Commissioner of Income Tax Delhi-I, New Delhi v. M/S Aci Wireless Ltd

order dated

28.08.2012 have . agreed with the contention of the Assessee. ITA 254/2013& 313/2013 Page5 of23

¶9The ITAT noticed that in the immediately preceding assessment year, total by the Assessee was of Rs. 10,68,788/-, which was allowed by the Assessin^g Officer and in the succeeding assessment year, of Rs],1:,25,76,T45/- was::also allowed by the,Assessing Officer. Th,e ITAT further'!;noticed t i^t '-the claim :.of the Assess'^^e of '> ,.i3 ^yR^i2^5,43,448/r • -toWardS' ppbduct improij/em'^nt expenses in the'^'-'-year''2 was also ni|t \'t disallowed. In vieW of the fact' that expenditure in the n • r,' f! immediate preceding assessment year in the • li ' § V'._ immediate succeeding assessment year had be.^h tl 'V • : ' • ' & •allowed aind^ no ' disallowahce -iHadM'been rpjade 'w> -y •• • . •• • tdwaf'dk-', product, improvement expefi.ses' for Assessrrietnt ,th^f^TAT'''h^ that the disallowance'f'macJe"'' in the'^ ybar under consideration was not justified.

¶10The ITAT also noticed the fact that the software was developed in the earlier year and during the year ITA254/2013&313/2013 Page6 of23 under consideration, improvement was done and on account of which, Assessee had towards salary, communication expenses, hosting charges, equipment hire charges, office jent, electrical expenses/'!-.-, legal professional ^Expenses consultancy charges. ITAT held these expenses to be' reyenue in Vrt "A I'nature and set" a&jde" the ,findings of the Asse,ssi^^g ji officer and CIT '(/^ppealfe)'th'^^^^ expens^ we^ -r' .fj ft capital in nature. " vi i a I .11 .f; The ITAT relied on;'thevdjec of the Delhi Hig|i "I' . S,: Court in -the cBse o^ CIT vs. •Asahi^Sndia Saf^y • '••!/ i • Glass Ltd. (2012^346 ITR 329 ("DfeL.;The Delhi,jfligh ' '• ./• . ..-i ' .V-, Co'iirt relying on various judgmehts'' J,including ^ 'iv • decisions of the S'upreme Court "held asf,under;- " the test of!enduring benefit is not a'certain or a conclusive test which the courts can apply almost by rote;. What is required to be seen is the real intent and purpose of the expenditure ITA 254/2013 & 313/2013 Page 7 of23 V-whether ' the' results in creation of fixed capital for the Assessee. It is important to bear in mind that what is required to be seen is not whether advantage obtained lasts forever.but whether expense ;jncuri:ed-- does^, away;, with a r,ecurrihg,expehse(s) defrayed towards-runqjng |;- a .business as .;agaihst an expense un'dettake^^ /•y ifor "the benefit-of the business as a whole. In ;p , " i''-• ./"''^other words, the-expenditure which is incurre.d) ij ''•'• •fwhich enables the,'prof.it-rnaking structure to |i 'rj work more efficiently leaving the source of the profit-makingstructure untouched, would, in, |j V our view, be.;;ari exRen,se in nature of •• •' ' "v' I if revenue expenditure. Fine , tuning business • 'iv- ' ',v' # opieratibnsuto enable the management =.to run ;§» V its, '.xbukin.ess "" effectively, effieiently'/'-vahd/" '<p,rdfitably ; leaving,the fixed assets untouched would be, an ' expenditure in 'the nature of revenue even though advantage may last for an indefinite period. test of enduring benefit or advantage would thus collapse in such like cases. It would, in our view, be only truer in cases which deal ITA 254/2013 & 313/2013 V with technology software application, which do not in any manner supplant source of income or added to the fixed capital of the Assessee."

