AMWAY INDIA ENTERPRISES v. DEPUTY COMMISSIONER OF INCOME TAX
[Citation -2008-LL-0215-19]

Citation 2008-LL-0215-19
Appellant Name AMWAY INDIA ENTERPRISES
Respondent Name DEPUTY COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 15/02/2008
Assessment Year 1998-99, 2001-02, 2002-03
Judgment View Judgment
Keyword Tags capital or revenue expenditure • higher rate of depreciation • intellectual property right • applicability of provision • income from house property • opportunity of being heard • 100 per cent depreciation • test of enduring benefit • information technology • technical information • transfer of ownership • new source of income • right of disposition • effective management • software development • technical assistance • legal representative • scientific research • technical knowledge • plant and machinery • rights of ownership
Bot Summary: According to him, all the software acquired by the assessee was in fact upgradation of the existing software and there was no purchase or acquisition of any new software as such. In addition to the above, the ruling provides the characteristics of standardized software and the characteristics of customized, as well as a broad definition for shrink-wrapped and packaged software, as following: Standardized software refers to software which is ready-made and available for sale to general users and its program is not made or modified for a specified user. The purchaser of standardized software can only acquire the right to install and use the program on an identifiable personal computer or number of computers, and is not permitted to reproduce, modify, reverse engineer, de-compile or disassemble the programme; Shrink-wrapped software refers to software where the software s owner has drafted a unilateral licensing agreement for the sake of user convenience and the terms are placed on a tangible medium. CIT 1 SOT 91, Jt. CIT vs. Citicrop Overseas Software Ltd. and IBM India Ltd. vs. CIT. In all the above decisions, it has been held that expenditure on license to computer software is decisions, it has been held that expenditure on license to computer software is allowable as revenue expenditure. Shri Devender Shanker further submitted that upgradation from a particular Disc Operating Software or application software to another particular software may have to be seen whether it tantamounts to acquisition of a new software or increasing or improving the speed, efficiency, capacity or overall performance of the software. According to Shri Devender Shanker, some of the software installed on servers which may or may have many end users across very large geographical area like software used for central reservation systems, airline booking, railway booking, banking, internet software requires certain maintenance on a regular basis so that the software operate without any interruption. Our conclusions on the issue under consideration thus can be summarized, as under: When the assessee acquires a computer software or for that matter the license to use such software, he acquires a tangible asset and becomes owner thereof as held above relying on the decision of Hon ble Supreme Court in the case of TCS. Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time.


N.V. Vasudevan, J.M.: This Special Bench has been constituted under s. 255(3) to dispose of appeals filed in case of M/s Amway India Enterprises and M/s SQL Star International Ltd., as well as to dispose of following important questions which are involved therein: "(i) Whether, in facts and circumstances of case, expenditure incurred by assessee on account of computer software is of revenue nature or capital nature? (ii) If expenditure incurred on computer software is held to be of capital nature, what would be rate of depreciation applicable thereon?" factual backdrop which has given rise to constitution of this Special Bench can be briefly summarized as follows. In case of M/s Amway India Enterprises, deduction on account of software expenditure incurred amounting to Rs. 20,04,105 was claimed by assessee company in its return of income filed for asst. yr. 2001-02. said expenditure was claimed to be incurred by assessee company for acquiring following software for use in its business: "1. MS Project 2000 Full Packaged Product (FPP): Rs. 19,700 Microsoft Office Project 2000 is used by project managers who need desktop tool to manage their projects independently. These project managers do not require k co-ordination with other project managers. Project 2000 is designed t o improve ability to organize work and communicate effectively and succinctly through familiar, easy to use tools. benefit of software is to better organize and manage work and people to ensure that projects are delivered on time and within budget. It conveys project plans and status effectively and succinctly. It also enhances productivity and effectiveness by learning and applying project management practices easily. MS Project 2000 Central Open License Program: Rs. 78,600 software is basically platform software, this helps in operating MS Project 2000 full packaged program software on to serve without which server cannot host MS Project, 2000. Macromedia Dream weaver and Flash: Rs. 35,800 Macromedia Dream weaver software includes following: (1) Macromedia Dream weaver version 4.0 on Windows: Macromedia Dream weaver is industry-leading web development tool, enabling users to efficiently design, develop and maintain standards-based websites and applications. With Dream weaver, web developers go from start to finish, creating and maintaining basic websites to advanced applications that support best practices and latest technologies. (2) Macromedia Flash version 5.0 on Windows: Website designers and developers use Macromedia Flash to accelerate projects while maintaining high degree of creative control. It provides standard templates and components, Macromedia online resource library and speed workflow by directly importing media including digital video, PDF and EPS files. This software also helps in adding interactivity with powerful scripting. Turbo Gold Software: Rs. 17,61,034.68 software helps in compression of size of e-mails sent through Lotus Notes mailing system. It includes licenses for 150 uses who are using Lotus Notes Mailing system and software license for running on its server. For example: user working on Lotus Notes Mailing system wants to send message through e-mail. e-mail size containing message in 2 MB (mega bytes). Turbo Gold Software compresses size of e-mail lesser than 2 MB thus saves time and usage cost. Wintap call billing software: Rs. 40,000 This windows based software is used for recording telephone calls and its cost. software provides complete detail in case of outgoing calls such as extension number, telephone numbers, time of call and duration of call etc. Bright Star Are Server Advance Edition: Rs. 2,50,000 function of software is to keep back up of data. It ensures that data on computer system are saved and stored and which may be retrieved in case computer system is not working or hard disk in system gets crashed. Windows 2000: Rs. 2,79,543 Windows 2000 software comprised following: (i) Back Office Server 2000 English International CD 5 Clients Back Office Server 2000 has 5 server components to take back-up of database such as MS Exchange Server for e-mail back-up, MS Windows Server for MS Windows database and SQL Server for storage of other database etc. basic function is to store database in respective space contained under server. (ii) Windows 2000 Server Microsoft Open License Program (MOLP) Windows 2000 Server is multipurpose network operating system for businesses of all sizes. Windows 2000 Server lets user share files and printers reliably and securely. This software helps in choosing from thousands of business applications compatible to run on Windows 2000 Server and build Web applications and connectivity to Internet. software license grants right to install Windows 2000 server on computer after which application software can be installed on it. (iii) Windows 2000 Client Licenses There are 100 licenses which have been taken for use of Windows 2000 for 100 users. For each user, separate license is required for Windows 2000 platform. As explained above, Windows 2000 is platform, which helps in running application software such as MS Office at computer system. Win XP software: Rs. 14,456 Microsoft Windows XP Professional is next version of Windows operating system. Windows XP Professional is designed specifically to optimize productivity using latest advancements in digital world and is built on solid foundation of Windows 2000. Windows XP Professional provides improved reliability, security, performance and ease of use, setting new standards in efficient and dependable computing. Microsoft Windows XP Professional provides enhanced security infrastructure that defends against viruses, worms, and hackers, along with increased manageability and control for IT professionals and improved experience for users." It was claimed by assessee that expenditure in question has been incurred on obtaining licenses for use of aforesaid software and since all these software are essentially in nature of application software, expenditure incurred was of revenue nature as same only facilitated in its day to day operations. It was also claimed that said expenditure did not result in enduring benefit as life of application software is invariably short and same was bound to become technically obsolete very fast. This claim of assessee, however, was not found to be acceptable by AO as, according to him, said software were part of plant and machinery of assessee and gave enduring benefit to it. AO also noted that all application software purchased by assessee had long-lasting use of more than three-four years and same, according to him, thus resulted into enduring benefit to it. He, therefore, treated expenditure incurred by assessee on acquisition of software as capital in nature and treating same as part of plant and machinery, depreciation thereon at normal rate of 25 per cent was allowed by him in absence of any specific rate prescribed in schedule for software. action of AO in treating software expenditure as that of capital nature was upheld by learned CIT(A) since he found on verification of relevant details that assessee has not upgraded or replaced software frequently. He however, directed AO to allow depreciation at rate of 60 per cent on software considering that rate of depreciation provided on computers for asst. yrs. 1999-2000 to 2002-03 was 60 per cent and from asst. yr. 2003-04 onwards, even computer software was included in computers to be eligible to claim depreciation at this higher rate. In asst. yr. 2002-03 also, expenditure incurred by assessee on acquisition of software was treated as capital expenditure by AO as well as by learned CIT(A) for similar reasons as given in asst. yr. 2001-02. However, depreciation allowed thereon at normal rate of 25 per cent by AO was confirmed by learned CIT(A) overlooking fact that same was allowed by his predecessor in assessee s own case for asst. yr. 2001-02 at rate of 60 per cent. Against order of learned CIT(A), appeal was filed by assessee before Tribunal and when same came up for hearing initially before Division Bench, main contention raised by learned counsel for assessee in support of assessee s case was that by incurring impugned expenditure, assessee company had acquired only license to use software and there was no outright purchase of software giving ownership to assessee of said software so as to treat same as capital expenditure. In support of this contention, reliance was placed on behalf of assessee on decision of Delhi Bench C of Tribunal in case of Addl. CIT vs. Asahi India Safety Glass (ITA Nos. 3280/Del/2001, 3287/Del/2001, C.O. No. 237/Del/2004 and C.O. No. 268/Del/2004) wherein expenditure incurred by assessee on acquisition of application software by way of license to use was allowed as revenue expenditure. It was contended by learned counsel for assessee that purchase of software and acquisition of license to use software are two different transactions in law which are not interchangeable. learned Departmental Representative, on other hand, contended before Division Bench that acquiring license to use software is common mode of purchase of software and therefore, expenditure incurred on such purchase of software giving enduring benefits to assessee is capital expenditure as rightly held by authorities below. In support of this contention, t h e learned Departmental Representative kly relied on decision of Delhi Bench of Tribunal in case of Maruti Udyog Ltd. vs. Dy. CIT (2005) 92 TTJ (Del) 987: (2005) 92 ITD 119 (Del) wherein it was held that expenditure incurred on purchase of software being capital asset, is always capital incurred on purchase of software being capital asset, is always capital expenditure. He submitted that nature of software purchased in present case was similar to one involved in case of Maruti Udyog Ltd. (supra) and as such, this issue is squarely covered in favour of Revenue by decision of Tribunal rendered in said case. After considering rival submissions, it was noted by Division Bench that in case of Maruti Udyog Ltd. (supra) cited by learned Departmental Representative, expenditure on purchase of software was held to be capital expenditure by Tribunal relying on decision of Hon ble Rajasthan High Court in case of CIT vs. Arawali Constructions Co. (P) Ltd. (2002) 177 CTR (Raj) 79: (2003) 259 ITR 30 (Raj) wherein it was held that software is akin to know-how. Reliance was also placed by Tribunal on decision of Hon ble Supreme Court in case of Scientific Engineering House (P) Ltd. vs. CIT (1985) 49 CTR (SC) 386: (1986) 157 ITR 86 (SC) wherein it was held that know-how is part of plant and machinery and assessee is entitled to depreciation thereon. In this context, Tribunal observed that software is integral part of computer inasmuch as computer can function only with help of software. Further reliance was also placed by Tribunal on decision of Hon ble Supreme Court in case of Arvind Mills Ltd. vs. CIT (1992) 106 CTR (SC) 237: (1992) 197 ITR 422 (SC) wherein it was held that expenditure incurred on capital asset does not lose character of capital expenditure and does not become revenue expenditure on score that said capital expenditure also ultimately helps in effective running of business. Tribunal thus held that software being akin to know-how is intangible capital asset and expenditure incurred on purchase of software is capital expenditure. Tribunal also referred to amendment made in IT Rules, 1962 providing for depreciation on software at rate of 60 per cent w.e.f. 1st April, 2003 and observed that on basis of said amendment providing for higher depreciation on software, it could not be said that prior to 1st April, 2003, expenditure incurred on software was revenue expenditure. Tribunal held that it was always capital asset entitled to normal rate of depreciation upto 31st March, 2003 which was enhanced to 60 per cent w.e.f. 1st April, 2003 considering rapid wear and tear. decision of Bangalore Bench of Tribunal in case of IAC vs. Commission & General Agency (1986) 17 ITD 6 (Bang) was also found by Division Bench to be of similar effect wherein it was held that cost of software purchased by computer dealer for purpose of demonstration and also to provide data processing service to its customers is capital expenditure. As noted by Division Bench, it was also held by Tribunal in said decision that software is technical know- how which has to be purchased by user of computer to make effective use of machine. It was also noted by Division Bench that in case of Jt. CIT vs. Citicrop Overseas Softwares Ltd. (2004) 85 TTJ (Mumbai) 87, Mumbai Bench of Tribunal, however, held that expenditure on application software is allowable revenue