The order of the Bench was delivered by
H.S. SIDHU : JM-
The Revenue has filed this Appeal against the impugned Order dated 28.5.2015 of the Ld. CIT(A)-IV, New Delhi relevant to assessment year 2011-12.
2. The grounds raised in this Appeal read as under:-
1. On the facts and circumstances of the case the Ld. CIT(A)-4 has erred in deleting the addition of Rs. 3,70,98,989/- made on account of license fee.
2. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.
3. The brief facts of the case are that assessee filed its return of income declaring an income of Rs. 20,79,11,509/- on 28.11.2011. The case of the assessee was selected for scrutiny and notice under section 143(2) of the Income Tax Act, 1961 (hereinafter referred as the Act) was issued on 24.9.2012. Again notice u/s. 143(2) of the Act alongwith questionnaire under section 142(1) was issued on 12.8.20132 and 30.10.2014. Due to change of incumbency AO issued notice u/s. 142(1) on 20.11.2014. In response to the notices, the assessee’s AR attended the proceedings from time to time and filed the details. The assessee company is engaged in the business of providing business of process management services to credit card companies, in particular SBI Cards and Payment Services Private Limited in respect of payment products such as credit cards, for which purpose it had entered into an agreement dated 6.6.2002 with that company. During the course of assessment proceedings, the AO observed that the assessee has signed an agreement called as End-User License Agreement on 7.7.2000 with US based company M/s GE Capital Corporation, which follows the assessee to use the ‘Vision Plus’ software program, which is used by various banks for enabling them to process credit card transactions. GECC is the global license holder of the said Vision Plus software program. During the assessment proceedings u/s. 143(3) of the Act, the AO was of the view that the license to this software provides enduring benefit to the assessee and therefore, held the payments and in pursuance of the EULA as capital in nature and therefore, disallowed license fee and data service management charges paid to GECC for use of Vision Plus software aggregating to Rs. 3,70,98,989/- and completed the assessment at Rs. 24,50,23,860/- u/s. 143(3) of the Act vide order dated 27.2.2015. Aggrieved with the assessment order, assessee appealed before the Ld. CIT(A), who vide his impugned order dated 28.5.2015 has allowed the appeal by respectfully following the order of the Ld. CIT(A) for the AY 2008-09 and 2010-11 in assessee’s own case. Aggrieved with the order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal.
4. Ld. DR relied upon the Order of the AO and reiterated the contentions raised in the grounds of appeal.
5. On the contrary, Ld. Counsel of the assessee has relied upon the order of the Ld. CIT(A) and stated he has passed a well reasoned order which does not need any interference. At the time of hearing, Ld. Counsel of the assessee stated that Ld. CIT(A) has deleted the addition in dispute by respectfully following the order of the Ld. CIT(A) for the assessment year 2007-08, 2008-09 and 2010-11. He further stated that the ITAT vide order dated 16.10.2015 passed in assessee’s own case in ITA No. 2806/Del/2011 (AY 2007-08) has allowed the similar claim to the assessee and in ITA No. 2124/Del/2013 (AY 2008-09) has followed the decision taken in assessment year 2007-08 and allowed the claim to the assessee. In this behalf, he filed the copy of the order of the ITAT, as aforesaid. In view of the above, he requested that respectfully following the ITAT, ‘C’ Bench decision dated 16.1.2015 (Supra) on the addition in dispute, the Appeals of the Revenue may be dismissed.
6. We have heard both the parties and perused the relevant records, especially the impugned order. For the sake of convenience, we are reproducing herewith the relevant portion of the impugned order passed by the Ld. CIT(A):-
“6.3 Regarding Ground II of the appeal relating to treatment of license fee paid to GECC as capital in nature, I find that the same issue have been discussed in detail in the appellate order passed by me in the Appellant's case for AY 2008- 09 and AY 2010-11. While deciding on the appeals for these years, on careful examination of the EULA between the Appellant and GECC, I had observed that GECC holds a global license for the software which is widely used and is available 'off the shelf' pursuant to its agreement with Pay Sys. This software enables carrying out of accounting and processing -of credit card transactions. Vision plus is an 'Application Software' which manages aspects of credit cards right from the time of the application for credit card is made, evaluated, account is created, transactions are authorized, raising disputes, sending statements, customer services and online payments processing. The software is mainly for credit card transactions processing by multinational banks and transaction processing companies. Various banks and financial institutions use this application software to store and process credit card, debit card, prepaid closed end loan accounts and process financial transactions which is available off the shelf. I also find that GECC itself has received the right to use the software internationally including its group entities for its business. It does not have any right to commercially exploit the software. The Appellant makes the payment to GECC only to use the licensed programs.
