IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI SPECIAL BENCH 'C', NEW DELHI

Before Shri Vimal Gandhi, President, Shri P.M. Jagtap, AM and Shri N.V. Vasudevan, JM

ITA No. 72/ DEL /2006

Assessment Year: 2002-03

ITA No. 128/ DEL /2005

Assessment Year: 2001-02

CROSS-OBJECTION No. 60/ DEL /2006

(In ITA No. 128/ DEL /2005)

Assessment Year: 2001-02

ITA No. 3072/Del/2002

Assessment Year: 1998-99

ITA No. 3247/Del/2002

Assessment Year: 1998-99

Assessees by: (i) Shri M.S. Syali, Sr. Adv, Shri Tarandeep Singh & Shri Saubhagya Agaral for M/s. Amway India Enterprises.

(ii) Shri O.S. Bajpai, Adv for M/s. SQL Star International Ltd.

(iii) Shri Sriram Seshadri, AR as Intervener appearing for M/s. Tube Investment of India Ltd.

(iv) Shri Ajay Vohra, Adv, Ms. Amisha Singal & Shri Authotosh Jain, ARs as Interveners appearing for M/s. Indo Rama Synthetics Ltd

(v) None appeared as Intervener on behalf of M/s. Denso Sales India Pvt Ltd.

Revenue by: Ms. Smita Jhingran & Shri Devendra Shanker, CIT - DRs.

(i) Whether, in the facts and circumstances of the case, the expenditure incurred by the assessee on account of computer software is of revenue nature or capital nature?

(ii) If the expenditure incurred on computer software is held to be of capital nature, what would be the rate of depreciation applicable thereon?"

(i) When the assessee acquires a computer software or for that matter the license to use such software, he acquires a tangible asset and becomes owner thereof as held above relying on the decision of Supreme Court in case of TCS
(ii) Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time. It can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. Any software having its utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make the expenditure incurred on software as capital in nature and the functional test as discussed above also needs to be satisfied.

(iii)    Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business touching either capital, or revenue Held or its utility to a businessman which may touch either capital or revenue field.(Para 59)

different considerations will apply in testing the nature of expenditure in the context of acquisition of know-how compared to expenditure on acquisition of software because know-how is an intangible asset whereas as held by Hon'ble Supreme Court in the case of TCS (supra), software is a tangible asset.(Para 66)

O   R   D   E   R

Per: N.V. Vasudevan , JM:

1. This Special Bench has been constituted u/s. 255(3) to dispose of the appeals filed in the case of M/s. Amway India Enterprises and M/s. SQL Star International Ltd., as well as to dispose of the following important questions which are involved therein: -

"(i)       Whether, in the facts and circumstances of the case, the expenditure incurred by the assessee on account of computer software is of revenue nature or capital nature?

(ii)        If the expenditure incurred on computer software is held to be of capital nature, what would be the rate of depreciation applicable thereon?"

2.      The factual backdrop which has given rise to the constitution of this Special Bench can be briefly summarized as follows. In the case of M/s Amway India Enterprises, a deduction on account of software expenditure incurred amounting to Rs. 20,04,105/- was claimed by the assessee company in its return of income filed for A.Y. 2001-2002. The said expenditure was claimed to be incurred by the assessee company for acquiring the following software for use in its business: -

“1.         MS Project 2000 Full Packaged Product (FPP): Rs. 19,700/- Microsoft Office Project 2000 is used by project managers who need a desktop tool to manage their projects independently. These project managers do not require strong coordination with other project managers. Project 2000 is designed to improve ability to organize work and communicate effectively and succinctly through familiar, easy-to-use tools. The benefit of the software is to better organize and manage work and people to ensure that projects are delivered on time and within budget. It conveys project plans and status effectively and succinctly. It also enhances productivity and effectiveness by learning and applying project management practices easily.

2.         MS project 2000 Central Open License Program: Rs. 78,600/- The software is basically platform software, this helps in operating MS Project 2000 Full Packaged Program software on to the serve without which server cannot host MS Project, 2000.