expenditure since software does not have any degree of endurance and permanence due to change of system and change of technology. Similarly, Chandigarh Bench of Tribunal in case of Bank of Punjab Ltd. vs. Jt. CIT (2004) 91 TTJ (Chd) 422, held that purchase of software is not expenditure in capital field as assessee is required to change software within very short span of time may be year or two and they become outdated because of change of system and change of technology. In case of Asahi India Safety Glass (supra) cited by learned counsel for assessee, similar issue had arisen for consideration before Delhi Bench of Tribunal and when decision of Tribunal rendered in case of Maruti Udyog Ltd. (supra) was relied upon by learned Departmental Representative in support o f Revenue s case that expenditure on purchase of software was capital expenditure, Tribunal distinguished same on ground that assessee in said case had actually purchased software whereas in case before it, assessee had only acquired right (license) to use software. Tribunal thus gave new dimension to issue while accepting contention raised on behalf of assessee that only license to use application software was acquired by assessee from Oracle in said case and it was not case of actual purchase of software by assessee. Tribunal also derived support from decision of Hon ble Supreme Court in case of Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1: (1989) 177 ITR 377 (SC) to hold that test of enduring benefit is more prone to failure in case of computer software where pace of advancement is so rapid that whatever technology is installed today become obsolete within short time. Having taken note of aforesaid decisions of Tribunal relied upon by both sides in support of their stand on issue under consideration, it was found by Division Bench that there were divergent views expressed on issue relating to exact nature of expenditure incurred on software being capital or revenue. It was also felt by Division Bench that there are various aspects which are relevant and material and having direct bearing on issue which have not been specifically/elaborately considered in said decisions rendered by different Division Benches of Tribunal while expressing divergent views on said issue. Since said issue was expected to occur regularly in many cases, it was felt by Division Bench that same may be referred to Special Bench for decision after taking into consideration all aspects referred to above as well as other contentions that might be put forth by parties. Accordingly, this Special Bench has been constituted by Hon ble President for deciding questions as referred to above at instance of Division Bench and also for disposing of appeals filed in case of M/s Amway India Enterprises. Before Special Bench constituted by Hon ble President could sit and hear appeals filed in case of M/s Amway India Enterprises, similar issue relating to allowability of software expenditure arose for consideration before Division Bench of Tribunal i.e. Delhi G Bench, in case of M/s SQL Star International Ltd. relevant facts involved in said case were that assessee company was engaged in business of software development as well as running training center to impart specialized training to students in software technology. It purchased computer software and claimed entire cost as depreciation. assessee contended before AO that software which it purchased becomes obsolete in about six months time due to fast changes in technology in IT sector and therefore, such expenses are to be considered as revenue expenditure. management of assessee company, however, considered it appropriate to claim expense under head Depreciation because company had intended to come out with public issue and to show healthy balance sheet. In immediately preceding assessment year also, assessee company had claimed 20 per cent assessment year also, assessee company had claimed 20 per cent depreciation on computer software owning to absence of profits. According to AO, it was not permissible for assessee to take different stand to suit its own need and to manipulate profits for taxation or for coming out with public issue. AO further held that financial position of company was healthy i n present assessment year and therefore, management arbitrarily decided to claim 100 per cent depreciation on computer software. AO also rejected plea of assessee that software becomes obsolete in about six months time. AO further noticed that assessee had not taken computer software as part of block of assets and treated them as revenue expense in books of account. He, therefore, held that assessee cannot claim depreciation on said software. On appeal by assessee, CIT(A) held that software becomes obsolete because of technological advancement in IT sector and also becomes redundant with every project undertaken by assessee for its software development program. He held that claim of assessee that it should be allowed as revenue expenditure, therefore, deserves to be accepted. Accordingly, claim of assessee was allowed by learned CIT(A) and this relief allowed to assessee by learned CIT(A) was challenged by Revenue in appeal filed before Tribunal which came to be heard initially by Division Bench. Having noted that similar issue relating to allowability of software expenditure has already been referred to Special Bench in case of M/s Amway India Enterprises, it was thought fit by Division Bench to make request to Hon ble President for referring case of M/s SQL Star International Ltd. also to Special Bench which was duly acceded to. Shri M.S. Syali, senior advocate, appearing for assessee i.e. M/s Amway India Enterprises opened argument. He contended before us that none of software purchased by assessee was custom made software and all of them had been purchased "off shelf". He submitted that assessee was merely licensee and right to use software was subject to conditions mentioned in license agreement. According to him, all software acquired by assessee was in fact upgradation of existing software and there was no purchase or acquisition of any new software as such. In support of his contention, he relied on decision of Hon ble Delhi High Court in case of CIT vs. G.E. Capital Services Ltd. (IT Appeal No. 560 of 2007 dt. 10th July, 2007) [reported at (2008) 214 CTR (Del) 551 Ed.] wherein their Lordships of Delhi High Court, while considering question whether expenditure incurred by assessee on acquisition of software was capital or revenue in nature, endorsed view of Tribunal that in view of technological changes and need to upgrade software on regular basis, software cannot be said to be asset of enduring nature. Court further observed that where expenditure was incurred on purchase of software which is not custom built software, same requires regular upgradation. Court ultimately concluded that there was thus no error committed by Tribunal in taking view that it did. Our attention was further drawn by Shri Syali to decision of Hon ble Delhi High Court in case of CIT vs. K & Co. (2003) 181 CTR (Del) 378 wherein it was held that expenditure incurred by assessee on maintenance of computer and their upgradation including software is in nature of revenue expenditure. Shri Syali thereafter distinguished decision rendered by Hon ble Rajasthan High Court in case of Arawali Constructions Co. (P) Ltd. (supra). He pointed out that assessee in said case had claimed Rs. 1,38,360 on account of acquisition of software which represented computer program purchased from Hindustan Computers Ltd. Hon ble Rajasthan High Court noticed that software so purchased was in nature of consultancy fees paid to Hindustan Computers Ltd. for program specifically developed for data analysis for mining purposes. AO, however, held that in agreement, there was no reference to payment being in nature of consultancy fees and it was outright purchase of computer program which was related to technical know-how. He, therefore, concluded that purchase was of technical know-how and same was asset of capital nature. learned CIT(A) allowed claim of assessee treating expenditure as revenue and Tribunal also confirmed order of CIT(A). Hon ble Rajasthan High Court, however, reversed order of Tribunal after concluding that payment made by assessee to Hindustan Computers Ltd. was made for outright purchase of computer software which was used as technique in mining operation. Court further noticed that CIT had held that acquisition of software cannot be treated to be asset of enduring nature. Court, however held that if program is used in one mining to another mining operation, there was no reason why it should not be treated as capital asset and expenditure on acquisition thereof capital expenditure. Court finally concluded that assessee had acquired technical know-how and expenditure incurred on such acquisition was capital expenditure. According to Shri Syali decision in case of Arawali Constructions Co. (P) Ltd. (supra) thus was given on totally different facts inasmuch as payment therein was for acquisition of software which was tailor-made to be used in mining operation which represented its earning apparatus whereas in present case, assessee was merely licensee of software which were acquired for efficient use of computers for running day to day business. Shri Syali, also pointed out that in case of Arawali Constructions Co. (P) Ltd. (supra), CIT(A) as well as Tribunal had relied on decision of Hon ble Bombay High Court in case of CIT vs. Borosil Glass Works Ltd. (1986) 51 CTR (Bom) 18: (1986) 161 ITR 286 (Bom) and Hon ble Delhi High Court in case of Shriram Refrigeration Industries Ltd. vs. CIT (1981) 127 ITR 7 4 6 (Del) which were found to be distinguishable on facts by Hon ble Rajasthan High Court pointing out that assessee in said cases merely had license to sell particular items and that there was no transfer or parting with secret processes and technical know-how to assessee. According to him, final conclusion of Hon ble Court was that assessee having made payment for outright purchase of computer software which was used as technique in mining operations, there was no reason not to treat it as capital expenditure. He contended that purchase of software thus was treated by Hon ble Rajasthan High Court in said case as acquisition of technical know- how by assessee and expenditure incurred thereon was held to be capital expenditure. Shri Syali then drew our attention to decision of Delhi Bench of Tribunal in case of Maruti Udyog Ltd. vs. Dy. CIT (supra). Our attention was drawn to para No. 68 of aforesaid decision and it was pointed out that in said case, there was admittedly acquisition of software through purchase. Otherwise expenditure incurred on upgrading of software was treated as revenue expenditure and allowed. It was also admitted position that software in that case was capital asset. He drew our attention to para Nos. 68 to 73 and in that case was capital asset. He drew our attention to para Nos. 68 to 73 and specifically relied on following observations of Tribunal made in para Nos. 72 and 73: "72. Rival submission of parties have been considered carefully. In our opinion, there is no merit in submission of learned counsel for assessee. There is no dispute that expenditure of Rs. 1,39,91,022 was incurred on acquisition of software by way of purchase. expenditure on upgradation and maintenance of software have been classified separately and also allowed by CIT(A) as revenue expenditure. So only and limited issue for our consideration is whether expenditure on acquisition of software is revenue or capital expenditure. Now only question is whether purchase of software is capital asset. There is no dispute that software is capital asset. There is no dispute that software is intangible asset. Hardware, commonly called as computer, is tangible asset which by itself cannot function. computer can function only with help of software. Software is akin to know-how as held by Hon ble Rajasthan High Curt in case of Arawali Constructions Co. (P) Ltd. (supra). In this judgment, it has been clearly held that expenditure on purchase of software is capital expenditure. There is no contrary judgment on this aspect of issue. Hence, it has to be held that software is asset. Admittedly, assessee is not in business of software. Hence, we are further of view that software was capital asset as far as present assessee is concerned. IT Rules, 1962 as amended w.e.f. 1st April, 2003 rather helps Revenue and not assessee inasmuch as it provides for depreciation on software at rate of 60 per cent." Shri Syali pointed out that in aforesaid case, there was thus no dispute that expenditure was incurred on acquisition of software by way of purchase and further that expenditure on upgradation on maintenance of software was considered separately and allowed by CIT(A) as revenue expenditure. Tribunal was basically concerned with case of acquisition of software by purchase. Software being intangible asset, its acquisition was rightly treated as capital expenditure. He also highlighted fact that in view of admitted position that software was purchased by assessee, Tribunal had no occasion to go into nature of right acquired by assessee. It was submitted by him that facts of present case, on other hand, are entirely different inasmuch as none of expenditure incurred by assessee was related to acquisition of capital asset. He contended that in aforesaid decision, Tribunal thus had no occasion to consider distinction between tailor-made software and software which is purchased "off-the-shelf". Shri Syali then referred to decision of Hon ble Supreme Court in case of Arvind Mills Ltd. vs. CIT (supra) and explained that said case is applicable to facts where there is no dispute that asset acquired is capital asset. Their Lordships have held that merely because capital asset also facilitates carrying on of business on day to day basis, expenditure incurred on purchase/acquisition thereof would not become revenue expenditure. He contended that asset which otherwise is capital asset does not lose character of capital expenditure and does not become revenue expenditure merely because it facilitates carrying on of business on day to day basis as held by Hon ble Supreme Court, but this proposition has no application where asset acquired by assessee is not capital asset at all. Shri Syali further argued that apart from two cases above, all other cases relating to acquisition of software were in favour of assessee as in all those cases, software acquired was held to be revenue asset. In this connection, Shri Syali drew our attention to decision of Addl. CIT vs. Asahi India Safety Glass (2006) 6 SOT 656 (Del), especially para No. 6 thereof and pointed out that assessee in said case had acquired software package prepared by globally known Oracle Corporation, USA. software covers areas of financial accounting, inventory and purchase. assessee entered into license agreement with Oracle titled Master Software License and Service Agreement . Tribunal further noticed that software which assessee was to install and implement was neither attached to any machinery used in production nor was part of any production process. Tribunal after examining various clauses of agreement pointed out that by acquiring license, assessee did not acquire any tangible asset, much less any asset which provides any new source of income or which augments present source of income. Tribunal ultimately concludes that expenditure was not in nature of capital ultimately concludes that expenditure was not in nature of capital expenditure. Tribunal also distinguished decision in case of Maruti Udyog Ltd. (supra). Shri Syali then drew our attention to decision of Delhi Bench of Tribunal in case of Escorts Ltd. vs. Asstt. CIT (2006) 102 TTJ (Del) 522: (2006) 8 SOT 167 (Del). As pointed out by him substantial expenditure was incurred by t h e