¶12The ITAT also-relied on-the judgment of.,the Delhi High Court in'1:hercase idf 1ndo Rama Symthet/c^ fNp/A Ltd.. iTR 18'. wher^^ the e6,ui;fcha%held ..s I ''' if'"" ;tMat the= expenditure^ariGurredi whi^ was in'the; nature JfOf salaries, wages,-^paitsJI'ma^^ des|g# atid ^ " I il engineeringfee, etc. and incui^redin the normal coursl il ' I ;! of business towards assignment given t'c V', ,• ' I:! consultants for the! purposes of;improving operational! •< <. p' efficiency and was pot towards acquiring any enduring b^t|efit--inVth^;;"capHai'fiei busirfe^s^v;hlore efficiently and .profitahilY.ff-^ was allowable is;business expenditure."" • '

¶13The ITAT held that no capita! asset had been acquired by Assessee major portion of expenses on account of salary paid, rent, consultancy ITA 254/2013 & 313/2013 charges, electricity charges, etc. were not for creating any capital asset Used for enduring benefit but were in the normal course of business were thus revenue in nature.

¶14Having, heard, counsel for the rev.enue and Gp,nsiderjng the^grouhds df appeal, we find no meritiiri/the appeal. The findings recorded by the I'TAT are factual. \^he . IHTAir?,; has held thatcih the, immediately pne'Qedit|g ili'f •' • f /v assessment year, 'total by th'e • 'K I ;• Assessee towards product improvement was df li ^ ^ ' I Rs.10,68,788/-, whjich*:was-allbwed by the Assessing •'I '•' | vOfficer and;, in 'the succeeding' assessment ye^r, of'•Rs.'t-25,76,145A was also sallowed by the 'Assessing Officer. Further that the' clciim'''of Assessee of Rs.2;05,43,448/- towards product improvement expenses in the year 2006-07 was also not disallowed.

¶15ITAT has held that in view of fact that ITA 254/2013 & 313/2013 V in the immediate preceding assessment year and in the immediate succeeding assessment year had been allowed and no disallowance had been made towards product improvement expenses'for Assessment' Year 2006-07; ;therdisallo\)vance made in the :i(;earunder:Considerationis not justified, '"j,

¶16Jhe irrAT has heild[that;the:s9ftwarewas de^elope^in rithe ..earlier years' and during the year'•'J,und^^^ s'l consideration,improvementwas done and on accout|t ;;•? ' • • •' h ' of which, Assessee had : ' • towards salary, corhmunication expenses, hostiqg '^'charges, equipment 'hii"e charges,-office rent, electri.eal . V;-,v-'^ ^ # expenses,' '-^legal ai7id, professional , e'xpehSes -y and consultancy !charges. These expenses .have been held to be revenue in nature. '

¶17The ITAT has found that no capital asset had been acquired or created by the Assessee.. The major portion of the expenses on account of salary paid, ITA 254/2013&313/2013 PageH of23 rent,, consultancy charges, electricity charges, etc. were not for creating any capital asset used for enduring benefit but were in . the normal course of business, and were revenue in nature.

¶18The As.sessee :is engaged in the-business'o.^,providing wireiesssolutionfcir mobile consuhnersand.ent^^rise. The Rsciifiware ,in }:issue i^^ rih/i the field '^of ins1:ant i7 ,-4'- iJ ;U % ^messaging which-i,is' •used sin .' mobile phoninq";,,. i§ ^ ^ -/v..'^ '1 [^product 'of the Assessee relates to mobile phonb jV-; '• •• " • ' ' • • •" '^1 V' E] communication/messaging.The technology of mobill lii ' 'i' r' ^ H '• ^, M phoning is rapidly chahging; .and improving day by day'.

