Full Judgment
2. The revenue has taken two grounds to the effect that on the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in deleting the addition of '(i) Rs. 2,75,10,589 on account of royalty payment for specific software by admitting fresh evidence in violation of rule 46-A, and (ii) Rs. 52,10,200 on account of liabilities continued for the last three years.
2.1 In connection with royalty payments, it is mentioned in the assessment order under the head "Repairs and maintenance" that certain expenditure aggregating to Rs. 5,22,82,485 was incurred in respect of repairs and maintenance facilities. The assessing officer was of the view that the impugned amount constituted capital expenditure and, therefore, the same was added to the income of the assessee. At the same time, depreciation was deducted in respect of the expenditure, leading to a net addition of Rs. 5,18,62,885. While still on the same issue, it was also mentioned that for the reasons given above, software expenses of Rs. 2,75,10,589, included in other office expenses, shall also be capitalized and depreciation shall be deducted @ 30 per cent.
Aggrieved by this order, the assessee moved an appeal before the learned Commissioner (Appeals), before whom a copy of the agreement witnessing the licensing of the software was filed. It was found by him that the assessee was liable to pay USDs 1.87 for every project hour executed in the office of the assessee company for the use of the software licensed by its parent company to it. He came to the conclusion that the instant case was not of acquisition of software, but one of licensing of software and therefore, the payments made to the parent company for use of the software constituted revenue expenditure.
2.2 Before us, the learned Counsel for the assessee pointed out that it was engaged in the business of providing detailed engineering design services. In order to provide the services, certain softwares were used by it in the normal course of its business. These software packages belonged to Fluor Inter-Continent Inc., USA, its parent company. The amounts payable were computed on the basis of number of hours of usage of the software. The assessee had been deducting tax at source from such payments @ 15 per cent in accordance with the provision regarding TDS from royalties under article 12 of the DTAA between India and the USA. It was further pointed out that the assessing officer had issued a questionnaire on 29-10-2004 in which the assessee was, inter alia, asked to furnish the details of expenses incurred on software (pp. 80 and 81 of the paper book). The details were furnished to the assessing officer on 18-11-2004 (pp. 13 to 17 of the paper book). Thereafter, the assessing officer did not ask any further question. However, without confronting the assessee with the issue of admissibility or otherwise; of the expenditure, the assessing officer held the expenditure to be of capital nature. The assessee filed appeal before the Commissioner (Appeals) and one of the grounds taken before him was that the assessing officer erred in holding that the licence fees amounted to a capital expenditure. It was urged before him that the assessee was required to make payments to its parent company in respect of specific software packages known as "Plant Design Software". These packages have been taken by Fluor Inter-Continental Inc. on a corporate licence which allows it to sub-licence the packages to its group companies. The assessee pays royalty to its parent company based upon the actual usage of the software. Tax is also deducted @ 15 per cent from the payments in accordance with the provisions contained in the relevant DTAA. The relevant documents, namely, the agreement with the parent company dated 13-3-2002, the bill for charging license fees received from the parent company, certificate from S.B. Billimoria & Co. dated 23-3-2002 and challan for payment of TDS from the payment were filed before the learned Commissioner (Appeals) (pp. 41 to 52 of the paper book). These documents are now being termed by the revenue as additional evidence.
It was also pointed out that at the relevant point of time, assessment proceedings for assessment year 2003-04 were going on before the assessing officer, in which the similar issue arose. The assessing officer asked for the details of software expenses (p. 83 of the paper book) and he was informed that in that year the assessee incurred expenditure of Rs. 5,05,62,545 as software expenses towards sub-licensing of software packages. Tax was deducted on the payments @ 15 per cent (p. 87 of the paper book). The details of the expenses are also placed on pp. 88 to 91 of the paper book. In reply dated 8-2-2006, it was explained that the royalty is being paid on the basis of number of hours of usage of the software, and a copy of the agreement in this respect was also placed on record. Thus, the case of the learned Counsel was that the assessing officer had not called for any explanation from the assessee, and the disallowance was made without hearing the assessee on the issue. In this light, the documents filed before the learned Commissioner (Appeals) could not be termed as fresh evidence so as to warrant its rejection by him. In any case, since the assessee was not heard on this issue, the learned Commissioner (Appeals) was entitled to call for the relevant documents and decide the issue on merits.
