License fee for use of application software with limited right to use, is revenue expenditure u/s 37

Brief of the Case

ITAT Delhi held In the case of GE Capital Business Process Management Serves Pvt. Ltd. vs. ACIT that M/s. GECC (USA), to whom payment has been made, itself has received the right to use the software internally including its group entities for its business and it does not have any right to commercially exploit the software. The assessee is vested with limited right to use the licensed program during the period of license agreement. The agreement nowhere provides any exclusive right to the assessee. Further right to use the vision plus software, being an application software which is routine in nature and used for accounting purposes, does not have any effect of providing enduring benefit and the payment made to GECC (USA) is only the license fees and not the price for acquisition of capital asset. The assessee did not acquire any ownership on the software and after termination of license agreement, all the rights and title remained with GECC (USA). Hence the license fee etc. paid by the assessee to M/s. GECC (USA) is revenue expenditure deductible u/s. 37.

Facts of the Case

The assessee is engaged in the business of process management services for credit cards. During the course of assessment proceedings, the AO noticed that the assessee have paid a sum of Rs.1,76,76,000/- towards license fee, Rs.33,47,207/- towards connectivity charges and Rs.9,41,260/- towards co-ordination charges to GE Capital Corporation USA [GECC(USA)] and claimed deduction u/s. 37 as Revenue Expenditure. On being asked by AO that why said expenditure should not be disallowed treating the same as capital expenditure, the assessee explained that license fee was due to M/s. GECC, USA for use of ‘vision plus software’. The vision / software is an accounts receivable processing software for credit cards transactions developed by pay sys a US based entity. GECC (USA) had entered into an agreement with pay sys international for the use of this software and further entered into end-user license agreement with the assessee company allowing it to use this software. It was also submitted that the license fee has been paid in lieu of only right of usage for limited period of technical know-how; that no ownership rights pass on to the assessee and that no right or advantage of enduring nature arose to the assessee.

The AO, however no being satisfied with the reply, relying upon the decisions of Hon’ble Supreme Court in the case of Jonas Woodhead and Sons (India) Ltd. vs. CIT, 224 ITR 342 and Southern Switch Gear Ltd. vs. CIT, 232 ITR 359, concluded that acquisition of license granted by the licensor in itself is a capital asset being “intangible asset” and the payment made for acquisition of this license having long validity is of capital nature. The AO finally disallowed the deduction of Rs.2,19,60,467/-.

The assessee also claimed depreciation @ 60% on printer, switches, networking equipments, batteries, pen drives etc. keeping the same into the category of computers. The Assessing Officer, after considering the definition of computer provided by ATIS Committee and definition of other accessories like switches, Router, Multiplexer or Mux held that all the networking equipments other than computer are plant and machinery eligible for depreciation @ 15% instead of 60% as claimed by the assessee. Therefore, the excess claim of depreciation to the extent of Rs.83,49,188/- was added to the income of the assessee.

Contention of the Assessee

The ld counsel of the assessee submitted that the license was acquired only to use the software for its day to day running of the business activities and there was no outright purchase of software giving ownership to the assessee. It was submitted that the payments made towards connectivity charges and co-ordination fees payable to GECC (USA) are relatable to facilities/services provided by the assessee to undertake the business operations and are not relatable to acquisition of any know-how and enduring benefit to the assessee. He also submitted that the licensed program was for a limited period and after expiry of such period, the same has to be delivered back to GECC (USA); that an officer of assessee has to certify in writing to GECC that all proprietary material relating to the Licensed Program has been delivered back to GECC or purged and that the use of the licensed program and any portion thereof has been discontinued.

He relied on the following decisions: CIT vs. Asahi India Safety Glass Ltd. 203 Taxman 277 (Del.), CIT vs. M/s. Asahi Safety Glass Ltd. SLP(C)CC No. 10108/2012, Empire Jute Company vs. CIT, 124 ITR 1 (SC), CIT vs. Amway India Enterprises, 346 ITR 341 (Del.), CIT vs. IAEC (Pumps) Ltd., 232 ITR 316 (SC), DCIT vs. Eicher Motors Ltd., 53 Taxman 317 (Delhi Tri.), CIT vs. Modi Revlon (P) Ltd., 26 Taxman.com 133 (Del.) and CIT vs. G4S Securities System (India) Ltd., 338 ITR 46 (Del). He also contended that the CIT (A) in the subsequent assessment years 2008-09, 2010-11 and 2011-12 has decided the issue on the basis of same end-user license agreement in favour of the assessee holding the expenditure of revenue nature.

