2024 (5) TMI 1244 - HC - Income Tax

Reimbursement of expenses towards software costs - addition made for purported reimbursement of expenses towards software costs to AE - Disproven incurring of software costs - failure of assessee to prove the actual receipt of such software and use thereof by the respondent in India in the subject AY for its business purposes - ITAT deleted addition - HELD THAT - Issue clearly merit being answered against the Revenue bearing in mind the judgment rendered by the Supreme Court in Engineering Analysis Centre of Excellence (P) Ltd. 2021 (3) TMI 138 - SUPREME COURT wherein as held that amounts paid by resident Indian end-users/distributors to nonresident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and were not liable to deduct any TDS u/s 195. Reimbursement of salaries of expatriate employees who had been seconded - TPO found that the major beneficiary of the services rendered by the seconded employees was liable to be attributed to the activities of AE - ITAT deleted the addition - HELD THAT - ITAT has in our considered opinion without assigning sufficient reasons upheld the aforesaid view that had been expressed. We would thus hold that question (iii) as proposed would merit further consideration. Lease Registration charges - ITAT noted that registration charges incurred during the execution of an instrument under the Stamp Act, 1899, should not be amortized over the lease period - HELD THAT - Dealing with the asserted argument of the appellant that registration charges incurred in the course of execution of an instrument which is presented for registration under the Stamp Act, 1899 and the said charges being liable to be amortized over the entire period of the lease, the ITAT has taken note of the consistent position which appears to have been taken by the High Courts of Bombay, Himachal Pradesh and others and which had held that there would be no justifiable logic for registration charges being amortized to run over the period of lease. We are inclined to agree since undisputedly the payment of registration charges is a one time expenditure which is incurred at the time of execution of the instrument and when it is presented for registration. Even the Schedule to the Stamp Act, 1899 does not correlate the computation of stamp duty and registration charges to the period of the lease. In view of the aforesaid, we find no ground to disagree with the view as expressed by the ITAT in this respect. We admit the appeals on the following question of law - Whether on the facts and in the circumstances of the case, the ITAT perversely and unlawfully deleted the additions made for purported reimbursement of expatriate salaries and payment for royalty, by failing to make an independent finding and determination on the double deduction nature of the claim for such purported expenses along with reimbursement of software expenses with near identical details, use, functions and purposes purportedly served?

Summary

Issues Involved:
1. Reimbursement of expenses towards software costs.
2. Reimbursement of expatriate salaries and payment for royalty.
3. Lease registration charges.

Summary of Judgment:

1. Reimbursement of Expenses Towards Software Costs:
The Principal Commissioner challenged the ITAT's deletion of additions made for "reimbursement of expenses" towards software costs to AE, arguing that the respondent failed to prove the actual receipt and use of such software in India for its business purposes. The court, referencing the Supreme Court judgment in *Engineering Analysis Centre of Excellence (P) Ltd. v. CIT* [(2022) 3 SCC 321], found that the proposed questions (i) and (ii) should be answered against the Revenue.

2. Reimbursement of Expatriate Salaries and Payment for Royalty:
The TPO observed that the major beneficiary of the services rendered by seconded employees was the Associated Enterprises (AEs). Consequently, the Assessing Officer (AO) adjusted the expatriate employees' salaries to NIL. The Commissioner of Income Tax (Appeals) held that the appellant had discharged its onus by providing documentation proving the employees worked in India, and TDS was deducted at source for their salaries. The ITAT upheld this view without assigning sufficient reasons, prompting the court to hold that question (iii) merits further consideration.

3. Lease Registration Charges:
The ITAT noted that registration charges incurred during the execution of an instrument under the Stamp Act, 1899, should not be amortized over the lease period. The court agreed, stating that the payment of registration charges is a one-time expenditure incurred at the time of execution and registration of the instrument. The ITAT's observation was supported by consistent positions taken by various High Courts, including Bombay and Himachal Pradesh, which held that registration charges should be treated as revenue expenditure and allowed as a deduction in the year incurred.

Conclusion:
The court admitted the appeals on the question of law regarding the deletion of additions made for purported reimbursement of expatriate salaries and payment for royalty, and scheduled the next hearing for 13.08.2024.