2015 (11) TMI 68 - AT - Income Tax

Tribunal rules for assessee: Vision Plus payments deductible as revenue expenditure. 60% depreciation upheld on computer components.

The Tribunal ruled in favor of the assessee on both issues. The payments for the use of Vision Plus software were treated as revenue expenditure, ... Capital expenditure vs revenue expenditure - end-user software license - treatment of licence fees - intangible asset - when a licence constitutes capital asset - deduction under section 37 of the Income-tax Act - depreciation - computer peripherals and networking equipment as integral part of computer systemEnd-user software license - treatment of licence fees - capital expenditure vs revenue expenditure - intangible asset - when a licence constitutes capital asset - deduction under section 37 of the Income-tax Act - Whether the payments made to GECC(USA) as licence fee, connectivity charges and co-ordination charges for use of Vision Plus software are capital in nature or revenue deductible under section 37 of the Act - HELD THAT: - The Tribunal examined the End-User License Agreement dated 07.07.2000 and the terms restricting copying, transfer, commercial exploitation and requiring delivery or purge of the licensed program on termination. The agreement granted the assessee only a limited right to use the application software for its business during the currency of the licence, with no right to sell, alienate or retain the software on termination. The licence was payable periodically and subject to renewal/revision; there was no material to show that periodic payments were instalments for purchase. The Tribunal distinguished authorities relied upon by the revenue where technical know-how or enduring benefits remained with the assessee after termination, and followed precedents holding that routine application software used for accounting and operational purposes, which does not confer enduring proprietary benefit or ownership, gives rise to revenue expenditure. The Tribunal further noted consistent findings in subsequent assessment years treating the same licence as revenue in nature and observed that the quantum of expenditure was not such as to make the software the 'soul' of the business. On this basis the disallowance treating the payments as capital expenditure was reversed and the payments were held to be revenue deductible under section 37. [Paras 7]Payments to GECC(USA) for licence, connectivity and co-ordination charges in respect of Vision Plus software are revenue expenditure deductible under section 37 and not capital expenditure.Depreciation - computer peripherals and networking equipment as integral part of computer system - Whether printers, switches, networking equipment, batteries and pen drives qualify as integral part of computer system and are eligible for depreciation at 60% - HELD THAT: - The CIT(A) followed the jurisdictional High Court decision and held that the items in question are integral to the computer system and eligible for depreciation at the higher rate claimed by the assessee. The Tribunal found no contrary material or law placed by the Revenue to dislodge that conclusion and agreed with the view that these items are integral parts of the computer system for the purposes of depreciation. [Paras 4, 9]Depreciation at 60% allowed on printers, switches, networking equipment, batteries and pen drives as they are integral parts of the computer system.Final Conclusion: Assessee's appeal for A.Y. 2007-08 allowed holding licence, connectivity and co ordination payments to GECC(USA) as revenue expenditure deductible under section 37; Revenue's appeal for A.Y. 2008-09 dismissed on the same issue; depreciation at 60% on specified computer peripherals upheld. Issues Involved:1. Treatment of license fees, connectivity charges, and coordination charges for the use of Vision Plus software as capital or revenue expenditure.2. Allowance of depreciation on printers, switches, networking equipment, batteries, and pen drives.Detailed Analysis:Issue 1: Treatment of License Fees, Connectivity Charges, and Coordination ChargesThe primary issue revolves around whether the payments made by the assessee for the use of Vision Plus software should be classified as capital expenditure or revenue expenditure. The Assessing Officer (AO) treated these payments as capital expenditure, citing that the assessee obtained a distinct right to use the software, which provided enduring benefits and exclusive rights in India. The AO relied on Supreme Court decisions in Jonas Woodhead and Sons (India) Ltd. vs. CIT and Southern Switch Gear Ltd. vs. CIT to support this view.The assessee argued that the payments were for the right to use the software for a limited period, without any ownership rights or enduring benefits. The software was used for day-to-day business operations, and the payments were periodic and not linked to acquisition. The assessee cited various judicial decisions, including CIT vs. Asahi India Safety Glass Ltd., Empire Jute Company vs. CIT, and CIT vs. Amway India Enterprises, to argue that the expenditure was revenue in nature.The Tribunal analyzed the end-user license agreement and found that the assessee had only limited rights to use the software, with significant restrictions on copying, transferring, or commercially exploiting it. The agreement also allowed for termination, requiring the assessee to return the software. The Tribunal concluded that the payments were for the use of the software, not for acquiring a capital asset, and thus should be treated as revenue expenditure. Consequently, the appeal of the assessee was allowed, and the expenditure was deemed deductible under Section 37 of the Act.Issue 2: Depreciation on Printers, Switches, Networking Equipment, Batteries, and Pen DrivesThe second issue involved the rate of depreciation applicable to printers, switches, networking equipment, batteries, and pen drives. The AO allowed depreciation at 15%, treating these items as plant and machinery. The assessee claimed depreciation at 60%, arguing that these items were integral parts of the computer system.The CIT(A) followed the decision of the jurisdictional High Court in M/s. BSES Rajdhani Powers Ltd., which held that such items are integral parts of the computer system and eligible for 60% depreciation. The Tribunal found no contrary law or material presented by the Revenue to challenge this view and upheld the CIT(A)'s decision, allowing depreciation at 60%.Conclusion:In conclusion, the Tribunal ruled in favor of the assessee on both issues. The payments for the use of Vision Plus software were treated as revenue expenditure, deductible under Section 37 of the Act. Additionally, the Tribunal upheld the allowance of 60% depreciation on printers, switches, networking equipment, batteries, and pen drives, as these were considered integral parts of the computer system. The appeal of the assessee was allowed, and the appeal of the Revenue was dismissed.Order pronounced in the open court on 16.10.2015.