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January, 08th 2014

+                 INCOME TAX APPEAL NOS. 25/2012, 287/2008,
                      417/2009, 447/2009, 461/2009, 683/2009

                                              Reserved on: 2nd September, 2013
                                          Date of decision: 25th November, 2013
                                                                   ..... Appellant
                                     Through Mr. M.S. Syali, Sr. Advocate with
                                     Ms. Husnal Syali Nagi, Mr. Mayank Nagi
                                     and Mr. Harkunal Anand, Advocates.


                                                                 ..... Respondent
                                     Through Mr. Sanjeev Sabharwal, Sr.
                                     Standing Counsel & Mr. Puneet Gupta,

                  INCOME TAX APPEAL NOS. 797/2006, 951/2006,
                              961/2006, 390/2007

                                                                   ..... Appellant
                                     Through Mr. M.S. Syali, Sr. Advocate with
                                     Ms. Husnal Syali Nagi, Mr. Mayank Nagi
                                     and Mr. Harkunal Anand, Advocates.


                                                                 ..... Respondent
                                     Through Mr. Sanjeev Sabharwal, Sr.
                                     Standing Counsel & Mr. Puneet Gupta,

ITA No. 25/2012- connected appeals                                    Page 1 of 32



         These 10 appeals by the assessees-Oracle India Private Limited

and Oracle Software India Limited relating to Assessment Years 1994-

95 to 2004-2005 raise a common substantial question of law and are,

therefore, being disposed of by this decision. The substantial question

of law as admitted for hearing reads:-

                  "Whether on the facts and in the
                  circumstances of the case, the Income Tax
                  Appellate Tribunal was justified in holding
                  that media cost paid for the import of a master
                  copy of Oracle Software used for duplication
                  and licensing is an expenditure of a capital
                  nature and as such is not an allowable

2.       For the purpose of clarity and to notice facts, ITA No. 797/2006,

which relates to Assessment Year 1995-96, was treated as a lead case

but as noticed below, wherever necessary and required we have

referred to facts of assessment year 1994-95.

3.       The appellant-assessee incorporated on 18th January, 1993, is a

subsidiary of Oracle Corporation, USA. The appellant entered into

licence agreement dated 28th May, 1993 with its parent/holding

company under which the appellant was granted non-exclusive non-

ITA No. 25/2012- connected appeals                                  Page 2 of 32
assignable right and authority to duplicate on appropriate carrier media

software products mentioned in schedule ,,A thereto or other products

which may be added to the said list, and sub-licence the same to third

parties in India.           The appellant could enter into enforceable sub-

licensing and services agreement in the prescribed form with third

parties users. The holding company retained ownership of the

copyright in the software and all associated and applicable intellectual

property rights in the products mentioned in schedule ,,A or to be

added to the said schedule. It was specifically stipulated that nothing

contained in the agreement shall confer or deem to confer on the

appellant any of the aforesaid rights.          The holding company also

retained rights to continue to manufacture or distribution activities in

the field of software and software products, including the products

mentioned in schedule ,,A or to be added to the said schedule with full

rights to produce, reproduce, duplicate and distribute the said products

in India or into India. The agreement stipulated that the appellant shall

duplicate and reproduce the software in India and sub-licence the same

as per the terms of the sub-licence deed stipulated and with the holding

company retaining entire data/intellectual property rights in the

software. The appellant was entitled to use the trademark and trade

name of the holding company with approval as to the manner of use

from the holding company and no royalty or remuneration was to be

ITA No. 25/2012- connected appeals                               Page 3 of 32
paid for the said use.

4.       The appellant was to pay royalty to the holding company @

30% of the list price of the licenced products as prescribed in the

Indian Published Price, fixed in consultation with the licensor at the

time of the sub- licence or such lesser amount agreed to. Royalty was

to be also paid on software products put to internal use. The royalty

was payable on quarterly fiscal basis and was subject to deduction of

tax at source. The licence agreement was for a period of five years but

it appears it was extended for further period relevant to the assessment

years in question.

5.       In addition to the aforesaid royalty, the appellant had also paid

the following amounts to the parent company reflected as expenditure

on import of software master copy:-

S No.         ITA                Assessment Year   Expenditure on import of
                                                   software master copy
1             951/06             1994- 95          94,49,041
2             797/ 06            1995-96           1,02,34,099
3             961/06             1996-97           82,39,876
4             390/07             1997-98           49,87,045
5             287/08             1998-99           72,49,066
6             461/09             1999-2000         45,52,944
7             417/09             2000- 01          20,05,860
8             447/09             2001- 02          17,37,557
9             683/09             2002- 03          4,11,177
10.           25/ 12             2004- 05          14,40,342

