Depreciation on licenses software allowable at the rate of 60%

DCIT Vs Vodafone Business Services Ltd. (ITAT Ahmedabad)

ITAT Ahmedabad held that depreciation on licenses software is allowable at the rate of 60% and not at the rate of 25% as alleged by the revenue.

Facts- Present appeal has been filed by the Revenue against order of the the ld.CIT(A) on the sole grievance of the Revenue is against allowance of depreciation on computer software at the rate of 60% as opposed to 25% held to be allowable by the AO.

Conclusion- Hon’ble high court held that since computer software has been defined in Appendix as any computer program recorded on disc, tape or other information storage device, it has to be identified accordingly and the description could not be ignored. Therefore irrespective of the usage of the software, the Hon’ble high court held that as long as it fell within the definition provided in the appendix it qualified as computer software for enhanced rate of depreciation of 60%. The ITAT, Ahmedabad Bench, in the case of Voltamp Transformers Ltd. (supra) has also categorically held that Income Tax Rules providing for rate of depreciation makes no distinction between the system software and application software while prescribing 60% depreciation thereon. Therefore, the distinction pointed out by the ld.DR that software of the assessee was utility software and such softwares qualify as intangible assets for the purposes of rate of depreciation, we hold is of no relevance. We see, therefore, no reason to interfere in the order of the ld.CIT(A) upholding the claim of depreciation at the rate of 60%. The ground of appeal of the Revenue is rejected.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

Present appeal has been filed by the Revenue against order of the ld.Commissioner of Income-Tax (Appeals)-8, Ahmedabad [hereinafter referred to as “the ld.CIT(A)”] dated 18.2.2020 passed under section 250 of the Income Tax Act, 1961 [hereinafter referred to as “the Act” for short] pertained to the Asst.Year 2015-16.

2. Sole grievance of the Revenue is against allowance of depreciation on computer software at the rate of 60% as opposed to 25% held to be allowable by the AO. The grounds raised in this regard read as under:

“1. Whether the ld.CIT(A) has erred in law and on facts in allowing depreciation @ 60% instead of 2% on the computer software treated as intangible asset”

3. Facts relating to the computer software, on which the assessee had claimed depreciation at the rate of 60%, noted in the order of the AO at para-3 is that, it related to SAP products which the AO noted was a customized licensed product. The assessee had incurred expenditure to the tune of Rs.17,30,28,684/-on purchase of the said SAP product and claimed depreciation at the rate of 60% thereon which was reduced to 25% by the AO holding that the application software being licensed was an intangible asset, and accordingly, depreciation at the rate of 25% was applicable to it. The ld.CIT(A) allowed the claim of the assessee of 60% depreciation thereon following order of the ITAT in the assessee’s own case for Asst.Year 2010-11 to 2012-13. The findings of the ld.CIT(A) at para 5.1 of the order in this regard is as under:

“5.1 The Id.AR in the course of appellate proceedings filed copies of the orders of Hon’ble ITAT in appellant’s own case in ITA No.124/Ahd/2017, 162/Ahd/2016, 1468/Ahd/2016 & 1923/Ahd/2016 DCIT vs. Vodafone Shared Services Ltd.(earlier name of appellant), A.Ys.2012-13, 2010-11 & 2011-12. On the very same issue wherein the Hon’ble ITAT have dismissed the departmental appeal vide Para 2.3 of their decision which is reproduced as below:-

“2.3 The CIT(A) accordingly, deleted the disallowance of depreciation in computer softwares. Aggrieved by the relief granted by the Ld.CIT(A), the Revenue has preferred the appeal before the Tribunal. It is the case of the Revenue that the depreciation on computer softwares is allowable @ 25% being intangible assets and not @ 60% applicable to computer softwares as claimed. We straightway notice that the identical issue has come up before the Tribunal in large number of cases including M/s.Navneet Publications (I) Ltd. vs. Addl.CIT in ITA No.1137/Mum/2010 order dated 17.01.2011 & ACIT vs. Zydus Infrastructure (P) Ltd. 72 taxmann.com 199 (Ahmedabad-Trib.) wherein it was held th’atlicenced software is also eligible for depreciation @ 60%. In view of the issue has already been adjudicated in this fashion, we do not see any perceptible reason to interfere with the order of the CIT(A), the appeal of the revenue is thus bereft of any merits.”

Since the issue stands covered squarely by the binding decision of Hon’ble ITAT, Ahmedabad in the appellant’s own case it is to be held that appellant is entitled to depreciation @ 60% on the impugned computer software. Accordingly, AO is directed to allow depreciation @ 60% on the computer software under consideration. Accordingly, Ground No. 1 of the appeal is allowed.

