CIT - 1 v. ACL Wireless Ltd

1. ITA No.. 254/^013 p^feHains td''Asses§ment^ 04 and impugns order of ITAT dated 2B.08.^p;i[2] &ITA No.313/2013 pertains to Assessment, Year 2007-08 and impugns order of ITAT dated 19.10.2012. I

2. These appeals have been filed by the Revenue under section 260A of the Income Tax Act,' 1961 (for short Page lot" 23 ITA 254/2013 «& 313/2013 3. "the Act") impugning the orders ITAT has accepted the I appeals of the Assessee and deleted the additions made by the Assessing Officer \A/ith regard to product improvement expenseS;VirrOIhe.;->As„sessing Officer had treated thei'pro^jgct it^iDrovbmemf^^^ as capital expenditure and disallowed equivalent', arih'ount as +'--v revenue;expenditure'.' ITAT:has held to the'contrai^k;?The; Assessee is a. company which is involved'ln the 'V- ". " ' • business of softwgX^ik',d,fe;y;i%l:5i55ri3ent. The commercia I i ' • • I;j operations started In ihe; feihaifibial Year 2002-03. Thi 1 ' ' • •''/H V M 'H •|\ Assessee provides /wireless.solutions for mobile •^consumers and enterprises:..The software I..;&/'• #' development relateslto:the field of ihstantsrrie.ssdging v...i> J.-- X't, •>'.-> f -0' (IM); It employed and functioned withZ/a ^barn of software professionals. They deVelojDed.hew software and were also involved in: continDous improvement in the existing software in terms of improvements, speed, usage, storage and providing enhanced features. The Assessee had signed revenue sharing agreements ITA 254/2013 & 313/2013 Page2of23 with mobile service providers like Airtel, Vodafone, etc. iTA 254 of 2013

4. During the Assessrripnt.Year 2003-04, the Assessee had capitalized the* pfodiUct development expenses for ^^the product (software) launehe'^H in the relevant assessnieht yearf However, un(|iei^ the^fhead,y Product lmprove|rhent Expenses', the Assessee ft'as claimed Rs.90,37/^5^^'jagexpendituf^'" % 5.;• The Assessee was asked by the Assessing Officer tp i % explain as to why^the exp,ehsg,s incurred on produdt % improvement sh,o:uld^nidt"bei<GBpitali In response, Six. ".-'ri'!., i'-., I' v'-y" -'Si. W was;;.sybm;itt^d,;:v:that,, the'^1mp,r6vem;pi^v;.^o^'^ v., 1•.0' software';.was' a,, regular feature ah^.f^3in€e the technoiagy'ofJmSfeijgiphpn^^ fastest changing techridlogies ' and; ^tci" keep pace, the Assessee was required to upgrade/improve/modify its product on constant basis. Product improvement was part and parcel of the business of the Assessee. ITA 254/2013 & 313/2013 #1 i The expenses incurred by the Assessee for product s i improvement did not result in any ' new product, i. ! however modified and new features were added to I i the existing product,jdepending,,.on rnarket/technology requirements.,,; The Assessee claimed these expenses to |b^ revenue in nature as Jhe samp were being incurred in the 'ordinary^course ^©f b TheJ'said expinses were essential to. stayljn the IFi'S" 's"' ->1,' •.•iff?'#' I'j;litiginess of rapidly' changing technological world qf I 'I mobile communications. y.i

6. I The Assessing.Opi^r, i/i||e ^js assessment order dated 23?0.d.2dQ6^• treatedi the said",expenses 'as capital,expenditure; on the ground!that the 'software hadflbeteWcapitilize^ by the y^ssessee ^d there was, ' a dedicated team''-of professionals whcgse job- was to "Kci-i-. I- 5 r carry out further improvement in the software-and the expenses incurred were to enhance the value of the capital asset resulting in enduring ibenefit. The Assessing Officer thus disallowed: the product Page 4 of23 Improvement expenses of Rs.90,37,605/- holding them to be capita! in nature.