6.       The aforesaid payments were not made in lumpsum, but on

distinct and separate dates in each assessment year on import of the

ITA No. 25/2012- connected appeals                                   Page 4 of 32
master media from the holding company. To avoid prolixity, we are

not reproducing details of import in each assessment year but for the

purpose of clarity, we are reproducing details of the said import in the

Assessment Year 1994-95:-


Invoice          Invoice             Invoice   Bill   of Bill    of No.    of
No.              Date                Value (in Entry No. Entry      Copies
                                     IEP)                Date
13896      20/10/93                     158.88    264270 18/11/93           2
13962      26/10/93                     599.60    264271 18/11/93          25
13910      21/10/93                     807.10    264860 19/11/93          24
13307      16/9/93                      411.00    264800 11-10-93          20
14619      12-1-93                      113.26    274179 27/12/93           2
14942      17/12/93                     716.83    274191 27/12/93          10
14698      12-6-93                      168.84    274540 28/12/93          15
14745      12-8-93                      150.47    275522 31/12/93           3
15045      23/12/93                     194.93    275525 31/12/93           4
15044      23/12/93                     209.25    275518 31/12/93           2
14821      13/12/93                     143.84    275733 31/12/93           4
15287      14/1/94                     7381.85    204690 24/1/94          351
15165      1-7-94                      2028.38    204703 24/1/94          150
15228      1-11-94                      274.59    204705 24/1/94            5
15156      1-7-94                      6702.20    205951 29/1/94          700
15191      1-10-94                      808.91    204701 24/1/94          110
15336      17/1/94                      241.29    206483 31/1/94           10
15385      19/1/94                     1282.47    207246 2-2-94           129
15425      21/1/94                      740.73    207259 2-3-94            15
15541      26/1/94                      324.17    209405 2-11-94           15
15578      27/1/94                      234.83    209403 2-11-94            5
15501      25/1/94                      327.70    209429 2-11-94           15
15604      28/1/94                      401.69    209399 2-11-94           20
15656      31/1/94                      192.19    209401 2-11-94            3
15569      27/1/94                      344.46    209397 2-11-94            5
16395      3-11-94                      326.87    220380 28/3/94            5
14206      11-11-93                     208.70    266143 24/11/93           5
14186      11-10-93                     535.55    266135 24/11/93          10
   Total IEP                         26,030.58           Total      1664

ITA No. 25/2012- connected appeals                                  Page 5 of 32

7.       The Assessing Officer held that the aforesaid payments of

Rs.94,49,041/- for the Assessment Year 1994-95 and similar payments

for the other years described as software master copy and

documentation was capital expenditure and not revenue in nature. He

referred to the agreement dated 28th May, 1993, which was for a term

of five years and observed on interpreting the terms that the appellant

had acquired copyright and all other associated and applicable

Intellectual Property Rights. He invoked Section 35A and held that on

this amount, the appellant was entitled to deduction equal to 1/14 th of

the expenditure as it was incurred on acquisition of copyright. He held

that there was transfer of copyright, in addition to other associated and

applicable Intellectual Property Rights by Oracle Corporation, USA to

the appellant company and the appellant had acquired the said rights

for the purpose of business.

8.       For the Assessment Years 1994-95 to 2004-2005, Commissioner

of Income Tax (Appeals) reversed the finding of the Assessing Officer

to this extent. For the Assessment Year 1994-95, Commissioner

(Appeals) observed that the obsolescence rate in software industry was

extremely high and updated version of softwares were developed

frequently. Some softwares had a commercial life of only 1 - 2 months

and had to be substituted by an upgraded version thereby making the

ITA No. 25/2012- connected appeals                            Page 6 of 32
earlier version redundant or useless. Referring to the agreement, he

observed that the intellectual property rights in the software were not

transferred to the appellant by Oracle Corporation, USA. Royalty was

payable to Oracle Corporation, USA based upon the number of copies

duplicated from each original master copy sold or sub-licensed to third

parties.      Large number of master copies were imported every 2-3

weeks. As far as royalty payment was concerned, there was no dispute

that it was revenue in nature. Similarly, the cost of procuring the

master copy was of recurring nature, which was established and proved

beyond doubt from shipment of numerous master copies and the fact

that there was no single lumpsum payment. He observed that firstly,

master copy updated software had to be procured, which was a

recurring expenditure. Secondly, there was no enduring benefit as

there were corrections; strides and frequent upgradation of software.

Thirdly, the expenditure incurred in question was for conduct of

business as an integral part of profit earning process and not for

acquisition of assets or right of permanent character. Fourthly, the

expenditure in question was in nature of procurement of raw material

for the purpose of business and not to procure capital and, therefore,

was a part of working capital of the company.

9.       After noticing these facts, the Commissioner (Appeals) deemed

it appropriate to ask for remand report.        The Assessing Officer

ITA No. 25/2012- connected appeals                           Page 7 of 32
submitted a report and also appeared in person.        Before the first

appellate authority, the assessing officer somewhat changed his stance

and submitted that the expenditure was in the nature of technical

services and know-how but, tax at source had not been deducted. It

was accordingly pleaded that if the expenditure was to be allowed as

revenue, it cannot be allowed as a deduction as per Section 40(a)(i) of

the Income Tax Act, 1961 (herein after referred to as the "Act").