3.         Macromedia Dream weaver and Flash: Rs. 35,800/- The Macromedia Dream weaver software includes the following:

1)         Macromedia Dream weaver version 4.0 on Windows:

Macro Media Dream weaver is the industry-leading web development tool, enabling users to efficiently design, develop and maintain standards-based websites and applications. With Dream weaver, web developers go from start to finish, creating and maintaining basic websites to advanced applications that support best practices and the latest technologies.

2)         Macromedia Flash version 5.0 on Windows;

Web Site designers and developers use Macromedia Flash to accelerate projects while maintaining a high degree of creative control. It provides standard Templates and Components, Macromedia online Resource Library and Speed workflow by directly importing media including digital video, PDF and EPS files. This software also helps in adding interactivity with powerful scripting.

4.         Turbo Gold Software: Rs. 17,61,034.68 The software helps in compression of size of e-mails sent through the Lotus Notes mailing system. It includes licenses for 150 uses who are using Lotus Notes Mailing system and software license for running on its server. For Example:

A user working on Lotus Notes Mailing system wants to send message through email. The email size containing the message in 2 MB (Mega Bytes). The Turbo Gold Software compresses the size of email lesser than 2 MB thus save time and usage cost.

5.         Wintap call billing software Rs. 40,000/- This windows based software is used for recording telephone calls and its cost. The software provides complete detail in case of outgoing calls such as Extension No., Telephone Nos., Time of call and duration of call etc.

6.         Bright Star Are Server Advance Edition: Rs. 2,50,000/- The function of software is to keep back up of data. It ensures that the data on the computer system are saved and stored and which may be retrieved in case the computer system is not working or the hard disk in the system gets crashed.

7.         Windows 2000: Rs. 279,543/- The Windows 2000 Software comprised the following:

i)          Back Office Server 2000 English International CD 5 Clients Back Office Server 2000 has 5 server components to take backup of data base such as MS Exchange Server for E-mail back up, MS Windows Server for MS Windows data base and SQL Server for storage of other data base etc. The basic function is to store the data base in respective space contained under the server.

ii)         Windows 2000 Server Microsoft Open License Program (MOLP) Windows 2000 Server is the multipurpose network operating system for businesses of all sizes. Windows 2000 Server less the user share files and printers reliably and securely. This software helps in choosing from thousands of business applications compatible to run on Windows 2000 Server and build Web applications and connectivity to the Internet. The Software License grants the right to install Windows 2000 server on the computer after which application software can be installed on it.

iii)        Windows 2000 Client Licenses There are 100 licenses which have been taken for use of Windows 2000 for 100 users. For each user, a separate license is required for Windows 2000 Platform. As explained above, Windows 2000 is a platform, which helps in running application software such as MS Office at the computer system.

8.         Win XP Software: Rs. 14,456/- Microsoft Windows XP Professional is the next version of the Windows operating system. Windows XP Professional is designed specifically to optimize productivity using the latest advancements in the digital world and is built on the solid foundation of Windows 2000. Windows XP Professional provides improved reliability, security, performance and ease of use, setting new standard in efficient and dependable computing Microsoft Windows XP Professional provides an enhanced security infrastructure that defends against viruses, worms, and hackers, along with increased manageability and control for IT professionals and an improved experience for users.”