2.3 Coming to the merits, a reference was made to the discussion made by the learned Commissioner (Appeals) in various sub-paras of para 4 of his order. It was, inter alia, mentioned that there was not much discussion on the issue in the assessment order and the amount was disallowed after giving reasons for capitalization of repairs and maintenance expenses. The assessee pointed out that a sum of Rs. 2,66,53,561 was paid for use of the software and not for any acquisition of the software. The payment was made to the parent company on the basis of usage of software sub-licensed to the assessee. Apart from the aforesaid payment, a sum of Rs. 8,57,028 pertained to annual maintenance charges, software lock and license fee paid for use of different types of software. It was also pointed out that the agreement between the licensor and the licensee only grants use of the software and no proprietary right therein has been passed on to the assessee.
The payment is made @ USDs 1.87 for every project hour executed at the office of the assessee. Therefore, it is clear that it is a case of payment for use of software and not for purchase of software. Thus, the expenditure was revenue in nature. The learned Commissioner (Appeals) considered the submissions and the evidence before him and came to the conclusion that the impugned amount, was wrongly treated as capital expenditure by the assessing officer, thereby he deleted the addition made by him.
3. Coming to the legal submissions, it was pointed out that in the proceedings for assessment year 2003-04. the assessing officer relied on the decision of Hon'ble Rajasthan High Court (Jaipur Bench) in the case of CIT v. Arawali Constructions Co. (P) Ltd. . In that case, the assessee company had acquired computer software, the cost of which was claimed as revenue expenditure. The Commissioner (Appeals) and the Tribunal held the expenditure to be of revenue nature. These findings were reversed by the Hon'ble Court by pointing out that acquisition of technical know-how, is a capital expenditure and, therefore, the assessing officer had rightly capitalized the expenditure incurred on acquisition of software and, thereafter, allowed deduction of depreciation as per rules. The case of the learned Counsel was that, that was a case of acquisition of software and not sub-licensing of the software and, therefore, the ratio of decision of that case is not applicable to the facts of the case of the assessee.
Further, the assessing officer had also relied on the decision of Hon'ble Andhra Pradesh High Court in the case of Hylam Ltd. v. CIT . One of the questions before the Hon'ble Court in that case was whether, on the facts and in the circumstances of the case, the sums claimed by the assessee in terms of the agreement with the English company dated 7-12-1959, were allowable expenditure The facts were that the assessee was carrying on the business of manufacturing laminated materials. It entered into an agreement with an English company in respect of patents obtained by the latter company in India for production of copper-clad laminates. The English company granted an exclusive non-assignable license to manufacture copper-clad laminates under the process covered by the patent. The license was to continue for the unexpired term of the patent and any extension granted in respect thereof. In lieu thereof, the assessee was to pay royalty @ 5 per cent on the net selling price of all its laminated products made in accordance with the patented processes. The Hon'ble court held that the payment was capital in nature. The learned Counsel pointed out that in this case also, the license was granted over the period of time which ran concurrently with the subsistence of the period of the patent. Thus, it was not a case of year to year licensing and, therefore, the facts do not correspond to the facts of the assessee's case.
3.1 On the other hand, it was argued that the facts of the case are similar to the facts of the case of Alembic Chemical Works Co. Ltd. v.CIT including penicillin. With a view to increase the yield, the assessee entered into an agreement with a Japanese company engaged in manufacture of antibiotics. In consideration "a once for all payment" of USDs 50,000 was paid. This amount was claimed to be deductible as revenue expenditure. Both the department and the Tribunal rejected the claim and held the expenditure to be capital in nature. The High Court also held that the expenditure was not a revenue expenditure for the reasons that?(i) the assessee had to install a larger plant, (ii) the payment was not made in the course of carrying out an existing business but for setting up a new plant and new process, and (iii) the expenditure was for complete replacement of the existing equipment.
Reversing the decision of the High Court, the Hon'ble court held that there was no material for the Tribunal to come to the finding that the assessee had obtained a completely new plant under the agreement. The assessee had been manufacturing penicillin and he continued to do so even after the agreement with the Japanese company. The agreement merely stipulated the supply of suitable sub-cultures evolved by it for increasing the yield of the penicillin.5 There was also no evidence before the Tribunal to hold that the aforesaid improvisation was not a part and parcel of the existing business. Various conditions put on the assessee regarding its exclusive usage, confidentiality, etc. pertained merely to the use of the know-how and did not point towards its acquisition by the assessee. He also relied on the decision of Hon'ble Karnataka High Court (Full Bench) in the case of Mysore Kirloskar Ltd. v. CIT , in which it was held that where the foreign company did not part with its assets and continued to have proprietary rights over it, their rights in this behalf were not lost. Therefore, the assessee did not acquire any asset or advantage of enduring nature.
