Indian Aluminum Company vs. CIT (Calcutta High Court)
April, 06th 2016
S. 37(1): Distinction between "application software" and "system software" explained. Expenditure on "application software" is revenue as it allows efficient carrying on of business and requires to be constantly updated due to rapid advancements in technology and increasing complexity of the features
(i) The Rajasthan High Court in CIT Vs. Arawali Constructions Co. (P.) Ltd. reported in (2003) 259 ITR 30 has not considered the difference between application software and system software which has been duly emphasized by the Delhi High Court in CIT Vs. Asahi Safety Glass Ltd. (Delhi) reported in (2012) 346 ITR 329. In the instant case the software developed by the assessee is application software which allows it to efficiently carry out mining activity for the extraction of Bauxite. Application software is distinct from system software as it has to be constantly updated due to rapid advancements in technology and increasing complexity of the features. The distinction between system software and application software was also considered by the Karnataka High Court in CIT Vs. IBM India Ltd. reported in (2013) 357 ITR 88 (Karn);
(ii) The concept of enduring benefit must respond to the changing economic realities of the business. The expenses incurred by installation of software packages in the present computer world, which revolves on the modern communication technology, enables the assessee to carry on its business operations effectively, efficiently, smoothly and profitably. However, such software itself does not work on a standalone basis. It has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in the manufacturing process rather than the tool itself. Therefore, the payment for such application software, though there is an enduring benefit, does not result in acquisition of any capital asset and it merely enhances the productivity or efficiency and hence, has to be treated as revenue expenditure;
(iii) The Apex Court in Alembic Chemical Works Co. Ltd. V. CIT reported in (1989) 177 ITR 377 at page 390 has recognised the fact that in a field where advancements are taking place rapidly and where technology which was once the state of the art becomes obsolete in a short time, the test of enduring nature cannot always reliably be applied. Software industry is one such field where advancements and changes happen at a lightning pace and it is difficult to attribute any degree of endurability even to system software let alone application software.