3.      It was claimed by the assessee that the expenditure in question has been incurred on obtaining licenses for use of the aforesaid software and since all these software are essentially in the nature of application software, the expenditure incurred was of revenue nature as the same only facilitated in its day to day operations. It was also claimed that the said expenditure did not result in enduring benefit as the life of application software is invariably short and the same was bound to become technically obsolete very fast. This claim of the assessee, however, was not found to be acceptable by the Assessing Officer as, according to him, the said software were part of the plant and machinery of the assessee and gave enduring benefit to it. The Assessing officer also noted that all the application software purchased by the assessee had long-lasting use of more than three-four years and the same, according to him, thus resulted into enduring benefit to it. He, therefore, treated the expenditure incurred by the assessee on acquisition of software as capital in nature an treating the same as part of the plant and machinery, depreciation thereon at the normal rate of 25% was allowed by him in the absence of any specific rate prescribed in the Schedule for the software. The action of the Assessing Officer in treating the software expenditure as that of capital nature was upheld by the learned CIT (A) since he found on verification of the relevant details that the assessee has not upgraded or replaced the software frequently. He however, directed the AO to allow depreciation at the rate of 60% on the software considering that the rate of depreciation provided on computers for AY 1999-2000 to 2002-03 was 60% and from AY 2003-04 onward, even the computer software was included in the computers to be eligible to claim the depreciation at this higher rate. In AY 2002-03 also, the expenditure incurred by the assessee on acquisition of software was treated as a capital expenditure by the Assessing Officer as well as by the learned CIT (A) for the similar reasons as given in A 60% and from AY 2003-04 onward, even the computer software was included in the computers to be eligible to claim the depreciation at this higher rate. In AY 2002-03 also, the expenditure incurred by the assessee on acquisition of software was treated as a capital expenditure by the Assessing Officer as well as by the learned CIT (A) for the similar reasons as given in AY 2001-02. However, the depreciation  allowed thereon at normal rate of 25% by the AO was confirmed by the learned CIT (A) overlooking the fact that the same was allowed by his predecessor in assessee’s own case for AY 2001-02 at the rate of 60%.

4.         Against the order of learned CIT (A), an appeals was filed by the assessee before the Tribunal and when the same came up for hearing initially before the Division Bench, the main contention raised by the learned counsel for the assessee in support of the assessee’s case was that by incurring the impugned expenditure, the assessee company had acquired only the license to use the software and there was no outright purchase of software giving ownership to the assessee of the said software so as to treat the same as a capital expenditure. In support of this contention, reliance was placed on behalf of the assessee on the decision of Delhi Bench ‘C’ of ITAT in the case of M/s. Asahi India Safety Glass (ITA No. 3280/Del/2001, 3287/Del/2001, C.O. No. 237/Del/2004 and C.O. No. 268/Del/2004) wherein the expenditure incurred by the assessee on acquisition of application software by way of license to use was allowed as revenue expenditure. It was contended by the learned counsel for the assessee that the purchase of software and acquisition of license to use the software are two different transactions in law which are not interchangeable.

5.         The learned DR, on the other hand, contended before the Division Bench that acquiring a license to use software is the common mode of purchase of software and therefore, the expenditure incurred on such purchase of software giving enduring benefits to the assessee is a capital expenditure as rightly held by the authorities below. In support of this contention, the learned DR strongly relied on the decision of Delhi Bench of ITAT in the case of Maruti Udyog Ltd. – 92 ITD 119 wherein it was held that the expenditure incurred on purchase of a software being a capital asset, is always a capital expenditure. He submitted that the nature of software purchased in the present case was similar to the one involved in the case of Maruti Udyog Ltd. (supra) and as such, this issue is squarely covered in favour of the Revenue by the decision of the Tribunal rendered in the said case.

6.         After considering the rival submissions, it was noted by the Division Bench that in the case of Maruti Udyog Ltd. (supra) cited by the learned DR, the expenditure on purchase of software was held to be a capital expenditure by the Tribunal relying on the decision of Hon’ble Rajasthan High Court in the case of Arawali Constructions Co. (P) Ltd. – 259 ITR 30 wherein it was held that the software is akin to know-how. Reliance was also placed by the Tribunal on the decision of Hon’ble Supreme Court in the case of Scientific Engineering House Pvt. Ltd. vs. CIT – 157 ITR 86 wherein it was held that know-how is part of plant and machinery and the assessee is entitled to depreciation thereon. In this context, the Tribunal observed that the software is an integral part of computer in as much as the computer can function only with the help of software. Further reliance was also placed by the Tribunal on the decision of Hon’ble Supreme Court in the case of Arvind Mills Ltd. Vs. CIT – 197 ITR 422 wherein it was held that the expenditure incurred on capital asset does not lose the character of capital expenditure and does not become a revenue expenditure on the score that the said capital expenditure also ultimately helps in the effective running of the business. The Tribunal thus held that the software being akin to know-how is an intangible capital asset and the expenditure incurred on purchase of software is a capital expenditure. The Tribunal also referred to the amendment made in the I.T. Rules, 1962 providing for depreciation on software at the rate of 60% with effect from 1.4.2003 and observed that on the basis of the said amendment providing for higher depreciation on software, it could not be said that prior to 1.4.2003, the expenditure incurred on software was a revenue expenditure. The Tribunal held that it was always a capital asset entitled to normal rate of depreciation up to 31.3.2003 which was enhanced to 60% with effect from 1.4.2003 considering the rapid wear and tear. The decision of Bangalore Bench of ITAT in the case of Inspecting Asstt. Commissioner Vs. Commissioner and General Agency – 17 ITD 6 (Bang) was also found by the Division Bench to be of similar effect wherein it was held that cost of software purchased by a computer dealer for the purpose of demonstration and also to provide data processing service to its customers is a capital expenditure. As noted by the Division Bench, it was also held by the Tribunal in the said decision that the software is a technical know-how which has to be purchased by the user of the computer to make effective use of the machine.