v) ; , ' *•' • • /Updates to the existing software are provided virtually ,r .•r o'n,day-to day' basis; -The requirement bf.,mobile dsers •fe, i A^' '''•h • r'"' '' •''^''-0 keeps, changing rapidly. To kee'p pace'wjt'h tlnie rapid changingHequirembht'of-mobile userSi|;:the software providers are making 'improvements in the existing software providing new updates product features by modifying existing features by adding new features to existing product. ITA 254/2013&313/2013 Pagel2'of23 IS company which is not able to keep pace with the increasing demands for newer products and features is left behind for not being able to keep pace with the improvements in ttpe industry: Keeping in view the rapid changing requirements, every company in the fieldof software development specially ib't mobile phbning'has to keep' modifying and enhanc^ing'^their ' ' ' ' I •• ' ' " ' /products provide' updates' on regular'^^basjis. ..--a ''•ii ySofiiware upgradation/is required to keep and "ensure --.r, , , I 4; marketability of th§ said product. Saleability of - a 1/ fj software or upgrade'lasts driiy as long as a newd^ v;.:, , • .-B- ''I,update or upgrade 1s hot' available. period Between'5ileikupgrade'and,the other is hbt^-;s^ubst^ptial onliahd'Ss'such,there may be no, enduri.ng!:b^.n^fitof software. This is clear apparent -from amounts spent on poftware improvement.

¶19To keep pace with requirements ensure product saleability, software development companies have to constantly incur to upgrade, ITA 254/2013&'313/2013 PageJ3or23 V improve and remove problem areas of the software. They have to employ professionals whose job is to continuously upgrade the software and provide newer features and updates on a regular basis. The shelf life of the software .without constant .im^provement would • ' , 'i., '• ' / • • ". \ ''''v . • ' be very small./ ' •:

¶20Expenditurewhichv;enables;the;profit making;strudt|Jre /}to 'v)Aofk more efflqi^ntl^leavi;ng^the source 'V making structure untouched, would be revenue i.f 1 . ill, nature.

¶21': The facts as noticed^herein above show that ti'b •vf "Revenue-r.ha's, not disputed , the following factual pd&iti6J- •• #

(A) Th'e'^Assessee.'Was irivolved in -business' of software developmeh.t. ,, ,,

(B) The software developed by the Assessee was"used in mobile phones and instant messaging. ITA 254/2013&313/2013 Page 14 of23

(C) The original cost for development of software was capitalised. The quantum of the said development cost was/is not in dispute or under challenge.

(D) respondent-Assessee product improverrient expenses which ^ related to upgradation,^ihiprbvenlent, -removal o^glitches of vthe existing or already developed '.software,, .^ quantum of expensesarid the nature of-.ch.aracte^rof '/ '/the expenses-incurred,i.e. softvvareimprovementdnd ,,fe f'^'upgradationwas^js/not.disp'uted or questigped -l^y H |i flj the Revenue. • % i;| ;• ' • . ^ I' 22 4 Tine question raised' Is; wHether expenses incurred or^ 'I •. . li yi upgrading, improving'or-rerhovihgproblenn areas in an % ' f/- Existing old product, shall be capitalised or treated^as reyen.ueexpe The finding of the tr.ibunal^^.j^^^^that these . upgradations were required cqristahtly and perpetually.iThe Asdessee had to keep>'pacewith the rapidly changing requiret¥ientsof the mobile phone users. Assessee was competing with other software providers. Thus, new features, upgrades, ITA 254/2013 & 313/2013 patches for removing glitches had to be provided, to keep up with matching needs and requirements of the mobile phone users.

¶23The aforesaid-exp'feshditure did not bring into existence a new asset bijt rectified and .improved product being sold. It is accepted that there has to bejecurring which has to be in'; the Said "business to ensure sale of software., This was incurred for removal of obstructions), (1 . ' • K) ^ restrictions or disabilities bh the sale and to ensure S that there was demand of the said product. These iwere normal day-to-day expenses for running b%ines's-in'question and did not create%ndijTihg or advaht'age or benefit over a long period time-' While determining deciding a question whether is capital or revenue in nature, determination should be based upon consideration of facts and circumistances and by applying principles of commercial trading business expediency. ITA 254/2013 & 313/2013