assessee in said case on software technological upgradation and computerization which was inclusive of cost of purchase of ERP system. Tribunal found that ERP business software was acquired by assessee with unlimited user license and therefore, expenditure incurred on acquisition of software was by way of outright purchase. Tribunal rejected plea of assessee that it was case of mere upgradation of existing software. Thereafter, Tribunal applied ratio laid down in Maruti Udyog Ltd. (supra) as well as Arawali Construction Co. (P) Ltd. (supra). He then referred to decision of Bangalore Bench of Tribunal in case of IBM India Ltd. vs. CIT (2007) 108 TTJ (Bang) 531: (2007) 105 ITD 1 (Bang) wherein expenditure incurred on application software was held to be revenue expenditure observing that said software merely enable assessee to carry out its business operation efficiently and smoothly. It was also noted by Tribunal that software has to be fitted to computer system to work and since same by itself cannot work on stand alone basis, it facilitates as aid to operation rather than tool itself. Thereafter, reference was made by Shri Syali to case of Sonata Information Technology Ltd. vs. Addl. CIT (2007) 106 TTJ (Bang) 797: (2006) 103 ITD 324 (Bang) where Tribunal drew distinction between acquisition of copyright and purchase of copyrighted article. According to learned counsel for assessee, acquisition of license to use computer program is akin to acquisition of copyright article in contrast to acquisition of copyright. Shri Syali submitted that there are different types of computer software. He then referred to changes made in IT Rules w.e.f. 1st April, 2003. He referred to Appendix I Part A-III(5) to IT Rules as applicable for asst. yrs. 2003-04 to 2005-06 whereby computers including computer software have been specifically classified as item of asset falling within block of asset, machinery and plant entitled to depreciation at rate of 60 per cent. It was submitted by him that merely because item is listed as capital asset in Appendix under IT Rules, it cannot automatically follow that software is capital asset. Shri Syali argued that before applying Appendix to Rules, finding has to be recorded in terms of s. 32(1)(ii) that software acquired by assessee is capital asset entitled only to depreciation. He then explained that aforesaid item of expenditure will only be applicable to tailor-made software for which source code exists or to software which are acquired and treated as part and parcel of computer hardware and capital asset. However, software acquired under license on terms and conditions whereby ownership is retained by licensor and where such software only adds to efficient running of day to day operation of business, cannot be held to be expenditure of capital nature as they were only copyrighted articles. Reliance was also placed on decision of Special Bench of Kolkata Tribunal in case of Peerless Securities Ltd. vs. Jt. CIT (2005) 93 TTJ (Kol)(SB) 325: (2005) 94 ITD 89 (Kol)(SB). Mr. O.S. Bajpai, learned counsel for assessee i.e. M/s SQL Star International Ltd., at outset, invited our attention to provisions of s. 32(1)(ii) and pointed out that as per said provisions operative from 1st April, 1999, assets are classified in two parts i.e. tangible and intangible assets. He submitted that intangible assets are to be of nature of any business or commercial rights as per said provisions and such rights again have to be in nature of capital asset. He submitted that terms and conditions of relevant agreement, therefore, need to be seen in order to ascertain whether acquisition of software by assessee on license amounts to acquisition of capital assets within meaning of s. 32(1)(ii). In this regard, he invited our attention to copy of relevant license agreement placed at page No. 12 of his paper book and took us through relevant terms and conditions of said agreement. He pointed out that software acquired by assessee from Oracle in terms of said agreement was application software/program and license granted to assessee was non-exclusive license to be used only for its own purpose as per cl. 2.1.1. He further pointed out that it was also stipulated in said clause that if there is limit to number of users or other restrictions stated on order form for program or otherwise imposed upon license granted pursuant to said agreement, license to use that program shall be restricted accordingly. He then invited our attention to cl. 2.1.6 of said agreement which reads as under: "By virtue of this agreement client acquires only right to use program(s), documentation and media upon which program(s) or documentation are supplied and provided for in this agreement and does not acquire any rights of ownership, or any other implied rights whatsoever. All rights, title and interest in or to programs or documentation, modifications, enhancements and derivatives shall at all times remain property of or vest on creation in Oracle or Oracle Corporation. Client agrees to execute all such documents as may become reasonably necessary for purpose of vesting or assigning any intellectual property rights in modifications, enhancements and derivative works to Oracle or its nominee." Relying kly on aforesaid restrictions imposed as per agreement on licensee acquiring right to use application software from Oracle, he contended that there was no acquisition of any asset, much less capital asset and what was acquired is only license to use software subject to terms of license as contained in agreement between assessee and Oracle. It was submitted by him that when person acquires license, he acquires no asset. In this connection, he drew our attention to meaning of term license as given in Black Law s Dictionary. Since license is not asset and condition of grant of depreciation is that assessee should own asset, assessee cannot claim depreciation. Shri Bajpai thereafter submitted that computer software is intangible asset and falls within ambit of Copyright Act. Intellectual property rights in computer software is recognized and protected by provisions of Copyright Act. Sec. 14(a) defines copyright as exclusive right subject to provisions of Copyright Act to do or authorize doing of any of following acts in respect of work or any substantial part thereof namely: "(a) in case of literary, dramatic or musical work, not being computer programme, (i) to reproduce work in any material form including storing of it in any medium by electronic means; (ii) to issue copies of work to public not being copies already in circulation; (iii) to perform work in public, or communicate it to be public; (iv) to make any cinematograph film or sound recording in respect of work; (v) to make any translation of work; (vi) to make any adaptation of work; (vii) to do, in relation to translation or adaptation of work any of acts specified in relation to work in sub-cls. (i) to (vi); (b) in case of computer programme, (i) to do any of acts specified in cl. (a); (ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of computer programme: Provided that such commercial rental does not apply in respect of computer programmes where programme itself is not essential object of rental;" It was submitted by him that assessee in using computer software under license cannot do any of acts specified in s. 14(b) of Copyright Act. Therefore, in law, assessee did not acquire any intellectual property right either wholly or partially in copyright on computer software which, at all material points of time, remain only with owner of copyright in computer software. In support of his contention, learned counsel relied on decision of Bangalore Bench of Tribunal in case of Samsung Electronics Company Ltd. vs. ITO (2005) 93 TTJ (Bang) 658: (2005) 94 ITD 91 (Bang) wherein it was held that in case of application software, owner retains copyright and what he transfers under license agreement is only copy of copyrighted article. He also relied on decision of Bombay Bench of Tribunal in case of Dy. CIT vs. All Russia Scientific Research Institute of Cable Industry (2005) 92 TTJ (Mumbai) 74: (2006) 98 ITD 69 (Mumbai) wherein it was held that outright sale implies unfettered right to use. He also relied on decision of Delhi Bench of Tribunal in case of Hero Honda Motors Ltd. vs. Jt. CIT (2005) 95 TTJ (Del) 782: (2006) 103 ITD 157 (Del) wherein it was held that when software is acquired with limited right of use, expenditure incurred on such acquisition is revenue expenditure. Shri Bajpai also cited following decisions in support of assessee s case on issue under consideration: (i) Business Information Processing Services vs. Asstt. CIT (2000) 67 TTJ (Jp) 131: (1999) 239 ITR 19 (Jp)(AT): "Held, that software used by assessee was not of any enduring benefit as assessee had to change software within short span of time, i.e., four months or six months. Sometimes it was of no use at all because it became outdated because of changes in system and changes in technology. Times were fast changing and computer system was emerging as very important component during this period. Day by day systems are developed in new way and software is needed like raw material for use in manufacturing. Therefore, these expenses were purely revenue in nature and they should be allowed in full." (ii) Sonata Information Technology Ltd. vs. Addl. CIT (supra): "Amount paid by assessee for purchase of software was payment for acquisition of copyrighted article and not for any copyright as assessee had merely obtained right to distribute copyrighted material i.e. software, and n o copyright was assigned to assessee by vendors and therefore, payment made to foreign concerns was not royalty within meaning of s. 9(1)(vi) and assessee was not liable to deduct tax under s. 195." (iii) IBM India Ltd. vs. CIT (supra): "The application software enables assessee to carry out its business operation efficiently and smoothly. However, such software itself does not work on stand alone basis. same has to be fitted to computer system to work. Such software enhances efficiency of operation. It is aid in manufacturing process rather than tool itself. Thus, for payment of such application software, though there is enduring benefit, it does not result into acquisition of any capital asset. same merely enhances productivity or efficiency and hence to be treated as revenue expenditure." (iv) Shriram Refrigeration Industries Ltd. vs. CIT (supra): "Any payment made for obtaining access to technical information which does not result in absolute transfer of technical knowledge is allowable as revenue expenditure." (v) CIT vs. Ciba of India Ltd. (1968) 69 ITR 692 (SC): "The contributions made by assessee to foreign company to merely enable it to acquire right to draw for purpose of carrying on its business as manufacturer and dealer of pharmaceutical products upon technical knowledge available from foreign company for limited period with stipulation not to divulge information to third parties and further return of all information and scientific data on conclusion of agreement is admissible revenue expenditure under s. 10(2)(xv)." (vi) Alembic Chemical Works Co. Ltd. vs. CIT (supra): "The rapid strides in science and technology in field should make us little slow and circumspect in too readily pigeonholing outlay such as this as capital. circumstance that agreement insofar as it placed limitations on right of assessee in dealing with know-how and conditions as to non- portability, confidentiality and secrecy of know-how incline towards inference that right pertained more to use of know-how than to its exclusive acquisition. improvisation in process and technology of enterprise was supplemental to existing business. financial outlay under agreement was for better conduct and improvement of existing business and should, was for better conduct and improvement of existing business and should, therefore be held as revenue expenditure." (vii) CIT vs. I.A.E.C. (Pumps) Ltd. (1998) 150 CTR (SC) 126: (1998) 232 ITR 316 (SC): "Business expenditure Capital or revenue expenditure Technical know- how fees Foreign collaborator granted license to assessee to use its patents and designs Assessee not acquiring capital asset Amount paid to collaborator was only license fee and constituted revenue expenditure." (viii) CIT vs. Kanpur Cigarettes (P) Ltd. (2005) 198 CTR (All) 414: (2006) 287 ITR 485 (All): "Business expenditure Capital or revenue expenditure Royalty for user of know-how and trademark Assessee was required to pay royalty charges on cigarettes manufactured by it under franchise agreement for know-how and technical assistance provided by GTC as well as for use of its trade-mark Tribunal has recorded finding that right acquired by assessee was not exclusive and that it was for limited period which too could be terminated earlier within period of agreement and payment was dependant on quantum of items manufactured Payment towards royalty was therefore revenue expenditure." (ix) Stock Exchange, Ahmedabad vs. Asstt. CIT (2001) 166 CTR (SC) 285: (2001) 248 ITR 209 (SC): "Right of membership of stock exchange is merely personal privilege granted to member and it is non-transferable and incapable of alienation; right of nomination of legal representative and heirs after assessee member s death having ceased and vested in exchange as per stock exchange rules, it was not property of deceased defaulter." Shri Sriram Seshadri, chartered accountant appearing on behalf of M/s Tube Investments of India Ltd. as intervener submitted that assessee in this c s e is listed company engaged in manufacture of cycle, cycle accessories, steel tubes, strips etc. During previous year relevant to asst. yr. 2001-02, total expenditure of Rs. 316.38 lacs was incurred by it on implementation of ERP software of Oracle. said expenditure comprised of license fees of Rs. 104.16 lacs paid for software to Oracle and remaining amount of Rs. 212.22 lacs spent on consultancy payments for implementation of ERP software package acquired from Oracle on license. He then explained concept of ERP package by pointing out its usage as well as functioning as follows: "(i) Enterprise Resource Planning (ERP) is software system designed to manage most or all aspects of manufacturing or distribution enterprise. ERP systems are usually broken down into modules such as financials, sales, purchasing, inventory management, manufacturing etc. modules are designed to work seamlessly with rest of system and should provide consistent user interface between them. These systems usually have extensive set up options that allow you some flexibility in customizing their functionality to your specific business needs. (ii) Oracle Corporation licensed software and system is implemented by customizing screen shots based on needs of business and clients. It is essentially software system, which is licensed to user, and any sub-licensing/assignment/time-sharing 3rd party training is prohibited, efforts of reverse engineering, disassembly or decompilation are restricted and Oracle retains all title, copyright and other proprietary rights in program. appellant does not get any right except right to use program. (iii) expenses for licensing of software and its implementation qualify as computer software in question framed and placed before Special Bench and these expenses also suffer disallowance from IT Department. issue of whether expenses are capital expenditure or revenue expenditure is contentions with differing decisions from different Benches of honourable Tribunal." Shri Seshadri submitted that ERP package thus is software platform which is integration of multiple software modules available for different specialized activities which works seamlessly across these multiple modules and records all data relating to each and every activity of all these transactions in manner that can be viewed across organization and thus would automatically