PAYMENT FOR SOFTWARE |
Business income ID – (JBC-042) |
In computing the income chargeable under the head 'Profits and gains of business or profession', section 37 of the Act provides for the deduction of any expenditure laid out or expended wholly and exclusively for the purpose of the business or profession, as the case may be. The fact that an item of expenditure is wholly and exclusively laid out for purposes of the business, by itself, is not sufficient to entitle its allowance in computing the income chargeable to tax. In addition, the expenditure should not be in the nature of a capital expenditure.
A perusal of various judicial pronouncements delivered by various courts over a period of time shows that there cannot be a specific or precise test, which can be applied conclusively or universally to all payments for distinguishing them as between capital and revenue expenditure. The cardinal rule is that the question whether a certain expenditure is on capital or revenue account, should be decided from the practical and business viewpoint and in accordance with sound accountancy principles. As held in the cases of Assam Bengal Cement Company and Empire Jute Co., in case an expense is incurred for creating a capital asset, the same is to be treated as a capital expenditure. However, in case the expense does not lead to creation of asset and only enhances the profit earning mechanism of business, the same has to be classified as revenue expense.
The above discussion can be encapsulated into following conclusions:
Where software becomes obsolete with technological innovation and advancement within a short span of time, or where the life of the computer software is shorter (say less than 2 years), it may be treated as a revenue expenditure;
Any software having its utility to the assessee for a period beyond two years, can be considered as accrual of benefit of an enduring nature. However, that, by itself, will not make the expenditure incurred on software as capital in nature and the functional test also needs to be satisfied;
Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business touching either upon capital or revenue field or its utility to a businessman which may touch either upon capital or revenue field;
These criteria for determining the nature of expenditure incurred on acquisition of software, whether capital or revenue as laid down above, are required to be applied to determine the exact nature of expenditure incurred by the assessees in question for acquiring different softwares. This exercise is required to be done in respect of each and every software independently, having regard to the abovesaid criteria.
Depreciation on software : Purchased software is a tangible asset -
The decision laid down by the Supreme Court in Tata Consultancy Services v. State of Andhra Pradesh [2005] 141 Taxman 132, that computer software put in a medium of disk would be goods, can only lead to the conclusion that purchase of such disk amounts to acquiring a tangible asset. If the disk, tape or floppy or other electronic medium in which the software is stored is by itself goods, then the assessee who acquires the same, acquires a tangible asset.
Computer software has not been defined in the Act, but in Appendix-I to the Income-tax Rules, 1962 it has been explained to include computer programme recorded on any disc, tape, perforated media or other information storage device. Therefore, computer software (whether in canned form or uncanned form) is goods and a tangible asset by itself.
With effect from 1-4-2003, computer software has been classified as a tangible asset under the heading 'Plant' in Appendix-I to the Rules entitled to depreciation at the rate of 60 per cent. Thus, the assessee would be entitled to depreciation on purchase of software at the rate of 60 per cent from 1-4-2003, provided:
Such software is owned by the assessee;
The shelf life of the software is not shorter and lasts for a reasonably longer period, i.e., more than 2 years; and
The advantage accruing from the software is in the capital field.
License to use software is an intangible asset -
For and from the assessment year 1999-2000, section 32(1)( ii) allows depreciation also on 'intangible assets', such as know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, owned wholly or partly by an assessee, acquired on or after 1-4-1998, and used by him during the relevant year for the purposes of his business or profession.
The Income Tax (Twelfth Amendment) Rules, 1998 inserted Part B in respect of such 'intangible assets', in the table of rates at which depreciation was admissible in Appendix-I, under rule 5 of Income-tax Rules, 1962, providing for depreciation at 25 per cent.
The question arising here for consideration is whether the licence fee paid for the user of a computer programme would be akin to know-how, etc., and would be covered by the provisions of section 32(1)(ii) on the application of the principle of ejusdem generis.
The Delhi ITAT in Maruti Udhyog Ltd. v. Dy. CIT [2005] 92 ITD 119 held that software is akin to know-how.
In the case of Sudarshan Chemical Industries Ltd. v. ACIT [2008] 110 ITD 171 (Pune), the assessee-company had entered into a licence agreement with SAP for a period of 25 years for use of its proprietary R/3 software, an ERP package, for the purposes of its business and in consideration a sum of ` 1 crore was paid to SAP. The Assessing Officer treated the aforesaid licence as an 'intangible asset' qualifying for depreciation under the provisions of clause (ii) of section 32(1). On appeal to the ITAT, it held that the impugned R/3 software was an 'intangible asset' within the meaning of clause (ii) of section 32(1) and a licence acquired by the assessee to use the same would also fall within the ambit of clause (ii) of section 32(1). Therefore, the expenditure incurred for acquiring the impugned licence is a capital expenditure, eligible for depreciation under section 32(1) at the rate of 25 per cent.
Replacement or updation of existing software is revenue expenditure -
Where expenditure is incurred for modernizing, upgrading and acquiring new technology in the place of old software system, the expenditure incurred on such replacement has been held to be revenue expenditure in the case of Escorts Ltd. v. ACIT [2007] 104 ITD 427 (Delhi).
In Sumitomo Corpn. India ( P.) Ltd. v. Addl. CIT [2005] 1 SOT 91 (Delhi), it was held that expenditure incurred for updating, rationalizing the existing data processing system of the assessee-company would be revenue expenditure. In fact, by incurring this expenditure the assessee has been able to save recurring expenditure of this nature. The software by its own nature is a thing which requires ongoing expenses for its upgradation, if it is to be used for efficient functioning of the office work in a business and, therefore, cannot be said to be an expenditure deriving an enduring benefit to the assessee.
In ACIT v. Jasper Investments Ltd. [2007] 109 TTJ 530 (Mum.), the Tribunal held that where software is in nature of license and not in nature of a new software, expenses thereon have to be treated as revenue in nature.
Conclusion as to depreciation on Softwares
Where capital expenditure is incurred to acquire a software, it shall be allowed as deduction in the form of depreciation under section 32(1)(i) at the rate of 60% and where a license is acquired to use the software, it might be treated as a technical know-how. Once it is treated as technical know-how it cannot be allowed as deduction under section 37(1), as held in CIT v. Premier Automobiles Ltd. [1993] 70 Taxman 495 (Bom.) and instead it shall be subject to depreciation under section 32(1)(ii) at the rate of 25%.