Software license costs and IT support services treated as revenue expenditure, not capital assets

The ITAT Bangalore upheld the CIT(A)'s decision treating Data Automation Software expenses as revenue expenditure, finding no asset creation or ownership rights. Software license costs from parent company were similarly allowed as revenue expenses. In transfer pricing matters, the Tribunal applied the 17.50% profit margin from the Bilateral Advance Price Agreement with US entity to Malaysian transactions, excluded non-comparable companies from benchmarking analysis, and dismissed Revenue's appeal on marketing support services adjustments. The assessee's claim for information technology support services was allowed as revenue expenditure. Loans and advances written off were permitted as business loss deduction under sections 28 and 29, despite rejection under sections 36(1)(vii) and 37(1).

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Issues Involved:
1. Condonation of delay in filing the appeal.
2. Nature of data automation expenses and information technology support service expenses.
3. Transfer Pricing (TP) issues related to the selection of comparable companies and determination of Arm's Length Price (ALP).

Detailed Analysis:

Condonation of Delay:
The Revenue's appeal was filed with a delay of 26 days, explained due to administrative reasons. The tribunal found the delay not inordinate and condoned it.

Nature of Data Automation Expenses:
The assessee, involved in the design and manufacture of computer software, claimed a deduction for "Data Automation Software Expenses" (EDA). The Assessing Officer (AO) treated these expenses as capital expenditure, allowing 60% depreciation. The CIT(A) reversed this decision, treating the expenses as revenue in nature, citing that the payment was for the usage of software tools provided by the parent company, Texas Instruments Inc. (TI Inc.), and did not result in the acquisition of any new asset. The tribunal upheld the CIT(A)’s decision, noting that the nature of the expenses was identical to those considered in previous years where they were treated as revenue expenditure.

Nature of Information Technology Support Service Expenses:
Similar to the EDA expenses, the Information Technology Support Service (ITSS) expenses were initially treated as capital expenditure by the AO. However, the CIT(A) treated these expenses as revenue in nature, noting that the assessee was charged for using licenses owned by the parent company, without acquiring any ownership rights. The tribunal upheld this decision, referencing a similar conclusion in the assessee’s case for a different assessment year.

Transfer Pricing (TP) Issues:
The Revenue challenged the CIT(A)’s decision to exclude certain companies as comparables for determining the ALP for Marketing Support Services (MSS). The CIT(A) excluded companies like M/s Asian Business Exhibition & Conference Ltd., M/s HCCA Business Services Pvt Ltd., and M/s Killick Agencies & Marketing Ltd., citing functional dissimilarity. The tribunal upheld the CIT(A)’s decision, referencing previous tribunal decisions where these companies were excluded for similar reasons.

Determination of ALP in Software Development Services (SWD) Segment:
The assessee argued that the profit margin agreed in a Bilateral Advance Price Agreement (BAPA) with the US should apply to transactions with Natsem Malaysia, given the similarity in services provided. The CIT(A) accepted this argument, and the tribunal upheld this decision, noting that neither the assessee nor the TPO had distinguished between US and non-US transactions in their comparability analysis.

Disallowance of Loans and Advances Written Off:
The assessee claimed a deduction for under-recovery of insurance claims on damaged shipments, which was treated as a capital loss by the AO. The tribunal held that the loss was incidental to the business and allowable under section 28 r.w.s 29 of the Act, directing the Revenue to allow the claim.

Conclusion:
The appeals by the Revenue were dismissed, and the appeals by the assessee were allowed, with the tribunal upholding the CIT(A)’s decisions on the nature of expenses and TP adjustments, and directing the Revenue to allow the deduction for loans and advances written off. The tribunal also directed the AO to verify and consider the assessee’s claim for short grant of TDS.

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