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From the Courts »
  Vatsala Shenoy vs. JCIT (Supreme Court)
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 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

CIT - I Vs. ACL WIRELESS LTD.
January, 04th 2014
*IN THE HIGH COURT OF DELHI AT NEW DELHI

%              Judgment reserved on :  23rd September, 2013
               Judgment pronounced on: 10th December, 2013

+                     ITA 254/2013 & 313/2013

CIT - I                                           ..... Appellant

                          Through    Mr. Abhishek Maratha, Sr.
                                     Standing Counsel & Ms.
                                     Anshul Sharma, Advocate.

                          Versus

ACL WIRELESS LTD.                              ..... Respondent
                 Through             Nemo

       CORAM:
       HON'BLE MR. JUSTICE SANJIV KHANNA
       HON'BLE MR. JUSTICE SANJEEV SACHDEVA

SANJEEV SACHDEVA, J.


1.     ITA No. 254/2013 pertains to Assessment Year 2003-

       04 and impugns order of ITAT dated 28.08.2012 & ITA

       No.313/2013 pertains to Assessment Year 2007-08

       and impugns order of ITAT dated 19.10.2012.


2.     These appeals have been filed by the Revenue under

       section 260A of the Income Tax Act, 1961 (for short

=======================================================================

ITA 254/2013 & 313/2013                                     Page 1 of 23
       "the Act") impugning the orders ITAT has accepted the

       appeals of the Assessee and deleted the additions

       made by the Assessing Officer with regard to product

       improvement expenses.              The Assessing Officer had

       treated the product improvement expenses as capital

       expenditure and disallowed equivalent amount as

       revenue expenditure. ITAT has held to the contrary.


3.     The Assessee is a company which is involved in the

       business of software development. The commercial

       operations started in the Financial Year 2002-03. The

       Assessee           provides    wireless   solutions   for    mobile

       consumers            and      enterprises.      The         software

       development relates to the field of instant messaging

       (IM). It employed and functioned with a team of

       software professionals. They developed new software

       and were also involved in continuous improvement in

       the existing software in terms of improvements, speed,

       usage, storage and providing enhanced features. The

       Assessee had signed revenue sharing agreements

=======================================================================

ITA 254/2013 & 313/2013                                            Page 2 of 23
       with mobile service providers like Airtel, Vodafone, etc.


ITA 254 of 2013


4.       During the Assessment Year 2003-04, the Assessee

         had capitalized the product development expenses

         for the new product (software) launched in the

         relevant assessment year. However, under the head

         ,,Product Improvement Expenses , the Assessee has

         claimed Rs.90,37,605/- as revenue expenditure.





5.       The Assessee was asked by the Assessing Officer to

         explain as to why the expenses incurred on product

         improvement should not be capitalized. In response,

         it   was    submitted       that   the   improvement     of    the

         software         was   a   regular   feature    and   since   the

         technology of mobile phoning was one of the fastest

         changing         technologies      and   to    keep   pace,    the

         Assessee was required to upgrade/improve/modify

         its product on constant basis.           Product improvement

         was part and parcel of the business of the Assessee.

=======================================================================

ITA 254/2013 & 313/2013                                          Page 3 of 23
         The expenses incurred by the Assessee for product

         improvement did not result in any new product,

         however modified and new features were added to

         the existing product depending on market/technology

         requirements.          The    Assessee     claimed      these

         expenses to be revenue in nature as the same were

         being incurred in the ordinary course of business.

         The said expenses were essential to stay in the

         business of rapidly changing technological world of

         mobile communications.


6.       The Assessing Officer, vide his assessment order

         dated 23.01.2006, treated the said expenses as

         capital expenditure on the ground that the software

         had been capitalized by the Assessee and there was

         a dedicated team of professionals whose job was to

         carry out further improvement in the software and the

         expenses incurred were to enhance the value of the

         capital asset resulting in enduring benefit.               The

         Assessing        Officer   thus   disallowed   the   product

=======================================================================

ITA 254/2013 & 313/2013                                       Page 4 of 23
         improvement expenses of Rs.90,37,605/- holding

         them to be capital in nature.


7.       The CIT (Appeals), vide his order dated 02.02.2010,

         dismissed the appeal of the Assessee and confirmed

         the    findings   of   the   Assessing    Officer   that   the

         expenses incurred by the specialized team were

         related to product development            and resulted in

         release of a new version of              the software with

         enhanced features over the earlier version. The CIT

         (Appeals) confirmed the findings of the Assessing

         Officer that the nature of activity undertaken by the

         software development team had resulted in creation

         of new products and assets which were having

         enhanced features of enduring benefit.


8.       Aggrieved by the order dated 02.02.2012 of the CIT

         (Appeals), the Assessee filed an appeal before the

         ITAT, who vide the order dated 28.08.2012 have

         agreed with the contention of the Assessee.


=======================================================================

ITA 254/2013 & 313/2013                                       Page 5 of 23
9.       The ITAT noticed that in the immediately preceding

         assessment year, total expenditure incurred by the

         Assessee was of Rs.10,68,788/-, which was allowed

         by the Assessing Officer and in the succeeding

         assessment year, expenditure of Rs.1,25,76,145/-

         was also allowed by the Assessing Officer. The ITAT

         further noticed that the claim of the Assessee of

         Rs.2,05,43,448/-             towards     product    improvement

         expenses          in   the    year     2006-07     was   also    not

         disallowed. In view of the fact that expenditure in the

         immediate preceding assessment year and in the

         immediate succeeding assessment year had been

         allowed      and       no    disallowance    had     been    made

         towards          product     improvement    expenses      for    the

         Assessment Year 2006-07,                 the ITAT held that the

         disallowance made in the year under consideration

         was not justified.


10.      The ITAT also noticed the fact that the software was

         developed in the earlier year and during the year

=======================================================================

ITA 254/2013 & 313/2013                                            Page 6 of 23
         under consideration, improvement was done and on

         account          of   which,   the    Assessee      had   incurred

         expenditure            towards        salary,      communication

         expenses, hosting charges, equipment hire charges,

         office      rent,       electrical     expenses,      legal      and

         professional          expenses       and   consultancy    charges.

         The ITAT held these expenses to be revenue in

         nature and set aside the findings of the Assessing

         Officer and CIT (Appeals) that these expenses were

         capital in nature.


11.      The ITAT relied on the decision of the Delhi High

         Court in the case of CIT               VS .    ASAHI INDIA SAFETY

         GLASS L TD. (2012) 346 ITR 329 (DEL.) The Delhi High

         Court      relying      on     various        judgments   including

         decisions of the Supreme Court held as under:-

               "......the test of enduring benefit is not a certain
               or a conclusive test which the courts can apply
               almost by rote. What is required to be seen is
               the real intent and purpose of the expenditure


=======================================================================

ITA 254/2013 & 313/2013                                             Page 7 of 23
               and    whether    the   expenditure     results     in
               creation of fixed capital for the Assessee. It is
               important to bear in mind that what is
               required to be seen is not whether the
               advantage obtained lasts forever but whether
               the   expense    incurred   does    away     with    a
               recurring expense(s) defrayed towards running
               a business as against an expense undertaken
               for the benefit of the business as a whole. In
               other words, the expenditure which is incurred,
               which enables the profit-making structure to
               work more efficiently leaving the source of the
               profit-making structure untouched, would, in
               our view, be an expense in the nature of
               revenue expenditure. Fine          tuning business
               operations to enable the management to run
               its   business     effectively,    efficiently    and
               profitably ; leaving the fixed assets untouched
               would be an expenditure in the nature of
               revenue    expenditure      even    though        the
               advantage may last for an indefinite period.
               The test of enduring benefit or advantage
               would thus collapse in such like cases. It would,
               in our view, be only truer in cases which deal

=======================================================================

ITA 254/2013 & 313/2013                                            Page 8 of 23
               with       technology    and   software application,
               which do not in any manner supplant the
               source of income or added to the fixed capital
               of the Assessee."

12.    The ITAT also relied on the judgment of the Delhi High

       Court in the case of INDO RAMA SYNTHETICS INDIA L TD.,

       (2011) 333 ITR 18 (DEL.), wherein the Court has held

       that the expenditure incurred which was in the nature

       of salaries, wages, repairs, maintenance, design and

       engineering fee, etc. and incurred in the normal course

       of    business         towards     the    assignment     given        to

       consultants for the purposes of improving operational

       efficiency and was not towards acquiring any enduring

       benefit in the capital field but to carry on existing

       business       more      efficiently     and   profitably.   It    was

       allowable as business expenditure.


13.    The ITAT held that no capital asset had been acquired

       by    the    Assessee       and    the    major   portion     of    the

       expenses on account of salary paid, rent, consultancy

=======================================================================

ITA 254/2013 & 313/2013                                             Page 9 of 23
       charges, electricity charges, etc. were not for creating

       any capital asset used for enduring benefit but were

       incurred in the normal course of business and were

       thus revenue in nature.


14.    Having heard counsel for the revenue and considering

       the grounds of appeal, we find no merit in the appeal.

       The findings recorded by the ITAT are factual. The

       ITAT has held that in the immediately preceding

       assessment year, total expenditure incurred by the

       Assessee           towards     product   improvement   was       of

       Rs.10,68,788/-, which was allowed by the Assessing

       Officer     and     in   the   succeeding   assessment      year,

       expenditure of Rs.1,25,76,145/- was also allowed by

       the Assessing Officer. Further that the claim of the

       Assessee           of    Rs.2,05,43,448/-    towards    product

       improvement expenses in the year 2006-07 was also

       not disallowed.


15.    The ITAT has held that in view of the fact that


=======================================================================

ITA 254/2013 & 313/2013                                       Page 10 of 23
       expenditure in the immediate preceding assessment

       year and in the immediate succeeding assessment

       year had been allowed and no disallowance had been

       made towards product improvement expenses for the

       Assessment Year 2006-07, the disallowance made in

       the year under consideration is not justified.


16.    The ITAT has held that the software was developed in

       the     earlier     years     and   during    the   year     under

       consideration, improvement was done and on account

       of which, the Assessee had incurred expenditure

       towards       salary,      communication     expenses,     hosting

       charges, equipment hire charges, office rent, electrical

       expenses,          legal   and   professional   expenses        and

       consultancy charges.             These expenses have been

       held to be revenue in nature.


17.    The ITAT has found that no capital asset had been

       acquired or created by the Assessee. The major

       portion of the expenses on account of salary paid,


=======================================================================

ITA 254/2013 & 313/2013                                         Page 11 of 23
       rent, consultancy charges, electricity charges, etc.

       were not for creating any capital asset used for

       enduring benefit but were incurred in the normal

       course of business and were revenue in nature.


18.    The Assessee is engaged in the business of providing

       wireless solution for mobile consumers and enterprise.

       The software       in   issue   is   in the field of instant

       messaging which is used in mobile phoning. The

       product of the Assessee relates to mobile phone

       communication/messaging. The technology of mobile

       phoning is rapidly changing and improving day by day.

       Updates to the existing software are provided virtually

       on day to day basis. The requirement of mobile users

       keeps changing rapidly. To keep pace with the rapid

       changing requirement of mobile users, the software

       providers are making improvements in the existing

       software and providing new updates and product

       features by modifying the existing features and by

       adding new features to the existing product. The

=======================================================================

ITA 254/2013 & 313/2013                                    Page 12 of 23
       company which is not able to keep pace with the

       increasing demands for newer products and features

       is left behind for not being able to keep pace with the

       improvements in the industry.            Keeping in view the

       rapid changing requirements, every company in the

       field of software development specially in mobile

       phoning has to keep modifying and enhancing their

       products       and   provide   updates    on    regular   basis.

       Software upgradation is required to keep and ensure

       marketability of the said product.             Saleability of a

       software or upgrade lasts only as long as a newer

       update or upgrade is not available.                The period

       between one upgrade and the other is not substantial

       one and as such, there may be no enduring benefit of

       the software. This is clear and apparent from the

       amounts spent on software improvement.


19.    To keep pace with the requirements and ensure

       product saleability, software development companies

       have to constantly incur expenditure              to upgrade,

=======================================================================

ITA 254/2013 & 313/2013                                      Page 13 of 23
       improve and remove problem areas of the software.

       They have to employ professionals whose job is to

       continuously upgrade the software and provide newer

       features and updates on a regular basis. The shelf life

       of the software without constant improvement would

       be very small.


20.    Expenditure which enables the profit making structure

       to work more efficiently leaving the source of profit

       making structure untouched, would be revenue in

       nature.


21.    The facts as noticed herein above show that the

       Revenue        has   not   disputed   the   following     factual

       position:-


       (A)     The Assessee was involved in business of software
               development.

       (B)     The software developed by the Assessee was used in
               mobile phones and instant messaging.




=======================================================================

ITA 254/2013 & 313/2013                                        Page 14 of 23
       (C)     The original cost for development of software was
               capitalised. The quantum of the said development
               cost was/is not in dispute or under challenge.

       (D)     The        respondent-Assessee     incurred      product
               improvement        expenses      which   related       to
               upgradation, improvement, removal of glitches of
               the existing or already developed software.          The
               quantum of expenses and the nature of character of
               the expenses incurred i.e. software improvement
               and upgradation was/is not disputed or questioned
               by the Revenue.




22.    The question raised is whether expenses incurred on

       upgrading, improving or removing problem areas in an

       existing old product shall be capitalised or treated as

       revenue expenditure. The finding of the tribunal is that

       these     upgradations      were   required   constantly     and

       perpetually. The Assessee had to keep pace with the

       rapidly changing requirements of the mobile phone

       users.        The Assessee was competing with other

       software providers.         Thus, new features, upgrades,


=======================================================================

ITA 254/2013 & 313/2013                                      Page 15 of 23
       patches for removing glitches had to be provided, to

       keep up with matching needs and requirements of the

       mobile phone users.


23.    The aforesaid expenditure did not bring into existence

       a new asset but rectified and improved the product

       being sold. It is accepted that there has to be recurring

       expenditure which has to be incurred in the said

       business       to    ensure    sale      of    the   software.       This

       expenditure was incurred for removal of obstructions,

       restrictions or disabilities on the sale and to ensure

       that there was demand of the said product.                       These

       were normal day-to-day expenses for running the

       business in question and did not create enduring rights

       or advantage or benefit over a long period time. While

       determining and deciding a question whether the

       expenditure         is   capital   or    revenue      in   nature,    the

       determination should be based upon consideration of

       facts and circumstances and by applying principles of

       commercial           trading       and        business     expediency.

=======================================================================

ITA 254/2013 & 313/2013                                              Page 16 of 23
       Enduring benefit test is not a universal test and can

       breaks down. We find that the said principles have

       been rightly applied by the tribunal in the facts of the

       present case to hold that expenditure incurred was

       revenue in nature and not capital.


24.    In case the expenditure is not incurred on the said

       capital asset the same would become unsalable and

       obsolete. Therefore to ensure marketability of the

       existing repeated and constant cost had to be incurred

       to    upgrade        and   remove       glitches   etc.   In    such

       circumstances in ALEMBIC CHEMICAL WORKS C O. L TD .

       V.   CIT [(1989) 177 ITR 377 (SC)] the Supreme Court of

       India has held as under :-

               "The       improvisation   in    the   process    and
               technology in some areas of the            enterprise
               was supplemental to the existing business and
               there was no          material to hold that it
               amounted to a new or fresh venture. The
               further       circumstance that the agreement
               pertained to a product already in the line of

=======================================================================

ITA 254/2013 & 313/2013                                          Page 17 of 23
               the Assessee's established business and not to
               a new product indicates           that what was
               stipulated   was    an     improvement    in   the
               operations of the        existing business and its
               efficiency and, profitability not removed from
               the    area of the day-to-day business of the
               Assessee's established enterprise.

               It appears to us that the answer to the
               questions referred should be on the basis that
               the financial outlay under the agreement was
               for the better     conduct and improvement of
               the existing business and should, therefore, be
               held to be revenue expenditure. Reference
               may also be made to the observations of this
               court in CIT v. Ciba of India Ltd. [1968] 69 ITR
               692.

               There is also no single definitive criterion
               which, by itself, is determinative as to whether
               a particular outlay is capital or revenue. The
               'once for all' payment test is also inconclusive.
               What is relevant is the purpose, of the outlay
               and its intended object and effect, considered
               in a common sense way having regard to the

=======================================================================

ITA 254/2013 & 313/2013                                       Page 18 of 23
               business realities. In a given case, the test of
               'enduring benefit' might break down. In CIT v.
               Associated Cement Companies Ltd. [1988] 172
               ITR 257 (SC) at p. 262, this court said:

                      "As observed by the Supreme Court in
                      the decision in Empire Jute Co. Ltd. v. CIT
                      [1980] 124 ITR 1 (SC), that there may be
                      cases    where        expenditure,   even         if
                      incurred for obtaining an advantage of
                      enduring benefit, may, none the less, be
                      on revenue account and the test of
                      enduring benefit may break down. It is
                      not every advantage of enduring nature
                      acquired by an Assessee that brings the
                      case within the principles laid      down in
                      this test. What is material to consider is
                      the     nature   of   the   advantage      in     a
                      commercial sense and it is only where
                      the advantage is in the capital field that
                      the expenditure would be disallowable
                      on an application of this test ......" "

25.    We may notice that in the immediate                       preceding



=======================================================================

ITA 254/2013 & 313/2013                                               Page 19 of 23
       assessment year and in the immediate succeeding

       assessment year to the year in issue, expenses have

       been allowed. In the Assessment Year 2006-07, the

       claim of the Assessee towards product improvement

       expenditure has not been disallowed.             The major

       portion of the expenses were incurred towards salary

       paid, rent, consultancy charges, electricity charges,

       etc., which are not expenses incurred towards creating

       any capital asset for enduring benefits but are normal

       day to day expenses and are thus revenue in nature.


26.    The finding recorded by the ITAT are factual. Nothing

       has been pointed out for us to hold that the finding are

       perverse. In view of the factual findings recorded by

       the ITAT, no substantial question of law arises for

       consideration in the present appeal.


ITA No.313/2013


27.    In the Assessment Year 2007-08, revenue expenses

       of Rs.6,86,87,898/- as claimed has been disallowed by

=======================================================================

ITA 254/2013 & 313/2013                                    Page 20 of 23
       the Assessing Officer vide order dated 07.12.2009 on

       the ground that the expenditure is capital in nature.


28.    In an appeal by the Assessee, the CIT (Appeals) vide

       order dated 05.01.2012 held the expenditure to be

       revenue in nature and deleted the disallowance by the

       Assessing Officer.          The CIT (Appeals) followed the

       Rule of Consistency since the Assessing Officer had

       himself allowed this to be revenue in the preceding

       and succeeding assessment year.


29.    The ITAT vide order dated 19.10.2012 has noticed

       that for the Assessment Years 2004-05 to 2006-07,

       the Assessing Officer has allowed similar expenditure

       and for the Assessment Years 2008-09 & 2009-10

       also, the Assessing Officer has himself allowed the

       said expenditure.


30.    In the present case, the ITAT had allowed the appeal

       of the Assessee and treated the said expenditure as

       revenue.           The expenses were incurred in the course

=======================================================================

ITA 254/2013 & 313/2013                                    Page 21 of 23
       of day to day business operations of the Assessee and

       the operations being routine in nature by way of

       providing value added services of the customers. The

       ITAT      noticed     that    the    mobile     services   required

       continued          upgradation      and    monitoring      and     the

       expenditure in question was incurred as a matter of

       routine for the business and commercial expediencies

       of the Assessee s business and as such, the expenses

       towards       product        development      were    allowed       as

       revenue expenditure.


31.    The findings are factual. In view of the factual findings

       and reasoning given by us for the Assessment Year

       2003-04,       and    also    in    view   of the fact that the

       Assessing          Officer    has     himself    allowed     similar

       expenses for the Assessment Year 2004-05 to 2006-

       07 and 2008-09 and 2009-10, we find no infirmity in

       the order of the ITAT and find that no substantial

       question of law arises in the present appeal.



=======================================================================

ITA 254/2013 & 313/2013                                           Page 22 of 23
32.    The appeals are accordingly dismissed with no orders

       as to costs.




                                      SANJEEV SACHDEVA, J.




10th DECEMBER, 2013                         SANJIV KHANNA, J.
St




=======================================================================

ITA 254/2013 & 313/2013                                    Page 23 of 23

 
 
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