M/S. STOUGHTON STREET TECH LABS PRIVATE LIMITED,MUMBAI vs. ITO, WARD 11(2)(1), MUMBAI, AAYAKAR BHAWAN, MUMBAI

PER SHRI ANIKESH BANERJEE, JUDICIAL MEMBER: The instant appeal of the revenue and cross appeal by the assessee filed against the order of the NFAC Delhi [for brevity “Ld. CIT(A)”], order passed under Section 250 of the Income Tax Act 1961 (for brevity ‘the Act’), for Assessment Year 2022-23, date of order 12.11.2025. The impugned order emanated from the order of the Assessment Unit Income Tax Department (for brevity ‘Ld. AO’), order passed under Section 143(3) r.w.s. 144B of the Act, date of order 27.03.2025. 2. Since both the appeal and the cross-appeal arise out of a common issue, they were heard together for the sake of convenience and are being disposed of by this common order. With the consent of both the parties, ITA No. 885/Mum/2026, being the Revenue's appeal, is treated as the lead case. Accordingly, the decision rendered therein shall apply mutatis mutandis to the connected appeal. ITA No.885/Mum/2026 revenue’s appeal: 3. The following grounds are taken by the revenue: “1. That on the facts and in the circumstances of the case and in law, the learned Commissioner of Income tax (Appeals) erred in deleting the disallowance of Rs.25,81,01,600/- under marketing and advertisement expenditure made by the Assessing Officer by treating the said expenditure as capital in nature, without appreciating that the Assessing Officer had rightly held that such expenditure resulted in enduring benefit to the assessee. 2. That the learned Commissioner of Income tax (Appeals) failed to appreciate that the impugned expenditure of Rs.32,26,27,487/-for AY 2022- 23, on marketing and advertisement created/strengthened an intangible advantage in the nature of brand, trademark, trade name, and market penetration, resulting in an enduring benefit to the assessee's business, and therefore was liable to be treated as capital expenditure and not allowable as a deduction under section 37(1) of the Income tax Act, 1961. 3. That the learned Commissioner of Income-tax (Appeals) erred in holding that the advertisement and marketing expenditure of Rs.32,26,27,487/-, was incurred wholly and exclusively for the purposes of business as revenue expenditure, ignoring the Assessing Officer's findings that such expenditure was not relatable only to the A. Y. 2022-23. (Tax effect on grounds 1, 2 & 3 is Rs.7,51,59,186/-). 4. That the learned Commissioner of Income-tax (Appeals) has erred in law and on facts in deleting the disallowance made by the Assessing Officer u/s.40(a)(i) of the Income-tax Act, 1961, in respect of expenses amounting to Rs.1,76,83,713/- for failure to deduct TDS on payments made to nonresidents. 5. That the learned CIT(A) has erred in not appreciating the facts that the assessee had failed to comply with the statutory requirements of deducting TDS on the payments made to non- residents under Section 195 of the Act, and consequently, the provisions of Section 40(a)(i) squarely apply. (Tax effect on grounds 4 & 5 is Rs.51,49,496/-) 6. The Appellant craves leave to amend or alter any ground or to submit additional new ground, which may be necessary before or during the course of hearing.”

The Ld. AR further submitted that the assessee had incurred losses in this venture during the year under consideration. It was also pointed out that similar development, marketing, and advertisement expenditure continued to be incurred in the subsequent assessment years in the ordinary course of business. In support of this contention, the Ld. AR furnished a comparative chart showing the gross revenue vis-à-vis the marketing and advertisement expenditure for the relevant years, which was placed before the Bench and is reproduced below: Particulars Amount in Rs. As on As on As on 31.03.2022 31.03.2023 31.03.2024 Gross Revenue Advertising Services 67,56,000 *12,80,611 Loco In App Export Sales 62,624 1,94,163 Loco In App Sales 3,31,032 6,91,193 3,15,09,902 Loco in-App Sales Apple 5,681 Revenue From Advertisement - 3,29,316 Domestic Revenue From Advertisement - Export 2,59,422 Total Gross Revenue 71,55,336 21,65,967 3,20,98,640 Note * Credit Note for Sales recorded in March 2022 of Rs.22,50,000 received in FY 2023-24 has been excluded to present the gross receipts for the year ended 31.03.2023 Marketing & Advertisement expenses Brand Marketing 6,18,15,293 5,36,02,336 1,04,64,928 Digital Marketing 18,91,80,152 26,03,74,681 3,81,85,316 Giveaway - VIP Users - - 1,42,29,117 Loco Giveaway 5,74,55,567 13,28,89,190 1,60,50,409 Marketing Tech 1,41,76,475 2,68,68,892 2,06,14,028 Gross Marketing & Advertisement 32,26,27,488 47,37,35,098 9,95,43,799 expenses

“(i) Addition of Rs. 25,08,17,691/-- Treatment of Marketing and Advertisement Expenditure as Capital u/s 35D

The Assessing Officer observed that the appellant had incurred substantial expenditure of Rs. 25.08 crores on marketing, advertisement, and brand promotion during the year, which was capitalised in the balance sheet and claimed as amortisable u/s 35D. The AO held that such expenditure resulted in creation of enduring benefit and was therefore capital in nature. Relying on section 35D, he allowed only one-fifth of the total expenditure and disallowed the remaining amount, adding Rs. 20.06 crores to the income.