Held by the Revenue

The ld counsel of the revenue submitted that in the case of Empire Jute Company Ltd. vs. CIT, 124 ITR 1(SC), the Hon’ble Court observed that there have been numerous decisions where the vexed question whether a particular expenditure incurred by the assessee is of a capital or revenue nature, has been debated, but it is not possible to reconcile the reasons given in all of them because general principle cannot be deduced from any decision owing to dissimilarity of facts. He, therefore, contended that regarding the question of an expenditure being of capital or revenue in nature, peculiar circumstances of each case need to be considered.

He submitted that the use of software which is subject matter of End-User License Agreement dated 07.07.2000 is vital for the business of assessee, as the vision plus software is the soul of assessee’s business. He further submitted that signing of agreement and deciding the rate of payment per quarter were mere paper formalities and significant portion of the payment under consideration is for providing benefits of enduring nature to the assessee and hence, it is capital in nature.

Held by CIT (A)

CIT (A) confirmed the addition of Rs.2,19,60,467/- made by the Assessing Officer treating the same as capital expenditure. However, deleted the addition of Rs.83,89,188/- made by the Assessing Officer on account of excess depreciation claimed by the assessee.

Held by ITAT

ITAT held that the basic reasons of AO for giving the license fee a treatment of capital expenditure are that the agreement provides exclusive right to use vision plus software which provides enduring benefits to the assessee; and the consideration is in respect of grant of license and that the information was not only in relation to use of license, but co-ordination and connectivity services were also provided by GECC (USA). He, therefore, held that the acquisition of license granted by the licensor in itself is a capita asset, being “intangible asset”, which having long validity is capital in nature. We have gone through the End-User license agreement dated 07.07.2000 and we do not find substance in the conclusion arrived at by the AO. It is notable that in terms of clause 2.2 and 2.3, the assessee company is specifically restricted to make copies of the software and make it available to any other period. There is also a bar on the assessee for use of software for the purpose other than that mentioned in clause 2.2 of the agreement. In terms of clause 2.3, the assessee does possess no right either to sell it or alienate in any other manner.

Similarly, clause 5 and its sub-clauses give the right of termination of license agreement to either parties under various circumstances. It is worthwhile to note that in case of default, if any, committed by the assessee, the rights of assessee to use the software would stand terminated forthwith. Under clause 5.5, the assessee is required to deliver the licensed program back immediately to GECC (USA) after removing the same from its systems on termination of agreement. Further, under clause 3.1, the license agreement allows GECC to receive license fee from assessee on quarterly basis as mutually agreed upon. The agreement provides for periodic payment for use of software to GECC, which is subject matter of renewal and revision every calendar year. No case is made out by the department to assume that the periodic payments made by the assessee were the instalments for acquisition of such software and the payment was not for mere usage of software.

It is a matter of fact on record that M/s. GECC (USA) itself has received the right to use the software internally including its group entities for its business and it does not have any right to commercially exploit the software. The assessee is vested with limited right to use the licensed program during the currency of license agreement. The agreement nowhere provides any exclusive right to the assessee, but the assessee was vested with the right to use the licensed program for facilitating its business operations enabling the assessee day-to-day management of business and to work with more efficiency.

Moreover, the CIT(A) in succeeding assessment years 2008-09, 2010-11 and 2011-12 has categorically gave finding of fact that the software is a application software which is routine in nature and used for accounting purposes. Therefore, in view of decisions in the case of CIT vs. Asahi India Safety Glass Ltd 203 Taxman 277 (Del.) and CIT vs. Amway India Enterprises 346 ITR 341 (Del.), we are of the considered opinion that the right to use the vision plus software program does not have any effect of providing enduring benefit and the payment made to GECC (USA) is only the license fees and not the price for acquisition of capital asset. The assessee did not acquire any ownership on the software and after termination of license agreement, all the rights and title remained with GECC (USA). In view of this discussion and relying on various decisions cited by assessee, we are of the considered opinion that the license fee etc. paid by the assessee to M/s. GECC (USA) is revenue expenditure deductible u/s. 37.

With respect to allowing depreciation @ 60% on printers, switches, networking equipments, batteries, pen drives etc. as against 15% allowed by the Assessing Officer. A perusal of impugned order shows that the CIT (A) after following direct decision of jurisdictional High Court in the case of M/s. BSES Rajdhani Powers Ltd. (ITA No. 1266/2010, has observed that the matter is already settled and the printers, switches, networking equipments, UPS and pen drives are held as integral part of the computer system and hence eligible for depreciation @ 60%. No contrary law or material is placed by the Revenue. We, therefore, find no infirmity in the impugned order on this ground

Accordingly appeal of the assessee allowed & appeal of the revenue dismissed.