Mumbai ITAT on GURANTEE COMMISSION & section14A.

01/08/2019

IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI
BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER
AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER

BEFORE SRI MAHAVIR SINGH, JM AND SRI RAJESH KUMAR, AM

IT(TP)A No. 2066/Mum/2017

Assessment Year 2012-13

Appellant	Vs.	Respondent
Cox & Kings Limited Turner Morrison Building, 16 Bank Street, Fort, Mumbai400 020	vs.	Additional Commissioner of Income Tax, Range-1(1), Room No. 538, 5th Floor, Aaykar Bhavan, M.K. Marg, Mumbai-400 020

Appellant by	Shri Rajan Vora, AR
Respondent by	S/shri Jayant Kumar & Rajeev K. Gubgotra, DRs’

Date of Hearing	5/10/2018
Date of pronouncement	3/1/2019

ORDER

PER MAHAVIR SINGH, JM

This appeal is arising out of the order of Dispute Resolution Panel-107, Mumbai [in short ‘DRP’], directions dated 05.09.2012. The Assessment was framed by the Addl. Commissioner of Income Tax, Range-1(1), Mumbai (in short ‘ACIT/AO’) for the assessment year 2012-13 vide order dated 25.01.2017 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).

2. The first issue in this appeal of assessee is against the orders of TPO/DRP/AO with regard to adjustment made in respect of international taxation of provisions of corporate guarantee loan taken by AE’s. For this assessee has raised the following ground No.1: –

“Adjustment made with respect to the international transaction of provision of corporate guarantee for loans taken by AEs

2. erred in making a notional adjustment on account of provision of corporate guarantee by the Appellant to its AEs. without appreciating the fact that such transactions do not qualify as international transactions within the meaning of Section 92B of the Act;

3. erred in making a notional adjustment of guarantee commission of Rs. 7,14,67,809 by determining the Arm’s Length Price (‘ALP’) on the corporate guarantee provided by the Appellant to its subsidiaries, over and above the voluntary adjustment in respect of guarantee commission made in the return of income, aggregating to Rs. 4,71,28,451.

4. erred in not appreciating the fact that the guarantee commission of Rs. 7,14,67,809 does not accrue or deemed to accrue or received or deemed to receive to/by the Appellant from its AEs:

5. erred in not appreciating the fact that the guarantee given by the Appellant is for strategic purpose and in its capacity of a shareholder;

6. erred in not appreciating the fact that no benefit arose to the AEs from corporate guarantee given by the Appellant;

7. without prejudice to above, erred in making an adjustment of guarantee commission 1.22% [in case of Cox & Kings (Australia) Ply Limited and Prometheon Holding Limited. UK] and at the rate of 1.77% [in case of Cox & Kings Travel Limited UK], amounting to Rs 7,14,67,809. without appreciating the fact that the Appellant has suo-moto made adjustment of guarantee commission in its return of income at the rate of 0.5%;

8. without prejudice to above, erred in using information obtained from CRISIL for determining the interest rates for Appellant and its AEs. without appreciating the fact that the same was not available in public domain and not applicable to the facts of the case of Appellant.

9. without prejudice to the above erred in disregarding the decision of Income Tax Appellate Tribunal, Mumbai (ITAT) in Appellant’s own case for AY 2009-10 and AY 2010-11, wherein guarantee given has been restricted to 0.5%;

10. Without prejudice to the above, erred in disregarding the decision of the jurisdictional High Court and various decisions of the Tribunals, limiting the guarantee commission adjustment within the range of 0.2.% to 0.5%;”

3. Briefly stated facts are that the assessee has issued guarantees to Axis Bank for the loan taken by Cox and Kings (Australia) PTY Limited (CNL Australia), Cox and Kings Travel Limited (CNK Travel UK) and Promethon Holdings UK Limited (Promethon UK) wholly owned subsidiaries of the

4. At the outset, the learned Counsel for the assessee stated that the Tribunal has accepted in assessee’s own case for AY 2009-10 and 2010-11 in ITA No 1354 and 7770/Mum/2014 order dated 04.11.2015, wherein the Tribunal following Hon’ble Bombay High Court decision in the case of CIT vs Everest Kanto Cylinder Limited [2015] (378 ITR 57) (Bom), wherein the jurisdictional High Court directed the AO to restrict the adjustment at 0.5%. The Tribunal observed as under: –

“Considering the above stated facts, we direct the AO to restrict the adjustments to 0.5% as upheld by the Hon’ble High Court in the case of Everest Kanto Cylinders (supra). Accordingly, the relevant ground nos. 6 to 9 are partly allowed.”