During appellate proceedings, the appellant explained that it is engaged in running an online live-gaming platform "LOCO," fully operational for several years, and that the impugned expenses were incurred for the purpose of business expansion, customer acquisition, and brand recall. It was submitted that these were recurring marketing expenses necessary for sustaining competitive visibility in the digital domain.

The appellant placed reliance on numerous judicial pronouncements including Empire Jute Co. Ltd. v. CIT (124 ITR 1 SC), CIT v. Salora International Ltd. (308 ITR 199 Del), CIT v. SBI Cards and Payments Services Pvt. Ltd. (ITA No. 334/2015, Del HC), and the coordinate bench decision in Casio India Co. Pvt. Ltd. v. DCIT (ITA No. 3120/Del/2011) to contend that advertisement and marketing expenses, even if resulting in some enduring brand advantage, remain revenue in nature as they are incurred wholly and exclusively for the purposes of business35D is a specific provision that allows amortisation of preliminary expenses incurred After careful consideration, I find merit in the appellant's submission. Section undertaking or setting up of a new unit. The nature of expenditure envisaged therein prior to commencement of business or in connection with extension of an studies, and public issue expenses. The marketing and promotional expenditure is confined to project-related or incorporation expenses such as legal fees, feasibility incurred by an existing company for augmenting its sales and sustaining market presence cannot be equated with preliminary expenditure of the nature contemplated by section 35D. The Assessing Officer's application of this section is therefore misplaced.

Further, it is a settled proposition that the test of "enduring benefit" is not conclusive in determining whether an expenditure is capital or revenue. As held by the Hon'ble Supreme Court in plethora of decisions, an expenditure that facilitates the carrying on of business more efficiently without creating a new asset or advantage in the capital field is revenue in character. The expenditure incurred by the appellant on brand promotion and customer outreach does not result in acquisition of any asset; it is a recurring cost required to maintain business operations in a highly competitive technology market. The benefit, if any, is short- lived and purely incidental to the conduct of business.

It is also pertinent that similar expenditure has been accepted as revenue in nature in preceding years, and there is no change in the facts or accounting method. The principle of consistency, as enunciated in RadhasoamiSatsang v. CIT (193 ITR 321 SC), also supports the appellant's case. In view of these settled principles and the binding decisions of the Delhi High Court and ITAT in Salora International Ltd., Casio India Ltd., and SBI Cards and Payments Services Pvt. Ltd., it is held that the expenditure in question is wholly and exclusively laid out for the purposes of business and is allowable u/s 37(1). The restriction imposed by the AO u/s 35D is unsustainable in law. Accordingly, the entire disallowance of Rs. 25,08,17,691/- is deleted, and the ground of appeal is allowed.

(ii) Addition of Rs. 1,76,83,713/-- Disallowance u/s 40(a)(i) on Account of Foreign Remittances

The Assessing Officer disallowed Rs. 1.76 crores u/s 40(a) (i) on the ground that the appellant made payments to non-residents such as Appsflyer, Amplitude, Slack Technologies, and other software-as-a-service (SaaS) providers without deducting tax u/s 195. The AO treated the payments as "royalty" within the meaning of section 9(1)(vi) and Article 12 of the applicable Double Taxation Avoidance Agreements (DTAAS).

The appellant contended that the payments were for access to cloud-based standard software used as tools for analytics, user engagement, and internal communication. The appellant neither acquired nor was granted any right to use or reproduce the underlying copyright or source code. The payments were in the nature of subscriptions for availing standard facilities and were therefore not chargeable to tax in India in the hands of the foreign vendors. The appellant relied on the judgment of the Hon'ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) 125 taxmann.com 42 (SC), wherein it was held that payments made for the use of standard software without any right to exploit the copyright are not "royalty" either under the domestic law or under the DTAAS. The appellant also furnished Tax Residency Certificates, Form 10F, and declarations of non- existence of Permanent Establishment in India.

