AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2012 (12) TMI 868
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....y from the above grounds of appeal at or before the time of hearing." I.T.A. No.220/Del./2012[Assessee] 1. "That the CIT(A) erred on facts and in law in confirming the disallowance of Rs.1,25,11,088/- made by the Assessing Officer, in respect of licence fee paid to Honda Motor Co.Japan(HMCL) for purchase of HIPACK Software Factory Module, Module, holding the same to be capital expenditure. 2. That the CIT(A) erred on facts and in law in holding that functions of the 'Factory Module' part of the software facilitated in production and was directly linked with fixed capital items, without appreciating that said module did not form integral part of the manufacturing process of the assessee. 3. Without prejudice, that the CIT(A) erred on facts and in law in not directing the Assessing Officer to allow depreciation on the aforesaid amount held to be capital expenditure." 2. Facts, in brief, as per relevant orders are that original assessment in this case was completed on a loss of Rs.848,61,712/- vide order dated 21.3.2002 u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act) in pursuance to return declar....
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....er Sales) a) Customer information b) Warranty claim processing 3. HIPACK-Sales (User Division- Marketing) a) finished goods inventory b) Invoicing to dealers 4. HIPACK-Parts (User Division- Spare Parts) a) Spare Parts inventory b) Spare parts procurement c) Spare parts invoicing" 2.2 The assessee also explained that they had incurred the expenses of Rs.2,34,34,782/- in connection with the a licensed computer software called HIPACK[Honda Integrated Package] which had been designed by Honda Motors Co. Ltd., Japan[HM] for use by various Honda group companies worldwide. It was explained that thereafter, some modifications were made every year, whenever price was hiked .After considering the submissions of the assessee, the AO concluded as under:- "........ Thus, it is gathered from the reply of the assessee that (i) assesse....
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....rovide upgrades of the aforesaid software, either with or without cost. That expenditure on software cannot be considered as expenditure in capital field, as the same becomes outdated in a very short span of time in view the rapid changes/advancement in technology, especially computer technology. In fact, the HIPACK software being used by the appellant today cannot be said to be the same one as was licensed to the appellant by HMCL during the relevant previous year as it has undergone many changes/modifications/enhancement etc., at the appellant's end. The appellant submitted various functionalities in detail performed by the use of HIPACK software under its four modules which facilitate appellant daily business operations. HIPACK-Factory (User Division- Manufacturing & Purchasing) - Cost Rs.12,511,088 a) Bill of Material for car production viz., maintenance of parts list etc. b) Production scheduling c) Part ordering for production d) Assembly Line ....
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....shift operation. The appellant has submitted that, based* on production plan, HIPACK Factory module monitors the daily production plan, material availability an fixation of ordering plan in relation thereto. Hence, the HIPACK software does not form an integral part of the designing, engineering or manufacturing operations of the assessee. As the Factory module is not used in the shop floor as such. Therefore, it does not form integral part the manufacturing process of the appellant and cannot be considered a part of profit making apparatus of the appellant. HIPACK-Warranty module' FY 1999-2000 - Free service coupon FY 2000-2001 - Price history keeping for warranty claims FY 2001-2002 - Warranty claim format revised FY 2002-2003 - CRV warranty claim function The above modifications in warranty module enabled the appellant in tracking of free service coupon claims issued to customers, reimbursement of claims to dealers based on issue price of parts, maintaining inform....
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....llant but for the modifications done by the appellant Thus, the HIPACK software did not continue to be used in its original form and shape as such. Therefore, no enduring benefit whatsoever arose from the use of the said software. FINDINGS 4. I have gone through the above submissions of the appellant and have also perused ITAT's decision in the case of Amway India Enterprises (111 ITO 112) and AO's order. The issue is examined in the light of the tests namely enduring benefits and functional tests. 4.1 On going through the details of the 4 software acquired by the appellant from its parent company and their subsequent notification by the appellant it is seen that the 3 softwares namely, (a) Warranty Module (b) Sales Module and (c) Parts Module- relates to those activities, which doesn't form integral part of manufacturing process. These softwares are directly related to the maintenance of books of account and in generating report for MIS etc. and perform the auxiliary function. But the same is not true in respect of the remaining 4th software namely HIPACK-Factory Module". 4.2 The "Factory Module" soft....
