The Commissioner Of Income Tax,Chennai v. M/S.chennai Petroleum Corporation Ltd.,536, Anna Salai, Teynampet,Chennai-600 018

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 17.06.2019 CORAM THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMand THE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case Appeal No.469 of 2018 The Commissioner of Income Tax,Chennai. .. Appellant -vs- M/s.Chennai Petroleum Corporation Ltd.,536, Anna Salai, Teynampet,Chennai-600 018.PAN: .. Respondent Appeal under Section 260A of the Income-tax Act, 1961against the order dated 07.12.2017 on the file of the Income-taxAppellate Tribunal 'B' Bench, Chennai in I.T.A.No.853/Mds/2013for the assessment year 2006-07, and against the order of theCommissioner of Incoem Tax(Appeals) (LTU) Large Taxpayer Unit,Anna Nagar Western Extension, Chennai-101, dated 08.01.2013 madein ITA.No.66/11-12/LTU(A) and against the order of the JointCommissioner of Income Tax, LTU, Chennai dated 30.11.2011, madein order U/s.147 r.w.s 143(3) of the I.T Act Assessment year2006-07. For Appellant:Mrs.R.Hemalatha,For Respondent :Mr.R.Venkatanarayanan,for M/s.Subbaraya Aiyar,Padmanabhan JUDGMENT (Judgment of the Court was delivered by T.S.Sivagnanam, J.) This appeal has been filed by the appellant/Revenue underSection 260A of the Income-tax Act, 1961 (hereinafter referredto as “the Act”), challenging the order dated 07.12.2017, passedby the Income-tax Appellate Tribunal 'B' Bench, Chennai inI.T.A.No.853/Mds/2013 for the assessment year 2006-07. https://hcservices.ecourts.gov.in/hcservices/ 2.The Revenue has raised the following substantial questionsof law for consideration:-“(i) Whether the Software License Fees andMaintenance Fees paid by the Assessee is Capitalexpenditure or Revenue expenditure?(ii) Whether the license fee paid by theassessee for purchase of software which enhancesthe efficiency of the operation services of itsbusiness giving an enduring benefit would becapital expenditure only?” 3.We have heard Mrs.R.Hemalatha, learned Senior StandingCounsel for the appellant/Revenue; and Mr.R.Venkatanarayanan,learned counsel accepting notice for the respondent/assessee.4.The Revenue has assailed the order passed by the Tribunaldated 07.12.2017, confirming the order passed by theCommissioner of Income-tax (Appeals), Large Taxpayer Unit,Chennai (for brevity, “the CIT(A)”), with regard to theexpenditure incurred by the assessee for maintenance of softwareand whether it is to be treated as a revenue expenditure orcapital expenditure. 5.The sheet anchor of the argument of Mrs.R.Hemalatha,learned Senior Standing Counsel is that the Tribunal was solelyguided by the decision of the Division Bench of this Court inthe case of Commissioner of Income-tax vs. Southern RoadwaysLtd., reported in [2008] 304 ITR 84 (Madras) and this judgmentof the Division Bench having been reversed by the Hon'bleSupreme Court, the order passed by the Tribunal calls forinterference. 6.In our considered view, this is not the only aspect inconsidering whether the Revenue has made out a case forentertainment. What is required to be seen is whether the orderpassed by the CIT(A) in allowing the expenditure as a revenueexpenditure was justified or not. We have gone throughparagraph 5 of the order passed by the CIT(A), dated 08.01.2013,which reads as follows:- “5.The next issue pertains to disallowance ofRs.98,01,867/- towards expenditure on softwarelicense fees and maintenance fees paid to aspentech by treating as capital expenditure. The AOstated that during the current year, the assesseehas incurred an amount of Rs.98.02 lakhs for thepurpose of software and the same was claimed asrevenue expenditure. He observed that theassessee has not made TDS as per Chapter XVII B ofthe Income Tax Act on the above payment for thepurpose of software. Since, the payment for thepurchase of software is tantamount to the payment “5.The next issue pertains to disallowance ofRs.98,01,867/- towards expenditure on softwarelicense fees and maintenance fees paid to aspentech by treating as capital expenditure. The AOstated that during the current year, the assesseehas incurred an amount of Rs.98.02 lakhs for thepurpose of software and the same was claimed asrevenue expenditure. He observed that theassessee has not made TDS as per Chapter XVII B ofthe Income Tax Act on the above payment for thepurpose of software. Since, the payment for thepurchase of software is tantamount to the payment for the purpose of royalty, the said expenditurecannot be allowed as per the provisions of Section40(a)(i)/40(a)(ia) of the Income tax Act. Hefurther observed that the purchase of software wasmade for the purpose of getting enduring benefitof the assessee company. Therefore, the abovesaid expenditure can be treated only as capitalexpenditure............. 5.1. The appellant contested the aboveaddition. The written submissions of the ld.ARare as follows: “The Appellant paid the software license feesand maintenance fees of Rs.98,01,867/- to Aspentech for scheduling models like Fuel refinerymodel, Lube refinery model, process industrymodeling system which is used by the refinery formaking decision support solution for optimizingproduction. The software maintenance support fees are paidon a yearly basis and hence the expenditure istowards the maintenance of the software and TDSfor such payments have been duly deducted andpaid................ 