5. We find that this issue is squarely covered by Tribunals decision in assessee own case for immediately preceding years and hence, respectfully following the Tribunals view and the decision of Hon’ble Bombay High Court in the case of Everest Kanto Cylinder Limited (supra) we direct the AO to restrict the adjustment at 0.5% of the loan amount advanced by the bank to its AE. We direct the AO accordingly. This issue of assessee’s appeal is partly allowed.

6. The next issue in this appeal of assessee is against the order of AO/TPO/ DRP is regarding making disallowance of expenses relatable to exempt income by invoking the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules 1962 (hereinafter the ‘Rules’). For this assessee has raised the following ground: –

“Disallowance under Section 14A of the Act by applying Rule 8D of Rules

11. erred in making disallowance of Rs. 2,57,57,212 under Section 14A of the Act read with Rule 8D of the income Tax Rules, 1962 (Rules’) over and above the suo-moto disallowance made by the Appellant of Rs. 43,96,340/- made by the Appellant of Rs. 43,96,340/-.

12. erred in making the said disallowance by considering the investments made in growth scheme of mutual funds while calculating average investments, without appreciating the fact that the income from growth scheme of mutual funds is chargeable to tax and not an exempt income.

13. without prejudice to the above, erred in not appreciating the fact that the investment in growth scheme of mutual funds were made out of owned funds (i.e. IPO proceeds) and not from borrowed ‘funds and as such should not be considered for the purpose of computing disallowance under Section 14A of the Act;

14. without prejudice to the above, erred in not reducing the suo-moto disallowance made by the Appellant of Rs. 43,96340 by not appreciating the fact that the Appellant has not earned any exempt income from the investments considered by it for computing disallowance under Section 14A of the Act;

7. Briefly stated facts are that the assessee while filling the return of income has made suo moto disallowance of ₹ 43,96,340/- i.e. on account of interest of ₹ 37,84,256/- and administrative expenses of ₹ 6,12,084/- under section 14A of the Act read with Section 8D of the Rules as expenditure attributable to earn exempt income under section 14A of the Act. The AO made disallowance of interest expenses under Rule 8D(2)(iii) at ₹ 2,55,87,778/- and under Rule 8D(2)(iii) being administrative expenses of ₹ 45,69,434/-. The DRP also confirmed the action of the Assessing Officer. Aggrieved, now assessee is in appeal before Tribunal

8. We have heard rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the assessee has earned dividend income of ₹ 5,35,51,111/- on the investment made in mutual fund, which were invested in earlier years. The assessee before us claimed that these investments were made out of earlier year funds i.e. IPO proceeds of the assessee and the said mutual fund were sold during the year. The assessee in its return of income has made suo moto disallowance for an amount of ₹ 43,96,340/- considering the overall investment amounting to ₹ 12,24,16,786/-. The AO was of the view that the disallowance under section 14A of the Act read with Rule 8D of the Rules be computed considering the growth oriented mutual funds in the average investment and accordingly, he disallowed a sum of ₹ 2,57,60,872/-, over and above the suo moto disallowance made by the assessee at ₹ 43,96,340/-. The assessee before us filed comparative chart of disallowance consider by assessee and the AO as under: –

which was own funds of the assessee and accordingly no interest bearing funds have been utilized for acquiring this investment. The assessee before us contended that the nexus of investment in mutual funds from IPO proceeds was duly submitted before the AO vide letter dated 07.03.2016 and the said details were also furnished before the DRP during the course of hearing. The learned Counsel for the assessee drew our attention to the letter dated 07.03.2016 and the details submitted before the lower authorities as under: –

When these facts were confronted to the learned CIT Departmental Representative, he could not controvert that the evidences and details of these were not filed.

10. In view of the above, we are of the view that the assessee has interest free funds available, which are sufficient to meet its investment and at the same time, the assessee has interest bearing funds, in the absence of nexus proved by the AO, it can safely be presumed that investment were made from interest free funds in view of the decision of Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom). In view of the decision of Hon’ble Bombay High Court, we are of the view that the interest expenses disallowed by AO/ TPO/ DRP is without any basis and in view of presumption held by Hon’ble Bombay High court in HDFC Bank Ltd (supra), we delete the disallowance.

