Expenses incurred for Licence of Software, revenue in nature: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai held that expenses incurred for the license of software, revenue in nature.

The assessee, M/s. Novartis Healthcare Pvt Ltd had incurred expenses in respect of software licenses amounting to Rs.5.35 crores. The AO asked the assessee why the expenses should not be treated as capital expenditure and the assessee replied that the assessee's company has incurred expenses on license fees for use of the software. According to the assessee, software license fees were to the tune of Rs.5.35 crores out of which 5.25 crores were on account of license fees for “computer software packages” or user license expenses and the balance is towards maintenance expenses.

It was pointed out by the assessee that these software packages get frequently outdated and have to be replaced. And the assessee company pointed out that it has a policy of capitalizing on operating software systems related to the hardware of a computer. However, since application software unlike operating software gets outdated and has to be replaced by the latest versions hence, it was claimed as revenue expenditure.

The CIT(A) relies on the coordinate benches decision of the Tribunal in the assessee’s own case for AY. 2008-09 has deleted the entire addition made by AO on account of capitalizing the software expenses and allowed the same revenue expenditure. Even though the aforesaid facts were brought to the notice of the AO, he did not accept the same and according to him the purchase of software provides enduring benefits and so is capital expenses; and resultantly is an intangible asset and allowed depreciation at 25% of the expenses claimed.

Aggrieved the assessee preferred an appeal before the CIT(A) after who appreciating the aforesaid contention of the assessee and taking note of the Tribunals decisions for earlier years, directed the deletion of the disallowance and allowed the expenditure claimed by the assessee in respect of license fees incurred for use of software packages. Aggrieved by the aforesaid action of the CIT(A), the revenue is in appeal before the Tribunal.

The Bench consisting of Pramod Kumar, Vice President, and Aby T Varkey, Judicial Member observed that “the CIT(A) has rightly held that the expenses incurred for the license of the software to be of revenue nature and took note of Tribunal's decision in assessee’s own case for earlier years AY 2008-09 (supra) and has followed the same.

To Read the full text of the Order CLICK HERE

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