5.2............ It is pertinent to note that the appellant hadpaid software license fees and maintenance fees ofRs.98,01,867/- to Aspen Tech for the system whichis used by the refinery for making decisionsupport solution for optimizing production.Moreover, these are paid on a yearly basis andtherefore, they are towards maintenance of thesoftware and TDS was also duly deducted and paid.As the expenditure is in the nature of recurring,it has to be treated as revenue expenditure. Onthe background of the factual positions andjudicial precedents, this ground is allowed.” 7.The above factual finding recorded by the CIT(A) clearlyreveals that the expenditure incurred by the assessee isrecurring in nature and has to be treated as revenue in nature.Though the Tribunal has referred to the decision of the DivisionBench in Southern Roadways Ltd. (supra), yet it has gone throughthe findings recorded by the CIT(A) and affirmed the findings. 8.Very recently, we had an occasion to consider somewhat asimilar question in the case of Commissioner of Income Tax,Trichy vs. The Lakshmi Vilas Bank Ltd., [2018-TIOL-1701-HC-MAD-IT] and dismissed the tax case appeals filed by the Revenue.This decision of ours has been confirmed by the Hon'ble SupremeCourt in CIT vs. Lakshmi Vilas Bank Ltd., [2019-TIOL-155-SC-ITby which, the delay in filing the special leave petitions before https://hcservices.ecourts.gov.in/hcservices/ the Hon'ble Supreme Court was condoned and the special leavepetitions were dismissed. 9.Mrs.R.Hemalatha, learned Senior Standing Counsel referredto a decision of the Division Bench of the High Court ofRajasthan in the case of Commissioner of Income-tax vs. ArawaliConstruction Co. (P) Ltd., reported in [2003] 259 ITR 30(Rajasthan). 10.We find that in the said case, the payment was not madeas consultancy fee to Hindustan Computers and the payment wasmade for outright sale of 'computer software' which is used astechnique in mining and operations. On facts, the Court heldthat the acquisition of technical know-how is a capitalexpenditure. In the instant case, as noticed by us and referredto above, the CIT(A) has examined the factual position and foundthat the expenditure is in the nature of revenue expenditure.Therefore, the decision in Arawali Construction Co. (P) Ltd.(supra) is distinguishable on facts. 10.We find that in the said case, the payment was not madeas consultancy fee to Hindustan Computers and the payment wasmade for outright sale of 'computer software' which is used astechnique in mining and operations. On facts, the Court heldthat the acquisition of technical know-how is a capitalexpenditure. In the instant case, as noticed by us and referredto above, the CIT(A) has examined the factual position and foundthat the expenditure is in the nature of revenue expenditure.Therefore, the decision in Arawali Construction Co. (P) Ltd.(supra) is distinguishable on facts. 11.Mrs.R.Hemalatha, learned Senior Standing Counsel referredto the decision of the High Court of Delhi in the case of BhartiTeleventures Ltd. vs. Additional/Joint Commissioner of Income-tax reported in [2013] 29 taxmann.com 326 (Delhi). 12.We have gone through the facts of the said case, wherein,in the computation of income accompanying the return, thesoftware expenses of Rs.2,69,35,669/- was claimed as adeduction. This was disallowed by the Assessing Officer and theappeal filed before the CIT (Appeals) was dismissed andconfirmed by the Tribunal. This order was affirmed by the HighCourt of Delhi, in which, it noted that only the Tribunal hadthe benefit of considering all documents which included thelease agreement with Bharti Telenet and the license agreement,dated 11.11.1996, whereby, the assessee secured license toexploit the software, provided it procured hardware as peragreed specification and also complied with the order by thelessor. Further, it held that the software as well as hardwarewere made an integral part of the arrangement. The softwareapparently caters to the hardware. Thus, on facts, the HighCourt of Delhi affirmed the factual finding rendered by theAssessing Officer, the CIT (Appeals) and the Tribunal. 13.We find the decision is wholly inapplicable to theassessee's case. 14.Thus, for the above reasons, the appeal is dismissed andthe substantial questions of law are answered against theRevenue. No costs. Sd/- Assistant Registrar(CS III)//True Copy// Sub Assistant Registrar abrTo 1.The Joint Commissioner of Income Tax, Large Taxpayer Unit, Chennai.2.The Commissioner of Income-tax (Appeals), Large Taxpayer Unit, II Floor, 1775, Jawaharlal Nehru Inner Ring Road, Anna Nagar Western Extension, Chennai-600 101.3.The Income-tax Appellate Tribunal 'B' Bench, Chennai.+1cc to Mr.T.Ravi Kumar, Advocate sr.48994+1cc to M/s.Subbaraya Aiyar Padmanabhan, Advocate sr.49642T.C.A.No.469 of 2018 br(co)nr 21/08/2019