Software Expenses Are 'Revenue In Nature' If Fixed Capital Did Not Undergo Any Change Consequent To Acquisition Of Licensed Software: Mumbai ITAT

The ITAT held so after finding that the fixed capital of assessee did not undergo any change as a consequence of the acquisition of the licensed software.

The Division Bench of Sandeep Singh Karhail (Judicial Member) and B.R. Baskaran (Accountant Member) observed that “the issue whether software license expenditure incurred by the assessee is revenue or capital expenditure, is recurring in nature and has been decided in favour of the assessee by the coordinate bench of the Tribunal in preceding years”. (Para 6)

Facts of the case:

The assessee company, engaged in the business of employment background screening services, filed its return declaring a total income of Rs. 25,01,35,460 under the normal provisions and book profit u/s 115JB at Rs.8,10,93,284. The AO however assessed the total income of assessee at Rs.36,72,33,727 under normal provisions of the Act, after disallowing software license expenses, treating the same as capital in nature, and making disallowance u/s 40(a)(ia) of the Act. On appeal, the CIT(A) deleted the disallowance.

Observation of the Tribunal:

The Bench referred to the submission of assessee that the nature of the software is such that it needs to be updated with new versions in view of the technological advancements, therefore, the software payment towards license fees is charged by the service provider on periodical basis.

As per the assessee, it has not obtained any enduring benefit from the use of the software, and expenditure incurred is recurring in nature, added the Bench.

The Bench found that the taxability of software license expenditure was decided in favour of assessee by the Coordinate bench in DCIT v/s M/s First Advantage Private Limited [ITA No. 6659/Mum/2013], wherein software license expenditure on similar products was held to be revenue in nature.

Similar findings were rendered by the coordinate bench of the Tribunal in assessee's own case for the assessment years 2005-06, 2009-10 and 2018-19, where software license expenditure was held to be revenue in nature, and the Departmental Representative failed to show any reason to deviate from the said decision, added the Bench.

Hence, respectfully following the order passed by the coordinate bench, the ITAT dismissed the Revenue's appeal and concluded that software license expenditure shall be treated as revenue in nature.

Counsel for Appellant/ Revenue: Surendra Meena

Counsel for Respondent/ Assessee: Nitesh Joshi and Sonakshi Jhunjhunwala

Case Title: ACIT versus First Advantage Pvt Ltd

Case Number: ITA no.1380/Mum/2024

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