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2013 Supreme(Del) 1570
High Court of Delhi
SANJIV KHANNA & SANJEEV SACHDEVA, JJ.
Oracle India Private Limited
Versus
Commissioner of Income Tax
Income Tax Appeal Nos. 25 of 2012, 287 of 2008, 417, 447, 461 & 683 of 2009
Decided On : 25-11-2013
For the Petitioner:M.S. Syali, Sr. Advocate with Ms. Husnal Syali Nagi, Mayank Nagi, Harkunal Anand, Advocates.
For the Respondent:Sanjeev Sabharwal, Sr. Standing Counsel, Puneet Gupta, Advocate.
The main legal point established in the judgment is the application of the enduring benefit test and commercial considerations in determining the nature of expenditure as capital or revenue. The judgment also emphasizes the importance of analyzing the commercial purpose and practical impact of the expenditure in question.
Headnote:
Income Tax - Oracle Software - Section 35A, Section 37, Section 40(a)(i), Section 80-IA - The judgment discusses the nature of expenditure incurred on import of master copies of Oracle software and its treatment as capital or revenue expenditure. The court analyzes the enduring benefit test, commercial considerations, and the distinction between capital and revenue expenditure. The court also addresses the applicability of various sections of the Income Tax Act, 1961 to the expenditure incurred.
Fact of the Case:
The appeals relate to the treatment of expenditure incurred on import of master copies of Oracle software as capital or revenue expenditure. The appellant-assessee, a subsidiary of Oracle Corporation, USA, entered into a license agreement to duplicate and sub-license the software products. The dispute arose regarding the nature of the expenditure incurred on importing master copies of the software.
Finding of the Court:
The court analyzed the terms of the license agreement, the nature of the software, and the commercial considerations involved in the duplication and sale of the software. It considered the enduring benefit test and the distinction between capital and revenue expenditure. The court also addressed the applicability of various sections of the Income Tax Act, 1961 to the expenditure incurred.
Issues: The primary issue was whether the expenditure on import of master copies of Oracle software should be treated as capital or revenue expenditure. Additionally, the court addressed the applicability of Section 35A, Section 37, Section 40(a)(i), and Section 80-IA of the Income Tax Act, 1961 to the expenditure.
Ratio Decidendi: The court held that the expenditure on import of master copies of Oracle software should be treated as revenue expenditure based on the enduring benefit test, commercial considerations, and the nature of the software. The court also provided analysis and interpretation of the relevant sections of the Income Tax Act, 1961 in relation to the expenditure incurred.
Final Decision: The court decided in favor of the appellant-assessee, holding that the expenditure on import of master copies of Oracle software should be treated as revenue expenditure. The court also addressed the applicability of Section 35A, Section 37, Section 40(a)(i), and Section 80-IA of the Income Tax Act, 1961 to the expenditure. The court also ruled in favor of the Revenue on the issue of interest under Section 234B of the Act.
Sanjiv Khanna, J.
1. These 10 appeals by the assessees-Oracle India Private Limited and Oracle Software India Limited relating to Assessment Years 1994-95 to 2004-2005 raise a common substantial question of law and are, therefore, being disposed of by this decision. The substantial question of law as admitted for hearing reads:-
“Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in holding that media cost paid for the import of a master copy of Oracle Software used for duplication and licensing is an expenditure of a capital nature and as such is not an allowable deduction?”
2. For the purpose of clarity and to notice facts, ITA No. 797/2006, which relates to Assessment Year 1995-96, was treated as a lead case but as noticed below, wherever necessary and required we have referred to facts of assessment year 1994-95.
3. The appellant-assessee incorporated on 18th January, 1993, is a subsidiary of Oracle Corporation, USA. The appellant entered into licence agreement dated 28th May, 1993 with its parent/holding company under which the appellant was granted non-exclusive non-assignable right and authority to duplicate on appropriate carrier media software products mentioned in schedule ‘A’thereto or other products which may be added to the said list, and sub-licence the same to third parties in India. The appellant could enter into enforceable sub-licensing and services agreement in the prescribed form with third parties users. The holding company retained ownership of the copyright in the software and all associated and applicable intellectual property rights in the products mentioned in schedule ‘A’or to be added to the said schedule. It was specifically stipulated that nothingcontained in the agreement shall confer or deem to confer on the appellant any of the aforesaid rights. The holding company also retained rights to continue to manufacture or distribution activities in the field of software and software products, including the products mentioned in schedule ‘A’or to be added to the said schedule with full rights to produce, reproduce, duplicate and distribute the said products in India or into India. The agreement stipulated that the appellant shall duplicate and reproduce the software in India and sub-licence the same as per the terms of the sub-licence deed stipulated and with the holding company retaining entire data/intellectual property rights in the software. The appellant was entitled to use the trademark and trade name of the holding company with approval as to the manner of use from the holding company and no royalty or remuneration was to be paid for the said use.
4. The appellant was to pay royalty to the holding company @ 30% of the list price of the licenced products as prescribed in the Indian Published Price, fixed in consultation with the licensor at the time of the sub-licence or such lesser amount agreed to. Royalty was to be also paid on software products put to internal use. The royalty was payable on quarterly fiscal basis and was subject to deduction of tax at source. The licence agreement was for a period of five years but it appears it was extended for further period relevant to the assessment years in question.
5. In addition to the aforesaid royalty, the appellant had also paid the following amounts to the parent company reflected as expenditure on import of software master copy:-
6. The aforesaid payments were not made in lumpsum, but on distinct and separate dates in each assessment year on import of themaster media from the holding company. To avoid prolixity, we are not reproducing details of import in each assessment year but for the purpose of clarity, we are reproducing details of the said import in the Assessment Year 1994-95:-
7. The Assessing Officer held that the aforesaid payments of Rs.94,49,041/- for the Assessment Year 1994-95 and similar payments for the other years described as software master copy and document
