Delhi HC favors assessee on transfer pricing comparables and classifies software license training expenses as revenue expenditure

The Delhi HC ruled in favor of the assessee on transfer pricing and expenditure classification issues. The court held that rejection of comparables as functionally dissimilar was covered by precedent in ST Microelectronics case. Regarding software license expenses, the court determined that expenditure on licensed software without ownership, used for business operations with duration not exceeding one year, constitutes revenue expenditure rather than capital expenditure. The enduring benefit test was deemed inconclusive, following Asahi India Safety Glass precedent that expenses enabling profit-making structure to work efficiently while leaving source untouched are revenue expenses. Similarly, employee training expenses were classified as revenue expenditure, as they don't alter the profit structure and employees may leave the organization. No substantial questions of law arose on these issues.

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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.

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