2024 (5) TMI 1244 - HC - Income Tax

Delhi HC admits appeal on ITAT's deletion of expatriate salary and royalty payment additions under section 195

Delhi HC admitted appeal on question whether ITAT unlawfully deleted additions for expatriate salary reimbursement and royalty payments. Court upheld ... Reimbursement of expenses - reimbursement of software expenses - reimbursement of expatriate salaries - double deduction - transfer pricing adjustment - onus of proof in transfer pricing adjustments - arm's length price / cost plus method - amortization of lease registration charges - revenue expenditure versus capital expenditureReimbursement of software expenses - transfer pricing adjustment - arm's length price / cost plus method - onus of proof in transfer pricing adjustments - Deletion by ITAT of additions relating to claimed reimbursement of software costs to associated enterprises upheld against Revenue - HELD THAT: - The Court recorded that, having heard counsel, the questions concerning deletion of additions made for claimed reimbursement of software costs (questions (i) and (ii)) should be answered against the Revenue in view of the Supreme Court's decision in Engineering Analysis Centre of Excellence (P) Ltd. v. CIT. The Court accepted that the assessee had produced documentation, TDS evidence and functional description and had adopted a cost to cost (cost plus) approach; accordingly the onus lay on the TPO/AO to bring forward evidence to dislodge the claim. On that basis the ITAT's deletion was endorsed. [Paras 2]Additions relating to reimbursement of software expenses deleted; decision in favour of the assesseeReimbursement of expatriate salaries - reimbursement of software expenses - double deduction - independent finding - Admitted for further consideration / remanded for independent determination on alleged double deduction between expatriate salary reimbursements and software expense reimbursements - HELD THAT: - The Court found that the ITAT had upheld the CIT(A)'s view regarding deletion without sufficient reasons and that the matter of whether the expatriate salaries (and royalty) claims resulted in a double deduction when considered together with reimbursement of software expenses required further consideration. Consequently the question framed in (iii) was admitted for fuller adjudication and the appeals were directed to be called again for consideration of that question. [Paras 6, 11]Question concerning alleged double deduction remitted for further consideration; appeals admitted on this questionAmortization of lease registration charges - revenue expenditure versus capital expenditure - Addition disallowing lease registration charges by spreading over lease period rejected and deletion upheld - HELD THAT: - The Court agreed with the ITAT's reliance on High Court precedents holding that stamp duty and registration charges paid on execution of lease instruments are one time revenue expenditures and need not be amortized over the lease term. The judgment records that the Schedule to the Stamp Act does not tie computation of stamp duty/registration charges to the period of lease and that the authorities cited support allowing the expense in the year of incurrence. Accordingly the ITAT's deletion of the AO's spread over adjustment was affirmed. [Paras 7, 8, 9]Lease registration charges treated as revenue expenditure and allowed in the year of incurrenceFinal Conclusion: The Court: (a) answered in favour of the assessee on deletion of additions relating to reimbursement of software expenses; (b) upheld the ITAT's deletion of the disallowance of lease registration charges as revenue expenditure; and (c) admitted for further consideration the question whether reimbursements of expatriate salaries and royalty involve a prohibited double deduction when viewed alongside reimbursement of software expenses. 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.