11. As regards to the disallowance made by AO under Rule 8D(2)(iii) i.e. 0.5% of average value of investment being administrative expenses, the assessee has made suo moto disallowance of ₹ 43,96,340/- by considering the overall investment of ₹ 12,24,16,063/-. The assessee claimed before us, that the assessee has not earned any dividend income from such investment of ₹ 12,24,16,063/-. The learned Counsel for the assessee before us relied on in the decision of Special Bench of Delhi ITAT in the case of ACIT vs. Vireet Investments (P.) Ltd. [2017] 58 ITR(T) 313 (Delhi – Trib.) (SB), wherein it is held as under: –

“11.16 Therefore, in our considered opinion, no contrary view can be taken under these circumstances. We, accordingly, hold that only those investments are to be considered for computing average value of investment which yielded exempt income during the year.”

12. When this facts were confronted to the learned CIT Departmental Representative, he stated that the issue can be remitted back to the file of the AO for verifying whether the investment of ₹ 12,24,16,063/- as claimed by assessee is giving exempt income or not. In view of the decision of Special Bench of ITAT Delhi in the case of Vireet Investments (P.) Ltd. (supra), we direct the AO to consider those investments only for computing the disallowance which related to exempt income during the year. We direct the AO accordingly. This issue of assessee’s appeal is set aside and allowed for statistical purposes.

13. The next issue in this appeal of assessee is against the order of AO/DRP against disallowance in respect of difference in tour sales as per Annual Information Report (AIR) Reconciliation submitted by assessee. For this assessee has raised the following ground: –
“Disallowance in respect of the Annual Information Report (‘AIR’) reconciliation.

15. erred in making addition of Rs 2586068 towards tour sales on the basis of AIR statement filed by third “dies. without appreciating that the onus is on the AO to establish the specific defects in the tour sales recorded by the Appellant in its books of account

16. erred in not appreciating the fact that the total tour sales recorded in the books of account of the Appellant are more than that as per AIR statement and accordingly, there is not under- recording of tour sales by the Appellant;

17, erred in making an addition based on the AIR statement filed by the third parties without providing an opportunity of cross verification of unreconciled amount with the third parties to the Appellant;

18. erred in making the above disallowance without appreciating the decision of Hon’ble ITAT in Appellants own case for AY 2009-10 and AY 2010-11;

19. without prejudice to the above, erred in making an addition of Rs. 25.86,068 being entire amount of unreconciled tour sales, without appreciating the fact that the addition, if any, should be restricted to the extent of profit embedded into the amount (i.e. 11.47% on the sales of Rs. 25,86,068, which is Rs.2,96,622) and not the entire unreconciled amount of tour sales of Rs. 25,86,068/-.”

14. Briefly stated facts are that the AO during the course of assessment proceedings required the assessee to reconcile the amount of total sales recorded in the books of accounts with that of the sales as per AIR statement. The assessee filed party wise comparative sales as reported in AIR statement vis a vis the books of accounts of the assessee. The AO require the reconciliation of tour sales and assessee submitted as under: –

“Total tour sales as per books of account is ₹ 205,43,52,402/- whereas,

Total sales as appearing in the AIR statement is ₹ 187,79,01,066/-.”

It was explained that out of total 284 parties, the tour sales pertains to 145 parties as per the books of account were more than the sales reflected in AIR to the extent of ₹ 17,90,37,421/-. Further in case of 118 parties the tour sales amount as per AIR is exactly matching with that of the books of account of the assessee. The assessee explained it was sales of balance 21 parties appearing in the books of accounts were less than those appearing in AIR statement by an amount of ₹ 25,86,068/-. The DRP also rejected the objection of the assessee and agreed with the order of the Assessing Officer. It was contended before us that the AIR statement is generated on system basis, the details provided by various parties and according to them there could be instances of possible errors therein and such errors are in regard the name, PAN, TAN of the assessee and grossing up of TDS etc. But the assessee before us could not filed any reconciliation qua the difference of Rs. 25,86,068/- except making verbal submissions. At last, the assessee contended that the addition should be restricted to the profit margin of sales at the rate of 11.47% on un accounted sales of ₹ 25,86,068/-. We are of the view that there are no matching unaccounted purchases which has been sold by assessee. Hence, we are of the view that the lower authorities have rightly added the non-reconciled tour sales amounting to ₹ 25,86,068/- in respect of these 21 parties. Hence, we find no infirmity in the orders of the lower authorities and this issue of assessee’s appeal is dismissed.