I find that the facts of the present case fall squarely within the ratio of the Supreme Court decision cited above. The impugned payments are for standard software and cloud services that are used by the appellant as an end-user for business convenience. There is no transfer of any right to exploit the underlying intellectual property or reproduction rights. Consequently, the income is not chargeable to tax in India under section 9(1)(vi) or Article 12 of the relevant DTAA. In absence of chargeability, there was no obligation on the appellant to deduct tax at source u/s 195. The disallowance made u/s 40(a)(i) is therefore without legal basis.

In light of the above discussion and in conformity with the ratio laid down by the Hon'ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. (supra), the disallowance of Rs. 1,76,83,713/- is deleted, and this ground is allowed.” 8. The Ld. AR further contended that the identical issue was duly considered by the Hon'ble Supreme Court in the case of Empire Jute Company vs CIT reported in 124 SCC 1 (SC) the relevant paragraphs are reproduced as below: “This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure "so long as the benefit is not so transitory as to have no endurance at all". There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, there-fore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. But even if this test were applied in the present case, it does not yield a conclusion in favour of the revenue. Here, by purchase of loom hours no new asset has been created.” 9. The Ld. AR further respectfully relied on the order of Hon'ble Madras High Court in the case of CIT vs Sakthi Soyas Ltd. reported in (2006) 283 ITR 194 (Mad.), the relevant part of the order is reproduced as below: “3. Heard learned counsel appearing for the Revenue. The assessee had incurred expenditure to an extent of Rs. 20,36,157 towards crop development during the relevant period. Therefore, it had to ensure continuous availability of raw materials. Keeping that objective in mind, the assessee-company propagated a new crop among the local farmers for which it had incurred various expenses totalling to Rs. 20,36,157. All these expenses were by 10 and large educative and advertisement in nature and that the participation of the farmers was ensured in developing the said crop. The assessee had incurred expenditure in making publicity through visual media as well as print media, distribution of seeds and fertilizers, for maintaining demonstrative plots, for conducting seminars for the local population, prize distribution to farmers, etc. These expenses were necessary and usually expendable in the event of launching a new project. All these expenses incurred by the assessee-company under this head were intimately connected with the activities carried on by the assessee in its business operations and therefore it had necessarily to be held as business expenditure and the expenditure could not have resulted in enduring benefit to the assessee-company. Therefore, we do not find any justification in the argument of the Revenue that crop development expenses needed to be treated as capital expenditure ineligible for deduction. 4. In respect of the project launching expenses amounting to Rs. 16,41,125 also, we find that the assessee had spent the money mainly for advertisement through visual and print media and also for designing and printing leaflets, brochures, etc., and hence these expenses were also in the nature of business expenditure entitled for deduction in computing the assessee's income.” 10. We have heard the rival submissions and carefully considered the material available on record. The short controversy before us relates to (i) the treatment of marketing and advertisement expenditure amounting to Rs.25,08,17,691 as capital expenditure by invoking Section 35D of the Act, and (ii) the disallowance of Rs.1,76,83,713 under Section 40(a)(i) of the Act on account of payments made to non-resident entities. On perusal of the record, we find that the "Loco Platform" was originally developed in the year 2018 and was subsequently transferred by the group concern to the assessee for a consideration of Rs.19.40 crore. Thus, the platform was already an existing and operational business asset and not a newly created venture in the year under consideration. The marketing and advertisement expenditure was incurred for promoting and expanding the existing business and enhancing user engagement. The comparative details placed on record further demonstrate that similar expenditure continued to be incurred in the subsequent years in the ordinary course of business. Merely because the expenditure was substantial in comparison to the revenue earned during the year cannot, by itself, justify its characterization as capital expenditure. The Ld. AO has not brought any material on record to establish that the impugned expenditure resulted in the creation of a new capital asset or any advantage in the capital field. The Hon'ble Supreme Court in Empire Jute Co. Ltd. (supra) has authoritatively held that the test of enduring benefit is not conclusive and that expenditure incurred for facilitating the carrying on of business more efficiently, without creating any asset in the capital field, retains its character as revenue expenditure. Likewise, the Hon'ble Madras High Court in Sakthi Soyas Ltd. (supra) held that advertisement, publicity, and project- launching expenses incurred for business promotion are allowable as revenue expenditure notwithstanding any incidental enduring benefit. Applying these settled principles to the facts of the present case, we are of the considered view that the marketing and advertisement expenditure incurred by the assessee is allowable as revenue expenditure under Section 37(1) of the Act and could not have been subjected to amortisation under Section 35D. The Ld. CIT(A) has rightly appreciated the factual and legal position, and we find no infirmity in the impugned order warranting interference.

(BIJAYANANDA PRUSETH) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai,िदनांक/Dated: 15/07/2026 SAUMYA Sr.PS Copy of the Order forwarded to: 1. अपीलाथ�/The Appellant , 2. �ितवादी/ The Respondent.