Accordingly, it was held that the expenditure was revenue in nature.
3.2 As mentioned earlier, the learned Departmental Representative did not make any argument in the matter.
4. We have considered the facts of the case and rival submissions. It is seen that the instant case is not one of acquisition of software, but of licensing of software, under which the assessee has to pay royalty to its parent company @ USDs 1.87 per hour for use of the software in its office. The agreement of licensing does not confer any proprietary right on the assessee, nor it dilutes the proprietary right of the parent company in the software in any manner. Therefore, the ratios of the cases of Aravali Constructions Co. (P) Ltd. (supra) and Hylam Ltd. (supra) are not applicable. On the other hand, the facts of the case are nearer to the facts of the case of Alembic Chemical Works Co. Ltd. (supra) and Mysore Kirloskar Ltd. (supra). Since the assessee neither acquired any capital asset nor obtained any advantage of enduring nature by paying license fees to its parent company, it is held that the expenditure was revenue in nature. Further, it is held that in absence of proper opportunity granted to the assessee by the assessing officer for explaining its case in this behalf, the learned Commissioner (Appeals) was justified in entertaining evidence in the form of the agreement, the bills, the certificate from the chartered accountant and proof of payment of the TDS for effectively deciding the ground of appeal raised before him. Thus, ground No. 1 is dismissed.
5. In regard to ground No. 2 also, the learned Departmental Representative did not make any argument, but relied on the order of the assessing officer. The issue is discussed by the learned Commissioner (Appeals) in various sub-paras of para 5 of his order. It was submitted before him that the assessee had issued shares to Fluor Daniel Engineers & Consultants Ltd. and Indo-Mauritian Affilates Ltd. in October, 1995. The value of the foreign exchange increased by an amount of Rs. 52.10 lakh. It was held that the receipt of this kind is not covered for taxation purpose under any of the sections falling between Sections 28 to 41 of the Act. Therefore, it was also held that there was no reason to make any addition in the matter.
6. We have considered the facts of the case and submissions before us.
The impugned gain arose to the assessee on capital account due to fluctuation in rate of foreign exchange for the reason that the share application money was received for allotment of shares. Thus, the sum of Rs. 52.10 lakh realized as surplus due to fluctuation in rate of foreign exchange between the date of receipt of share application money and allotment of shares, is on capital account which is not liable to be taxed in the hands of the assessee. Thus, this ground is also dismissed.
8. Ground No. 1 of the revenue is against the deletion of an amount of Rs. 52,10,200, representing excess share application money received and retained in the balance sheet under the head "Other liabilities". This issue stands covered by our order in ITA No. 4565/Del/2005 (supra), in which it was held that the receipt is capital in nature and not liable to tax as revenue receipt. Following that order, this ground is dismissed.
9. Ground No. 2 is against disallowance of expenditure of Rs. 5,04,93,551 incurred in respect of sub-licensing of software packages.
This issue has been decided in favour of the assessee in ITA No.4565/Del/2005 (supra). Following that order, this ground is also dismissed.
10. Ground No. 3 is against deletion of the disallowance made by the assessing officer of Rs. 61,89,660 on account of fluctuation in rate of foreign exchange. This issue was not argued by any of the parties before us although, the learned Counsel for the assessee relied on the decision of Hon'ble Delhi High Court in the case of CIT v. Woodward Governor India (P) Ltd. and Ors.
10.1 On perusal of the order of the learned Commissioner (Appeals), it is found that the impugned amount was claimed on account of re-statement of bank balances lying in EEFE account, leading to loss of Rs. 68,72,567, and restatement of unrealized debtor leading to gain of Rs. 6,82,907, thus, leading to an overall loss of Rs. 61,89,660. It has nowhere been made out by the assessing officer that impugned loss was in any manner related to the capital expenditure incurred by the assessee. The issue is squarely covered by the decision of Hon'ble Delhi High Court in the case of Woodward Governor India (P) Ltd. (supra) in favour of the assessee. Respectfully, following this decision, it is held that the assessee was entitled to deduct the amount of Rs. 61,89,660 in computing its income. Thus, this ground is also dismissed.