15. The next issue in this appeal of assessee is against the order of AO / TPO/ DRP is as regards to the disallowance of Travel Book engine expense considering the same as capital work-in-progress in the books of accounts and claimed by assessee as Revenue in the return of income. For this assessee has raised the following ground: –

“Disallowance of travel booking engine expenses considered as Capita! Work in Progress / (‘CWIP) in the books of account and claimed as revenue in the return of income of the captioned AY

20. erred in disallowing the expenditure incurred on development of travel booking engine and SAP software of Rs. 1,20,24,914 incurred by the Appellant by holding that the said expenditure is capital in nature and not allowable under Section 37(1) of the Act:

21. erred in not appreciating the fact that out of the total expenditure of travel booking engine and SAP software incurred, the Appellant has only claimed expenses related to salaries paid to staff, which are items of revenue nature and the same are deductible as per provisions of Section 37(1) the Act;

22. erred in holding that expenditure incurred on travel booking engine as capital in nature basis the fact that the same has been considered as CWIP in the books of account without appreciating the legal position that accounting treatment in the books of account cannot be a decisive factor to determine the allowability of any expenditure under the Act.

23. without prejudice to the above, erred in not holding that the depreciation on the travel booking engine expenses shall be granted in the year in which the same will be capitalized in accordance with the provisions of Section 32 of the Act.”

16. Briefly stated facts are that the assessee was in process of development of front and customize travel booking Portal and SAP software which enable the customers to book tickets for tour packages and other allied serves directly by using the comparable. The assessee has also developed SAP software for its back office functions like accounting and Human Resource management and for this various direct and indirect expenses have been incurred by the assessee. The assessee claimed total expenses for development of portal and SAP software amounting to ₹ 31,88,06,569/- forming part of capital work in progress as per AS(Accounting Standard) followed by the assessee. The AO while framing assessment disallowed an expenses of ₹ 1,20,24,914/- mainly incurred by assessee on account of salary expense of staff/ employees and according to the AO these were not wholly and exclusively involved in the development and implementation of software and their involvement is less than 60% of the total activity. The assessee carried the matter to DRP and raised objections which were rejected by holding that the expenses incurred on travel booking engine and SAP software was to acquire new capital asset to be used in a new line of business of assessee allowing the customers to book tickets, tour packages etc. and accordingly the same cannot be allowed under section 37(1) of the Act. Aggrieved, assessee came in appeal before Tribunal

17. The assessee before us contended that this expenditure is normal revenue expenditure and eligible for deduction under section 37(1) of the Act but alternatively the assessee also contended that in case these expenses are held to be capital in nature depreciation should be allowed on the same under section 32 of the Act. On the other hand, the learned CIT Departmental Representative relied on the orders of the lower authorities.

18. We have heard rival contentions and gone through the facts and circumstances of the case. We find from the records of the case that the assessee has paid salary to staff which were actually paid to employees who were working on various projects of the assessee, which inter alia including the development of the travel booking portal and SAP software as the said expenditure has not been specifically incurred only for the purpose of development of said portal, whether the same can be considered as normal Revenue expenditure and is eligible for deduction under section 37(1) of the Act. The learned Counsel for the assessee relied on the decision of Mumbai, ITAT in the case of Reliance Footprint Limited v. ACIT (2014) (41 Taxmann 553), wherein it is held as under: –

