Amway India vs. DCIT (ITAT Delhi Special Bench)

(i) The question whether expenditure is on capital or revenue account should be decided from the practical and business view point and in accordance with sound accountancy principles. The three tests applied to decide the nature of expenditure are the tests of enduring benefit, ownership test and the functional test.

(ii) In view of Tata Consultancy Services vs. State of AP 271 ITR 401 (SC), computer software put in the medium of disk are “goods” and its purchase constitutes the “purchase” of a tangible asset and the assessee becomes the “owner” thereof.

(iii) The fact that the computer software is obtained by way of “ownership” or on “license” is not determinative. The functional test is more important and the issue has to be seen from the point of its utility to the businessman and to see how important an economic or functional role it plays in his business.

(iv) The duration of time for which the assessee acquires right to use the software is relevant. Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, if can be said that that where the life of the computer software is shorter (say less than 2 years), it should be treated as revenue expenditure. Expenditure having utility beyond 2 years confers ‘enduring benefit’ though it may still be revenue on application of the ‘functional test’.

(v) If the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business.

(vi) In each case the AO will have to consider the nature of the software and its functional use to the assessee and decide whether the expenditure is capital or revenue in nature.