In a significant ruling, the Madras High Court has allowed a 60% depreciation rate on computer software licenses, particularly emphasizing the specific entry in the tax laws. The case of CIT Vs Computer Age Management Services Pvt. Ltd. revolved around two primary issues: the depreciation rate for software licenses and the treatment of non-compete fees as revenue expenditure.
The Revenue had filed these appeals under Section 260A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal (ITAT) for the assessment years 2012-13, 2013-14, and 2014-15. The central questions raised by the Revenue included the eligibility of the assessee to claim depreciation at 60% for software licenses and whether non-compete fees should be treated as revenue expenditure.
Depreciation on Software Licenses
The assessee in this case is engaged in the business of registrar and transfer agent licensed by the Securities Exchange Board of India (SEBI). They handle large volumes of market-sensitive data and information, primarily relying on customized application software for their operations. During the relevant years, the assessee capitalized software licenses and claimed a depreciation rate of 60%.
The dispute centered around whether these software licenses should be treated as ‘computers, including computer software’ and thus eligible for a 60% depreciation rate. The Revenue contended that software licenses are intangible assets and should fall under Part B of the relevant tax laws, which deals with various intangible assets.
The specific entry in question, Entry 5 of Part A of New Appendix I, stated that ‘computers, including computer software’ are entitled to depreciation at 60%. Note 7 of the Appendix further defined ‘computer software’ as any computer program recorded on various storage devices. The Revenue argued that software licenses should be categorized as intangible assets, like knowhow, patents, copyrights, and licenses, falling under Part B of New Appendix I.
However, the Madras High Court, in line with the specific nature of the entry and taking into consideration the specific definition provided in Note 7, upheld the ITAT’s decision. It concluded that the assessee is indeed eligible for a 60% depreciation rate for the software licenses.
Treatment of Non-Compete Fees
In the case of non-compete fees, the Tribunal interpreted the terms of the non-compete clause in the agreement. It found that the non-compete clause had a limited duration of 18 months, and the payment made by the assessee was for obtaining certain commitments from an individual and preventing competition in the business. The Tribunal, citing a previous decision of the Madras High Court, held that non-compete fees should be treated as revenue expenditure.
The decision in M/s. Asianet Communications Ltd. Vs. CIT considered a similar non-compete agreement, and this case served as a precedent for the Tribunal’s decision.
In conclusion, the Madras High Court upheld the ITAT’s decision, allowing the assessee to claim a 60% depreciation rate for computer software licenses, emphasizing the specific entry in the tax laws. Additionally, it affirmed the treatment of non-compete fees as revenue expenditure. This judgment provides valuable clarity on the tax treatment of software licenses and non-compete fees, with implications for businesses dealing with such financial matters.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
We have heard Mrs.R.Hemalatha, learned Senior Standing Counsel for the appellant and Ms. K.S. Neelayadakshi, learned counsel accepting notice on behalf of Mr.Sandeep Bagmar, learned counsel for the respondent.
2. These appeals, filed by the Revenue under Section 260A of the Income Tax Act, 1961 (for short, the Act), are directed against the common order dated 14.12.2018 in ITA.Nos.1140 to 1142/Chny/2018 on the file of the Income Tax Appellate Tribunal, Chennai ‘C’ Bench respectively for the assessment years 2012-13, 2013-14 and 2014-15.
3. The Revenue has filed these appeals by raising the following substantial questions of law :
“Common Question in all the TCAs:
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the software license acquired by the assessee are in the nature of software application and hence, the assessee was eligible to claim depreciation at 60% ?
Additional Question in TCA.No.412 of 2019 (AY 2014-15) :
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the non compete fee was a revenue expenditure and had to be allowed in one go irrespective of the method of accounting adopted by the assessee?”
4. The assessee is engaged in the business of registrar and transfer agent licensed by the Security Exchange Bureau of India (SEBI). 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. 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 Vs. M/s.Cactus Imaging India Private Limited [reported in (2018) 406 ITR 406], 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. Vs. State of Tamil Nadu [reported in (1991) 80 STC 167] 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.
13. So far as the second substantial question of law is concerned, which arises only for the assessment year 2014-15, the Tribunal accepted the case of the assessee by interpreting the non compete clause in the agreement, which has been reproduced in paragraph 25 of the impugned order. After analyzing the same, the Tribunal held that the tenor of the agreement was only 18 months and it could not be stated that the assessee derived any enduring benefit due to the payment effected by it for obtaining certain commitments from one Mr.V.Shankar and restricting himself from indulging in any competition with the business of the assessee or from weaning way the employees.
14. The Tribunal took note of the decision a Division Bench of this Court in the case of M/s. Asianet Communications Ltd. Vs. CIT [TCA.No.174 of 2005 dated 26.6.2018], to which, one of us (TSSJ) was a party, wherein this Court considered a similar condition imposed in a non compete agreement. Therefore, we find that the Tribunal, on appreciation of the factual position, rightly held that a non compete fee has to be treated as a revenue expenditure. Hence, the second substantial question of law is to be necessarily answered against the Revenue.
15. For the above reasons, the above tax case appeals are dismissed. The substantial questions of law are answered against the Revenue. No costs. Consequently, the connected CMPs are also dismissed.