integrate various Departments of organization together. He submitted that said software helps manufacturer or other businessmen to manage important aspects of business more efficiently and effectively including product planning, purchasing, inventory control, providing customer service etc. He submitted that all these functions otherwise also would be performed whether or not ERP system is in place and thus by implementing ERP software package, existing organization system is replaced in order to increase its efficiency and effectiveness. He contended that ERP package thus neither enhances productivity or capacity of user nor does it bring into existence any asset of enduring nature in capital field since it is merely platform where Departmental goals and actions are synchronized towards common organizational objectives. He also contended that ERP software is provided by Oracle to assessee as user only on license basis and such license is non-exclusive one with many restrictions and prohibitions. In this regard, he invited our attention to cl. 2.1 of Master Software License and Service Agreement entered into between assessee and Oracle and pointed out that rights granted under said agreement give user only license to use software which cannot be treated as acquisition of any capital asset. He contended that user thus does not get any right from Oracle except right to use software/program as licensee. He contended that expenditure incurred on acquisition of ERP package thus is purely revenue expenditure firstly because expenses so incurred are only for improving effective management of day to day operations and secondly because assessee is provided with limited right by way of user license for product with conditions attached to its use. In support of this contention, he relied on decision of Hon ble Supreme Court in case of Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113: (1980) 124 ITR 1 (SC) wherein it was held that if expenditure incurred is for obtaining advantage which consists merely in facilitating assessee s business to be carried on more efficiently or more profitably while leaving fixed capital untouched, expenditure would be on revenue account even though advantage may endure for indefinite future. Shri Ajay Vohra learned counsel appearing for M/s Indo Rama Synthetics Ltd. as intervener, submitted that assessee in this case is engaged in business of manufacturing yarns which were used in textile industry. During previous year relevant to asst. yr. 2001-02, it incurred sum of Rs. 2,21,59,648 in implementation of Systems Applications and Products (SAP), ERP (Enterprise Resource Planning) software package. expenses incurred related to acquiring license to use said software, implementation thereof, training to employees etc. contention of Shri Ajay Vohra was that said expenditure was claimed to be deductible under provisions of s. 37(1) having been incurred by assessee wholly and exclusively for purpose of business. Department, however, treated said expenditure as of capital nature and disallowed assessee s claim. He submitted that Hon ble Supreme Court in case of Empire Jute Co. Ltd. vs. CIT (supra) has laid down test for determining as to what constitutes capital expenditure in following terms: ".......It is not every advantage of enduring nature acquired by assessee that brings case within principle laid down in this test. What is material to consider is nature of advantage in commercial sense and it is only where advantage is in capital field that expenditure would be disallowable on application of this test. If advantage consists merely in facilitating assessee s trading operations or enabling management and conduct of assessee s business to be carried on more efficiently or more profitably while leaving fixed capital untouched, expenditure would be on revenue account, even though advantage may endure for indefinite future....." Shri Vohra laid emphasis on fact that assessee should obtain advantage of enduring nature and in addition to getting such advantage, capital structure of assessee should also be enhanced. Only then expenditure can be considered as capital expenditure. He drew our attention to fact that assessee acquired software under agreement from SAP which specifically lays down that assessee was merely licensee. He contended that assessee was not owner of software and did not have dominion or control over same. He laid emphasis on fact that to be regarded as owner of software, assessee should have right of disposition. Since assessee in present case did not have any such right of disposition, he could not be considered as having acquired any enduring advantage. He submitted that software in question was installed for purpose of better structuring of organization and therefore, no benefit in capital field was accrued to assessee. Another contention of Shri Vohra was that in view of above principles explained, it will not make any difference whether software in question was application software or system software. It has to be seen in each case as to what right assessee acquired irrespective of nature of business of assessee. Shri Vohra drew our attention to provisions of s. 14 of Copyright Act and submitted that to be regarded as owner of copyright, assessee should have acquired any of rights mentioned in s. 14(1)(b) of said Act. Referring to terms of license agreement, Shri Vohra submitted that assessee did not derive any rights as specified in aforesaid section of Copyright Act. He highlighted fact that in terms of license agreement, copyright in software continued to remain vested with SAP. Shri Vohra drew distinction between acquisition of software and purchase of book. He submitted that in case of book, there is transfer of ownership of book as copyrighted article with more rights including right to transfer said book whereas in case of software acquired under license, gets only limited rights with no right to transfer said license without consent of licensor. He drew our attention to decision of Hon ble Supreme Court in case of Tata Consultancy Services vs. State of Andhra Pradesh (2004) 192 CTR (SC) 257: (2004) 137 STC 620 (SC) wherein Hon ble Supreme Court in context of levy of sales-tax of transfer of right to use software had held that software were in nature of goods under Sale of Goods Act and in light of extended definition of sale as contained in relevant sales-tax law, even transfer of right to use software was held to be sale of goods exigible to taxation under Expln. (iv) to s. 2(n) of sales-tax law. It was contended by him that it is only because of extended definition of sale as found in relevant law that Hon ble Supreme Court came to above conclusion. According to him, such extended meaning cannot be ascribed to computer software used by assessee in context of IT law. Shri Ajay Vohra then drew our attention to U.S. Regulations on classification of transactions involving computer programs which are to following effect: "The U.S. Regulations envisage four alternatives for characterisation of software and payments derived therefrom. Transfers of software are characterised by rights transferred. Depending on rights transferred, transfer of software will fall into one of following categories: (i) transfer of copyright right in computer program; (ii) transfer of copy of computer program (a copyrighted article); (iii) provision of services for development or modification of computer program; or (iv) provision of know-how relating to computer programming techniques. Transactions involving transfer of computer program [alternatives (i) and (ii)] may be distinguished as follows: Transfers of copyrighted article are transactions in which no copyright right is transferred; in such case, transfer is regarded as: (a) sale or exchange, if all benefits and burdens of ownership are transferred; or (b) lease of copyrighted article, if insufficient benefit and burdens of ownership are transferred. granting of shrink-wrap license would normally fall under (a) above, thus being considered sale of copyrighted article if it is perpetual, whereas it would be regarded as lease of copyrighted article if it is limited in time. Transfers of copyright right are transactions in which copyright right is transferred; only following are regarded as copyright rights: (a) right to make copies of computer program for purposes of distribution to public by sale or other transfer of ownership, or by rental, lease or lending; (b) right to prepare derivative computer programs based on copyrighted computer program; (c) right to make public performance of computer program; or (d) right to publicly display computer program." Shri Vohra highlighted fact that even U.S. Regulations recognize t h e distinction between transfer of copyrighted article and transfer of copyright. He submitted that in present case, there was transfer of only copyrighted article going by aforesaid regulation. He highlighted fact that even U.S. Regulations recognize granting of shrink-wrap license as falling within transfer of copyrighted article and not transfer of copyright as such. Our attention was also drawn to instructions of Taiwanese authority on taxation of software sales and their treatment for purpose of taxation. gist of guidance notes issued in this regard given on p. 187 of his paper book is extracted below: " Taiwanese Ministry of Finance has issued tax ruling numbered Tai-Tsai-Shui 9604520730 dt. 9th April, 2006 (the ruling) which clarifies tax treatment of transactions in standardized unmodified software. Previously, there were disputes over tax treatment of such transactions in absence of tax law to distinguish license transaction from software sale transaction. ruling states that non-resident enterprises that: directly sell standard unmodified software to domestic Taiwanese buyers, including programmes downloaded online and installed on computer hardware or compact disks (e.g. shrink-wrapped software) and buyer is not permitted to reproduce, modify, transfer or publicly display software, sale is to be regarded as sale of goods and income will be treated in accordance to international trade principles; and sell standard unmodified software, via domestic Taiwanese distributors including programmes downloaded online or installed on compact disks and domestic distributor installs software onto hardware in accordance to instructions of final purchaser, sale is to be regarded as sale of goods and income will be treated in accordance to international trade principles. In this situation, purchaser is not permitted to reproduce, modify, transfer or publicly display software. It should be noted that domestic distributor is subject to Taiwanese tax and reporting requirements with regard to any income arising from sale of software. In addition to above, ruling provides characteristics of standardized software and characteristics of customized, as well as broad definition for shrink-wrapped and packaged software, as following: Standardized software refers to software which is ready-made and available for sale to general users and its program is not made or modified for specified user. Additionally, purchaser of standardized software can only acquire right to install and use program on identifiable personal computer or number of computers, and is not permitted to reproduce, modify, reverse engineer, de-compile or disassemble programme; Shrink-wrapped software refers to software where software s owner has drafted unilateral licensing agreement for sake of user convenience and terms are placed on tangible medium (e.g. packaging). Should user accept terms, they merely have to unwrap packaging to have access to software, Generally, software is standardized and available for general public use without any modifications: and Pursuant to this ruling, payments for standardized unmodified software should be categorized as business profits rather than royalties, and therefore, not subject to 20 per cent royalty withholding tax." Reference was also made by Shri Vohra to decision of Special Bench of Tribunal, Delhi in case of Motorola Inc. vs. Dy. CIT (2005) 96 TTJ (Del)(SB) 1: (2005) 95 ITD 269 (Del)(SB). Our attention was drawn to para Nos. 157 and 158 of said judgment wherein Special Bench has laid emphasis on fact that in order to find out nature of right assessee has acquired, terms and conditions of relevant contract are required to be looked into in light of provisions of s. 14 of Copyright Act which deals with definition of copyright in computer software. Mr. Vohra submitted that software is equivalent to know-how. He drew our attention to several judicial pronouncements where acquisition of know-how was treated as revenue expenditure. following are judicial pronouncements: (i) CIT vs. Ciba of India Ltd. (supra); (ii) CIT vs. Wavin (India) Ltd. (1999) 155 CTR (SC) 164: (1999) 236 ITR 314 (SC); (iii) CIT vs. I.A.E.C. (Pumps) Ltd. (supra); (iv) CIT vs. Indian Oxygen Ltd. (1996) 134 CTR (SC) 372: (1996) 218 ITR 337 (SC); (v) Shriram Refrigeration Industries Ltd. vs. CIT (supra); (vi) Addl. CIT vs. Shama Engine Valves Ltd. (1983) 32 CTR (Del) 351: (1982) 138 ITR 216 (Del); (vii) CIT vs. Oblum Electrical Industries (P) Ltd. (1980) 17 CTR (AP) 266: (1981) 127 ITR 409 (AP); (viii) Crescent Capacitors vs. CIT (1985) 45 CTR (Del) 15: (1984) 149 ITR 285 (Del); (ix) CIT vs. Bhai Sunder Dass & Sons (P) Ltd. (1986) 158 ITR 195 (Del); (x) Bajaj Tempo Ltd. vs. CIT (1993) 111 CTR (Bom) 131: (1994) 207 ITR 1017 (Bom); (xi) CIT vs. Madras Rubber Factory Ltd. (1995) 212 ITR 443 (Mad); (xii) Praga Tools Ltd. vs. CIT (1980) 16 CTR (AP)(FB) 356: (1980) 123 ITR 773 (AP)(FB); (xiii) CIT vs. B.N. Elias & Co. (P) Ltd. (1987) 60 CTR (Cal) 144: (1987) 168 ITR 190 (Cal); (xiv) S.R.P. Tools Ltd. vs. CIT (1998) 148 CTR (Mad) 133: (1999) 237 ITR 684 (Mad); (xv) CIT vs. Southern Pressings (P) Ltd. (1999) 157 CTR (Mad) 511: (2000) 242 ITR 67 (Mad); (xvi) CIT vs. Gujarat Carbon Ltd. (2002) 173 CTR (Guj) 389: (2002) 254 ITR 294 (Guj); (xvii) CIT vs. Eicher Motors Ltd. (2007) 293 ITR 464 (MP); (xviii) CIT vs. Kirloskar Tractors Ltd. (1998) 148 CTR (Bom) 121: (1998) 231 ITR 849 (Bom); (xix) Goodyear India Ltd. vs. ITO (2000) 68 TTJ (Del)(TM) 300: (2000) 73 ITD 189 (Del)(TM). His further submission was that mere right to use software is as good as right to use know-how and therefore expenditure on acquiring computer software is to be considered as revenue expenditure. He also brought to our notice judicial pronouncements of Hon ble Madras High Court case of CIT vs. Southern Roadways Ltd. (2006) 202 CTR (Mad) 279: (2006) 282 ITR 379 (Mad) wherein Hon ble Madras High Court has held that expenditure incurred on software packages was revenue expenditure and that such software enhances efficiency of operation and was not aid in manufacturing process and therefore there is no enduring benefit or acquisition of any capital asset by assessee. Reference was made to decision of Madras High Court in case of CIT vs. Southern Roadways Ltd. (2007) 288 ITR 15 (Mad) laying down identical proposition. Further attention was drawn to following decisions CIT vs. K & Co. (supra), Business Information Processing Services vs. Asstt. CIT (2000) 67 TTJ (Jp) 131: (2000) 73 ITD 304 (Jp), Sumitomo Corpn. India (P) Ltd. vs. Addl. CIT (2005) 1 SOT 91 (Del), Jt. CIT vs. Citicrop Overseas Software Ltd. (supra) and IBM India Ltd. vs. CIT (supra). In all above decisions, it has been held that expenditure on license to computer software is decisions, it has been held that expenditure on license to computer software is allowable as revenue expenditure. Explaining arguments that there was no enduring benefit in capital field by virtue of expenditure incurred on computer software, Shri Vohra submitted that in view of technological changes in present world no enduring benefit can be said to accrue to assessee. In this regard, he drew attention to following observations of Hon ble Supreme Court