Reimbursement, interest nexus and software costs: ITAT treats secondment payments and recurring tech as non-capital and revenue in nature.

A pure reimbursement of manpower costs under a secondment arrangement, with no income element in the non-resident's hands, was not subject to withholding tax; the related disallowance under section 40(a)(i) was deleted. Interest disallowance linked to capital work in progress failed because no nexus with borrowed funds was proved and the estimate was unsupported; the deletion was upheld. Recurring software-related payments for annual maintenance, consumables and licence renewals were held to be revenue expenditure because they did not create a new asset or enduring benefit, and that disallowance was also deleted.

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Issues: (i) Whether reimbursement of manpower costs paid to a non-resident company under a secondment arrangement was liable to tax deduction at source and disallowance under section 40(a)(i) of the Income-tax Act, 1961; (ii) whether interest expenditure attributable to capital work in progress was rightly disallowed; (iii) whether software-related expenditure comprising annual maintenance, consumables and licence fees was capital in nature.

Issue (i): Whether reimbursement of manpower costs paid to a non-resident company under a secondment arrangement was liable to tax deduction at source and disallowance under section 40(a)(i) of the Income-tax Act, 1961.

Analysis: The payment was bifurcated between reimbursement of actual salary cost and a mark-up. Tax had already been deducted on the mark-up component, while the reimbursement portion contained no income element in the hands of the non-resident. The employees were under the assessee's control and supervision, the non-resident had merely supplied manpower, and the conditions for treating the payment as fees for technical or included services were not satisfied. Tax had also been deducted on salaries at the employee level under section 192, so no revenue loss arose.

Conclusion: The reimbursement portion was not subject to deduction under section 195, and the disallowance under section 40(a)(i) was correctly deleted.

Issue (ii): Whether interest expenditure attributable to capital work in progress was rightly disallowed.

Analysis: The disallowance was made on an estimated basis without establishing any nexus between borrowed funds and the items shown as capital work in progress. The assessee had sufficient own funds, the capital work in progress was small compared with its net worth, and the expenditure reflected temporary staging of equipment before use in ongoing construction activities. The factual finding that similar treatment had been accepted in a subsequent year also supported the assessee.

Conclusion: The deletion of the interest disallowance was justified.

Issue (iii): Whether software-related expenditure comprising annual maintenance, consumables and licence fees was capital in nature.

Analysis: The expenditure consisted of recurring items such as annual maintenance contracts, consumables and yearly licence renewals. These items did not bring into existence any new asset or enduring advantage and were incurred for the ordinary conduct of business. The nature of the payments showed revenue character rather than capital character.

Conclusion: The software expenditure was allowable as revenue expenditure and the disallowance was rightly deleted.

Final Conclusion: No interference was warranted with the order of the first appellate authority, and the revenue's appeal failed in entirety.

Ratio Decidendi: A payment that is a pure reimbursement without an income element is not chargeable to withholding tax, interest cannot be capitalized or disallowed on a speculative basis without proof of nexus with borrowed funds, and recurring software maintenance, consumables and licence fees lacking enduring benefit are revenue in nature.

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