2018 (7) TMI 2282 - HC - Income Tax

TP Adjustment - excluding the comparables such Kals Information Systems Ltd and Bodhtree Consulting Ltd - HELD THAT - KALS Information Systems Ltd. and Bodhtree Consulting Ltd. are functionally dissimilar to that of the assessee and hence it is not to be regarded as a comparable. See M/S. CISCO SYSTEMS (INDIA) PRIVATE LTD. 2014 (11) TMI 849 - ITAT BANGALORE Nature of expenses - software expenses - revenue or capital expenditure - HELD THAT - This Court in the case of Commissioner of Income Tax vs. IBM India Ltd., 2013 (10) TMI 1225 - KARNATAKA HIGH COURT and answered the substantial question of law in favour of the Assessee and against the Revenue, treating the software expenses as revenue expenditure.

Summary

Issues:
1. Exclusion of comparables Kals Information Systems Ltd and Bodhtree Consulting Ltd.
2. Disallowance of software expenses claimed by the assessee.

Issue 1: Exclusion of comparables Kals Information Systems Ltd and Bodhtree Consulting Ltd:

The Appellants-Revenue filed an appeal under section 260A of the Income Tax Act, 1961, challenging the exclusion of comparables Kals Information Systems Ltd and Bodhtree Consulting Ltd by the ITAT. The Tribunal held that Kals Information Systems Ltd was functionally dissimilar to the assessee and hence not regarded as a comparable. Similarly, Bodhtree Consulting Ltd was excluded from the list of comparables based on functional dissimilarity. The controversy was addressed in a recent judgment where it was established that unless there is an exfacie perversity in the Tribunal's findings, the appeal under section 260A is not maintainable. The High Court emphasized that the selection of comparables does not give rise to a substantial question of law unless it involves significant legal interpretations or treaty provisions.

Issue 2: Disallowance of software expenses claimed by the assessee:

Regarding the disallowance of software expenses claimed by the assessee, the ITAT held that the license fees paid for software usage did not lead to the creation of any capital asset as the software was designed to enhance business operations' efficiency without providing enduring benefits. The Court referred to a previous judgment treating software expenses as revenue expenditure, emphasizing that software expenses, even if providing enduring benefits, do not result in the acquisition of a capital asset. The Court concluded that the software expenses were revenue expenditure based on the efficiency enhancement and productivity benefits they provided. Consequently, the Court dismissed the appeal filed by the Appellants-Revenue, stating that no substantial question of law arose in this case.

In conclusion, the High Court dismissed the appeal filed by the Appellants-Revenue concerning the exclusion of comparables and the disallowance of software expenses. The judgment highlighted the importance of legal interpretations and substantial questions of law in determining the admissibility of appeals under section 260A of the Income Tax Act, 1961.