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....of the assessee while carrying us through the assessment order dated 21.3.2002 & para 55 and 59 of the decision in the case of Amway India Enterprises(supra) contended that the entire expenditure was revenue in nature, the proprietory rights in the software being vested in HM. While referring to para 12 in the decision in the case of CIT Vs. Asahi India Safety Glass Ltd., the ld. AR argued that since their software was application software as was the case in the said decision while no enduring benefit was received ,accordingly, expenditure was revenue in nature. It was pointed out that with every price increase, software was suitably modified by the assessee itself. In a confirmation dated 6.9.2012 obtained by the assessee from HM, it is mentioned that after studying the need of assessee company, HM granted a license of HIPACK to HSCI, as per invoice no.561-E985-01 dated 19th June, 1998.The aforesaid HIPACK was specifically developed for the usage of HM and its subsidiaries worldwide and the ownership vested in with HM only. It is also stated that fee was charged from the respective licensees, who enjoy only a right to use HIPACK while the ownership, and all other Intellectual Prop....
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....of tests laid down by the Special Bench of the Tribunal in the case of Amway India Enterprises (supra). In the facts of the said decision, the expenditure had been incurred on obtaining licenses for use of the certain software, claimed to be in the nature of application software. The assessee claimed expenditure to be of revenue nature as the same only facilitated in its day to day operations and it did not result in enduring benefit. The AO rejected the claim, treating the software as part of the plant and machinery and thus, gave enduring benefit to it, inter alia, due to the fact that all the application software purchased by the assessee had long-lasting use of more than three-four years and the same, according to him, thus, resulted in enduring benefit to it. On appeal, the ld. CIT(A) upheld the action of the AO. On further appeal, the matter was referred to Special Bench. The ITAT(SB) on perusal of various judicial pronouncements observed that there cannot be any specific or precise test, which could be applied conclusively or universally for distinguishing between capital and revenue expenditure. While referring to decisions of the Hon'ble Apex Court in Tata Consultancy Serv....
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....al in nature and the functional test as discussed above also needs to be satisfied. (iii) Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business touching either capital or revenue field or its utility to a businessman which may touch either capital or revenue field. 8.1 The Special Bench further observed that the rights which an assessee acquires by purchasing the disk or magnetic medium containing the computer software with limited or absolute right to use the same by itself would satisfy the requirements of the Plant. The assessee's ownership of limited right over the tangible asset is sufficient to conclude that the assessee is the owner of the Plant. It was also observed that in the case of Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119, Radha Kr....
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....r software/ licence to use such software, it acquired a tangible asset and became owner thereof. The assessee claimed that the said integrated software had four modules; the impugned order does not reveal nor the ld. AR threw light as to whether or not each of these four modules could function independently. The ld. CIT(A) without examining this aspect concluded that expenditure incurred on three modules other than factory module was revenue in nature while expenditure incurred on factory module was capital. The ld. AR also claimed that the assessee had carried out some modifications. Whether or not the modifications were such that original software lost its utility and if so, what was the role of supplier HM in such modifications, is also not known. It has been claimed that, the HIPACK software is integrated that is it contained several applications rolled into one. As already stated whether or not each of the four modules could function independently, has not been examined in the light of tests laid down in the aforesaid decision in Amway India Enterprises.(supra). This software is not available off the shelf. It has been specifically designed by HM for internal use of the said c....
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....of the Tribunal. As is apparent from the facts in the said decision, the Tribunal analysed various clauses of the agreement and thereafter alone recorded their findings. But in the instant case, despite specific request, the ld. AR did not place a copy of the relevant license agreement before us nor seems to have been submitted before the lower authorities for their examination. In this fact situation, the aforesaid decision in Asahi India Safety Glass(supra), in our opinion, does not further the case of the assessee. 8.4 In Amway India Enterprises(supra), the Special Bench laid down that the advantage which an assessee derives has to be seen in a commercial sense. Though in a confirmation dated 6.9.2012, submitted before us, Honda Motor Co. Ltd., Japan stated that it granted license to the assessee and its other subsidiaries worldwide to use HIPACK software, it does not spell out any terms and conditions of the license. In our view, a number of factors are relevant to determine whether the advantage operates in the capital field or revenue field. The nature of business of the assessee, an understanding of the business functions or effect of a concern's software. Software normally....