Commissioner (Appeals) did not agree with the Assessing Officer and

observed that the expenditure incurred was neither for extension of

business nor for substantial replacement of equipment, which related to

carrying on or conduct of business and an integral part of profit making

process. It was nothing but for procurement of raw material. He

overturned the finding of the Assessing Officer that the appellant had

acquired right of enduring nature by importing master copies and also

rejected the finding that Section 35A was applicable. The price paid

for the master copy or royalty payment did not involve transfer of

intellectual property rights and no such rights were acquired by the

appellant. The price at which the product was sold did not include the

cost of intellectual property right.   He noticed that the Assessing

Officer in the appellate proceedings for the first time had relied upon

Section 40(a)(i) and observed that the cost of the master copy does not

constitute technical know-how or royalty under Section 9 of the Act.

ITA No. 25/2012- connected appeals                            Page 8 of 32
The transaction in question, i.e., import of master copy was separate

and could not be inter-linked with payment of royalty. It was held that

the payments made for acquisition of the master copy should be

allowed as business expenditure under Section 37 of the Act.

Commissioner (Appeals) for the Assessment Year 1994-95 gave a

categorical finding that there was no transfer of intellectual property

rights and the copyright continued to vest and remain with Oracle

Corporation, USA.                    The master copies were not of enduring

nature/benefit as they had to be updated frequently in view of high

degree of obsolescence. Price paid for the master copy did not include

cost involved in transfer of rights in the software. Royalty was paid

towards intellectual property rights of the Oracle Corporation, USA

and the cost of the master copy did not include the said price.

10.      Tribunal by their order dated 28th October, 2005, which was a

 common order, relating to Assessment Years 1994-95, 1995-96, 1996-

 97 reversed the order of the Commissioner (Appeals) and restored the

 view taken by the Assessing Officer. We would like to reproduce two

 paragraphs from the said impugned order as the same reflect the core

 of the findings recorded by the tribunal:-

                  "3.4 We have perused the records and
                  considered the rival contentions carefully. The
                  assessee is a 100% subsidiary of Oracle
                  Corporation, USA and is authorised as per the
                  agreement signed to sub-lease the software

ITA No. 25/2012- connected appeals                                  Page 9 of 32
                  products developed by the foreign company.
                  For this purpose, the assessee has imported the
                  Master Copy of the softwares as goods under
                  the open general licence scheme of the Export
                  Import Trade Policy. The assesse is making
                  duplicate copies from the Master Copy and
                  selling it to local clients. For importing the
                  Master copy it has paid a lumpsum
                  consideration and is also paying royalty @ 30%
                  of the listed price of duplicate softwares sold
                  locally. The Assessing Officer treated the
                  lumpsum consideration paid for import of the
                  Master Copy as capital expenditure holding that
                  it was an asset of enduring benefits to the

                  3.5 The import of Master Copy with the
                  righty of duplication is definitely an asset of
                  enduring benefit. But whether the expenditure
                  on the acquisition of the same can be
                  considered as capital expenditure or a revenue
                  expenditure has to be examined in the light of
                  judicial pronouncements on the subject. The
                  payment of lumpsum consideration or enduring
                  benefits are not conclusive tests in deciding
                  whether an expenditure is a revenue
                  expenditure or capital expenditure as held by
                  the Supreme court in the case of M/s Empire
                  Jute company (124 ITR 1) and subsequently
                  reiterated in the case of M/s Alembic Chemical
                  Works (177 ITR 377). It would be pertinent to
                  elaborate these cases which will be useful in
                  understanding the true nature of the expenditure
                  in the instant case."

11.      Thereafter, reference was made to the facts and the ratio in the

case of Empire Jute Company (1980) 124 ITR 1 (SC) and Alembic

Chemical Works (1989) 177 ITR 377 (SC) and it was observed that

imported master copy was used for duplicating copies of software and,

ITA No. 25/2012- connected appeals                                   Page 10 of 32
therefore, a part of the profit earning apparatus. It was not a case

where the appellant had imported some know-how device or device by

which copying of software was done more efficiently. Once master

copies were held to be a part of profit earning apparatus or source of

income, it was immaterial whether the appellant had ownership rights

or only right to duplication. Decisions of the tribunal in the cases of

sound tracks of film songs and the film music were distinguished as

they related to payment of yearly royalty, based on sales of cassettes

obtained from master plates. In the said cases, the expenditure was

relating to trading operation and no lumpsum payment was made. In

the present case also, on royalty there was no dispute but the dispute

related to lumpsum payments. Another case was distinguished on the

ground that lumpsum payment made for procurement of master plates

for producing audio cassette could be treated as revenue expenditure as

the sound tracks got duplicated in the process and were used as raw

material.        The master copies of softwares, it was observed had

unlimited life and capable of giving unlimited number of copies. The

master copies were not raw material but only a tool to get duplicate

copies of software. Further, the mater copies were not procured from

third parties but from in-house establishment.

12.      Before we dwell upon the questions raised, we would like to

point out certain undisputed facts. The Assessing Officer had also

ITA No. 25/2012- connected appeals                           Page 11 of 32
denied benefit to the appellant under Section 80-IA on the ground that

duplication of software did not amount to manufacture.          Section

40(a)(i) was also invoked in respect of royalty payments. The tribunal

decided the two issues against the revenue. Revenue preferred appeals

before the High Court, but the appeals were dismissed on the two

issues vide judgment CIT v. Oracle Software India Ltd. (2007) 293

ITR 353 (Delhi) observing that no substantial question of law arose for

consideration and Section 40(a)(i) was not applicable.