6.3.1 Further, on careful consideration of the contents of the EULA, I had observed as under:
(i) The Appellant has been vested with only the limited right to use the license by GECC during the period the agreement is in existence and the EULA does not provide any exclusive use to the Appellant.
(ii). GECC is a global license holder of the vision plus software and the Appellant is one of the users of such software license which in itself implies that there is no 'exclusivity that the Appellant is entitled to.
(iii) The EULA allows GECC to receive license fee from the Appellant on quarterly basis (refer in this regard clause 3.1 of the EULA). The agreement provides for periodic payment for use of software to GECC which has been subject matter of renewal and revision-every calendar year.
iv) The Appellant is specifically forbidden from making the copies of the software and make it available to any other person or use the license for any purpose other than the purposes defined at clause 2.2 of the EULA, or sell it or alienate in any other manner, or duplicate, market license or compete with the licensed program commercially, in any manner. (Refer in this regard clause 2.3 of the EULA).
(v) The agreement is subject to termination where there is any "breach in material terms including on the periodical payments for user", i.e., if there is a default in payment, then the agreement and consequentially, the right of the Appellant to use the software stands terminated forthwith. (Refer in this regard clause 5.1 (a) of the EULA).
(vi) Upon termination, the right to use the licensed program shall end and the Appellant is required to with immediate effect deliver the licensed program to GECC and the Appellant is required to remove the software from its systems. (Refer in this regard clause 5.1 (a) of the EULA).
6.3.2 Keeping in view the above, in the said order for AY 2008-09, I had held that what is transferred to the Appellant through EULA is only a limited right to use the license for a limited period in a prescribed manner and subject to the specific conditions put by the licensor. In view of the above, it is undisputed that the EULA did not have the effect of vesting in the Appellant any enduring benefit or any irrevocable transfer of bundle of rights on it. On the other hand, the Appellant is bound by various conditions in respect of the manner of use of the license. Keeping in view the same, the Appellant Company's case gets squarely covered by the Hon'ble SC in the case of MIs Empire Jute Co. Ltd. (supra) and other cases cited by the Appellant in its defence, since no enduring benefit has been acquired by the Appellant through the payment of license fee for the limited use of the license. The reliance of the AO on various judicial pronouncements has been distinguished by the- Appellant on facts.
3.3 As the facts for AY 2011-12 are similar to the facts of AY 2008-09 and AY 2010-11, I thereby hold that my findings in the order passed for AY 2008-09 would stand equally applicable here.
3.4 In view on the same, hold that the impugned payment of Rs. 3,70,98,989/- on account of license fee and data management service charges for use of the 'Vision Plus' software Was revenue in nature and allowable u/s 37 of the Act. Accordingly, this ground is allowed in favour of the Appellant. The alternative plea of the Appellant thus, become infructuous.”