¶24Enduring benefit test is not a universal test and can breaks down. We find that the said principles have been rightly applied by the tribunal in the facts of the present case to hold that expenditure. was revenue in'n&ture and not capital; In Q^se the expenditure isfVnot incurred? oh tli^, said /s.r _ ^ capital-asset the', sarne would ybeeorne unsalable \and iobsolete. Therefore to ensure marketabilityf--of tljj^e )v I existing repeated and cohstgnt icost had to be incurred •• •• • ^ , i• , • , Mj •] to upgrade and remove^ glitches etc. In ^ucp ' Ij ; circumstances in Alembic Chemical Works Co. Ltc)'. •, • • •• !•" %. CIT [(1989)17^ ITR 377 (SC)] the SupremeCourtjbf idia hasrheld;'as under #' "•••'^'tli'e' -"jmprovisation in prode^s^ arid techn.diogy in" sbrtle:'areas' of: the# enterprise was supplen^ental to the existing business there was no material to hold that it amounted to a new or fresh venture. further circumstance that agreement ii pertainedto a product already in the line of ITA 254/2013& 313/2013 Page 17of23 V if. f I % the Assessee's established business and not to a new product indicates that what was stipulated was an improvement , in operations of the existing business its efficiency and, profitability not removed from area of the day-to-day business of the Assessee's established enterprise. , •H'J, K\ It appears to us that' answer "to ,.the'';|v questions referred should be on the basis that ,,)-'''"the financial outlaylunder' the agreement wajs;i< for the better,nduct."'.and Improvennent of the existing business andjshould, therefore, be held to be revenue expenditure. Reference may also be jinade,to the, .observations of this 'f.'. fA f count'in CIT y: .Ciba of India Ltd. [19,68.] 69 ITR

¶692^ # There is also no single definitive , criterion which, by itself, iis determinative as to/whether a particular outlay is capital: or revenue. 'once for all' payment test is also inconclusive. What is relevant is the purpose, of the outlay and its intended object and effect, considered in a common sense way having regard to the ITA 254/2013 & 313/2013 yf • . , ^ on revenue account test of \^' ;; enduring benefit may break down. It is not every, advantage of enduring nature i\ acquired,.by'ah Assessee that brings the ''a , .. . I-;'' ' .;'-case within, the principles laid.; i'down in , thiktest."\A/hat= is imaterial to, cons.iden|, isj/'' v; ' .;'- 'the nature of advantagein . ^'a ' commercial sense it ,is .only .where the advantage is in the capital .field that would be disallowable on an application of this test ""

¶25We nnay notice that in immediate preceding ^ . ^ i V\ business realities, in a given case, the test of 'enduring benefit' might breai< down-In CIT v. Associated Cement Companies Ltd. [1988] ITR 257 (SC) at p. 262, this court said;. "As ' dtDserved by the Supreme. Court in the decision in Empire Jute Co. Ltd. y. CIT _ [1980] 124 ITR 1\(SC), that therg:;may% f . i: cases . where - -• 'expenditure, everi? if%, . ' *• ' '''Uv ' for obtaining an advantage.-[df % 1, enduring^ benefit, may, none,the less,'bef''* ITA 254/2013 & 313/2013 assessment year in the immediate succeeding 7, assessment year to the year in issue, expenses have been allowed. In the Assessment Year 2006-07, claim of the Assessee towards product improvement has|, not been disallowed.'The major portion'ofthejexpenses were incurredibWard's^salary pai&, .r^nt; consultancy charges, electricity chacges, ! • , • ,iV •',••• • • - • : . r,ii 'V& • .etc.'v^wViichare'not expenses incurred towardsrci^reating •'! • - »J. -r \ V'i M : f' anf%apital asset fqr'dndurihg'-benefits but are normm ft day to day expenses and'are th'us revenue in nature. !l| r-= f Hi.. 26 I The finding recorded by the .ITAT are factual. Nothirtig 'i , . X, I' '•i^as been,pointed out for us to hold that the finding dre perverse-.;In.yiew of the factual findings recQrd|ia by rAT": m!3 SLibstantial question of .layv^'ajriisesfor ^t; :i :r' consideratiorY1n4he present appeal: '

¶27In the Assessment Year 2007-08, revenue expenses of Rs.6,86,87,898/- as claimed has been disallowed by ITA 254/2013&313/2013 , Page20 of23 V' A V the Assessing Officer vide order dated

07.12.2009 on the ground that the expenditure is capital in nature.