13.      Not satisfied, Revenue preferred further appeals on issue of

deduction under Section 80-IA but did not succeed vide detailed

decision in CIT v. Oracle Software India Ltd. reported as (2010) 320

ITR 546 (SC). The Supreme Court in the said decision has noted that

the appellant had imported master media of software from Oracle

Corporation, USA for duplicating on blank disc, which were packed

and sold in the market along with the relevant brochure. The appellant

had paid lumpsum amount to Oracle software for import of master

media. The Supreme Court has further observed that the software in

question was application software and not operating software or

system software. The software could be categorised as product line

application, application solutions and interim applications. The master

media was subjected to validation and checking process by software

engineers by installing and rechecking the integrity of the master

ITA No. 25/2012- connected appeals                           Page 12 of 32
media with the help of the software installed in the fully operational

computer. Thereafter the same was inserted in a machine CD blaster

and virtual image of the software was created on the internal storage

device. This virtual image was replicated to produce or duplicate the

software. The virtual image was too large to be shown on screen. The

Supreme Court has further observed that softwares were goods as held

in Tata Consultancy Services versus State of Andhra Pradesh, (2004)

271 ITR 401 (SC). The software copyright might remain with the

originator of the programme but the moment copies were made and

sold, they would be termed as goods. There was no difference between

sale of software programme on CD and sale of music on cassettes/CDs.

The intellectual copyrights had got incorporated on the media for the

purpose of transfer and, therefore, media cannot be split up. Reference

was made to the decision in Gramophone Company of India Limited

versus Collector of Customs, (1999) 114 ELT 770 (SC) and it was

observed that duplication or recording of audio cassettes amounts to

manufacture as goods were produced.

14.      Before proceeding further, we would like to reproduce the exact

reply given by the appellant as recorded in the assessment order for

Assessment Year 1994-95 on the issue in question. The same reads as


                 "1.       Imports master copy of Oracle products

ITA No. 25/2012- connected appeals                                  Page 13 of 32
                 under the OGL Classification 85.24 after the full
                 payment of custom duty. These are further
                 replicated in India using the appropriate carrier
                 media by virtue of an agreement OSIPL has with
                 Oracle Corporation.

                 2.      The master copies are versions of
                 Oracles new product offerings which have a
                 very accelerated obsolence. At any point of
                 time it is not capable of determining whether the
                 version will be current for one day or one
                 month. In the life cycle of product if a version is
                 released and improvement is developed the next
                 day the earlier version is obsolete. The master
                 copy/documentation write off policy which
                 Oracle has adopted recognizes the accelerated
                 obsolence and the non-enduring use of master
                                               (Emphasis supplied)

15.      After recording/ reproducing the said reply, the Assessing

Officer in the assessment order has not disputed or factually

controverted the contents or the assertion made by the appellant. The

Assessing Officer accepted and did not contradict the said factual

assertion as incorrect, but addition was made by the Assessing Officer

on the grounds, namely, (i) in spite of the factual position the

expenditure was capital (ii) Section 35A of the Act was applicable and,

therefore, the cost paid on master copy was to be amortised/allowed in

14 instalments for the Assessment Year 1994-95.                  Even if the

expenditure was revenue in nature, the same has to be disallowed.

16.       We have quoted the finding recorded by the tribunal in

ITA No. 25/2012- connected appeals                                     Page 14 of 32
paragraphs 3.4 and 3.5 of the order for the Assessment Years 1994-95,

1995-96 and 1996-97. It has been observed that lumpsum payment

was made for the master copy and as the appellant also had right of

duplication it lead to creation or acquisition of an asset of enduring

benefit. It became part of the profit making apparatus and source of

income. The Tribunal without disturbing or contradicting the stand of

the appellant, on legal principles has held that the expenditure was

capital in nature.

17.      We have given thoughtful consideration to the said findings, but

find that the final conclusion cannot be sustained and should be

reversed. Tribunal in the impugned order and the reasoning given

therein has not disturbed the finding of the Commissioner (Appeals) or

the assertion of the appellant before the Assessing Officer that the

master copies were versions of software developed by Oracle

Corporation, USA, a new product offerings, which had high

accelerated obsolescence and even at the point of time of import it was

difficult whether the version would be replaced by a new or updated

version after one day or a month. The life cycle of the version released

was limited and improvements and further developments were constant

and intermittent. The earlier version had a high degree of obsolescence

and the master copy, documentation and policy adopted by the

appellant recognised that the master copy did not have enduring or

ITA No. 25/2012- connected appeals                             Page 15 of 32
long- term benefit.