in case of Alembic Chemical Works Co. Ltd. vs. CIT (supra): "(i) It would be unrealistic to ignore rapid advances in research in antibiotic medical microbiology and to attribute degree of endurability and permanence to technical know-how at any particular stage in this fast changing area of medical science. state of art in some of these areas of high priority research is constantly updated so that know-how could not be said to bear element of requisite degree of durability and non- ephemerality to share requirements and qualifications of enduring capital asset. rapid strides in science and technology in field should make us little slow and circumspect in too readily pigeonholing and outlay, such as this, as capital. (ii) In infinite variety of situational diversities in which concepts of what is capital expenditure and what is revenue arises, it is well nigh impossible to formulate any general rule, even in generality of cases, sufficiently accurate and reasonable comprehensive, to draw any clear line of demarcation. However, some broad and general tests have been suggested from time to time to ascertain on which side of line outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants; but as masters they tend to be over exacting. (iii) question in each case would necessarily be whether tests relevant and significant in one set of circumstances, are relevant and significant in case on hand also, judicial metaphors are narrowly to be watched, for starting as devices to liberate thought, they end often by enslaving it. idea of once for all payment and enduring benefit are not to be treated as something akin to statutory conditions nor are notions of capital or revenue judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to changing economic realities of business. expression asset or advantage of enduring nature was evolved to emphasis element of sufficient degree of durability appropriate to context, There is also no single definitive criterion which, by itself, is determinative whether particular outlay is capital or revenue. once for all payment test is also inconclusive. What is relevant is purpose of outlay and its intended object and effect, considered in common sense way having regard to business realities. In given case, test of enduring benefit might breakdown." According to Shri Vohra test of enduring benefit would break down in t h e case of acquisition of license to use software because by acquiring license to use computer software, assessee does not get any enduring benefit. In this regard he also drew attention to decision of Hon ble Supreme Court in case of CIT vs. Madras Auto Service (P) Ltd. (1998) 148 CTR (SC) 398: (1998) 233 ITR 468 (SC) wherein it was held that tenant effecting improvements to building with no right of ownership to improvements and where owner was to get benefit of improvement by tenant, capital expenditure incurred by tenant was held to expenditure of revenue nature. He pointed out that in aforesaid decision tenant had right to enjoy premises for 39 years but still Court considered period of use as irrelevant. According to him it was ownership that was material and this has been highlighted in aforesaid judgment. He thus submitted that even period of license to use software acquired by assessee becomes irrelevant. In this regard he also drew attention to decision of Delhi High Court in case of CIT vs. Saw Pipes Ltd. (2007) 208 CTR (Del) 476 wherein Court held that expenses incurred by assessee on electric service line for its new units was allowable as revenue expenditure despite fact that assessee had right o f perpetual use of electric lines. Reference was also made to decision of Madras High Court and Karnataka High Court in case of CIT vs. Gemini Arts (P) Ltd. (2002) 254 ITR 201 (Mad) and CIT vs. H.M.T. Ltd. (1993) 109 CTR (Kar) 392: (1993) 203 ITR 820 (Kar) where upfront payment of premium in connection with lease for 48 years and 95 years respectively were considered as revenue expenditure. Shri Vohra further explained that software is mere supplement or replacement of human labour which helps in doing work more efficiently. It is substitute for revenue expenditure which would otherwise be allowed as revenue expenditure. He further submitted that s. 32 does not trigger if there is n o ownership of software and in this regard drew attention to provisions of 32(1) where ownership was condition for allowing depreciation. He submitted that word "acquired" contemplates acquisition of ownership. In this regard he drew attention to decision of Hon ble Supreme Court in case of Chiranjit Lal vs. Union of India AIR 1951 SC 41 and Devidas Gopalkrishan vs. State of Punjab AIR 1967 SC 1895. According to him license to use computer software does not transfer ownership and therefore provisions of s. 32 are not applicable. He also distinguished decisions in case of Scientific Works (supra) and Arvind Mills (supra) by pointing out that in those cases assessee acquired rights of ownership. In conclusion, Shri Ajay Vohra submitted that on facts of his assessee s case, implementation fee paid for installation of SAP system can never be considered its capital expenditure. In this regard he relied on decision of Chandigarh Bench of Tribunal in case of Glaxo Smithkline Consumer Healthcare vs. Asstt. CIT (ITA No. 379/Chd/2004) [reported at (2007) 112 TTJ (Chd) 94 Ed.]. Smt. Smita Jhingran learned CIT Departmental Representative firstly drew our attention to scheme of Act whereby deduction of expenses in acquiring capital assets are to be allowed in staggered manner. Referring to provisions of s. 32, she submitted that w.e.f. 1st April, 1998 depreciation was to be allowed on both tangible and intangible assets. With effect from 1st April, 2003 computer and computer software have been treated as plant and tangible assets. According to her, expression "computer software" is defined in rules to mean computer programme recorded on any disk tape, perforated media or any other storage device. It was submitted by her that intent of legislature was to make ambit of words "computer software" as wide as possible without any room for any doubt. Strong reliance was placed by her on possible without any room for any doubt. Strong reliance was placed by her on decision of Delhi Bench of Tribunal in case of Maruti Udyog Ltd. vs. Dy. CIT (supra) where expenditure on purchase of computer software was treated as capital expenditure. She also drew attention to provision of sub-cl. (xi) of s. 36(1) introduced w.e.f. 1st April, 1999 which enabled assessee to claim expenses in nature of software to make their computer systems Y2K compliant as revenue expenditure. It was submitted by her that but for this amendment, said expenditure would be only capital expenditure. She highlighted fact that in case of interveners before Special Bench, assessment years involved are prior to 1st April, 2003. She submitted that decision in case of Arawali Construction (supra) and Escorts Ltd. (supra) would clearly support stand taken on behalf of Revenue. It was also pointed out by her that decision of Delhi High Court in case of K & Co. (supra) has been considered in case of Maruti Udyog (supra). Referring to case of assessee M/s Amway, she submitted that software purchased by assessee in that case gives assessee new advantage in so far as functioning of organization is concerned. She referred to decision of Hon ble Supreme Court in case of Ballimal Naval Kishore vs. CIT (1997) 138 CTR (SC) 284: (1997) 224 ITR 414 (SC) wherein it was held that where amount spent was for obtaining new advantage then same would be capital expenditure. It was submitted by her that even in case of upgradation of software principle laid down in case of Ballimal Naval Kishore (supra) would apply. In this regard reference was made to decision of Supreme Court in case of CIT vs. Saravana Spinning Mills (P) Ltd. (2007) 211 CTR (SC) 281: (2007) 293 ITR 201 (SC). She also placed reliance on decision of apex Court in case of Arvind Mills Ltd. vs. CIT (supra) for proposition that expenditure incurred on capital asset does not lose character of capital expenditure and does not become revenue expenditure on ground that said capital expenditure also ultimately ensures effective running of business. According to her software installed once is capable of being used for couple of years and therefore there is enduring advantage to assessee. According to her license to use software would also be case of acquisition of software and distinction sought to be made by assessee cannot be accepted. It was also submitted by her that distinction between copyright and copyrighted article is not recognized by IT Act and therefore both copyright and copyrighted articles are covered under s. 32(1) of Act. It was also submitted by her that expression "wholly or partly" used in s. 32(1) would also include within its ambit, person owing license to use software. It was also submitted by her that to claim depreciation even ownership is not condition as laid down by Hon ble Supreme Court in case of Mysore Minerals Ltd. vs. CIT (1999) 156 CTR (SC) 1: (1999) 239 ITR 775 (SC) and Delhi High Court in case of CIT vs. Bharat Aluminium Co. Ltd. (2007) 292 ITR 600 (Del). Attention was drawn to decision of Pune Bench of Tribunal in case of Sudarshan Chemical Industries Ltd. vs. Asstt. CIT (2007) 108 TTJ (Pune) 28 wherein purchase of ERP software was treated as capital expenditure. Shri Devender Shanker, learned CIT Departmental Representative appeared for Revenue and made submissions in light of provisions of Copyright Act, 1957. His submission was that definition of capital asset as given in s. 2(14) of Act was wide enough to include property of any kind. When assessee acquires computer software he acquires capital asset and therefore expenditure would only be capital expenditure. Referring to provision of s. 14 of Copyright Act, he submitted that reproduction of any literary work in any material form including storing of it in any medium by electronic means would be part of bundle of rights comprised in larger right of copyright. According to him when assessee purchases computer software even on license basis he would reproduce work by storing it in his computer and therefore he should be considered as having acquired copyright in software. It was therefore submitted by him that even in case of license to use computer software assessee acquires copyright and therefore expenditure was to be treated as capital expenditure. On question of expenditure on "acquisition, upgradation and maintenance of software", Shri Devender Shankar submitted that in modern day technology, hardware and software are often acquired separately. Any transaction in software may fall in any of three broad categories which are: (i) Disk Operating System: like Windows 97, 2003, 2007 etc. or Linux, (ii) Application Software: like Office, Excel, Power Point which operate on operating systems like Windows. (iii) Data Software: (like CTR online, ITR etc. or other banking software even movie CDs) which require both disk operating system as well as application software defined in (i) and (ii) above for being run on computer. acquisition of disk operating software or application software from original owner can be in form of "copyright under assignment" or "a license" as right to use copyright for purpose of one s business. exact "nature of transaction" shall depend on terms of agreement. acquisition of software results in either grant of copyright or license. As per definition in s. 2(14) of IT Act it will be capital asset and accordingly to be treated in terms of s. 32 or s. 35A of IT Act as case be. Shri Devender Shanker further submitted that upgradation from particular Disc Operating Software or application software to another particular software may have to be seen whether it tantamounts to acquisition of new software or increasing or improving speed, efficiency, capacity or overall performance of software. For example if person who is already using disk operating system software Windows 91 and wants to upgrade to Windows 2003 or Windows 2005 he will have to discard existing Windows 97 and upload Windows 2003/2005 on his computer by acquiring it afresh. Similar will be case when new application software like Office 97, Office 2000 or any such other software is installed by replacing existing older version. Thus, this kind of upgradation does not lead to upgradation in real sense but is acquisition of new software. Shri Devender Shanker further submitted that in case of software like ERP, SAP , Oracle (which are not in nature of shrink-wrap), any upgradation to newer version has to be carried out by original supplier who has source code of software with him. If this upgradation results in higher efficiency, higher speed, higher memory and data handling capacity then it will be acquisition of enduring benefit and will be in nature of capital asset. He made simple comparison to building where new floors are added to accommodate more people or offices or case where extra berths/seats are added to any train or bus to be able to carry more passengers such expenditure incurred will result in enduring benefit with regard to capital asset and be capital expenditure to be treated in terms of s. 32 or s. 35A of IT Act as case be. According to Shri Devender Shanker, some of software installed on servers which may or may have many end users across very large geographical area like software used for central reservation systems, airline booking, railway booking, banking, internet software requires certain maintenance on regular basis so that software operate without any interruption. For this purpose certain maintenance expenses are incurred which are in fact expenditures for user or for being able to use capital asset and therefore could be in nature of revenue expenditure. In rejoinder, Shri M.S. Syali submitted that argument of learned Departmental Representative that after enactment of s. 32(1)(ii) of Act, w.e.f. 1st April, 1998, all intangible assets are capital assets is not correct. In this regard, he referred to reasons for introduction of s. 32(1)(ii) as explained in CBDT s Circular No. 772 dt. 23rd Dec., 1998 [(1999) 151 CTR (St) 9] and submitted that provisions were intended only to widen scope of allowing depreciation even on intangible and that provisions of ss. 35A and 35AB which allowed deduction on account of expenses of capital nature on acquisition of patents, know-how copyright, etc. were being deleted because of provision of s. 32(1)(ii). provisions of s. 32 are attracted only where there is acquisition of capital asset and where there is use of such capital asset by assessee for purpose of his business. To contend that any intangible asset used by assessee in his business will be capital asset will not be correct. In this regard he drew analogy from provision of Expln. 