Partial Relief to Motorola: ITAT Treats Software Expenses as Revenue Expenditure Citing Recurring Maintenance and No Enduring Benefit [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) granted partial relief to Motorola Solutions by holding that software expenses incurred by the company were revenue in nature, as they related to recurring maintenance and did not result in any enduring benefit.

Motorola Solutions, the assessee, had filed appeals for Assessment Years 2005–06 and 2006–07 challenging, among other disallowances, the treatment of software expenses as capital expenditure. The Assessing Officer (AO) had disallowed the software expenses amounting to Rs. 1.65 crore and Rs. 2.12 crore respectively in the two assessment years, classifying them as capital in nature, and granted depreciation instead.

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The assessee’s counsel argued that the expenses were related to annual software maintenance and renewal charges necessary for the smooth functioning of its operations. The company further relied on earlier tribunal decisions in its own case, where similar expenditures had been held to be revenue in nature. They also submitted that the software was not a one-time investment or purchase giving any enduring benefit, but rather a recurring cost for keeping systems updated.

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The revenue counsel opposed the claim, asserting that the software upgrades and related expenses added long-term value and should be capitalized. They argued that these were not routine operational costs but improvements enhancing the life of the software.

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The two-member bench comprising S. Rifaur Rahman (Accountant Member) and Vimal Kumar (Judicial Member) considered the arguments and examined the tribunal’s findings from previous years in the assessee’s own case. The tribunal observed that most of the expenses pertained to annual renewals and routine maintenance, and no new asset or long-term advantage was acquired by the company. The tribunal held that the expenditure did not qualify as capital in nature.

The tribunal ruled that the software expenses were revenue in nature and directed the Assessing Officer to allow them as a deduction in full. The appeal was partly allowed on this issue in favour of the assessee.

To Read the full text of the Order CLICK HERE

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