Revenue expenditure and software royalty rules favour deductions for platform promotion and standard cloud-service subscriptions without copyright exploitation rights.

Marketing and advertising expenditure to promote and expand an existing online streaming platform is revenue expenditure under Section 37(1) where it creates no asset or advantage in the capital field; Section 35D amortisation does not apply. Payments for end-user access to standard subscription software and cloud services are not royalty where the user receives no right to reproduce, exploit, or otherwise use underlying copyright or intellectual property. As no income is chargeable to tax in India, no withholding obligation arises under Section 195 and disallowance under Section 40(a)(i) is not sustainable.

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Issues: (i) Whether marketing and advertisement expenditure incurred for promotion and expansion of an existing online streaming platform was revenue expenditure allowable under Section 37(1), or capital expenditure amortisable under Section 35D; (ii) Whether payments to non-resident providers for subscription-based software and cloud services constituted royalty requiring tax deduction at source, so as to attract disallowance under Section 40(a)(i).

Issue (i): Whether marketing and advertisement expenditure incurred for promotion and expansion of an existing online streaming platform was revenue expenditure allowable under Section 37(1), or capital expenditure amortisable under Section 35D.

Analysis: The platform had been developed earlier and was an existing operational business asset when transferred to the assessee. The expenditure was directed towards promotion, user engagement, and expansion of the existing business, and similar expenditure was recurrently incurred in subsequent years. The quantum of expenditure relative to current revenue did not establish creation of a capital asset. The enduring-benefit test was not conclusive, since no advantage in the capital field or new capital asset was shown; expenditure facilitating business operations remained revenue in character. Section 35D, concerning specified preliminary or expansion-related expenditure, was inapplicable.

Conclusion: The marketing and advertisement expenditure was allowable as revenue expenditure under Section 37(1) and was not amortisable under Section 35D, in favour of the assessee.

Issue (ii): Whether payments to non-resident providers for subscription-based software and cloud services constituted royalty requiring tax deduction at source, so as to attract disallowance under Section 40(a)(i).

Analysis: The payments were for end-user access to standard subscription-based software and cloud services. No right to reproduce, exploit, or otherwise use the underlying copyright or intellectual property was acquired. Such payments were not royalty or income chargeable to tax in India; consequently, no withholding obligation arose under Section 195.

Conclusion: The software and cloud-service payments were not royalty, no tax was deductible under Section 195, and the disallowance under Section 40(a)(i) was unsustainable, in favour of the assessee.

Final Conclusion: The first appellate order deleting both additions was sustained.

Ratio Decidendi: Expenditure incurred to promote and expand an existing business is revenue expenditure where it creates no asset or advantage in the capital field; payments for end-user access to standard software or cloud services, without copyright exploitation rights, are not royalty.

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