¶28In an appeal by the Assessee, the CIT (Appeals) vide order dated 0,5.01.2012 held to be revenueoin nature, and deleted the disallowance by the Assessing Officer. CiT (Appeals) 'followed A' ' • -• Rule of Consistency since the Assessing Officer' bad I' -• . • •• •• V' Vihirnself allowed this'to. be/revenue in the pr.ecediliig S and succeeding assessm'eht:year. 'si rin i' . •• . •

29.il The ITAT vide order dated 19.10.2012 has noticed % • •••:;.• •-j • W %that for the Assessment Years 2004-05 to 2006-07, •• '• .1 the Assessing .Officer, has allowed similar expenditjiJre and , for ,the Assessment Years 2008-0.9 20,09-10 also, Assessing Officer has himself ajjowed said expenditure.

¶30In the present case, the ITAT had allowed the appeal of the Assessee and treated the said as revenue. The expenses were incurred in the course ITA 254/2013 & 313/200 of day to day business operations of the Assessee operations being routine in nature by way of providing value added services of the customers. ITAT noticed that .the mobile services required continued, ' tipgradation monitoring ,in question was as, a niatter of . 'i.-, ' ' , ' . rpptine for the business ahd •commercialexpediencies 6f the Assessee's business and as such, the exp,§nd/es , V'ii towards product development were alloWed a: || revenueexpenditure, •• •c;,5V

¶31The findings are factual. In yiew, of the factual findings land reasoning giis/ien by us Tor' the Assessment Year 2b03-04,<-andi"''alsG'i in: ;viewJ^of the: "fa'bt"'thatl'The Assessing Officer has himself allowed similar expenses'Tor'the^AssessmentYeaP'20P4-d5to 2006-07 and 2008-09 and 2009-10; we find-no infirmity in order of the ITAT find that no substantial question of law arises in the present appeal. ITA 254/2013 & 313/2013

¶32The appeals are accordinglydismissed v\/ith no orders as to costs. •J' •SANJEEV:S%pHDEVA, J. 5 . "in . • rJ i '• SANjiv KHANN^jJ. , -I • !,••?• I'V 10*'^ DECEMBER, 2013 p. .i.-. St % «« ff' K % Ws; 'h' - r> in..' f'l /! '\]x, '! • -• ' •' v.i). .••> ••. ' ! - •,•/''•' A t?l i'f ITA 254/2013 & 313/2013