4. The contentions of the Revenue before us, which was submitted in writing also, was to the effect that the ITAT while deciding issue in the case of the assessee in the preceding Asst.Years 2010-11 to 2012-13 has placed reliance on its own decision in the case of ACIT Vs. Zydus Infrastructure P.Ltd., 72 com 199 (Ahd-Trib) which was distinguishable on facts, since in the said case, the software was basically systems software on which the computer hardware ran and noting the fact that it wasimpossible to use the computer without this software, the ITAT held, it was entitled to depreciation on computer software at the rate of 60%. The contention of the Revenue was that in the present case, the software purchased was not one on which the computer hardware ran, in fact, the software was for the smooth and efficient functioning of the assessee’s business activities, giving enduring benefit to the assessee, and thus, was in the nature of intangible asset. For the said purpose, the Revenue has relied on the judgment of the ITAT, Chennai Bench in the case of Pentamedia Graphics Ltd. Vs. DCIT, 116 taxmann.com 564 (Chennai-Trib); copy of the order was placed before us.

5. The ld.counsel for the assessee countered by stating that this distinction between application software and systems software was of no relevance at all, and he pointed out that Hon’ble Madras High Court in the case of CIT Vs. Computer Age Management Services P.Ltd., 109 com 134 (Mad) had categorically held that all computer software of whatever nature, as long as they qualify in the definition of computer software products as appearing in Appendix-I to the Income Tax Rules, 1962, wherein they have defined to mean any programme recorded on CD or disc, tape, perforated media or other information storage devices ,qualified as computer software for the purpose of claiming depreciation at the rate of 60%. He drew our attention to para-4 to 12 of the order as under:

“4. The assessee is engaged in the business of registrar and transfer agent licensed by the Security Exchange Bureau of India (SEBI) (sic). In these appeals, two issues are raised by the Revenue for consideration. The first issue, which is common for all the assessment years, is as to whether the assessee was entitled to claim depreciation at 60% in respect of the software or software applications. The second issue, which pertains to the assessment year 2014-15 alone, is as to whether the payment effected for non compete fee should be treated as revenue expenditure or otherwise.

5. The Assessing officer held that the assessee was not entitled to depreciation at 60%, but was entitled to only 25% by referring to Part B of New Appendix I, which deals with intangible assets. The assessee carried the matter on appeal to the Commissioner of Income Tax (Appeals)-5, Chennai-34 (for brevity, the Act), who confirmed the orders passed by the Assessing Officer. On further appeal by the assessee, the Tribunal accepted the case of the assessee and it was held that the assessee was entitled to depreciation at 60% in terms of Entry 5 of Part A of New Appendix I read with Note 7.

6. Mr.R. Hemalatha, learned Senior Standing Counsel appearing for the Revenue would vehemently contend that what were acquired by the assessee were only licenses, which are intangible. However, the Assessing Officer held that they would fall under Part B of New Appendix I and that the assessee was entitled to depreciation at 25%.

7. As noticed above, the assessee is in the business of registrar and transfer agent as licensed by the SEBI handling large volume of market sensitive data and information, which is available only through general customized application software. The assessee acquired software licenses capitalized during the relevant years in the books of accounts and claimed depreciation at 60%. In paragraph 20 of the order passed by the Tribunal, the nature of items, on which, the assessee claimed depreciation at 60%, has been listed out and they are 17 in number, from which, we find that substantial amount of server licences, which have been obtained by the assessee are customized and some of which are single user licenses.

8. The question would be as to whether the software application, which was acquired by the assessee would fall under Entry 5 of Part A of New Appendix I, which states that computers including computer software are entitled to depreciation at 60%. Note 7 of the Appendix defines the expression ‘computer software’ to mean any programs recorded on CD or disc, tape, perforated media or other information storage devices.

9. The case of the Revenue is that software are licences and that they are intangible assets and would fall under Part B of New Appendix I, which deals with knowhow, patents, copyrights, trademarks, licenses, francises or any other business or commercial rights of similar nature.

10. We find that Part B of New Appendix I is a general entry whereas Entry 5 of Part A of New Appendix I is a specific entry read with Note 7. In the instant case, the Tribunal, in our considered view, rightly held that the assessee is eligible to claim depreciation at 60%.