18.      The Right to duplication and import of master copy though

connected, cannot and does not show that the expenditure in question

was capital in nature. The import of master copy was for the purpose of

creating virtual image for the purpose of duplication. The right to

duplication was given to the appellant under the agreement dated 28 th

May, 1993 and was subject to payment of royalty. The payments in

question were not for acquiring the right to duplication. This is not the

case of the Revenue or the finding of the Assessing Officer or the

Tribunal. We have also quoted above the sample data for Assessment

Year 1994-95, which shows that there were as many as 28 imports on

different dates after October, 1993 indicating the number of master

copies imported. The average price per copy was minimal. We have

also noted the findings recorded by the Supreme Court as to the nature

and character of the software of which virtual image was created from

the master copies. This is not a case where the master copies contained

operating or system software, which normally do not require frequent

upgradation or changes for consideration or price. Neither are we

dealing with a case of an assessee who is the end user of software.

We are dealing with the appellant who was required to repeatedly pay

for the master copy media in view of frequent newer or updated

versions of the application software from time to time. Once newer or

ITA No. 25/2012- connected appeals                            Page 16 of 32
better version of application softwares was available, the earlier

application softwares were not saleable and did not have any market

value for the seller i.e. the appellant. The earlier versions became

obsolete and had limited shelf life, as long as the newer version was

not available. No one would like to pay or obtain an older version of

the same software, when the new or updated version was available.

19.      Courts have grappled with the problem of classification of

income and expenditure as capital and revenue.             The distinction

between capital and revenue nature though basic and fundamental to

preparation of accounts and income tax, appears to be a never ending

concoct and resultant cause of litigation.            Even the principles

applicable, oscillate and the difficulty also arises on selecting the right

principle applicable to facts of the given case.       There is divergence

and conflict as to the principle which should be applied. Thus, it is not

a case of application of principles to facts alone, which is a cause of

debate and confusion. The terms "capital" or "revenue expenditure"

have not been specifically defined in the Act.           They are closely

connected with accounting practices, though elucidated and expounded

in judicial pronouncements.          Most income tax enactments, including

the present Act, require and mandate determination of income earned

by the appellant during two particular points of time i.e., the

assessment year. The income is determined on the basis of principles

ITA No. 25/2012- connected appeals                              Page 17 of 32
of accountancy or accounting practices as moderated and subject to

mandate/ amendments by the Act.                    The expression "income" has

historically received somewhat derisory and derisive interpretation but

as a theoretical as well as practical concept means the income

generated during two particular points of time by a person without

impoverishment of oneself. (see J.R. Hicks "Value and Capital- An

inquiry into some fundamental principles of economic theory, Oxford

University Press, London, Second Edition 1946). Alexander making

reference to the term income in corporate context has stated: income is

"the amount which [a] company can distribute to the shareholders and

be as well off at the end of the year as it was at the beginning". It was


                  "The net income of an entity for any period is the
                  maximum amount that can be distributed to its
                  owners during the period and still allow the
                  entity to have the same net worth at the end of
                  the period as at the beginning, after adjusting for
                  the owners contributions. In other words,
                  capital must be maintained before an entity can
                  earn income."

20.      The       aforesaid         definitions   are   improvements    on       the

conceptualization of the term "income" as assigned by the German

economist Georg Von Schanz in 1896, who held that income means

the economic power accrued to a given person over a period of time,

i.e., the disposing power of a given person during the period in

ITA No. 25/2012- connected appeals                                      Page 18 of 32
question, without impairing his capital or incurring personal debts.

The aforesaid definitions have become subject matter of new thought/

thinking to categorise revenue and capital expenditure based upon

market place criteria [see Working Paper "The Classification of capital

and revenue in accounting and the definition of income in the market

place (Centre for Accounting, Governance and Taxation Research,

School of Accounting and Commercial Law, Wellington, New

Zealand" at the works referred to therein.) The aforesaid article refers

to the notion of capital maintenance or net accretion. The said note also

refers to the report on Wheat Committee, 1972 (a special committee of

the American Institute of Certified Public Accounts charged with

studying how accounting principles should be determined) wherein it

has been observed that financial accounting standards and reporting are

not grounded in natural laws as are the physical sciences, but must rest

on a set of conventions or standards designed to achieve what are

perceived to be the desired objectives of financial accounting and


21.      While interpreting the meaning of "accounting income", the

Financial Accounting Standards Board, United States of America

formally embodied capital maintenance, or net accretion, notion in its

statements of Financial Accounting Concepts (Financial Accounting

Standards Board). It has been elucidated as:-

ITA No. 25/2012- connected appeals                            Page 19 of 32
              " An enterprise receives a return only after its
                capital has been maintained or recovered. The
                concept of capital maintenance, therefore, is
                critical in distinguishing an enterprises return
                on investment from return of its investment.
                Both investors and the enterprises in which they
                acquire an interest invest financial resources
                with the expectation that the investment will
                generate more financial resources than they

22.      In the Framework for the Presentation and Preparation of

Financial Statements published by International Accounting Standards

Board, an asset has been defined as "a resource controlled by the entity

as a result of past events and from which future economic benefits are

expected to flow to the entity" in subsequent accounting period s. The

assets are recognised in the balance sheet, when "it is probable that

future economic benefits will flow to the entity and the asset had a cost

or value that can be measured reliably." The words "income" and

"expenditure" have been defined in the said framework as under: -

                 "Increases in economic benefits during the
                 accounting period in the form of inflows or
                 enhancements of assets or decreases of liabilities
                 that result in increases in equity, other than those
                 relating     to    contributions     from equity

