2023 (12) TMI 1133 - HC - Income Tax

TP Adjustment - comparable selection - HELD THAT - Rejection of comparables as functional dissimilar as covered against the appellant/revenue by the decision rendered by this Court in the matter of Principal Commissioner of Income Tax vs. ST Microelectronics Private Limited 2017 (11) TMI 266 - DELHI HIGH COURT Nature of expenses - purchasing software licenses - revenue or capital expenditure - HELD THAT - There is no dispute that the respondent/assessee had purchased licensed software, of which, it did not have ownership or title. It is also not in dispute that the license had a duration that did not exceed one (1) year. Assessee s stand that the licensed software was used for business operations was also not disputed by the appellant/revenue. That said, the test employed by the AO and the DRP, that is enduring benefit is not, in our view, a conclusive test to determine the nature of the expense See Empire Jute Company Limited vs. Commissioner of Income Tax 1980 (5) TMI 1 - SUPREME COURT . The ratio of the judgment rendered in the Asahi India Safety Glass Ltd. 2011 (11) TMI 2 - DELHI HIGH COURT as held that the expenditure which is incurred, which enables the profit-making structure to work more efficiently leaving the source of the profit-making structure untouched, would in our view be an expense in the nature of revenue expenditure. Fine tuning business operations to enable the management to run its business effectively, efficiently and profitably; leaving the fixed assets untouched would be an expenditure in the nature of revenue expenditure even though the advantage may last for an indefinite period. Test of enduring benefit or advantage would thus collapse in such like cases. It would in our view be only truer in cases which deal with technology and software application, which do not in any manner supplant the source of income or added to the fixed capital of the assessee In our view, would apply to the facts of this case, and therefore, no substantial question of law arises with regard to the said issue. Amount expended on training its employees - capital or revenue expenses - ITAT Ruled in favour of the respondent/assessee - HELD THAT - In our view, qua this issue as well, the test employed, i.e., the advantage of enduring nature is not the correct one. Training accorded to employees, which may have a lasting impact, is not determinative of the fact that the expenditure should be treated as one incurred on the capital account. In determining the treatment to be given to expenses, it has to be seen whether the profit structure of the assessee is altered. It is well established that if the profit structure is left undisturbed, such an expense is to be treated as one incurred on the revenue account. The mere fact that employees' efficiency improves with learnings acquired through seminars, conferences, and other forms of training, cannot be the reason to treat such expenses as capital expenditure. As noted by the Tribunal, it is not as if the employees stay with the employer (in this case, the respondent/assessee) for all times to come. It is quite possible that the employees may shift to another employer.no substantial question of law arises.

Summary

Issues Involved:
1. Condonation of delay in re-filing the appeal.
2. Functional comparability of certain companies.
3. Treatment of software license expenses.
4. Treatment of training expenses.

Summary:

Condonation of Delay:

The appellant/revenue sought condonation of a 460-day delay in re-filing the appeal. The respondent/assessee had no objection to this request. Consequently, the delay was condoned, and the application was disposed of accordingly.

Functional Comparability:

The appeal concerned the Assessment Year (AY) 2008-09, challenging the Income Tax Appellate Tribunal's (ITAT) order dated 28.09.2020. The appellant proposed several questions of law regarding the functional comparability of specific companies (Helios & Matheson Information Technology Ltd., Tata Elxsi Ltd., Persistent Systems Ltd., Infosys Technologies Ltd., and Kals Information System Ltd.). The appellant contended that these companies were functionally comparable based on the Transfer Pricing Officer's (TPO) qualitative and quantitative filters. However, the respondent argued that ITAT correctly ruled these companies as non-comparable.

Mr. Ruchir Bhatia, representing the appellant, conceded that questions (i) to (v) were covered against the appellant by the decision in Principal Commissioner of Income Tax vs. ST Microelectronics Private Limited, 2017:DHC:6442-DB. Consequently, no substantial question of law arose for these issues.

Software License Expenses:

The appellant argued that expenses on software licenses should be treated as capital expenditure due to the 'enduring benefit' they provided. Conversely, the respondent asserted that the software was licensed for one year without ownership rights, making the expenses revenue in nature. The Tribunal ruled in favor of the respondent, noting that the software licenses did not confer ownership and were used for business operations. The court agreed with the Tribunal, citing the precedent set in Commissioner of Income Tax vs. Asahi India Safety Glass Ltd., (2012) 346 ITR 329, which emphasized that the 'enduring benefit' test is not conclusive for determining the nature of the expense. Therefore, no substantial question of law arose regarding this issue.

Training Expenses:

The appellant contended that training expenses should be treated as capital expenditure due to their 'enduring benefit.' The respondent argued that these expenses were revenue in nature as they did not alter the profit structure and employees could leave the company. The Tribunal ruled in favor of the respondent, stating that training expenses, despite enhancing employee efficiency, should be treated as revenue expenditure. The court concurred, noting that the 'enduring benefit' test was not appropriate for this issue. Consequently, no substantial question of law arose regarding this matter.

Conclusion:

The court found no substantial questions of law in the issues raised by the appellant and declined to interfere with the Tribunal's order. The appeal was accordingly closed.