6.1. We further find that ITAT, ‘C’ Bench, New Delhi vide its order dated 16.10.2015 passed in ITA No. 2806/Del/2011 (AY 2007-08) in the matter of assessee i.e. GE Capital Business Process Management Services Pvt. Ltd. and in ITA No. 2124/Del/2013 (AY 2008-09) in the case of ACIT vs. GE Capital Business Process Management Services Pvt. Ltd. has dealt the similar and identical issues. For the sake of convenience, we are reproducing the relevant portion of the order of ITAT, ‘C’ Bench, New Delhi as under:-
“7.We have considered the rival submissions, perused the orders of the authorities below, material available on record and gone through the case laws cited by both the parties. From the above narration of facts, we find that the arguments advanced by both the parties rest on the vital question whether under the facts and circumstances of the case, the payment of license fee, connectivity charges and co-ordination charges amounting to Rs. 2,19,60,467/- made by the assessee to GECC(USA) under the end-user agreement shall fall within the category of capital expenditure or revenue expenditure? The stand of the assessee is that it is in the nature of revenue expenditure and deductible u/s. 37(1) of the Act whereas the ld. Authorities below have put it in the category of capital expenditure and disallowed the claim of assessee. The basic reasons of Assessing Officer for giving the license fee a treatment of capital expenditure are that the agreement provides exclusive right to use vision plus software which provides enduring benefits to the assessee; that the consideration is in respect of grant of license and that the information was not only in relation to use of license, but co-ordination and connectivity services were also provided by GECC(USA). He, therefore, held that the acquisition of license granted by the licensor in itself is a capita asset, being “intangible asset”, which having long validity is capital in nature. We have gone through the End-User license agreement dated 07.07.2000 and we do not find substance in the conclusion arrived at by the ld. Authorities below. It is notable that in terms of clause 2.2 and 2.3, the assessee company is specifically restricted to make copies of the software and make it available to any other period. There is also a bar on the assessee for use of software for the purpose other than that mentioned in clause 2.2 of the agreement. In terms of clause 2.3, the assessee does possess no right either to sell it or alienate in any other manner. The relevant clauses No. 2.2 and 2.3 of the license agreement are reproduced as under :
“2.2. GECC shall provide the Licensed Program, any revisions to the Licensed Program and any updates to the Licensed Program to GECBPMS for its business use only in accordance with this agreement.”
2.3. GECBPMS undertakes that it shall not;
(a) make the licensed program or any part thereof available to any period other than its employees on a “need to know” basis;
(b). copy the Licensed Program or any part thereof, other than for archival backup purposes;
(c). use the Licensed Program for any purpose other than as permitted by clause 2.2 of license, sell or otherwise alienate the Licensed Program in any manner whatsoever; or
(d). Duplicate, market, license or develop software programs that compete with the Licensed Program and/or exploit commercially the Licensed Program in any manner whatsoever.”
Similarly, clause 5 and its sub-clauses give the right of termination of license agreement to either parties under various circumstances. It is worthwhile to note that in case of default, if any, committed by the assessee, the rights of assessee to use the software would stand terminated forthwith. Under clause 5.5, the assessee is required to deliver the licensed program back immediately to GECC(USA) after removing the same from its systems on termination of agreement. Clause 5.5 of the agreement reads as under :
“5.5. Upon termination of this Agreement the right to use the Licensed Program shall end and GECBPMS shall, with immediate effect :
(a) deliver to GECC the Licensed Program; and
(b) purge all copies of the licensed program stored in any CPU or other storage medium or facility, which for any reason cannot be delivered to GECC. In addition, an officer of GECBPMS shall certify in writing to GECC that all proprietary material relating to the Licensed Program has been delivered to GECC or purged and that the use of the Licensed Program and any portion thereof has been discontinued.”
