Expenditure on ERP Software allowed as Revenue in nature

Expenditure on ERP Software allowed as Revenue in nature despite being treated as deferred revenue expenditure in the books of accounts

ABACUS Case Law Citation
ABCAUS 3362 (2020) (08) ITAT

Important case law relied upon by the parties:
CIT vs Associated Cement Companies Ltd: 172 ITR 257 (SC)
Alembic Chemical Works Co. Ltd vs CIT: 177 ITR 377 (SC)
CIT vs K & Co. 181 CTR 378
DCIT vs. Eicher Motors Ltd. 37 ITR (T) 427

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the addition being expenses incurred on Enterprise Resource Planning (“ERP”) and software expenses, holding the same as capital expenditure not revenue expenditure.

The appellant assessee was a public limited company. The return of the assessee was processed u/s 143(1) later and selected for scrutiny.

During the Assessment Year in question, the assessee had incurred expenditure on \implementation of new ERP package which had been treated as deferred revenue expenditure in the books of accounts. However, being revenue in nature, assessee had claimed the said expenditure as deduction in the return of income.

The Assessing Officer (AO) however, disallowed the aforesaid expenses holding the same to be capital expenditure on the ground that the same resulted in enduring benefit to the assessee, and allowed depreciation @ 60% on the same.

Before the Tribunal the assessee relied upon number of judgments of Hon’ble Supreme Court, ITAT and High Courts and submitted that the expenditure incurred by the assessee towards  implementation  of  ERP system in the business, in the present modern era of fast changing technology, cannot be said to result in acquisition of any capital asset nor could be said to have resulted in any benefit of enduring nature, to be regarded as capital expenditure.

The Revenue contended that the expenditure on ERP was linked to acquiring SAP Software and its implementation. The benefit derived by acquiring such software was not limited to the current year but brought to the assessee an advantage of enduring nature. The benefits associated with the software would accrue over a protracted period of time. The benefits derived through other expenses on software & design development, similarly confer long term benefits to assessee. Hence such expenditure was in the capital field and rightly disallowed by the Assessing Office.

The Tribunal noted that note that no ownership of any software was acquired by the assessee as a consequence of the ERP expenditure. This fact was not disputed by the Assessing Officer. The assessee had only limited right to use the concerned software product which the assessee acquired without acquiring the right of transferring the said software.

Thus, the Tribunal opined that no benefit of an enduring nature had been derived by the assessee as result of said expenditure. The said expenditure had been incurred only for smooth working and for improving the functioning of the organization.

According to the Tribunal, the AO ignored the fact that in today’s fast changing technology where software becomes obsolete for smooth functioning of the business, the software needs to be replaced / upgraded by an assessee from time to time, the software, in any, case could not also be said to result in any enduring benefit to the assessee to be considered and thus, it could not be held as capital expenditure.

The Tribunal also noted that the case laws referred by the assessee also supported the contentions of the assessee as expenditure incurred on computer software does not constitute enduring benefit to term the same as capital in nature. 

The Tribunal held that the Assessing Officer as well as the CIT(A) failed to take cognizance of the decisions of the various High Court and the Apex Court as well as the nature of the expenditure incurred by the assessee.

Accordingly, the Tribunal allowed this ground of appeal.

Download Full Judgment Click Here >>

• ITAT allows exemption of Rs. 25 lakhs u/s 10(10A) to non-government employees
• PCIT has revisionary jurisdiction u/s 263 over the cases passed by the NFAC or the JAO
• Appellate court interfering with MACT finding must undertake reappreciation of evidence
• When delay is not huge & involves huge monetary liability, lenient approach to be taken
• EoGM of company can not ratify diversion of fund raised by preferential issue – SC