“6.1 From the submissions made by the assessee before the AO it is also clear that opening of stores at various places was one composite business of the assessee and in that course the assessee had started operation of its stores at Bangalore and Hyderabad. It was the contention of the assessee that operations of these stores at various locations is one composite business and once business had been started then the expenditure can not be linked only to the stores which became operational during the year under consideration. Such submission of the assessee has not been controverted by the AO. All these details were submitted before the AO and it is not the case of the AO that assessee had not incurred such expenditure for its business. In the letter submitted by the assessee before AO it is clearly mentioned that when the expenditure is incurred for the purpose of expansion of business which is already in existence and, which is in the nature of revenue, then the same is allowable as revenue expenditure irrespective of the treatment given by the assessee to such expenditure in its books of account. No material has been brought on record by the AO to negate such submissions made by the assessee. These propositions put forth by of the assessee before AO are supported by the decision of the Hon’ble Bombay High Court in the case of Kothari Auto Parts Mfg. (P.) Ltd. (supra), and the decision of Hon’ble Gujarat High Court in the case of Alembic Glass Industries Ltd. (supra). Therefore, it has to be held that these expenditures incurred by the assessee are for the purpose of expansion of its business and those expenditure are in the nature of revenue (being mostly paid to employees). These are allowable in the year itself as per ratio of aforementioned decision of the Hon’ble Bombay High Court in the case of Kothari Auto Parts Mfg. (P.) Ltd. (supra) and Hon’ble High Court of Gujrat in the case of Alembic Glass Industries Ltd. (supra). These expenditures did not create any asset and also did not provide enduring benefit to the business of the assessee so as to say that the expenditure was capital in nature. Therefore, we hold that expenditure are allowable in the year under consideration irrespective of the fact that assessee has given dual status to such expenditure in its books of account vis-à-vis computation of income filed alongwith return.
6.2 So far as it relates to the observations made by Ld. CIT(A) in his order that assessee vide his letter dated 28/6/2011 has merely given the name, designation and amount paid with reference to salary paid without giving any proof of work actually being done, we may mention that we have carefully gone through the details filed by the assessee before Ld. CIT(A). Copy of the documents submitted before Ld. CIT(A), as mentioned earlier, were filed before us. We find that assessee in the details so filed has mentioned job description of each of the employees alongwith amount paid to him describing also that how much TDS has been deducted. For example job description is described as sourcing product design and development; sourcing and procurement; category management; marketing communication, marketing consumer behaviors; distribution and logistic; sourcing and procuring; talent acquisition buyer etc. etc. In the note which has been filed along with the details it is clearly mentioned that the assessee has employed these persons for carrying out market research work such as to contact various manufacturers and suppliers of the footwear and other accessories; getting base price and delivery schedules as well as comparing the products of various manufacturers of unbranded products with the price and quality of branded products, preparing various reports for this purpose, planning, distribution and logistic, sourcing, designing products, inventory planning discussing consumer preferences for various product range etc. The submissions made by the assessee before Ld. CIT(A) matches with the job description of all the employees. Therefore, it cannot be said that assessee did not provide the necessary details. By furnishing these details, the assessee had placed on record prima facie material to substantiate the query raised by Ld. CIT(A). Without pointing out any defect and without brining any adverse material on record, Ld. CIT(A) has observed that assessee has failed to prove that the expenditure was made wholly and exclusively for the purpose of business of the assessee. Thus there is no basis for recording such finding. Therefore, even for the additional reasons described by Ld. CIT(A), the disallowance cannot not be upheld.

19. We find from the DRP’s order that the DRP has tried to distinguish the above decision of Tribunal, wherein DRP has considered that the assessee is in new line of business or where the assessee is incurring expenses on expanding of its existing line of business. The expenses incurred by assessee on account of salary on development of travel booking engine and SAP software cannot be considered as adding a new line of business for its customers, infact, upon successfully development of the same, the existing business of the assessee for providing tours and travel services can be carried out more effectively and efficiently. Thus, incurring of these expenses for travel booking engine, the assessee is expanding its existing line of business. Further, it is also a fact that the expenses incurred for travel booking engine and SAP software was only for the purpose of technology upgradation to the existing business of the assessee and by incurring the same the assessee has not created any new line of business or asset which can be given enduring benefit to the assessee. Thus, according to us, in view of the above factual and legal submission, the salary and profession expenses incurred and disallowed by AO amounting to ₹ 1,20,24,914 over the development of travelling booking engine and SAP software is to be allowed as Revenue expenses under section 37(1) of the Act. The facts and circumstances are similar to the decision of Mumbai, ITAT in the case of Reliance Footprint Limited (supra) and hence, respectfully following the same, we allow the claim of the assessee.

20. In the result, the appeal of assessee is partly allowed.
Order pronounced in the open court on 03-01-2019.