead, the assessee is allowed depreciation on the amount @ 60%.
[Addition Rs. 54,21,00,637/-]”
29. On appeal by the Assessee, the CIT(A) deleted the addition made by the AO holding that the Assessee acquired on purchase by the Assessee and as per the Agreement with the owner of the software the Assessee had only a right to use the software and that the software was an enabling tool in the business of the Assessee and therefore the expenditure question was revenue expenditure. Aggrieved by the order of the CIT(A), the revenue is in appeal before the Tribunal.
30. We have heard the rival submissions. A copy of the group cost allocation Agreement dated 24.3.2006 is at page -406 of Assessee’s paper book. The agreement is between Texas Instruments Inc., USA and the Assessee. The Agreement refers to the US parent company of the Assessee having acquired license to use EDA tools from the vendors and the right of the Assessee to use the same and the fact that billing will be done on the Assessee on the basis of actual use of the software by the Assessee. It is thus clear that the Assessee had acquired no right or interest whatsoever in the EDA tools and had only a right to use the software. It is not the case of the revenue that the EDA tools was not connected to the business of the Assessee. In such circumstances, we are of the view that the deduction was rightly allowed by the CIT(A) as revenue expenditure. We find no grounds to interfere with the order of the CIT(A) and dismiss Gr.No.2 raised by the revenue.
31. In the result, appeal by the revenue is dismissed while the appeal by the Assessee is partly allowed.
Pronounced in the open court on this 6th day of March, 2020.
Tags: Judgement, Appellant Tribunal, Income Tax
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