7.         It was also noted by the Division Bench that in the case of Joint CIT Vs. City Crop Overseas Software Ltd. – 85 TTJ 87, the Mumbai Bench of ITAT, however, held that the expenditure on application software is an allowable revenue expenditure since a software does not have any degree of endurance and permanent due to change of system and change of technology. Similarly, the Chandigarh Bench of ITAT in the case of Bank of Punjab Ltd. Vs. JCIT – 91 TTJ 422, held that the purchase of software is not an expenditure in capital field as the assessee is required to change the software within a very short span of time may be a year or two and they become outdated because of change of system and change of technology. In the case of Asahi India Safety Glass (supra) cited by the learned counsel for the assessee, a similar issue had arisen for consideration before Delhi Bench of ITAT and when the decision of the Tribunal rendered in the case of Maruti Udyog Ltd. (supra) was relied upon by the learned DR in support of the Revenue’s case that the expenditure on purchase of software was a capital expenditure, the Tribunal distinguished the same on the ground that the assessee in the said case had actually purchased a software whereas in the case before it, the assessee had only acquired the right (license) to use the software. The Tribunal thus gave a new dimension to the issue while accepting the contention raised on behalf of the assessee that only the license to use the application software was acquired by the assessee from Oracle in the said case and it was not a case of actual purchase of the software by the assessee. The Tribunal also derived support from the decision of Hon’ble Supreme Court in the case of Alembic Chemical Works Ltd. – 177 ITR 390 to hold that the test of enduring benefit is more prone to failure in the case of computer software where the pace of advancement is so rapid that whatever technology is installed today become obsolete within a short time.

8.         Having taken note of the aforesaid decisions of the Tribunal relied upon by both the sides in support of their stand on the issue under consideration, it was found by the Division Bench that there were divergent views expressed on the issue relating to the exact nature of expenditure incurred on software being capital or revenue. It was also felt by the Division Bench that there are various aspects which are relevant and material and having a direct bearing on the issue which have not been specifically/elaborately considered in the said decisions rendered by the different Division Benches of the Tribunal while expressing divergent views on the said issue. Since the said issue was expected to occur regularly in many cases, it was felt by the Division Bench that the same may be referred to the Special Bench for decision after taking into consideration all the aspects referred to above as well as other contentions that might be put forth by the parties. Accordingly, this Special Bench has been constituted by the Hon’ble President for deciding the questions as referred to above at the instance of the Division Bench and also for disposing of the appeals filed in the case of M/s. Amway India Enterprises.