23.      The word "expense" in the said Framework has been defined as

decreases in economic benefits during the accounting period in the

form of outflows or depletions of assets or incurrence of liabilities

ITA No. 25/2012- connected appeals                                      Page 20 of 32
other than those relating to distribution to equity participants. The

Framework recognised the principle of matching of costs with the

revenues in preparation of financial statements and has stipulated:-

                  "Expenses are recognised in the income
                  statement on the basis of a direct association
                  between the costs incurred and the earning of
                  specific items of income. This process is
                  commonly referred to as the matching of costs
                  with revenues........

                  When economic benefits are expected to arise
                  over several accounting periods and the
                  association with income can be only broadly
                  or indirectly determined, expenses are
                  recognised in the income statement on the
                  basis of systematic and rational allocation
                  procedures.........These allocation procedures
                  are intended to recognise expenses in the
                  accounting periods in which the economic
                  benefits associated with these items are
                  consumed or expire.

                  An expense is recognised immediately in the
                  income statement when an expenditure
                  produces no future economic benefits or
                  when, and to the extent that, future economic
                  benefits do not qualify, or cease to qualify, for
                  recognition in the balance sheet as an asset."

24.      Compendium of Accounting Standards by Institute of Chartered

Accountants of India defines "income" as encompassing both revenue

and gains including unrealized gains.                 The term "expenses"

encompasses the expenditures that arise in the ordinary course of an

enterprise as well as losses. Expenses will include depreciation as it is

in the form of outflow caused due to depletion of assets. The term

ITA No. 25/2012- connected appeals                                    Page 21 of 32
"depreciation" and its significance in accounting as elucidated in the

Compendium of Accounting Standards are set out below. Adjustment

towards capital accounts is when the expenditure includes a future

economic benefit associated with the article/ goods which will flow to

or from the enterprise.              This may be, inspite of the degree of

uncertainty regarding future economic benefits and this degree of

uncertainty is ascertained on the basis of evidence available when the

financial statements are prepared. But, an asset is not recognised in the

balance sheet, when expenditure has been incurred in respect of an

item, on which it is improbable that economic benefit will flow beyond

the current accounting period. Such transactions merit recognition as

an expense in the statement of profit and loss.             Thus the term

,,expenses as recognized in the profit and loss account will take into

account decrease in future economic benefits relating to an asset.

Concept of expenses includes decrease in the value of asset.               An

expense is recognized immediately in the statement of profit and loss

account, if expenditure produces no future economic benefit (see

paragraphs 73 to 97 of the Compendium of Accounting Standards

issued by the Institute of Chartered Accountants of India).

25.      Matching of cost with revenues takes into consideration direct

association between cost incurred and earning of specific items of

income and also includes various components of expenses making up

ITA No. 25/2012- connected appeals                               Page 22 of 32
the cost of goods. The term ,,depreciation has been defined in the

Accounting Standard VI, as a measure of wearing out, consumption or

loss of value arising from use of any type, efflux of time, of

obsolescence through technology and market changes. But depreciable

items are those which are used for more than accounting period and its

useful life is over a period during which a depreciable item is expected

to be used by the enterprise or number of production of similar units

expected to be obtained from use of the asset by the enterprise.

Assessment of depreciation is done based upon the three criterions: (1)

historical cost or other amounts substituted when the asset has been

revalued; (2) expected useful life of the depreciable asset; and (3)

estimated residual value.            Useful life of depreciable asset may be

shorter than its physical life and is determined by several factors

including obsolescence due to technological changes, improvements,

change in market demand or service output etc.                Useful life of

depreciable asset is a matter of estimation and is mainly based upon

experience with similar type of assets.            Determination of residual

value, it is stated, is a difficult matter but when insignificant, it should

be taken as nil. One of the basis for determining residual value would

be realizable value of similar assets.

26.      The Act does not define the term ,,asset in generality though the

term ,,block of assets is defined but the said definition is not relevant.

ITA No. 25/2012- connected appeals                                Page 23 of 32
Explanation 3 to section 32 states the term asset for the said provision

means tangible and intangible assets being know-how, copyrights etc.

The Act, however, more appropriately and pertinently defines the term

,,capital asset in Section 2(14) as property of any kind, but does not

include stock in trade, consumable stores or raw materials held for the

purposes of his business or profession.                Personal effects and

agricultural land etc. are also excluded.               The term/expression

,,expenditure finds elucidation in Section 37 of the Act and it excludes

any expenditure of capital nature or personal expenses.            There is

substantial authority for the proposition that determination of whether

an expenditure is capital or revenue in nature must and should be

decided keeping in view the nature of the business, commercial reasons

for incurring the said expenses in business and the object for which the

expense is incurred.                 Emphasis being placed on business and

commercial considerations, rather than pure legal and technical

aspects. Thus, primacy is given to practical and business point of view

and not on juristic classification. The expression ,,capital or revenue

expenditure must be construed in business sense and by applying

sound accountancy principles unless there is statutory mandate to the

contrary. (see Section 145 of the Act and observations of the Delhi

High Court in CIT v. Virtual Soft Systems Ltd. (2012) 341 ITR 593).