1 to s. 32(1) of Act which permitted assessee who was tenant of premises to claim depreciation on capital expenditure incurred in respect of tenanted premises and submitted even in such cases expenditure must be capital expenditure in nature and it is not any and every expenditure that is covered by said provisions. As first step one has to see if expenditure was capital expenditure or revenue expenditure. Our attention was drawn to decision of Hon ble Karnataka expenditure. Our attention was drawn to decision of Hon ble Karnataka High Court in case of CIT vs. Rex Talkies (1984) 42 CTR (Kar) 97: (1984) 148 ITR 560 (Kar) and CIT vs. Haridas Bhagath & Co. (P) Ltd. (1999) 240 ITR 169 (Mad) for above proposition. In case of computer software also one has to see whether expenditure on computer software was capital or revenue only then applicability of provision of s. 32(1)(ii) should be seen. It was also submitted by Shri Syali that amendment to provisions of s. 36(1)(ix) presupposes that expenditure in question was complete restructuring of computer hardware and software as explained by Board in its Circular No. 779 dt. 14th Sept., 1999 [(1999) 156 CTR (St) 17] (para 22 of circular). In this regard he also submitted that Expln. (a) to s. 36(1)(ix) also justifies such interpretation. It was further submitted by him that software does not provide any new advantage to assessee, which is of enduring nature. It does not result in acquisition of any new asset. It was submitted by him that Hon ble Supreme Court in case of Tata Consultancy Service (supra) clearly held that software were "goods" only in context of extended definition of "goods" as given in relevant sales-tax law. He submitted that in case of IBM (supra) Bangalore Bench of Tribunal has held that computer software merely enhances productivity or efficiency and therefore is revenue expenditure. Reference in this regard was made to fact that Bench rightly distinguished case of Arawali Constructions (supra) by saying that said decision was case of acquisition of know-how. He submitted that Pune Bench in case of Sudharshan Chemical (supra) in context of ERP software followed decision of Arawali Constructions (supra) without noticing that said decision related to acquisition of know-how. It was again emphasized by him that ownership is condition for claiming depreciation under s. 32 and that mere license to use did not give any ownership. Reference was made in this regard to decision of Tribunal Special Bench in case of Motorola Inc. (supra). He also submitted that decision of Hon ble Delhi High Court in case of Balco (supra) was in context of income from house property where assessee exercised all rights of ownership. On argument of learned Departmental Representative on s. 2(14) of Act defining "capital assets", Shri Syali submitted that all capital expenditure gives raise to capital asset but all capital assets need not result only from incurring of capital expenditure. It was also submitted by him that definition of "capital asset" is relevant only for purpose of determining capital gains and same cannot be extended to hold that expenditure incurred on acquiring capital asset is by itself capital expenditure. Mr. Ajay Vohra submitted that expression "wholly or partly" used in s. 32(1) was inserted only with view to mitigate hardship owing to decision of Hon ble Supreme Court in case of Seth Banarsi Dass Gupta vs. CIT (1987) 6 4 CTR (SC) 142: (1987) 166 ITR 783 (SC) where it was held that fractional ownership will not be sufficient to claim depreciation and therefore "mere right to use software" cannot be said to be ownership wholly or partly being with assessee. We have considered rival submissions in light of material placed on record and case laws cited at Bar. issue before us is as to whether expenditure on computer software is revenue or capital in nature. Before we specifically deal with this issue, it would be relevant to dwell upon general guidelines and principles laid down by various higher Courts including Hon ble apex Court for deciding nature of any expenditure whether capital or revenue. Lord Denning in Heather vs. P.E. Consulting Group Ltd. (1972) 48 Tax Cases 293 made following still very pertinent observations at p. 321A: "The question revenue expenditure or capital expenditure is question which is being repeatedly asked by men of business, by accountants and by lawyers. In many cases answer is easy; but in others it is difficult. difficulty arises because of nature of question. It assumes that all expenditure can be put correctly into one category or other but this is simply not possible. Some cases lie on border between two and this border is not line clearly marked out; it is blurred and undefined area in which anyone can get lost. Different minds may come to different conclusions with equal propriety. It is like border between day and night, or between red and orange. Everyone can tell difference except in marginal cases; and then everyone is in doubt. Each can come down either way. When these marginal cases arise, then practitioners be they accountants or lawyers must of necessity put them in one category or another. And then, by custom or by law, by practice or by precept, border is staked out with more certainty. In this area at least, where no decision can be said to be right or wrong, only safe rule is to go by precedent. So thing to do is to search through cases and see whether instant problem has come up before. If so, go by it. If not, go by nearest you can find." As observed by Hon ble Supreme Court in case of Alembic Chemical Works Co. Ltd. vs. CIT (supra), in infinite variety of situational diversities in which concept of what is capital expenditure and what is revenue arises, it is almost impossible to formulate any general rule sufficiently accurate and reasonably comprehensive to draw any clear line of demarcation. However, as further observed by Hon ble apex Court in said case, some broad and general tests have been suggested from time to time in various judicial pronouncements to ascertain on which side of line outlay in particular case might reasonably be held to fall. As further observed by Hon ble apex Court, these tests are generally efficacious and serve as usual servants and as masters, they tend to be over exacting. There is also no single definitive criterion which by itself is determinative as to whether particular outlay is capital or revenue and what is relevant is purpose of outlay said its intended object and effect considered in common sense way having regard to business realities. In case of British Insulated Helsby Cables Ltd. vs. Atherton (1926) AC 205 which is often quoted on subject, it was held that when expenditure is made with view to bringing into existence asset or advantage for enduring benefit of trade, there is very good reason for treating such expenditure as properly attributable to capital and not to revenue. In Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC), it was held by Hon ble Supreme Court that if expenditure is made for acquiring or bringing into existence asset or advantage for enduring benefit of business, it is properly attributable to capital and is of nature of capital expenditure. It is properly attributable to capital and is of nature of capital expenditure. It was also held that aim and object of expenditure thus would determine character of expenditure, whether it is capital expenditure or revenue expenditure. In case of Sun Newspaper Ltd. & Associated Newspaper Ltd. vs. Federal Commr. of Taxation (1938) 61 CLR 337, Dixon J. observed that there are three matters to be considered to decide nature of any expenditure (a) character of advantage sought and in this its lasting qualities may play and part, (b) manner in which it is to be used relied upon or enjoyed and in this and under former head, recurrence may play its part and, (c) means adopted to obtain it i.e. by providing periodical reward or outlay to cover its use or enjoyment for periods, commensurate with payment. As observed by Hon ble Supreme Court in case of Empire Jute Co. Ltd. vs. CIT (supra), there may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may nonetheless be on revenue account and test of enduring benefit may break down. It is not every advantage of enduring nature acquired by assessee that brings case within principles laid down in this test. What is material to consider is nature of advantage in commercial sense and it is only where advantage is in capital field that expenditure would be disallowable on application of this test. In case of CIT vs. Ciba of India. Ltd. (supra), assessee had acquired under agreement merely right to draw for purpose of carrying on its business as manufacturer and dealer of pharmaceutical products, upon technical knowledge of Swiss company for limited period and since Swiss company did not part with any asset of its business nor did assessee acquire any asset or advantage of enduring nature for benefits of its business, payment made by assessee to Swiss company under agreement was held by Hon ble Supreme Court to be towards revenue expenditure observing that nature of receipt as capital or revenue is not always determinative of nature of this outgoing in hands of person who receives it. Explaining further, it was observed by Hon ble apex Court that license was for period of five years liable to be terminated in certain events and since object of agreement was to obtain benefit of technical assistance for running business of assessee expenditure in question was of revenue nature. In case of Arvind Mills Ltd. vs. CIT (supra), amount was paid by assessee for improvement by way of laying down roads, making provision for drainage etc. under Bombay Town Plan Scheme and as result of said expenditure, assessee got advantage of betterment of land owned by him which resulted in increase in valuation of said land. In these facts and circumstances of case, it was held by Hon ble Supreme Court that simply because such improvement has also resulted in providing better facilities for carrying out business of assessee, betterment charges required to be paid by assessee do not become revenue expenditure. It was also held by Hon ble apex Court that merely because said expenditure had ultimately resulted in efficiently carrying on business and that process gave aid in running day to day business more efficiently would not make capital expenditure revenue expenditure. resume of aforesaid judicial pronouncements shows that there cannot be any specific or precise test, which can be applied conclusively or universally for distinguishing between capital and revenue expenditure. It is blurred and undefined area in which anyone can get lost. Different minds may come to different conclusions with equal propriety. cardinal rule is that question whether certain expenditure is on capital or revenue account should be decided from practical and business view point and in accordance with sound accountancy principles and this rule is of special significance in dealing with expenditure on expansion and development of business. While dealing with this complex issue, three tests generally applied to decide nature of expenditure as to whether it is capital or revenue, are test of enduring benefit, ownership test and functional test. Applying said tests, expenditure is treated as capital expenditure either when it results in acquisition of capital asset by assessee as owner thereof or when it results in accrual of advantage of enduring nature to assessee in capital field. In first situation, ownership test assumes greater significance because acquisition of capital asset by assessee as result of incurring expenditure is condition. If expenditure is resulting merely in acquisition or creation of asset without assessee becoming owner thereof, it cannot be said that said expenditure is capital expenditure. coming into existence of asset as result of incurring expenditure alone thus is not sufficient to treat said expenditure as of capital nature unless asset coming into existence is also owned by assessee. In other situation, expenditure can be treated as capital expenditure only when it results in accrual of advantage of enduring nature to assessee in capital field. relevant tests applied to determine nature of expenditure in such situation are functional tests and test of enduring benefit. advantage is to be considered as of enduring benefit if benefit accruing is not of transient nature but is of such durability as to justify it being treated as capital asset. expression "enduring benefit" has been explained by Hon ble Supreme Court in case of Assam Bengal Cement Co. Ltd. vs. CIT (supra) to mean enduring in way that fixed capital endures. As held by Hon ble Supreme Court in case of Empire Jute Co. Ltd. vs. CIT (supra), there may be cases where expenses, even, if resulting in advantage of enduring benefit, may be properly chargeable to revenue account if advantage consists merely in facilitating assessee s trading operations or enabling him to manage and conduct his business more efficiently or more profitably while leaving fixed capital untouched. It is thus necessary that in order to treat any expenditure as capital expenditure, same should result in accrual of advantage of enduring benefit and such benefit should accrue to assessee in capital field. What exactly is meant by accrual of benefit in capital field is that said benefit should form part of profit making apparatus of assessee s business. Computer software Ownership test Supreme Court decision in case of TCS For applying ownership test in context of computer software, preliminary issue that arises is whether computer software is tangible or intangible asset and whether assessees get ownership right by acquiring same. contention raised on behalf of assessees before us is that as per agreement under which software is commonly acquired, assessees acquire only licence to use computer software for their own purpose and there is as such no acquisition of any asset, much less capital asset. It has also been contended that intellectual property rights in computer software is recognized and protected by Copyright Act and as per provisions of s. 14(b) of said statute, use of computer software under licence is not exercise of copyright. It has been contended that acquisition of computer software under licence at most could be considered as purchase of copyrighted article wherein no copyright right is transferred either as per Copyright Act or even as per U.S. Regulations on this subject. As regards t h e decision, of Hon ble Supreme Court in case of Tata Consultancy Services vs. State of Andhra Pradesh (supra), it has been contended that same was rendered in context of levy of sales-tax and transfer of right to use software was held to be sale of goods exigible to sales-tax in light of extended definition of "sale" as given in Expln. (iv) to s. 2 (n) of sales-tax law. It has been contended that said decision of Hon ble Supreme Court especially rendered in context of extended definition given in relevant statute cannot be applied in context of IT law. After having carefully perused judgment of Hon ble Supreme Court in case of Tata Consultancy Services (supra) (TCS in short), we find it difficult to agree with contention raised on behalf of assessee. It is no doubt true that transaction of sale of computer software package off shelf was held to be sale of "goods" by Hon ble Supreme Court in case of TCS relying, inter alia, on extended definition given in s. 2(n) of Andhra Pradesh General Sales-tax Act, 1957. But it was not only basis on which decision of Hon ble apex Court was exclusively based. First and foremost, there was reference made to decisions of American Courts rendered in several cases including especially cases of Commerce Union Bank vs. Tidwell 538 S.W. 2d 405; State of Alabama vs. Central Computer Service Inc. 349 So. 2d 1156; First National Bank of Fort Worth vs. Bob Bullock 584 S.W. 2d 548; First National Bank of Springfield vs. Department of Revenue 421 NE 2d 175; Compuserve Inc. vs. Lindley 535 N.E. 2d 360 and North East Datacom Inc. et al vs. City of Wallingford 563 2d 688 and proposition propounded therein holding computer software as intangible personal property was summarized by Hon ble Supreme Court in relevant portion of judgment at page Nos. 409 and 410 of report as under: "The reasoning for arriving at this conclusion is basically that information contained in software programs can be introduced into user s computer by several different methods, namely, (a) it could be programmed manually by originator of program at location of user s computer, working from his own instructions; or (b) it could be programmed by remote programming terminal located miles away from user s computer, with input information being transmitted by telephone; or (c) more commonly computer could be programmed by use of punch cards, magnetic tapes or disks, containing program developed by vendor. It