9.         Before the Special Bench constituted by the Hon’ble President could sit and hear the appeals filed in the case of M/s. Amway Indian Enterprises, a similar issue relating to allowability of software expenditure arose for consideration before the Division Bench of Tribunal i.e. Delhi ‘G’ Bench, in the case of M/s. SQL Star International Ltd. The relevant facts involved in the said case were that the assessee company was engaged in the business of software development as well as running a training center to impart specialized training to the students in software technology. It purchased computer software and claimed the entire cost as depreciation. The assessee contended before the AO that the software which it purchased becomes obsolete in about six months time due to fast changes in technology in the IT Sector and therefore, such expenses are to be considered as revenue expenditure. The management of the assessee company, however, considered it appropriate to claim the expense under the head ‘depreciation’ because the company had intended to come out with a public issue and to show a healthy balance sheet. In the immediately preceding assessment year also, the assessee company had claimed 20% depreciation on computer software owning to absence of profits. According to the AO, it was not permissible for the assessee to take a different stand to suit its own need and to manipulate profits for taxation or for coming out with a public issue. The AO further held that the financial position of the company was healthy in the present assessment year and therefore, the management arbitrarily decided to claim 100% depreciation on computer software. The AO also rejected the plea of the assessee that software becomes obsolete in about six months time. The AO further noticed that the assessee had not taken computer software as part of the block of assets and treated them as revenue, expense in the books of account. He, therefore, held that the assessee cannot claim depreciation on the said software. On appeal by the assessee, the CIT (A) held that software becomes obsolete because of technological advancement in the IT sector and also becomes redundant with every project undertaken by the assessee for its software development program. He held that the claim of the assessee that it should be allowed as a revenue expenditure, therefore, deserves to be accepted. Accordingly, the claim of the assessee was allowed by the learned CIT (A) and this relief allowed to the assessee by the learned CIT (A) was challenged by the Revenue in an appeal filed before the Tribunal which came to be heard initially by the Division Bench. Having noted that a similar issue relating to allowability of software expenditure has already been referred to the Special Bench in the case of M/s. Amway India Enterprise, it was thought fit by the Division Bench to make a request to the Hon’ble President for referred the case of M/s. SQL Star International Ltd also to the Special bench which was duly acceded to.

10.       Shri Syali, Senior Advocate, appearing for the assessee i.e. M/s. Amway India Enterprises opened the argument. He contended before us that none of the software purchased by the assessee was a custom made software and all of them had been purchased “off the shelf”. He submitted that the assessee was merely a licensee and the right to use the software was subject to the conditions mentioned in the license agreement. According to him, all the software acquired by the assessee was in fact up gradation of the existing software and there was no purchase or acquisition of any new software as such. In support of his contention, he relied on the decision of Hon’ble Delhi High Court in the case of CIT Vs. G.E. Capital Services Limited (ITA No. 560/2007 dated 10.07.2007) wherein their Lordships of Delhi High Court, while considering the question whether expenditure incurred by an assessee on acquisition of a software was capital or revenue nature, endorsed the view of the Tribunal that in view of Technological changes and the need to upgrade software on a regular basis, software cannot be said to be an asset of enduring nature. The Court further observed that where the expenditure was incurred on purchase of software which is no custom built software, the same requires regular up gradation. The Court ultimately concluded that there was thus no error committed by the Tribunal in taking the view that it did. Our attention was further drawn by Shri Syali to the decision of Hon’ble Delhi High Court in the case of CIT Vs. K & Co. 181 CTR 378 wherein it was held that an expenditure incurred by the assessee on maintenance of computer ad their up gradation including software is in the nature of revenue expenditure. Shri Syali thereafter distinguished the decision rendered by the Hon’ble Rajasthan High Court in the case of Arawali Constructions Co.(P) Ltd. 259 ITR 30 (Raj). He pointed out that the assessee in the said case had claimed Rs. 1,38,360/- on account of acquisition of a software which represented a computer program purchased from Hindustan Computers Limited. The Hon’ble Rajasthan High Court noticed that the software so purchased was in the nature of a consultancy fees paid to Hindustan Computers Limited for a program specifically developed for data analysis for mining purposes. The AO, however, held that in the agreement, there was no reference to the payment being in the nature of a consultancy fees and it was an outright purchase of a computer program which was related to technical know-how. He, therefore, concluded that the purchase was of a technical know-how and the same was an asset of capital nature. The learned CIT (A) allowed the claim of the assessee treating the expenditure as revenue and the Tribunal also confirmed the order of the CIT (A). The Hon’ble Rajasthan High Court, however, reversed the order of the Tribunal after concluding that the payment made by the assessee to Hindustan Computers Ltd. was made for outright purchase of computer software which was used as technique in mining operation. The Court further noticed that the Commissioner had held that the acquisition of the software cannot be treated to be an asset of ending nature. The Court, however held that if the program is used in one mining to another mining operation, there was no reason why it should not be treated as a capital asset and the expenditure on acquisition thereof a capital expenditure. The Court finally conclude that the assessee had acquired technical know-how and the expenditure incurred on such acquisition was a capital expenditure. According to Shri Syali the decision in the case of Arawali Constructions Co(P) Ltd. (supra) thus was given on totally different facts in as much as the payment therein was for acquisition of software which was tailor-made to be used in mining operation which represented its earning apparatus whereas in the present case, the assessee was merely a licensee of the software which aware acquired for efficient use of computers for running day to day business.

