Opus Software Solutions (P.) Ltd. v. Asstt. CIT

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The Tax PublishersIT Appeal Nos. 466 (Pn) of 2011 & 1179, 1205 & 1206 (Pn) of 2009 2013 TaxPub(DT) 0139 (Pune-Trib) : (2012) 139 ITD 0427 INCOME TAX ACT, 1961 --Capital or revenue expenditure--Expenditure incurred on development of software Business of development of software products --Assessee-company was engaged in the business of development of software products. The assessee explained that expenditure incurred on development of such products was revenue expenditure. the assessing officer and, thereafter, the Commissioner (Appeals) held that such development expenditure was capital in nature. *Held:* Not rightly so. Expenditure incurred on software development is in line with assessee's business and therefore, revenue in nature. The appellant company is engaged in developing various software products, which are in turn used in the banking sector. The assessee had explained that expenditure in question has been incurred on development of various products, like, Trade Now, Electra ATM, Electra Card and Electra Product Gateway (EPG). From the explanation of the assessee rendered to the lower authorities, it emerges that the product Electra Product Gateway (EPG) is an end-to-end software solution product which can support multiple types of financial instruments and transactions on the internet. The assessee explained that it was in the business of software development since 1999 and the various products developed by it are sold to different customers. A pertinent factor which was brought out and has also been articulated by the learned Counsel before us is to the effect that the products developed and sold by the assessee are not customer-specific, but are developed specific to the business processes. For instance, the software packages, namely, EPG, Electra Card and Electra ATM are products which are developed for use in the banking and financial services sector. In this background of the nature of business being carried out by the assessee, we may now examine the expenditure referred to as product development expenditure of Rs 2,77,07,736, which is in dispute. Details of such expenditure show that the same comprises of employees' salaries, software consultancy/training expenses and indirect costs by way of administrative/other expenses, e.g. power and fuel, printing & stationery, marketing expenses, rent, professional fees, office expenses, rates and taxes, books and periodicals, etc. The details of such expenditure are found placed in the Paper Book as submitted at the time of hearing. Be that as it may, it is quite evident that the expenditure in question cannot be said to have resulted in acquisition of any new asset. So, however, the plea of the Revenue is that such expenditure has resulted in development of software products, which in turn are being sold by the assessee to various customers over a period of time including in the subsequent years and, therefore, it results in an enduring benefit, and accordingly, such expenditure was to be held as capital expenditure. [Para 9] the aforesaid proposition of the Revenue is quite alien to the business realities under which the assessee is operating. Quite clearly, the assessee is in the business of software development which entails fast technological changes and in that view, there is no permanence attached to any product developed. In fact, it is quite understandable that the business of the assessee is exposed to volatility of new and upcoming technological advances and the products developed by it may not be sustainable over a period of time to compete in the market place. Therefore, in this background one has to examine as to whether the expenditure incurred on development and launching of new products in the same line of business results in an advantage in the revenue field or in the capital field. Even if, it has to be accepted that the expenditure results in an enduring benefit to the assessee, yet following discussion by the Hon'ble Supreme Court would show that each and every incidence of enduring benefit would not result in classification of expenditure as a capital expenditure. [Para 10] In the present case, in our view, the expenditure on development of new product in the line of business being carried out by the assessee is an expenditure related to such business and benefit to the assessee is in the revenue field, inasmuch as it seeks to improve the profitability of the assessee and the enduring benefit cannot be regarded to be in the capital field. The parity of reasoning laid down by the Hon'ble Apex Court in the case of Empire Jute Co. Ltd. (supra), as extracted above, clearly supports the stand of the assessee, inasmuch as the expenditure in question merely results in development of new products by the assessee in its existing line of business. Even otherwise, it is noteworthy that none of the expenditures in question are of capital nature and in fact, the expenditure which has been referred to by us in the earlier paragraph clearly are such expenditure, which are incurred in the course of carrying on of business. [Para 12] The other objection of the Revenue that the assessee had treated the impugned expenditure as a deferred revenue expenditure in the books of account and claimed it as a revenue expenditure in the computation of income, is of no consequence. [Para 11] Regarding the objection of the Revenue to the effect that the assessee was seeking to register its trade-mark in relation to the produces developed, same, in our view, is irrelevant to decide the nature of the expenditure incurred on development of products. In section 32(1)(ii), a trade-mark is considered as an intangible asset, so however, it is clear that in the present case the expenditure is not incurred on a trade-mark developed and accordingly, the plea of the Revenue that such expenditure resulted in creation of an intangible asset is quite irrelevant. Similarly, the reference made by the Commissioner (Appeals) to the decision of the Special Bench of the Tribunal in the case of Amway India Enterprises is also of no help, inasmuch as it deals with expenditure on acquisition of a software package in the hands of a customer and the dispute in the present case stands on a qualitatively different footing, inasmuch as in the present case the assessee has developed the products in order to market the same in its line of business of development and selling of software packages. [Para 12] In conclusion, having regard to the aforesaid discussion, the expenditure in question which has been incurred on development of various software packages, for being sold in the assessee's business of software development and selling, is to be regarded as in the nature of revenue expenditure. Thus, on this issue the assessee succeeds. [Para 13] SUBSCRIBE FOR FULL CONTENT

The Tax PublishersIT Appeal Nos. 466 (Pn) of 2011 & 1179, 1205 & 1206 (Pn) of 2009
2013 TaxPub(DT) 0139 (Pune-Trib) : (2012) 139 ITD 0427

INCOME TAX ACT, 1961

--Capital or revenue expenditure--Expenditure incurred on development of software Business of development of software products --Assessee-company was engaged in the business of development of software products. The assessee explained that expenditure incurred on development of such products was revenue expenditure. the assessing officer and, thereafter, the Commissioner (Appeals) held that such development expenditure was capital in nature. Held: Not rightly so. Expenditure incurred on software development is in line with assessee's business and therefore, revenue in nature.