.,N THE HIGH COURT OF DELHI AT NEW DELHI Judgmentreservedon ^ 23-Sept-mbe.2013 Judgmentpronouncedon. 10 uecem % ITA 313/2013 Appellant CIT - 1 Through Mr. Abhishek ®''- Standing Counsel & Ms. Anshul Sharma, Advocate. Versus ACL WIRELESS LTD. Respondent Through Nemo gg^E MR. JUSTICESANJIVKHANNA HON'BLEMR. JUSTICESANJEEVSACHDEVA RANJEEV SACHDEVA, J. For order see ITA No. 254/2013 lo"" DECEMBER, 2013 St ITA 313/2013 L. ANJEEVSACHDEVA,J. SANJIV KHANNA,J. *JN THE HBGH COURT OF DELHI AT NEW DELHI ox, Judgmentreservedon : 23^^^September.2013 Judgmentpronouncedon; 10 December,20 + ITA.254/2013 Sc 313/2013 ciT-1 " ,:v V. " •I'-"',' ! •' * n' '•( ••ii-'' . "• -l-Jr., • ' through Mr. %^hi§hek'Maratha,Sr. Standing CQunsel;.i& Ms. Anshul ShafM, Advocate. /• ^ /• ••VerMs:;t ACUWIRELESSltd. Respond,^nt Through Nemo ^ 8HOMM^EI¥iR. JUSTSp^^SAJM^!VKHAMNA I HOM'BLESVIR. JUS^pES^N'OEEVSACHDEVA SACHDEVA,J. ' i |' 1. ITA No.. 254/^013 p^feHainstd''Asses§ment^ 04 and impugnsorder of ITAT dated 2B.08.^p;i2&ITA No.313/2013 pertains to Assessment,Year 2007-08 and impugnsorder of ITAT dated 19.10.2012. I 2. These appealshave been filed by the Revenue under section 260A of the Income Tax Act,' 1961 (for short Page lot" 23 ITA 254/2013 «& 313/2013 3. "the Act") impugning the orders ITAT has accepted I appeals of the Assessee deleted additions made by the Assessing Officer \A/ith regard to product improvement expenseS;VirrOIhe.;->As"sessing Officer had treated thei'pro^jgctit^iDrovbmemf^^^ as capital disallowed equivalent', arih'ount as +'--v revenue ;expenditure'.' ITAT:has held to the'contrai^k ;?The; Assessee is a. company which is involved'ln 'V- " . " ' • business of softwgX^ik',d,fe;y;i%l:5i55ri3ent.The commercia I i'• • I ;j operations started In ihe; feihaifibialYear 2002-03. Thi ' ' • •''/H V M 'H •|\ Assessee provides/wireless .solutions for mobile •^consumers enterprises: ..The software I. .;&/'• #' development relateslto :the field of ihstantsrrie.ssdging v.. .i> J.-- X't , •>'.-> f -0' (IM); It employed functioned withZ/a ^barn of software professionals. They deVelojDed .hew software and were also involved in: continDous improvement in the existing software in terms of improvements, speed, usage, storage and providing enhanced features. Assessee had signed revenue sharing agreements ITA 254/2013 & 313/2013 Page2of23 with mobile service providers like Airtel, Vodafone, etc. iTA 254 of 2013 4. During the Assessrripnt.Year 2003-04, the Assessee had capitalized the* pfodiUct development expenses for ^^the product (software) launehe'^Hin the relevant assessnieht yearf However, un(|iei^the^fhead ,y Product lmprove|rhent Expenses', the Assessee ft'as claimedRs.90,37/^5^^'jagexpendituf^'" % 5. ;• The Assessee was asked by the Assessing Officer tp i % explain as to why^the exp,ehsg,s incurred on produdt % improvement sh,o:uld^nidt"bei<GBpitali In response, Six . ".-'ri'!. , i'-., I' v'-y" -'Si. W was ;;.sybm;itt^d,;:v:that,, the'^1mp,r6vem;pi^v;.^o^'^ v., 1• .0' software';.was' a ,, regular feature ah^.f^3in€e technoiagy'ofJmSfeijgiphpn^^ fastest changing techridlogies ' and; ^tci" keep pace, Assessee was required to upgrade/improve/modify its product on constant basis. Product improvement was part and parcel of the business of the Assessee. ITA 254/2013& 313/2013 #1 i The expenses incurred by the Assessee for product s i improvement did not result in any ' new product, i . ! however modified and new features were added to I i the existing product,jdepending,,.onrnarket/technology requirements.,, ; The Assessee claimed these expenses to |b^ revenue in nature as Jhe samp were being in the 'ordinary^course ^©f b TheJ'said expinses were essential to. stayljn the IFi'S" 's"' ->1,' • .•iff?'#' I'j;- litiginess of rapidly'changing technological world qf I 'I mobile communications. y.i 6. I The Assessing .Opi^r, i/i||e ^js assessment order dated 23?0.d.2dQ6^•treatedi the said",expenses 'as capital ,expenditure;on the ground!that the 'software hadflbeteWcapiti