11.       Shri Syali, also pointed out that in the case of Arawali Constructions Co.(P) Ltd. (supra), the CIT (A) as well as ITAT had relied on the decision of Hon’ble Bombay High Court in the case of Borosil Glass Works Ltd. – 161 ITR 286 and Hon’ble Delhi High Court in the case of Shriram Refrigeration Industries Ltd. 127 ITR 746 which were found to be distinguishable on facts by the Hon’ble Rajasthan High Court pointing out that the assessee in the said cases merely had a license to sell particular items and that there was no transfer or parting with secret processes and technical know-how to the assessee. According to him, the final conclusion of the Hon’ble Court was that the assessee having made a payment for outright purchase of computer software which was used a technique in mining operations, there was no reason not to treat it as a capital expenditure. He contended that the purchase of software thus was treated by the Hon’ble Rajasthan High Court in the said case as acquisition of technical Know-how by the assessee and expenditure incurred thereon was held to be capital expenditure.

12.    Shri Syali then drew our attention to the decision of Delhi Bench of the Tribunal in the case of Maruti Udyog Ltd. Vs. DCIT – 92 ITD 119 (Delhi). Our attention was drawn to paragraph No.68 of the aforesaid decision and it was pointed out that in the said case, there was admittedly acquisition of a software though purchase. Otherwise expenditure incurred on upgrading of the software was treated as revenue expenditure and allowed. It was also an admitted position that software in that case was a capital asset. He drew our attention to paragraph Nos.68 to 73 and specifically relied on the following observations of the Tribunal made in paragraph Nos.72 & 73:-

“72.      Rival submission of the parties have been considered carefully. In our opinion, there is no merit in the submission of learned counsel for assessee. There is no dispute that expenditure of Rs.1,39,91,022 was incurred on acquisition of software by way of purchase. The expenditure on up gradation and maintenance of software have been classified separately and also allowed by CIT (A) as revenue expenditure. So the only and limited issue for our consideration is whether expenditure on acquisition of software is revenue or capital expenditure.

73.       Now the only question is whether purchase of software is a capital asset. There is no dispute that software is a capital asset. There is no dispute that software is an intangible asset. Hardware, commonly called as computer, is a tangible asset which by itself cannot function. The computer can function only with the help of software. Software is akin to know how as held by the Hon’ble Rajasthan High Curt in the case of Arawali Constructions Co.(P)Ltd. (supra). In this judgment, it has been clearly held that expenditure on purchase of software is a capital expenditure. There is no contrary judgment on this aspect of issue. Hence, it has to be held that software is an asset. Admittedly, the assessee is not in the business of software. Hence, we are further of the view that software was a capital asset as far as the present assessee is concerned. The Income-tax Rules, 1962 as amended w.e.f. 1-4-2003 rather helps the revenue and not the assessee in as much as it provides for depreciation on software at the rate of 60 per cent."

13.    Shri Syali pointed out that in the aforesaid case, there was thus no dispute that the expenditure was incurred on acquisition of software by way of purchase and further that the expenditure on up gradation on maintenance of software was considered separately land allowed by the CIT (A) as revenue expenditure. The Tribunal was basically concerned with case of software by purchaser. Software being an intangible asset, its acquisition was rightly treated as a capital expenditure. He also highlighted the fact that in view of the admitted position that the software were purchased by the assessee, the Tribunal had no occasion to go into the nature of the right acquired by the assessee. It was submitted by him that the facts of the present case, on the other hand, are entirely different in as much as none of expenditure incurred by the assessee was related to acquisition of a capital asset. He contended that in the aforesaid decision, the Tribunal thus had no occasion to consider the distinction between tailor-made software and the software which s purchased “off-the-shelf”.

