2016 (5) TMI 865 - AT - Income Tax

Tribunal Remands Case for Fresh Assessment on Computer Software Depreciation

The Tribunal remanded the case back to the Assessing Officer for a fresh assessment regarding the restriction of depreciation on license fees paid for ... Depreciation on license fees paid for the use of computer software @25% of written down value - rejection of assessee’s claim of depreciation @ 60% on “License Fees' - Held that:- Matter restored back to the file of the Assessing Officer to examine the question whether the expenditure on computer software was capital or revenue in the light of the criteria laid down above after giving an opportunity of being heard to the assessees. If on such examination, the Assessing Officer would come to the conclusion that the expenditure was capital expenditure, then the question regarding allowing depreciation would be decided in accordance with the principles laid down in the subsequent paragraphs. - Decided in favour of assessee for statistical purposes. Issues Involved:1. Restriction of depreciation on license fees paid for the use of computer software to 25% instead of 60%.Issue-Wise Detailed Analysis:1. Restriction of Depreciation on License Fees:Background: The appeal arises from the final assessment order dated 30.09.2010, which restricted the depreciation on license fees paid for the use of computer software to 25% of the written down value, applicable to intangible assets. The assessee claimed depreciation at 60%, leading to a reduction of Rs. 50,78,450/- in the depreciation allowance.Arguments by Assessee: The assessee argued that the restriction was incorrect and referred to the Special Bench decision in the case of Amway India Enterprises vs. DCIT, which supports the claim for higher depreciation on computer software. The assessee highlighted that detailed oral and written arguments were submitted but not considered in the original order.Arguments by Revenue: The Revenue, represented by the CIT(DR), contended that the Assessing Officer (AO) had correctly restricted the depreciation based on the precedent set by Sudarshan Chemical Industries Limited, which treated license fees as intangible assets eligible for 25% depreciation.Tribunal's Observations: The Tribunal noted that the original order failed to consider the detailed arguments presented by the assessee, which was acknowledged as an apparent mistake. The Tribunal recalled the order for fresh adjudication of this limited issue.Special Bench Decision: The Tribunal referred to the Special Bench decision in Amway India Enterprises, which clarified that computer software, considered a tangible asset, is eligible for 60% depreciation from 1.4.2003. The decision emphasized the need to apply a functional test to determine whether the expenditure on software is capital or revenue in nature.Functional Test Application: The Tribunal highlighted that the functional test is crucial in distinguishing between capital and revenue expenditure. The test considers the software's role in the business, its centrality, and the nature of the advantage derived from its use. The Tribunal noted that this exercise was not conducted by the tax authorities in the present case.Remand for Fresh Examination: Given the lack of detailed examination by the AO, the Tribunal remanded the issue back to the AO for a fresh assessment. The AO was directed to evaluate each software independently, applying the criteria laid down by the Special Bench, and determine whether the expenditure was capital or revenue in nature. If deemed capital, the AO should then decide on the appropriate rate of depreciation.Conclusion: The Tribunal allowed the appeal for statistical purposes, emphasizing the need for a detailed factual examination by the AO in line with the principles established by the Special Bench.Pronouncement: The order was pronounced in the open court on 19th May 2016.