7. The CIT (Appeals), vide his order dated 02.02.2010, dismissed the appeal of the Assessee and confirmed the findings of the Assessing,. Officer-:- that the expienses incurred by the specialized \ tearn');-, were •/elated 'to produdt-; develbprrieht and resulted in I':'. "f release of a new version'.of the softwarewith enhanced featuresyov6r, the earlier version. The Cl^ (Appeals) confirmed the findings of the Assessing B 1 •. Officer that the nature of activity undertaken by the i " •.. software development team had resulted in creation i • J of new products and assets, which werfe; having enhanced-features of enduringi benefit;" ', ''

8. Aggrieved by the order dated 02.02.2012 of the CIT (Appeals), the Assessee filed an appeal before the ITAT, who vide the order dated 28.08.2012 have. agreed with the contention of the Assessee. ITA 254/2013 & 313/2013 Page[5] of23

9. The ITAT noticed that in the immediately preceding assessment year, total expenditure incurred by the Assessee was of Rs. 10,68,788/-, which was allowed by the Assessin^g Officer and in the succeeding assessment year, expenditure of Rs],1:,25,76,T45/was::also allowed by the,Assessing Officer. Th,e ITAT further'!;noticed t i^t '-the claim:.of the Assess'^^e of '>,.i[3] ^yR^i2^5,43,448/r • -toWardS' ppbduct improij/em'^nt expenses in the'^'-'-year''2 was also ni|t \'t disallowed. In vieW of the fact' that expenditure in the n • r,' f! immediate preceding assessment year and in the • li ' § V'._ immediate succeeding assessment year had be.^h tl 'V •: ' • ' & •allowed aind^ no ' disallowahce -iHadM'been rpjade 'w> -y •• •. •• • tdwaf'dk-', product, improvement expefi.ses' for the Assessrrietnt,th^f^TAT'''h^ that the disallowance'f'macJe"'' in the'^ ybar under consideration was not justified.

10. The ITAT also noticed the fact that the software was developed in the earlier year and during the year ITA254/2013 &313/2013 Page6of23 under consideration, improvement was done and on account of which, the Assessee had incurred expenditure towards salary, communication expenses, hosting charges, equipment hire charges, office jent, electrical expenses/'!-.-, legal and professional ^Expenses and consultancy charges. The ITAT held these expenses to be' reyenue in Vrt "A I'nature and set" a&jde" the,findings of the Asse,ssi^^g ji officer and CIT '(/^ppealfe)'th'^^^^ expens^ we^ -r'.fj ft capital in nature. " vi i a I.11.f; The ITAT relied on;'thevdjec of the Delhi Hig|i "I'. S,: Court in -the cBse o^ CIT vs. •Asahi^Sndia Saf^y • '••!/ i • Glass Ltd. (2012^ 346 ITR 329 ("DfeL.; The Delhi,jfligh ' '•./•...-i '.V-, Co'iirt relying on various judgmehts'' J,including ^ 'iv • decisions of the S'upreme Court"held asf,under;- " the test of!enduring benefit is not a'certain or a conclusive test which the courts can apply almost by rote;. What is required to be seen is the real intent and purpose of the expenditure Page 7 of23 Vand whether ' the' expenditure results in creation of fixed capital for the Assessee. It is important to bear in mind that what is required to be seen is not whether the advantage obtained lasts forever.but whether the expense;jncuri:ed-- does^, away;, with a r,ecurrihg,expehse(s) defrayed towards-runqjng |;- a.business as.;agaihst an expense un'dettake^^ /•y ifor "the benefit-of the business as a whole. In;p, " i''- •./"''^other words, the-expenditure which is incurre.d) ij ''•'• •fwhich enables the,'prof.it-rnaking structure to |i 'rj work more efficiently leaving the source of the profit-making structure untouched, would, in, |j V our view, be.;;ari exRen,se in the nature of •• •' ' "v' I if revenue expenditure. Fine, tuning business • 'iv- ' ',v' # opieratibnsuto enable the management =.to run;§» V its, '.xbukin.ess "" effectively, effieiently'/'-vahd/" '<p,rdfitably; leaving,the fixed assets untouched would be, an ' expenditure in 'the nature of revenue expenditure even though the advantage may last for an indefinite period. The test of enduring benefit or advantage would thus collapse in such like cases. It would, in our view, be only truer in cases which deal V with technology and software application, which do not in any manner supplant the source of income or added to the fixed capital of the Assessee."

12. The ITAT also-relied on-the judgment of.,the Delhi High Court in'1:hercase idf 1ndo Rama Symthet/c^ fNp/A Ltd.. iTR 18'. wher^^ the e[6],ui;fcha%held..s I ''' if'"";tMat the= expenditure^ariGurredi whi^ was in'the; nature JfOf salaries, wages,-^paitsJI'ma^^ des|g# atid ^ " I il engineering fee, etc. and incui^red in the normal coursl il ' I;! of business towards the assignment given t'c V',,• ' I:! consultants for the! purposes of; improving operational! •< <. p' efficiency and was pot towards acquiring any enduring b^t|efit-- inVth^;;"capHai' fiei busirfe^s^v;hlore efficiently and.profitahilY.ff-^ was allowable is;business expenditure."" • '

13. The ITAT held that no capita! asset had been acquired by the Assessee and the major portion of the expenses on account of salary paid, rent, consultancy charges, electricity charges, etc. were not for creating any capital asset Used for enduring benefit but were incurred in the normal course of business and were thus revenue in nature.