14.    Shri Syali then referred to the decision of Hon’ble Supreme Court in the case of Arvind Mills Ltd. Vs. CIT - 197 ITR 422 and explained that the said case is applicable to facts where there is no dispute that asset acquired is a capital asset. Their Lordships have held that merely because a capital asset also facilitates carrying on of business on day to day basis, the expenditure incurred on purchase/acquisition thereof would not become revenue expenditure. He contended that the asset which otherwise is a capital asset does not lose the character of a capital expenditure and does not become a revenue expenditure merely because it facilitates carrying on of business on day to day basis a held by Hon'ble Supreme Court, but this proposition has no application where the asset acquired by the assessee is not a capital asset at all.

15.    Shri Syali further argued that apart from two cases above, all other cases relating to acquisition of software were in favour of the assessee as in all those cases, software acquired was held to be a revenue asset. In this connection, Shri Syali drew our attention to the decision of Addl. CIT Vs. Asahi India Safety Glass – 6 SOT 656 (Delhi), especially paragraph No.6 thereof and pointed out that the assessee in the said case had acquired a software package prepared by globally known Oracle Corporation, USA. The Software covers areas of financial accounting, inventory and purchase. The assessee entered into a license agreement with Oracle titled ‘Master Software License & Service Agreement’. The Tribunal further noticed that the software which the assessee was to install and implement was neither attached to any machinery used in the production nor was a part of any production process. The Tribunal after examining the various classes of the agreement pointed out that by acquiring the license, the assessee did not income or any tangible asset, much less any asset which provides any new source of income or which arguments the present source of income. The Tribunal ultimately concludes that the expenditure was not in the nature of a capital expenditure. The Tribunal also distinguished the decision in the case of Maruti Udyog Ltd. (supra).

16.    Shri Syali then drew our attention to the decision of Delhi Bench of ITAT in the case of Escorts Ltd. Vs. ACIT - 8 SOT 167 ( Delhi ). As pointed out by him substantial expenditure was incurred by the assessee in the said case on software technological up gradation and computerization which was inclusive of cost of purchase of ERP system. The Tribunal fund that the ERP business software was acquired by the assessee with unlimited user license and therefore, the expenditure incurred on acquisition of software was by way of an outright purchase. The Tribunal rejected the plea of the assessee that it was a case of mere up gradation of an existing software. Thereafter, the Tribunal applied the ration laid down in Maruti Udyog Ltd. (supra) as well as Arawali Construction Co.(P) Ltd. (supra). He then referred to the decision of Bangalore Bench of ITAT in the case of IBM India Ltd. Vs. CIT 105 ITD 1 wherein the expenditure incurred on application software was held to be a revenue expenditure observing that the said software merely enable the assessee to carry out its business operation efficiently and smoothly. It was also noted by the Tribunal that the software has to be field to a computer system to work and since the same by itself cannot work on standalone basis, it facilitates as an aid to the operation rather than a tool itself.

17.       Thereafter, reference was made by Shri Syali to the case of Sonata Information Technology Limited vs. Addl. CIT 103 ITD 324 where the Tribunal drew a distinction between acquisition of a copyright and purchase of copyrighted article. Accordingly to the learned counsel for the assessee, the acquisition of a license to use a computer program is akin to acquisition of a copyright article in contrast to a acquisition of a copyright. Shri Syali submitted that there are different types of computer software. He then referred to the changes made in the Income-tax Rules w.e.f. 1.4.2003. He referred to Appendix I part A-III(5) to the Income-tax Rules as applicable for Assessment Year 2003-04 to 2005-06 whereby computers including computer software have been specifically classified as an item of asset falling within the block of asset, machinery and plant entitled to depreciation at the rate of 60%. It was submitted by him that merely because an item is listed as a capital asset in the Appendix under the Income-tax Rules, it cannot automatically follow that software is a capital asset. Shri Syali argued that before applying Appendix to the Rues, a finding has to be recorded in terms of Section 32(I)(ii) that software acquired by the assessee is a capital asset entitled only to depreciation. He then explained that aforesaid item of expenditure will only be applicable to tailormade software for which source code exists or to software which are acquired and treated as part and parcel of computer hardware and a capital asset. However, software acquired under a license on terms and conditions whereby ownership is retained by the licensor and where such software only adds to the efficient running of day to day operation of business, cannot be held to be expenditure of capital nature as they were only copyrighted articles. Reliance was also placed on the decision of Special Bench of Kolkata Tribunal in the case of Peerless Securities Ltd. Vs. JCIT – 94 ITD 89 (SB)(Kol).