27.      This aforesaid principle of matching, as we shall elucidate

ITA No. 25/2012- connected appeals                                Page 24 of 32
below, is of immense importance and significance.                  When we

determine whether an expenditure is capital or revenue in nature, it

exposes and brings to forefront the practice and commercial approach

from the true and correct perspective and objective; "income" earned

should be taxed. This has to be kept in mind as the guiding principle,

subject to the statutory mandate which will override. A statement of

accounts prepared on the basis of the aforesaid matching principle will

generally reflect the true and correct income earned during the

specified period.           The said determination would be fair, just and

equitable both to the appellant and the revenue.             An asset is not

normally created when a liability is incurred and it does not give

benefit or advantage in future accounting periods or beyond a short/

small length of time, in view of the past practice and practical/

commercial reality.             The expenses will be revenue in nature if its

usefulness will come to an end within the financial year itself or is for

limited time and would not have any residual value thereafter.

Therefore, while determining              whether   expenditure is capital or

revenue in nature, we must also dwell into the question whether the

expenditure, would create an asset which is of value in further

assessment periods and should be amortised ( i.e. depreciated) as

long as it has value. (The last portion is obviously subject to the

statutory mandate of an enactment, which may prescribe amortisation

ITA No. 25/2012- connected appeals                                 Page 25 of 32
or depreciation rates. These being fixed by law will override the

accounting principles). Thus, when an expenditure incurred does lead

to creation of an asset but of a limited or short life, it has to be treated

as a liability and not as a fixed asset. The said expenditure cannot be

valued for price for future financial years.

28.      A word of caution and a caveat for the aforesaid test, is one of

importance as was elucidated by the Supreme Court in Empire Jute

Company Limited versus Commissioner of Income Tax, (1980) 124

ITR 1 (SC). The said decision highlights advantage of enduring benefit

test but nonetheless it was cautioned that the said test may break down

and what is material to be considered is the nature of advantage in

commercial sense. If the advantage consists of merely facilitating

assets in trading operation or enabling the management and conduct of

business more efficiently, it would be expenditure on revenue account

even though the advantage may be of indefinite future.            Thus, in

Alembic Chemical Works Company Limited versus Commissioner of

Income Tax, (1989) 177 ITR 377 (SC) and Jonas Woodhead and

Sons (India) Limited versus CIT, (1997) 224 ITR 342 (SC), the

Supreme Court observed that though the technology had been received

but it related to a product already under production and to ensure

betterment or of the improvement, it was part and parcel of the existing

business and, therefore, the benefits were composite partly revenue and

ITA No. 25/2012- connected appeals                               Page 26 of 32
partly capital. However, in the present case we need not apply the

caveat. The caveats and caution elucidated would apply as exceptions

of the enduring benefit tests. When the enduring benefit test itself

justifies the conclusion that the expense is revenue, it would not be

proper and appropriate to apply the caveats or exceptions. These

secondary tests apply when in spite of the primary test of enduring

benefit being in negative, i.e. against the assessee a different

conclusion against the revenue is justified. Thus the dictum and in the

words of Viscount Cave LC in Atherton v. British Insulated & Helsby

Cables Ltd. 10 TC 155:-

                  "When an expenditure is made, not only once
                  and for all, but with a view to bringing into
                  existence an asset or an advantage for the
                  enduring benefit of a trade, there is very good
                  reason (in the absence of special circumstances
                  leading to an opposite conclusion) for treating
                  such an expenditure as properly attributable not
                  to revenue but to capital."

The said enunciation has been approved by the Supreme Court in CIT

vs. Finlay Mills Ltd. 20 ITR 475 (SC) and Empire Jute (Supra) and

other cases. The term enduring we clarify does not mean permanent,

perpetual or everlasting but it refers and indicates that the right

acquired must have enough durability to justify it being treated as a

capital asset.

ITA No. 25/2012- connected appeals                               Page 27 of 32
29.      The view we have taken find support and is in consonance with

the view taken by the Delhi High Court in Commissioner of Income

Tax versus Ashahi India Safety Glass Limited, (2012) 346 ITR 329

(Del) wherein appellant had procured software which was amortised in

the books as deferred revenue expenditure but was claimed as a

deduction in the income tax income statement. It was observed that

the said expenditure along with other expenditures neither created a

new asset nor brought forth a new source of income. The expenditure

incurred was to upgrade or to run the existing set up. It was to remove

deficiencies in the software installed in the earlier years, to modify,

customise or upgrade the software. Similarly, in Commissioner of

Income Tax versus G.E. Capital Services Limited, (2008) 300 ITR

420 (Del) it was observed that the software procured by the assessee in

question was not customised software and the software in question

required regular upgradation and, therefore, was not of enduring


30.      The Punjab and Haryana High Court in Chief Commissioner of

Income Tax versus O.K. Play India Private Limited, (2012) 346 ITR

57 has again observed that computer software does not enjoy a degree

of permanence and it could be unrealistic to ignore the stand and

repeated upgradation and newer versions which have to be adopted and

applied on the payment. In Alembic Chemicals Works Company

ITA No. 25/2012- connected appeals                           Page 28 of 32
Limited (supra), lumpsum consideration paid for technical know-how