has been noticed that usually vendor will also provide manuals, services and consultancy designed to instruct user s employees in installation and utilization of supplied program. It has been held that even though intellectual process is embodied in tangible and physical manner, that is on punch cards, magnetic tapes, etc., logic or intelligence of program remains intangible property. It is held that it is this intangible property right which is acquired when computer software is purchased or leased. It has been held that what is created and sold is information and magnetic tapes or disks are only means of transmitting these intellectual creations from originator to user. It has been held that same information could have been transmitted from originator to user by way of telephone lines or fed directly into user s computer by originator of programme and that as there would be no tax in those cases merely because method of transmission is by means of tape or disk, it remains intangible personal property. It has been held that what customer paid for is intangible knowledge which cannot be subjected to personal property tax." Thereafter, different view taken by American Courts in other cases as brought to notice of Hon ble Supreme Court on behalf of assessee was also taken note of and proposition propounded while taking such view in cases of South Central Bell Telephone Co. vs. Sidney J. Barthelemy 643 So. 2d 1240, Comptroller of Treasury vs. Equitable Trust Company 464 A. 2d 248, Chittenden Trust Co. vs. Commr. of Taxes 465 A. 2d 1100, University Computing Company vs. Commr. of Revenue for State of Tennessee 677 S.W. 2d 445 and Hasbro Industries Inc. vs. John H. Norberg, Tax Administrator 487 A. 2d 124 was summarized by Hon ble Supreme Court at page Nos. 410 and 411 of report as follows: "In these cases, Courts have held that when stored on magnetic tape, disk or computer chip, this software or set of instructions is physically manifested in machine readable form by arranging electrons, by use of electric current, to create either magnetized or unmagnetized space. This machine readable language or code is physical manifestation of information in binary form. It has been noticed that at least three program copies exist in software transaction (i) original, (ii) duplicate, and (iii) buyer s final copy on memory device. It has been noticed that program is developed in seller s computer then seller duplicates program copy on software and transports duplicates to buyer s computer. duplicate is read into buyer s computer and copied on memory device. It has been held that software is not merely knowledge, but rather is knowledge recorded in physical form having physical existence, taking up space on tape, disk or hard drive, making physical things happen and can be perceived by senses. It has been held that purchaser does not receive mere knowledge but receives arrangement of matter which makes his or her computer perform desired function. It has been held that this arrangement of matter recorded on tangible medium constitutes corporeal body. It has been held that software recorded in physical form becomes inextricably intertwined with, or part and parcel of corporeal object upon which it is recorded, be that disk, tape, hard drive, or other device. It has been held that fact that information can be transferred and then physically recorded on another medium does not make computer software any different from any other type of recorded information that can be transferred to another medium such as film, video tape, audio tape or books. It has been held that by sale of software programme incorporeal right to software is not transferred. It is held that incorporeal right to software is copyright which remains with originator. What is sold is copy of software. It is held that original copyright version is not one which operates computer of customer but physical copy of that software which has been transferred to buyer. It has been held that when one buys copy of copyrighted novel in bookstore or recording of copyrighted song in record store, one only acquires ownership of that particular copy of novel or song but not intellectual property in novel or song." decision in case of CST vs. M.P. Electricity Board 1968 (1) SCC 200 was also considered by Hon ble apex Court. question in that case was whether electricity was goods for purpose of imposition of sales-tax under Madhya Pradesh General Sales-tax Act, 1959 under which definition of term "goods" was given to mean all kinds of movable property and included all materials, articles and commodities. It was held in case of M.P. Electricity Board (supra) in this context that term "goods" for purposes of sales-tax, cannot be given narrow meaning and properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed etc. are "goods", for purposes of sales-tax. In this regard, it was contended, before Hon ble Supreme Court on behalf of assessee in attempt to distinguish decision in case of M.P. Electricity Board (supra) that software is different from electricity, inasmuch as, software is intellectual incorporeal property, whereas electricity is not. This contention of assessee, however was not accepted by Hon ble Supreme Court observing that in India, test, to determine whether property is goods, for purposes of sales-tax is not whether property is tangible or intangible or incorporeal. test is whether concerned item is capable of extraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed etc. It was observed by Hon ble Supreme Court in this context that in case of software, both canned and uncanned, all of these attributes are admittedly possible. Thereafter, reference was made by Hon ble Supreme Court to its earlier decision in case of Associated Cement Companies Ltd. vs. Commr. of Customs 2001 (4) SCC 593, wherein, question involved was whether customs duty was leviable on technical material supplied in form of drawings, manuals and computer disks etc. It was held therein that computer programme may be copyrightable as intellectual property but that does not alter fact that once in form of floppy disk or other medium, programme is tangible, movable and available in market place. It was also held that fact that movable and available in market place. It was also held that fact that some programs may be tailored for specific purposes need not alter their status as "goods". While referring to this decision, it was noted by Hon ble Supreme Court that definition of term "goods" in Customs Act is not as wide or exhaustive as definition of term "goods" in Andhra Pradesh Sales-tax Act, but despite that, it was held that decision in case of Associated Cement (supra) is authority directly dealing with question and as held therein, intellectual property when it is put in media becomes "goods". Thus, after taking into consideration various decisions of American Courts taking different views in matter, as well as Court s own decisions in this context rendered, inter alia, in case of Associated Cement Co. Ltd (supra) wherein similar issue was decided in context of Customs Act in which definition of term "goods" given was not as wide or as exhaustive as definition of term "goods" given in Andhra Pradesh Sales-tax Act, its conclusion was recorded by Hon ble Supreme Court finally as under: "In our view, term goods as used in Art. 366(12) of Constitution of India as defined under said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with observations made by this Court in Associated Cement Companies Ltd. (2001) 4 SCC 593; (2001) 124 STC 59 (SC). software programme may consist of various commands which enable computer to perform designated task. copyright in that programme may remain with originator of programme. But moment copies are made, and marketed, it becomes goods, which are susceptible to sales-tax. Even intellectual property, once it is put on to media, whether it be in form of books or canvas (in case of painting) or computer disks or cassettes, and marketed would become goods . We see no difference between sale of software programme on CD/floppy disk from sale of music on cassette/CD o r sale of film on video cassette/CD. In all such cases, intellectual property has been incorporated on media for purposes of transfer. Sale is not just of media which by itself has very little value. software and media cannot be split up. What buyer purchases and pays for is not disk or CD. As in case of paintings or books or music or films buyer is purchasing intellectual property and not media, i.e., paper or cassette or disk or CD. Thus transaction sale of computer software is clearly sale of goods within meaning of term as defined in said Act. term all materials, articles and commodities includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed, etc. software programmes have all these attributes." As already noted, similar contention as raised on behalf of assessee before us relying on relevant provisions of Copyright Act, 1957 was also raised before Hon ble Supreme Court in case of TCS (supra) and while specifically dealing with same, it was observed by his Lordship Mr. Justice S.B. Sinha, who wrote separate but concurring judgment as follows: "Reference by Mr. Sorabjee to provisions of Copyright Act, in my opinion, was not apposite. Copyright Act and Sales-tax Act are also not statutes in pari materia and as such definition contained in former should not be applied in latter. [see Jagatram Ahuja vs. CGT (2000) 164 CTR (SC) 1: AIR 2000 SC 3195, 3201]. In absence of incorporation or reference, it is trite that it is not permissible to interpret word in accordance with its definition in other statute and more so when same is not dealing with any cognate subject. [see State of Kerala vs. Mathai Verghese (1986) 4 SCC 746, 753 and Feroze N. Dotivala vs. P.M. Wadhwani (2003) 1 SCC 433, 442]." His Lordship Mr. Justice S.B. Sinha also discussed other contentions raised on behalf of assessee as well as relevant case laws on point before finally recording his conclusion in judgment which, as appearing at p. 431 of report, is extracted below: "A software may be intellectual property but such personal intellectual property contained in medium is bought and sold. It is article of value. It is sold in various forms like floppies, disks, CD-ROMs, punch cards, magnetic tapes, etc. Each one of mediums in which intellectual properly is contained is marketable commodity. They are visible to senses. They may be medium through which intellectual property is transferred but for purpose of determining question as regard leviability of tax under fiscal statute, it may not make difference. programme containing instructions in computer language is subject-matter of licence. It has its value to buyer. It is useful to person who intends to use hardware, viz., computer in effective manner so as to enable him to obtain desired results. It indisputably becomes object of trade and commerce. These mediums containing intellectual property are not only easily available in market for price but are circulated as commodity in market. Only because instruction manual designed to instruct use and installation of supplier programme is supplied with software, same would not necessarily mean that it would cease to be goods . Such instructions contained in manual are supplied with several other goods including electronic ones. What is essential for article to become goods is its marketability." It is also observed that contention was also raised on behalf of assessee in case of TCS that only property in literary work of computer software is source code i.e. code in which programmer writes software which is subsequently converted in machine code for use in physical form. It was contended that software code and media on which it happens to be stored have to be viewed differently and source code being information which cannot be touched and ideas therein being expressed in logical form, same constitutes intellectual property which its essentially intangible. This contention raised by assessee again was not accepted by t h e Hon ble Supreme Court as is evident from relevant portion of judgment which is extracted below from page No. 432 of report: "It is not in dispute that when programme is created it is necessary to encode it, upload same and thereafter unloaded. Indian law, as noticed by my learned Brother, Variava, J., does not make any distinction between tangible property and intangible property. goods may be tangible property or intangible one. It would become goods provided it has attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. If software whether customized or non-customized satisfies these attributes, same would be goods." Keeping in view judgment of Hon ble Supreme Court in case of TCS (supra) especially relevant observations recorded therein as discussed and extracted above, we do not find merit in contention raised on behalf of assessee that said decision was rendered by Hon ble Supreme Court relying entirely on extended definition of term "goods" given in relevant statute i.e. Andhra Pradesh Sales-tax Act. On other hand, view of American Court on issue as well as its own decision rendered in case of Associated Cement Co. (supra) in context of Customs Act wherein definition of term "goods" given was not as wide or exhaustive as definition of term "goods" in Andhra Pradesh Sales-tax Act was taken into account and relied upon by Hon ble Supreme Court to hold that software, whether customised or non-customised, satisfies all attributes of being "goods" and as such, same is capable of being bought and sold and becomes object of trade and commerce. In our opinion, ratio laid down by Hon ble Supreme Court in case of TCS (supra) holding that computer software put in medium of disk would be goods can only lead to conclusion that purchase of such disk is acquiring tangible asset. If disk, tape or floppy or other electronic medium i n which software is stored is by itself goods, then assessee who acquires same, acquires tangible asset. Computer software has not been defined in Act, but in Note 7 to Appendix I to IT Rules, it has been explained to include computer programme recorded on any disk, tape, perforated media or other information storage device. Therefore computer software (whether in canned form or uncanned form) is goods and tangible asset by itself. question whether assessee by purchase of disk containing software has purchased capital asset or not should not, therefore, be viewed from angle of acquisition of any copyright or any of bundle of rights comprised in such copyright. assesses purchasing such software becomes owner thereof. But test of ownership in computer software in light of question whether same is capital or revenue cannot be decided on basis of ownership test alone but has to be seen from point of its utility to businessman and to see how important economic or functional role it plays in his business. In other words, functional test becomes more important and relevant because of peculiar nature of computer software and its possible use in different areas of business teaching either capital or revenue field or its utility to businessmen which may touch either capital or revenue field. manner in which computer software is used is again peculiar. General mode is to acquire computer software on license. That by itself will not be sufficient to conclude that said expenditure is revenue expenditure, if on application of functional test, it is found that expenditure operates to confer benefit in capital field. On other hand, some computer software may have very limited economic life so as to be treated as capital expenditure, though owned by assessee. Whether expenditure on computer software gives enduring benefit to assessee: For ascertaining as to whether expenditure on computer software gives enduring benefit to assessee, duration of time for which assessee acquires right to use software becomes