Licence to use Software Not an Enduring Benefit: ITAT Treats Software Licence Fees as Revenue Expenditure in DSP Merrill Lynch Case [Read Order]

The Income Tax Appellate Tribunal ( ITAT ) Mumbai has held that software licence fees paid for the right to use MS Office constitute revenue expenditure and not a capital outlay, in a decision favouring DSP Merrill Lynch Ltd.

An addition was made by the AO, who treated the software licence payment of ₹89,000 as capital expenditure and allowed only depreciation at 25 per cent. The Commissioner (Appeals) upheld this finding, relying on the Special Bench ruling in Amway India Enterprises, which treated software as capital if its useful life extended beyond three years.

DSP Merrill Lynch, however, contended that it had only acquired a limited right to use the software and not the software itself, and that no enduring benefit or proprietary ownership had passed to it.

During appellate proceedings, the assessee produced invoices showing that it had merely obtained a non-exclusive licence to use Microsoft Office software, which was subject to renewal and could not be transferred or sold.

The assessee further argued that the software was an essential office tool used to facilitate business administration and did not form part of its profit-making apparatus. Hence, the expenditure was operational in nature, similar to routine business costs like data processing or communication systems.

In support, the assessee cited the Bombay High Court’s ruling in CIT v. Raychem RPG Ltd. (2012), which had held that enterprise resource planning (ERP) and other software enabling efficient management are revenue expenses if they do not result in the creation of a capital asset.

The Tribunal observed that the High Court had approved the functional test approach, whereby the decisive factor is whether the software forms an integral part of the profit-earning structure or merely facilitates the smooth conduct of business operations.

After examining the facts, the Tribunal found merit in the assessee’s submissions. It held that DSP Merrill Lynch had not acquired ownership of the software, nor had it gained any enduring advantage that could be considered capital in nature. Instead, it had only obtained the right to use the software as an operational tool for the day-to-day functioning of its financial advisory business.

The Bench noted that the expenditure did not bring into existence any new asset or profit-generating apparatus but simply enabled smoother execution of existing business activities.

The two-member bench comprising Amith Shukla (Judicial Member) and Padmavathy S (Accountant Member), therefore applied the ratio of Raychem RPG Ltd. and directed the AO to delete the disallowance, treating the software licence fee as revenue expenditure.

It clarified that software with a short useful life and limited rights of usage does not qualify as a capital asset under the Income Tax Act.

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