The appellant company is engaged in developing various software products, which are in turn used in the banking sector. The assessee had explained that expenditure in question has been incurred on development of various products, like, Trade Now, Electra ATM, Electra Card and Electra Product Gateway (EPG). From the explanation of the assessee rendered to the lower authorities, it emerges that the product Electra Product Gateway (EPG) is an end-to-end software solution product which can support multiple types of financial instruments and transactions on the internet. The assessee explained that it was in the business of software development since 1999 and the various products developed by it are sold to different customers. A pertinent factor which was brought out and has also been articulated by the learned Counsel before us is to the effect that the products developed and sold by the assessee are not customer-specific, but are developed specific to the business processes. For instance, the software packages, namely, EPG, Electra Card and Electra ATM are products which are developed for use in the banking and financial services sector. In this background of the nature of business being carried out by the assessee, we may now examine the expenditure referred to as product development expenditure of Rs 2,77,07,736, which is in dispute. Details of such expenditure show that the same comprises of employees' salaries, software consultancy/training expenses and indirect costs by way of administrative/other expenses, e.g. power and fuel, printing & stationery, marketing expenses, rent, professional fees, office expenses, rates and taxes, books and periodicals, etc. The details of such expenditure are found placed in the Paper Book as submitted at the time of hearing. Be that as it may, it is quite evident that the expenditure in question cannot be said to have resulted in acquisition of any new asset. So, however, the plea of the Revenue is that such expenditure has resulted in development of software products, which in turn are being sold by the assessee to various customers over a period of time including in the subsequent years and, therefore, it results in an enduring benefit, and accordingly, such expenditure was to be held as capital expenditure. [Para 9] the aforesaid proposition of the Revenue is quite alien to the business realities under which the assessee is operating. Quite clearly, the assessee is in the business of software development which entails fast technological changes and in that view, there is no permanence attached to any product developed. In fact, it is quite understandable that the business of the assessee is exposed to volatility of new and upcoming technological advances and the products developed by it may not be sustainable over a period of time to compete in the market place. Therefore, in this background one has to examine as to whether the expenditure incurred on development and launching of new products in the same line of business results in an advantage in the revenue field or in the capital field. Even if, it has to be accepted that the expenditure results in an enduring benefit to the assessee, yet following discussion by the Hon'ble Supreme Court would show that each and every incidence of enduring benefit would not result in classification of expenditure as a capital expenditure. [Para 10] In the present case, in our view, the expenditure on development of new product in the line of business being carried out by the assessee is an expenditure related to such business and benefit to the assessee is in the revenue field, inasmuch as it seeks to improve the profitability of the assessee and the enduring benefit cannot be regarded to be in the capital field. The parity of reasoning laid down by the Hon'ble Apex Court in the case of Empire Jute Co. Ltd. (supra), as extracted above, clearly supports the stand of the assessee, inasmuch as the expenditure in question merely results in development of new products by the assessee in its existing line of business. Even otherwise, it is noteworthy that none of the expenditures in question are of capital nature and in fact, the expenditure which has been referred to by us in the earlier paragraph clearly are such expenditure, which are incurred in the course of carrying on of business. [Para 12] The other objection of the Revenue that the assessee had treated the impugned expenditure as a deferred revenue expenditure in the books of account and claimed it as a revenue expenditure in the computation of income, is of no consequence. [Para 11] Regarding the objection of the Revenue to the effect that the assessee was seeking to register its trade-mark in relation to the produces developed, same, in our view, is irrelevant to decide the nature of the expenditure incurred on development of products. In section 32(1)(ii), a trade-mark is considered as an intangible asset, so however, it is clear that in the present case the expenditure is not incurred on a trade-mark developed and accordingly, the plea of the Revenue that such expenditure resulted in creation of an intangible asset is quite irrelevant. Similarly, the reference made by the Commissioner (Appeals) to the decision of the Special Bench of the Tribunal in the case of Amway India Enterprises is also of no help, inasmuch as it deals with expenditure on acquisition of a software package in the hands of a customer and the dispute in the present case stands on a qualitatively different footing, inasmuch as in the present case the assessee has developed the products in order to market the same in its line of business of development and selling of software packages. [Para 12] In conclusion, having regard to the aforesaid discussion, the expenditure in question which has been incurred on development of various software packages, for being sold in the assessee's business of software development and selling, is to be regarded as in the nature of revenue expenditure. Thus, on this issue the assessee succeeds. [Para 13]