to achieve higher level of production by better technology was held to

be of revenue account. This was in spite of the fact that there was

enduring benefit, but the Supreme court deemed it appropriate to apply

a more liberal test on the consideration that in this age of rapidly

advancing technology the contention of the Revenue that the

expenditure brought into existing capital asset, should be rejected. The

need of the age, the environment and the business consideration

mattered and were given due recognition and acceptance. The said

view has been followed by the Courts in India. As noticed above, in

the present case the appellant is duplicating software and sells the same

to generate income.              It requires master copies, which have to be

updated and upgraded to be able to sell the said software. In case the

appellant had imported the said software and sold the same, it would be

stock in trade and deductible. However, when the master copies were

used for duplication and the software replicated and transferred on the

media as a result of the said activities was then sold, the master copy

itself might not be stock in trade as such in strict sense, but it did not

have a long life and its value and life span was small since it perished

and diminished when the upgraded version or a better software in form

of the next master copy was imported, for the purpose of duplication.

When we accept the said position, the requirement of enduring benefit

ITA No. 25/2012- connected appeals                                 Page 29 of 32
fails and it cannot be said that any capital asset was acquired or

purchased. In these circumstances, we need not apply and go into the

other test or caveats. The flaw and the error committed by the tribunal

is that they applied other tests or caveats without first ascertaining and

determining whether enduring benefit test is satisfied or not. The

enduring test may not be the sole, exclusive or universal test but is

considered to be the primary test.

31.      The Supreme Court in CIT versus IAEC Pumps limited (1998)

232 ITR 316 upheld the decision of the tribunal that payment towards

royalty was revenue expenditure and was allowable after observing

that the licence for use of patents and designs was for a duration of 10

years with the parties having option to renew or extend the licence.

The assessee had been only allowed use and there was no transfer of

rights. The rights acquired by the assessee were not exclusive and

were for a limited period which could be determined earlier also.

Payment was dependent upon quantum of items manufactured.

32.      Decision in the case of Commissioner of Income Tax versus

Denso India Limited, (2009) 318 ITR 140 (Del) and submission

relying upon Section 35A of the Act is misconceived.            The said

provision comes into play only when the expenditure incurred is of

capital nature and is on the acquisition of patent rights and copyrights.

ITA No. 25/2012- connected appeals                             Page 30 of 32
Merely because expenditure has been incurred for material for

duplication without acquisition of proprietary and when the

expenditure is not of capital nature, the said Section would not be

applicable. In any case, the said provision is not applicable with effect

from the 1st day of April, 1998.       The view we have taken finds

affirmation and support from the decision of the Delhi High Court in

Denso India Limited (supra). It supports the case of the appellant as it

has been held that depreciation claim in respect of intangible assets

would arise only when it is first determined that the expenditure was

capital in nature. Reference was made to CIT v. J.K. Synthetics Ltd.

(2009) 309 ITR 371 (Del) where broad principles have been culled out

and some of the principles have been set out in seritum. Decision in

CIT v. Sharda Motors Industrial Ltd. (2009) 319 ITR 109 (Del) was

also referred too.

33.      The question of law mentioned above is accordingly answered in

favour of the appellant-assessee and against the Revenue.

34.      In the assessment year 1997- 98, in ITA No. 390/2007 titled

Orcale India Softwares Ltd vs. CIT Delhi, two additional questions

have been raised, which read as under:-

         "(2) Whether the Assessing Officer could have charged interest
         on the taxable income of the Assessee under the provisions of
         Section 234B of the Income Tax Act, 1961 without any specific
         order to this effect and in spite of the existence of ITNS 50?

ITA No. 25/2012- connected appeals                            Page 31 of 32
         (3) If the answer to the question No. (1) is in the affirmative,
         whether the interest under Section 234B of the Income Tax Act,
         1961 has to be charged on the assessed income or the returned
         income of the Assessee?"

35.      Interest under Section 234B is mandatory in nature and has to be

paid when the statutory conditions are satisfied. Further, the interest

has to be paid on the assessed income [see decision of the Supreme

Court in Commissioner of Income Tax, Mumbai versus Anjum M.H.

Ghaswala and Others, (2001) 252 ITR 1 (SC)].             Tribunal in the

impugned order has already directed that interest under section 234B

of the Act shall be determined only after ascertaining the taxability.

The question Nos. 2 and 3 are accordingly answered in favour of the

Revenue and against the appellant.

36.      The appeals are accordingly disposed of with no orders as to


                                          (SANJIV KHANNA)

                                         (SANJEEV SACHDEVA)
NOVEMBER 25th, 2013

ITA No. 25/2012- connected appeals                             Page 32 of 32
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