ERP Software expenditure allowable as revenue expenditure – Bombay HC

CIT vs. Raychem RPG Ltd (Bombay High Court) – When we apply this functional test suggested by the Special Bench of the Tribunal, we find that impugned software does not form part of the profit making apparatus of the assessee and hence the same is to be disallowed a revenue expenditure. We hold so because we find that the business of the assessee company is that of manufacturing of telecommunication and power cable accessories and trading in oil retracing system and other products and impugned software is an Enterprises Resources Planning (ERP) package and hence it facilitate the assessee’s trading operations or enabling the management to conduct the assessee’s business more efficiently or more profitably but it is not in the nature of profit making apparatus. We, therefore, decide this issue also in favour of the assessee and we hold that this expenditure of Rs.20.60 lakhs is of revenue expenditure. We hold so by following the judgment of the Special Bench of the Tribunal relied upon by the LD AR of the assessee.

IN THE HIGH COURT OF JDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION.
INCOME TAX APPEAL NO.4176 OF 2009
The Commissioner of Income Tax Vs. M/s Raychem RPG Ltd.

DATE    : 4TH JULY, 2011.

P.C.

1.      Two questions of law raised by the Revenue in this appeal, which reads thus :

“(a) Whether on the facts and circumstance of the case and in law, the Hon’ble ITAT was justified in deleting the additions in respect of disallowance of software expenditure to the extent of Rs. 23,62,368/- as capital expenditure as software used for the first time will have to be considered as capital in nature?

(b) Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT was right in deleting the additions made in respect of the scrap sales as while computing the eligible deduction u/s 80HHC of the Act , any receipt credited to the profit & loss account should either be included in the total turnover or 90% of the same should be reduced while computing profit of the business.?”

2. As regards the first question, ITAT relying upon on its order in the assessee’s own case relating to Assessment year 2001-02 held that the software expenditure was a revenue expenditure. The appeal filed by the Revenue for the assessment year 2001 and 2002 has been dismissed for want of removal of office objections and thus the order passed by the ITAT for the Assessment year 2001-2002 has attained finality. Moreover, the Tribunal in its order relating the assessment year 2001-02 has allowed expenditure as revenue expenditure by recording thus:

“7. When we apply this functional test suggested by the Special Bench of the Tribunal, we find that impugned software does not form part of the profit making apparatus of the assessee and hence the same is to be disallowed a revenue expenditure. We hold so because we find that the business of the assessee company is that of manufacturing of telecommunication and power cable accessories and trading in oil retracing system and other products and impugned software is an Enterprises Resources Planning (ERP) package and hence it facilitate the assessee’s trading operations or enabling the management to conduct the assessee’s business more efficiently or more profitably but it is not in the nature of profit making apparatus. We, therefore, decide this issue also in favour of the assessee and we hold that this expenditure of Rs.20.60 lakhs is of revenue expenditure. We hold so by following the judgment of the Special Bench of the Tribunal relied upon by the LD AR of the assessee.”

3. In our view, no fault can be found in the aforesaid order of ITAT holding that software expenditure was allowable as revenue expenditure.

4.    As regards, the second question is concerned, learned Counsel for the parties agree that in view of the judgment in CIT V/s Dresser Rand India P. Ltd. reported in 323 ITR 429 (Bom). the question be restored to the file of the ITAT for fresh consideration in the light of aforesaid judgment. Accordingly, the second question is restored to the file of ITAT for fresh consideration in the light of Judgment in Dresser Rand India P. Ltd. (Supra).

5.      Appeal is disposed of accordingly.

( A.A. SAYED, J. )                                                       ( J.P. DEVADHAR , J.)