18.       Mr.O.S. Bajpai, the learned counsel for the assessee i.e. M/s SQL. Star International Ltd., at the outset, invited our attention to the provisions of Section 32(1)(ii) and pointed out that as per the said provisions operative from 1.4.1999, assets are classified in two parts i.e. tangible and intangible assets. He submitted that intangible assets are to be of the nature of any business or commercial rights as per the said provisions and such rights again have to be in the nature of capital asset. He submitted that the terms and conditions of the relevant agreement, therefore, need to be seen in order to ascertain whether the acquisition of software by the assessee on license amounts to acquisition of capital assets within the meaning of Section 32(1)(ii). In this regard, he invited our attention to the copy of relevant license agreement placed at page No.12 of his paper book and took us through the relevant terms and conditions of the said agreement. He pointed out that the software acquired by the assessee from Oracle in terms of the said agreement was an application software/program and the license granted to the assessee was a non-exclusive license to be used only for its own purpose as per clause 2.1.1. He further pointed out that it was also stipulated in the said clause that if there is a limit to the number of users or other restrictions stated on the order form for a program or otherwise imposed upon the license granted pursuant to the said agreement, the license to use that program shall be restricted accordingly. He then invited our attention to clause 2.1.6 of the said agreement which reads as under:-

“By virtue of this Agreement CLIENT acquires only the right to use the Program(s), Documentation and the media upon which the Program(s) or Documentation are supplied and provided for in this Agreement and does not acquire any rights of ownership, or any other implied rights whatsoever. All rights, title and interest in or to the Programs or documentation, modifications, enhancements and derivatives shall at all times remain the property of or vest on creation in ORACLE or Oracle Corporation. CLIENT agrees to execute all such documents as may become reasonably necessary for the purpose of vesting or assigning any intellectual property rights in the modifications, enhancements and derivative works to ORACLE or its nominee”

Relying strongly on the aforesaid restrictions imposed as per the agreement on the licensee acquiring the right to use the application software from Oracle, he contended that there was no acquisition of any asset, much less a capital asset and what was acquired is only a license to use the software subject to the terms of the license as contained in the agreement between the assessee and Oracle. It was submitted by him that when a person acquires a license, he acquires no asset. In this connection, he drew our attention to the meaning of the term ‘license’ as given in the Black Law’s Dictionary. Since license is not an asset and the condition of grant of depreciation is that the assessee should own an asset, the assessee cannot claim depreciation.

19.    Shri Bajpai thereafter submitted that computer software is an intangible asset and falls within the ambit of the Copyright Act. Intellectual Property Rights in computer software is recognized and protected by the provisions of the Copyright Act. Section 14(a) defines ‘Copyright’ as the exclusive right subject to the provisions of the Copyright Act to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof namely:

“(a) in the case of a literary, dramatic or musical work, not being a computer programme.

(i)         to reproduce the work in any material form including the storing of it in any medium by electronic means;

(ii)        to issue copies of the work to the public not being copies already in circulation;

(iii)       to perform the work in public, or communicate it to be public;

(iv)       to make any cinematograph film or sound recording in respect of the work;

(v)        to make any translation of the work;

(vi)       to make any adaptation of the work;

(vii)      to do, in relation to a translation or an adaptation of the work any of the acts specified in relation to the work in sub-clauses (i) to (vi);

(b)        in the case of a computer programme,-

(i)         to do any of the acts specified in clause (a);

(ii)        to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme: