*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
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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
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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.
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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
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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.
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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
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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
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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
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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
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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
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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,
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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
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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,
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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.
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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,
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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.
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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
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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
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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
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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
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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
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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.
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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
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