S.37(1): Business expenditure-Master copy of software- Expenditure on acquiring master copy of software subject to obsolescence is deductible as revenue expenditure.

The assessee entered into a license agreement with Oracle Corp under which it acquired a nonexclusive
& non-assignable right to duplicate software products which were owned by Oracle Corp
and to sub-license the same to parties in India. The assessee paid recurring royalty of 30% for the said
right. In addition to the royalty, the assessee periodically paid an amount towards “expenditure on
import of software master copy”. The said master copy was used to replicate the software. The

assessee claimed that the said master copies were versions of Oracle’s new product offerings which
had very accelerated obsolescence and that at any point of time it was not possible to say whether the
version will be current for one day or one month. The AO allowed a deduction for the recurring
royalty but held that the expenditure for acquiring the software master copy was capital expenditure.
On appeal, the CIT(A) reversed the AO on the ground that owing to obsolescence, there was no
enduring benefit as there were frequent corrections and up-gradation of the software. On appeal by the
department, the Tribunal reversed the CIT(A) and held that the expenditure was capital in nature on
the ground that the master copy was an asset of enduring benefit. On appeal by the assessee, HELD
reversing the Tribunal:
The assessee’s claim that the master copies had high accelerated obsolescence and that even at the
point of time of import it was difficult to say whether the version would be replaced by a new or
updated version after one day or a month had not been disproved. Also the facts showed that there
were periodical imports of the master copies and that the average price per copy was minimal. This
was not a case where the master copies contained operating or system software, which normally did
not require frequent up-gradation or changes. It is also not the case of an assessee which is the end
user of software. It is a case where the assessee is required to repeatedly pay for the master copy
media in view of frequent newer or updated versions of the application software from time to time.
Once newer or better version of the application software is available, the earlier version is not saleable
and does not have any market value for the seller i.e. the assessee. Also, as per the “matching
concept” in accountancy, while determining whether expenditure is capital or revenue in nature, the
question whether the expenditure would create an asset which is of value in further assessment
periods and should be amortised (i.e. depreciated) as long as it has value (subject to the statutory
provisions) requires to be considered. If the expenditure does lead to creation of an asset but of a
limited or short life, it has to be treated as a liability and not as a fixed asset. The said expenditure
cannot be valued for price for future financial years.(Dt. 25th Nov.2013.)
Oracle India Pvt. Ltd. v. CIT (Delhi)(HC) www.itatonline.org