We are pleased to release a Tax alert which summarizes a recent ruling of the Karnataka High Court (HC) in the case of IBM Global Services India Pvt. Ltd. (Taxpayer) on whether payment made for domestic customer database and human skills is to be regarded as revenue in nature.
Considering the facts of the case and placing reliance on judicial precedents, the HC noted that the Taxpayer incurred expenditure for the use of database and not for acquisition of such database. Further, payment for transfer of human skill was towards expenses incurred by the transferor on training and recruitment and such expenses were in the revenue field. The HC also reaffirmed a well settled legal proposition viz., the concept of payment made once and for all and of enduring benefit should respond to the changing economic realities of business. Accordingly, expenditure incurred for use of domestic customer database and transfer of trained human skill is revenue, though the benefit may be enduring in nature.
This decision provides guidance on when a payment for customer database may be regarded as revenue in nature. There is no acquisition of asset when the access is made available to the transferee and the transferor, which has provided such database, is not precluded from using such database. Thus, it draws a distinction between payments made for “use” of customer database versus a payment made for “acquisition” of database. The former is on revenue account while the latter is on capital account. This may need to be determined having regard to the facts of the case.
The HC seems to have accepted the proposition that when expenditure results in saving in future revenue costs, it would be possible to claim the expenditure as revenue. While revenue expenditure qualifies for deduction, capital expenditure may qualify for depreciation. In the case of CIT v. Smifs Securities, the SC regarded the reputational advantage and ability to retain the clientele as business/commercial right (recorded as goodwill) on which depreciation could be claimed.
Thus, the analysis of whether an expenditure is “capital” or “revenue” in nature is fact sensitive and the present decision reflects a situation where the payment was accepted to be of revenue in nature
Considering the facts of the case and placing reliance on judicial precedents, the HC noted that the Taxpayer incurred expenditure for the use of database and not for acquisition of such database. Further, payment for transfer of human skill was towards expenses incurred by the transferor on training and recruitment and such expenses were in the revenue field. The HC also reaffirmed a well settled legal proposition viz., the concept of payment made once and for all and of enduring benefit should respond to the changing economic realities of business. Accordingly, expenditure incurred for use of domestic customer database and transfer of trained human skill is revenue, though the benefit may be enduring in nature.
This decision provides guidance on when a payment for customer database may be regarded as revenue in nature. There is no acquisition of asset when the access is made available to the transferee and the transferor, which has provided such database, is not precluded from using such database. Thus, it draws a distinction between payments made for “use” of customer database versus a payment made for “acquisition” of database. The former is on revenue account while the latter is on capital account. This may need to be determined having regard to the facts of the case.
The HC seems to have accepted the proposition that when expenditure results in saving in future revenue costs, it would be possible to claim the expenditure as revenue. While revenue expenditure qualifies for deduction, capital expenditure may qualify for depreciation. In the case of CIT v. Smifs Securities, the SC regarded the reputational advantage and ability to retain the clientele as business/commercial right (recorded as goodwill) on which depreciation could be claimed.
Thus, the analysis of whether an expenditure is “capital” or “revenue” in nature is fact sensitive and the present decision reflects a situation where the payment was accepted to be of revenue in nature
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