Under clause 3.1, the license agreement allows GECC to receive license fee from assessee on quarterly basis as mutually agreed upon. The agreement provides for periodic payment for use of software to GECC, which is subject matter of renewal and revision every calendar year. No case is made out by the department to assume that the periodic payments made by the assessee were the installments for acquisition of such software and the payment was not for mere usage of software. It is a matter of fact on record that M/s. GECC (USA) itself has received the right to use the software internally including its group entities for its business and it does not have any right to commercially exploit the software. The assessee is vested with limited right to use the licensed program during the currency of license agreement. The agreement nowhere provides any exclusive right to the assessee, but the assessee was vested with the right to use the licensed program for facilitating its business operations enabling the assessee day-to-day management of business and to work with more efficiency. In view of all these terms of agreement and the facts & circumstances attending to the case, we are of the considered opinion that end user license agreement in the instance case does not have the effect of any enduring benefit for holding the same as capital in nature. The ld. DR has failed to rebut the contention of the assessee that the impugned software is an application software and is being used for accounting purposes. Such software are used by various banks and financial institutions. Moreover, the ld. CIT(A) in succeeding assessment years 2008-09, 2010-11 and 2011-12 has categorically gave finding of fact that the software is a application software which is routine in nature and used for accounting purposes. Therefore, in view of decisions in the case of CIT vs. Asahi India Safety Glass Ltd (supra) and CIT vs. Amway India Enterprises (supra), we are of the considered opinion that the right to use the vision plus software program does not have any effect of providing enduring benefit and the payment made to GECC(USA) is only the license fees and not the price for acquisition of capital asset. The assessee did not acquire any ownership on the software and after termination of license agreement, all the rights and title remained with GECC (USA). The ld. DR failed to dislodge the findings of the ld. CIT(A) given in the orders passed for subsequent years after considering the same license agreement and various decisions of Hon’ble High courts and Supreme Court. It is also a matter of record that the assessee has returned its income for the relevant previous year at Rs. 152.88 crores whereas the amount expended towards use of routine application software is Rs. 2.19 croes which is 1.43%. This shows that implies that this software only is not the soul of assessee’s business as argued by the ld. DR. In the case of southern Switchgear Ltd. (supra), the technical knowledge and information remained with the assessee even after termination of agreement which constituted enduring benefit to the assessee whereas in the present case, the software in question is an application software and after termination of license agreement, said software was to be delivered back to the licensor and the same cannot be made to use by the assessee in any manner. Similarly in the case of Jones Woodhead and Sons (India) (supra) relied on by the Assessing Officer is also distinguishable on facts inasmuch as in that case the agreement between the assessee and the foreign collaborator was in relation to setting up of a new business and the foreign collaborator besides furnishing information and technical know-how, rendered valuable assistance in setting up of the factory itself. No such situation arises in the present case. In view of this discussion and relying on various decisions cited by assessee, we are of the considered opinion that the license fee etc. paid by the assessee to M/s. GECC(USA) is revenue expenditure deductible u/s. 37 of the Act. The appeal of the assessee is accordingly allowed.
ITA No. 2124/Del./2013 (By Revenue):
8. The vital issue involved in this appeal is deletion of disallowance of Rs. 2,42,58,933/- made by the Assessing Officer on account of license fee, connectivity charges and co-ordination charges paid to US based company M/s. GE Capital Corporation for use of vision plus software holding the same as capital expenditure. This issue has been decided in favour of the assessee while deciding the appeal of the assessee for the assessment year 2007-08 in the foregoing part of this order. There being no change in the facts and circumstances of the case and the disallowance being based on the same license agreement, we decide the issue in favour of the assessee in this appeal also after following our conclusions given in appeal of assessee for the year 2007-08. Accordingly, the appeal of the Revenue is liable to be dismissed on this count.”
6.2 After perusing the aforesaid finding of the Tribunal, we are of the considered view that the issue in dispute in the present appeal, relating to deletion of addition of Rs. 3,70,98,989/- made on account of license fee is squarely covered by the aforesaid decision of the ITAT, hence, we respectfully follow the aforesaid decision of the ITAT and decide the issue against the Revenue. Even otherwise, we also note that Ld. CIT(A) has held that as the facts for AY 2011-12 are similar to the facts of AY 2008- 09 and AY 2010-11, therefore, he held that his findings in the order passed for AY 2008-09 would stand equally applicable here and accordingly, in view of the same, the impugned payment of Rs. 3,70,98,989/- on account of license fee and data management service charges for use of the 'Vision Plus' software was rightly held as revenue in nature and allowable u/s 37 of the Act. We further note that the factual finding of the Ld. CIT(A) on the issue in dispute also could not be controverted by the department during the proceedings before us and we, therefore, find no reason to interfere with the findings of the Ld. CIT(A) on this issue as well and while upholding the same.
7. In the result, the appeal filed by the Department stands dismissed.
The order pronounced in the open court on 01/09/2017.