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/-.

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