11. In the decision rendered by a Division Bench of this Court in the case of CIT v. Cactus Imaging India (P.) Ltd. [20181 93 com 396/256 Taxman 32/406 ITR 406 (Mad.) to which, one of us (TSSJ) was a party, an identical question came up for consideration wherein the object was printer (computer printer). This Court, after taking into consideration as to how the entries would be interpreted, referred to the decision in the case of Bimetal Bearings Ltd. v. State of Tamil Nadu [1991] 80 STC 167 (Mad.) and held as hereunder :

“9. The Hon’ble Division Bench took note of the decision of the Hon’ble Supreme Court pointing out that the ‘entry’ to be interpreted is in a taxing statute; full effect should be given to all words used therein and if a particular article would fall within a description, by the force of words used, it is impermissible to ignore the description, and denote the article under another entry, by a process of reasoning.

10. It was further pointed out that the rule of construction by reference to contemporanea expositio is a well-established rule for interpreting a statute by reference to the exposition it has received from contemporary authority, though it must give way where the language of the statute is plain and unambiguous.

11. By applying the rule of interpretation, we find that the relevant entry under old appendix I Clause III (5) states computers including computer software and the Notes under the Appendix defines ‘computer software’ in Clause 7 to mean any computer program recorded on disc, tape, perforated media or other information storage device. Noteworthy to mention that the notes contained in the appendix, the term ‘computer’ has not been defined. Therefore, as pointed out by the Division Bench in Bimetal Bearings Ltd. (supra), if a particular article would fall within the description by the force of words used, it is impermissible to ignore the word description. Thus, going by the usage of the equipment purchased by the petitioner, we have to take a decision.”

12. As held in the above decision, if a particular article would fall within the description by the force of the words used, it is impermissible to ignore the word ‘description’ and going by the usage of the equipment purchased by the assessee, a decision has to be arrived at. We find that there is no error in the decision arrived at by the Tribunal by taking note of the specific entry in contra distinction with the general entry. Therefore, the first substantial question of law has to be necessarily answered against the Revenue.”

6. He further contended that in any case, SAP software purchased by the assessee was only licensed software and thus qualified as copyrighted article only. The assessee had acquired no license or copy right as such in the software and the assessee by virtue of purchase of this software was given licence to utilize for its own purpose, and had not been given licence or copy right to the software for making further sale to other parties. He pointed out that ITAT, Ahmedabad Bench in the case of assessee itself had held that license to software was eligible for depreciation at the rate of 60%. He further drew our attention to the decision of the ITAT in the case of ACIT(OSD) Vs. Voltamp Transformers Ltd., ITA No.1676/Ahd/2012 order dated 23.3.2013 wherein while dealing with identical issue, the ITAT had held computer software to be eligible at the rate of 60% without any distinction between system software and application software. Copy of the decision was placed before us.

7. We have heard rival contentions and have gone through the orders of the authorities below. We see no reason to interfere in the order of the Ld.CIT(A) allowing assesses claim of depreciation on licensed software @ 60%.

Undeniably assesses claim to 60% depreciation on this software in the preceding years, A.Y 2010-11 to 2012-13, has been consistently upheld by the ITAT. The Ld.DR has sought to distinguish the said decisions pointing out that the claim has been allowed following the ratio laid down by the ITAT in the case of Zydus Infrastructure(supra) wherein the claim related to depreciation on systems software ,while in the present case the issue relates to applications softwares. But we find that this distinction has been held to be of no consequence in various decisions of the ITAT and even the Hon’ble High Court. The Hon’ble High Court of Madras ,in the case of Computer Age Management Services (supra) has categorically held that items listed in Appendix I , prescribing rates of depreciation for different assets under the Act, have to be literally interpreted since the entry is in a taxing statute . In the matter before it the issue was identical, of rate of depreciation applicable to softwares, which as per the Revenue qualified as intangible assets since the softwares were actually licenses granted. The Hon’ble high court held that since computer software has been defined in Appendix as any computer program recorded on disc, tape or other information storage device, it has to be identified accordingly and the description could not be ignored. Therefore irrespective of the usage of the software, the Hon’ble high court held that as long as it fell within the definition provided in the appendix it qualified as computer software for enhanced rate of depreciation of 60%. The ITAT, Ahmedabad Bench, in the case of Voltamp Transformers Ltd. (supra) has also categorically held that Income Tax Rules providing for rate of depreciation makes no distinction between the system software and application software while prescribing 60% depreciation thereon. Therefore, the distinction pointed out by the ld.DR that software of the assessee was utility software and such softwares qualify as intangible assets for the purposes of rate of depreciation, we hold is of no relevance. We see, therefore, no reason to interfere in the order of the ld.CIT(A) upholding the claim of depreciation at the rate of 60%. The ground of appeal of the Revenue is rejected.

8. In the result, appeal of the Revenue is dismissed.

Order pronounced in the Court on 25th January, 2023 at Ahmedabad.