relevant. Having regard to fact that software becomes obsolete with technological innovation and advancement within short span of time, it can be said that where life of computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. It is also evident from amendment to law w.e.f. 1st April, 2003 granting 60 per cent depreciation on computer software that even legislature considers life of computer software as about two years by providing higher rate of depreciation @ 60 per cent thereon so as to enable assessee to write off same to extent of 84 per cent even when treated as capital asset within period of two years. assessee may own software outright or be licensee but same may operate to confer benefit only in revenue field and therefore it may have to be regarded as revenue expenditure. decision of Hon ble Supreme Court, in case of Empire Jute Co. Ltd. (supra) lays down that it is not every advantage of enduring nature acquired by assessee that brings case within principle laid down in this test assessee that brings case within principle laid down in this test (enduring benefit test). What is material to consider is nature of advantage in commercial sense and it is only where advantage is in capital field that expenditure would be disallowable on application of this test. If advantage consists merely in facilitating assessee s trading operations or enabling management and conduct of assessee s business to be carried on more efficiently or more profitably while leaving fixed capital untouched, expenditure would be on revenue account, even though advantage may endure for on indefinite future. In other words, functional test would become material and if on application of same it is found that expenditure operates to confer benefit in revenue field, then same would be revenue, irrespective of duration of time for which assessee acquires rights in software. period of advantage in context of computer software should not be viewed from point of view of different assets or advantage like tenancy or use of know-how because software is business tool enabling businessman s ability to run his business. Whether expenditure operates to add profit earning apparatus of assessee (Functional test): advantage which assessee derives has to be seen. nature of advantage has to be seen in commercial sense. If advantage is in capital field then same would be capital expenditure. If advantage consists merely in facilitating assessee s trading operations or enabling management and conduct of assessee s business to be carried on more efficiently or more profitably, while leaving fixed capital untouched, expenditure would be on revenue account, however, if assets/advantage is part of profit earning apparatus, it is capital. following factors would be relevant to determine whether advantage operates in capital field or revenue field. (i) Nature of business of assessee: It is necessary to obtain understanding of business function or effect of concern s software. Software normally functions as tool enabling business to be carried on more efficiently. scope, power, longevity of such tool and its centrality to functions of business will all bear on its treatment. In case of M/s SQL Star international Ltd. one of assessees in cases referred to Special Bench, assessee company is engaged in business of software development as well as running training center to impart specialized training to students in software technology. If software were used in such business to impart training to students, then same would be part of profit making apparatus of assessee and consequently expenditure on software, capital. Similarly, example of travel agent can be cited here as illustration wherein expenditure incurred on acquisition of software for purpose of enabling assessee to make booking of air tickets would be capital expenditure because such software certainly forms part of profit making apparatus of travel agency business inasmuch as business of air ticket booking is done with help of that software. Another example which can be considered here is that of acquisition of Turbo Gold software for Rs. 17.61 lakhs by one of assessees in present c s e i.e. M/s Amway India Enterprises. As submitted before us, said software helps in compression of size of e-mails sent through Lotus Notes Mailing System and it includes licenses for 150 users who are using Lotus Notes Mailing System and software license for running on its server. If use of this software in business of assessee is limited to facilitate merely effective and fast communication in order to increase its organizational efficiency, same cannot be treated as forming part of profit making apparatus of assessee. On other hand, if such software is being used by assessee engaged in business of placement agency where applications from persons seeking jobs are invited through e-mail and are also forwarded to concerned clients through e-mail, same may form part of profit making apparatus of assessee s business of placement agency and can be treated as capital asset. (ii) As general rule it may be stated that more expensive computer software more it is likely to be central tool of business and more enduring is likely to be its effect adding to profit earning apparatus. I f there are associated capital expenditure like purchase of new computer equipment for running software developed under project, then it can be considered as capital expenditure. This is especially case where new hardware is not merely desirable but necessary for this purpose. (iii) Degree of associated organisational change: Similarly degree of change intended in way operations are carried out as result of computer software, for example, savings in number, and changes in location, of staff used to provide services to customers will have bearing. more radical changes, more likely expenditure will be capital. These changes are likely to be most radical when operations previously carried on manually are computerised. (iv) It has to be borne in mind that computer software industry is of fast changing nature. Therefore whatever software purchased by assessee would become outdated much earlier than expected. assessee has therefore to upgrade his software. element of upgrading does not automatically make expenditure capital. presence of element of upgrading, therefore, will not necessarily cause expenditure in question to be capital. Our conclusions on issue under consideration thus can be summarized, as under: (i) When assessee acquires computer software or for that matter license to use such software, he acquires tangible asset and becomes owner thereof as held above relying on decision of Hon ble Supreme Court in case of TCS (supra). (ii) Having regard to fact that software becomes obsolete with technological innovation and advancement within short span of time. It can be said that where life of computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. Any software having its utility to assessee for period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make expenditure incurred on software as capital in nature and functional test as discussed above also needs to be satisfied. (iii) Once tests of ownership and enduring benefit are satisfied, question whether expenditure incurred on computer software is capital or revenue has to be seen from point of view of its utility to businessman and how important economic or functional role it plays in his business. In other words, functional test becomes more important and relevant because of peculiar nature of computer software and its possible use in different areas of business touching either capital, or revenue field or its utility to businessman which may touch either capital or revenue field. Having laid down criteria for determining nature of expenditure incurred on acquisition of software, whether capital or revenue, we are of view that these criteria need to be applied to determine exact nature of expenditure incurred by assessees in present cases for acquiring different softwares. Since this exercise is required to be done in respect of each and every software independently having regard to criteria laid down above, we are of view that matter needs to be restored back to file of AO for doing such exercise. AO shall examine question whether expenditure on computer software is capital or revenue in light of criteria laid down above after giving opportunity of being heard to assessees. If on such examination, AO comes to conclusion that expenditure is capital expenditure, then question regarding allowing depreciation will be decided in accordance with principles laid down in subsequent paras. We have already discussed as to how computer software is tangible property. Though licensee, person purchasing disk or other medium containing software is owner to extent of rights comprised in license. decision of Hon ble Supreme Court in case of TCS (supra) supports view that software contained in disk is tangible property by itself. use by assessee of such software in his business is enough to allow claim for depreciation. rights which assessee acquires by purchasing disk or magnetic medium containing computer software with limited or absolute right to use same by itself would satisfy requirements of plant, assessee s ownership of limited right over tangible asset is sufficient to conclude that assessee is owner of plant. There is therefore no difficulty in allowing depreciation claim at 25 per cent under s. 32(1)(i) r/w Appendix I, Part Division III(1) to IT Rules, 1962. With effect from 1st April, 2003, computer software has been classified as tangible asset under heading "Plant" in Appendix I to IT Rules entitled to depreciation at 60 per cent. assessee would be entitled to depreciation at 60 per cent from 1st April, 2003. argument raised on behalf of assessees in this context was that rate of depreciation on computer software from 1st April, 1999 should be 60 per cent. basis of this argument was that depreciation on computers was originally allowed treating them as plant only at 25 per cent. With effect from 1st April, 1999, computers were treated as different class of asset falling within description of plant and depreciation was allowed at 60 per cent. With effect from 1st April, 2003, computer software was also included along with computers. argument of assessee was that amendment to rules was merely clarificatory and therefore, even on computer software w.e.f. 1st April, 1999, 60 per cent depreciation should be allowed. We do not agree with submissions of assessee in this regard. amendment is prospective. It is not clarificatory for reason that computer and computer software are two different items of assets. If legislature wanted to allow depreciation at 60 per cent w.e.f. 1st April, 1999 on computer software, it would have said so specifically by making provisions retrospective. In this regard, we agree with view expressed by Delhi Bench of Tribunal in case of Maruti Udyog Ltd. (supra) wherein similar view has been taken. By order of reference, entire appeals in case of M/s Amway I n d i Enterprises and M/s SQL Star International Ltd, were referred for determination by Special Bench. arguments were heard only with regard to issue of expenditure on computer software. There are other issues arising for consideration in these appeals. same, however, are entirely different and have no interlinking whatsoever with issue of expenditure on computer software. We, therefore, deem it proper to refer back cases to Hon ble President for placing appeals before regular Division Bench for decision in accordance with ruling of Special Bench on issue of expenditure on in accordance with ruling of Special Bench on issue of expenditure on software and decision on ether issues after hearing parties. Before parting, it would be our duty to explain reasons as to why we have not made any reference to various decisions which are specifically on issue of expenditure on computer software. We have already noticed question whether expenditure is capital or revenue is dependent on facts and circumstances of given case. We have also noticed that different minds may come to different conclusions with equal propriety. We, therefore, thought it fit to lay down general guidelines to be applied to individual cases. In decisions of Tribunal specifically on issue, different considerations prevailed for ultimate conclusion. In case of Maruti Udyog Ltd. (supra), Radha Krishna Foodland Ltd. (supra), Escorts Ltd. (supra) and Hero Honda Ltd. (supra) conclusion that expenditure on purchase of computer software was capital proceeded on footing that purchase was outright purchase and that software was intangible asset. In decision in case of Asahi India Safety Glass (supra), Sonata Information Technology Ltd. (supra) and IBM India Ltd., however it was held that expenditure on purchase of computer software was revenue in nature. Such conclusion was arrived at by Tribunal on basis that assessees were merely licensees of software and had not acquired any ownership rights therein. So also decision in case of Samsung Electronics Co. Ltd. (supra) and in case of All Russia Scientific Research Institute Cable Industry (supra). In case of Business Information Processing Services (supra) conclusion was based on premise that computer software does not provide enduring benefit because of fast changing technology and therefore, expenditure in question was revenue expenditure. We have only reconciled different approach by laying down that all circumstances have to be cumulatively taken into account. decision of Hon ble Rajasthan High Court in case of Arawali Constructions Ltd. (supra) is again based on factual conclusion that software was program specifically developed for data analysis for mining purposes and purchase of software was outright. business of assessee was carrying out mining operations. Therefore, decision is on facts of that case. In case of G.E. Capital Services Ltd. (supra) decided by Hon ble Delhi High Court, finding of fact by Tribunal was that expenditure in question was for upgradation and that software had very limited life. It was on these facts that Hon ble Delhi High Court concurred with view expressed by Tribunal that expenditure was of revenue nature. In case of K & Co. (supra) decided by Hon ble Delhi High Court, expenditure in question was on maintenance and upgradation and was held to be revenue in nature. In case of CIT vs. Southern Roadways Ltd. (2007) 288 ITR 15 (Mad), expenditure in question was on upgradation of computer software and finding of fact was that expenditure was incurred only for improving efficiency of existing system. Court has also reiterated law that there was no single rigid formula to find out whether expenditure was capital or revenue. These decisions of Hon ble High Courts have to be considered as laying down general guidelines but in each case facts and other surrounding circumstances have to be taken into account before applying ratio laid down therein, learned counsel for assessee Mr. Ajay Vohra relied on some judicial pronouncements wherein it was held that expenditure on acquisition of know- how was considered as expenditure of revenue nature. His submission was that computer software is akin to know-how and therefore, expenditure on acquisition of computer software should also be considered as revenue expenditure. We are of view that different considerations will apply in testing nature of expenditure in context of acquisition of know-how compared to expenditure on acquisition of software because know-how is intangible asset whereas as held by Hon ble Supreme Court in case of TCS (supra), software is tangible asset. questions referred to this Special Bench thus are answered accordingly as indicated above. respective appeals will now be placed for consideration before regular Bench. *** AMWAY INDIA ENTERPRISES v. DEPUTY COMMISSIONER OF INCOME TAX
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