14. Having, heard, counsel for the rev.enue and Gp,nsiderjng the^grouhds df appeal, we find no meritiiri/the appeal. The findings recorded by the I'TAT are factual. \^he. IHTAir?,; has held thatcih the, immediately pne'Qedit|g ili'f •' • f /v assessment year, 'total expenditure incurred by th'e 1 • 'K I;• Assessee towards product improvement was df li ^ ^ ' I Rs.10,68,788/-, whjich*:was-allbwed by the Assessing •'I ' • ' | vOfficer and;, in 'the succeeding' assessment ye^r, expenditure of'•Rs.'t-25,76,145A was also sallowed by the 'Assessing Officer. Further that the' clciim'''of the Assessee of Rs.2;05,43,448/- towards product improvement expenses in the year 2006-07 was also not disallowed.

15. The ITAT has held that in view of the fact that V expenditure in the immediate preceding assessment year and in the immediate succeeding assessment year had been allowed and no disallowance had been made towards product improvement expenses'for the Assessment' Year 2006-07;;therdisallo\)vance made in the:i(;ear under: Consideration is not justified, '"j,

16. Jhe irrAT has heild[that;the:s9ftware was de^elope^ in rithe..earlier years' and during the year'•'J,und^^^ s'l consideration, improvement was done and on accout|t;;•? ' • ••' h ' of which, the Assessee had incurred expenditure: ' • towards salary, corhmunication expenses, hostiqg '^'charges, equipment 'hii"e charges,-office rent, electri.eal.V;-,v-' ^ ^ # expenses,' '-^legal ai7id, professional, e'xpehSes -y and consultancy !charges. These expenses.have been held to be revenue in nature. '

17. The ITAT has found that no capital asset had been acquired or created by the Assessee.. The major portion of the expenses on account of salary paid, ITA 254/2013 &313/2013 Page Hof23 rent,, consultancy charges, electricity charges, etc. were not for creating any capital asset used for enduring benefit but were incurred in. the normal course of business, and were revenue in nature.

18. The As.sessee:is engaged in the-business'o.^,providing wireiess solution fcir mobile consuhners and.ent^^rise. The Rsciifiware,in }:issue i^^ rih/i the field '^of ins[1]:ant i[7],-4'iJ;U % ^messaging which- i,is' •used sin.' mobile phoninq";,,. The i§ ^ ^ - / v.. ' ^ '1 [^product 'of the Assessee relates to mobile phonb jV-; '• •• " • ' ' • • •" '^1 V' E] communication/messaging. The technology of mobill lii ' 'i' r' ^ H '• ^, M phoning is rapidly chahging;.and improving day by day'. v);, ' *•' • • 0 /Updates to the existing software are provided virtually,r.•r o'n,day- to day' basis; -The requirement bf.,mobile dsers •fe, i A^' '''•h • r'"' '' •''^''-0 keeps, changing rapidly. To kee'p pace'wjt'h tlnie rapid changingHequirembht'of- mobile userSi|;:the software providers are making 'improvements in the existing software and providing new updates and product features by modifying the existing features and by adding new features to the existing product. The ITA 254/2013 &313/2013 Pagel2'of23 IS company which is not able to keep pace with the increasing demands for newer products and features is left behind for not being able to keep pace with the improvements in ttpe industry: Keeping in view the rapid changing requirements, every company in the fieldof software development specially ib't mobile phbning'has to keep' modifying and enhanc^ing'^their ' ' ' ' I ••• ' ' " ' /products and provide' updates' on regular'^^basjis...--a ''•ii ySofiiware upgradation/is required to keep and "ensure --.r,,, I 4; marketability of th§ said product. Saleability of - a 1/ fj software or upgrade'lasts driiy as long as a newd^ v;.:,, •.-B- ''I,update or upgrade 1s hot' available. The period Between'5ileikupgrade 'and,the other is hbt^-;s^ubst^ptial onliahd'Ss'such, there may be no, enduri.ng!:b^.n^fit of the software. This is clear and apparent -from the amounts spent on poftware improvement.