2014 (4) TMI 1097 - AT - Income Tax

Revenue appeals partly allowed, deletions upheld, transfer pricing adjustments accepted, issues remanded for further review.

Dy. Commissioner of Income Tax – Cir. 2 (2), Mumbai Versus M/s The Indian Hotels Company Ltd.,

The Tribunal partly allowed both appeals filed by the Revenue. It upheld deletions of disallowances and transfer pricing adjustments made by the CIT(A) in ... Disallowance of interest - interest free advances given by the assessee to its other group companies - CIT(A) deleted the disallowance - Held that:- The relevant advances having been given by the assessee to its subsidiary company wholly and exclusively for the purpose of its business, the disallowance of interest attributable to the said advance was not justified. Following this Third Member decision for A.Y. 1989-90, the Tribunal has consistently decided a similar issue in favour of the assessee in the subsequent years up to A.Y. 2002-03. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to that of the earlier years, we respectfully follow the decision rendered by the Tribunal in assessee’s own case for the earlier years and uphold the impugned order of the ld. CIT(A) deleting the disallowance - Decided in favour of assessee. Disallowance of interest amount on share application pending allotment - A.O. alleging that there was diversion of borrowed funds by the assessee for non-business purpose - CIT(A) deleted the disallowance - Held that:- In A.Y. 1995-96, it was held by the Tribunal that there being no diversion of interest bearing funds for non-business purpose as alleged by the A.O., there was no justification in making any disallowance on account of interest paid on the borrowed funds. It was noted by the Tribunal that the share application money was finally returned to the assessee with interest @ 19% and the interest so received was duly offered by the assessee in the relevant year. A similar view has been taken by the Tribunal in the subsequent years i.e. assessment years 1996-97 to 2002-03. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to the earlier years, we respectfully follow the orders of the Tribunal for the said years and uphold the impugned order of the ld. CIT(A) giving relief to the assessee on this issue. - Decided in favour of assessee. Disallowance of expenditure on the replacement of carpets - Held that:- A similar disallowance on account of expenditure incurred by the assessee on replacement of carpets was made by the A.O. treating the same as capital expenditure in the earlier years and the Tribunal consistently gave relief to the assessee by holding the expenditure on replacement of carpets as revenue expenditure - Decided in favour of assessee. Expenditure incurred on the replacement of linen - CIT(A) treated as Revenue expenditure instead of capital expenditure - Held that:- This issue is similar to the issue relating to the assessee’s claim for deduction on account of expenditure incurred on replacement of carpets and the same has also consistently decided by the Tribunal in favour of the assessee in earlier years. Respectfully following the orders of the Tribunal in assessee’s own case for the earlier years upto A.Y. 2002-03 on a similar issue, we uphold the impugned order of the ld. CIT(A) allowing the deduction claimed by the asssessee - Decided in favour of assessee. Transfer pricing adjustments - Held that:- No justifiable reason to interfere with the impugned order of the ld. CIT(A) deleting the TP adjustment made by the A.O./TPO in respect of the international transactions involving availing of sales promotion services by the assessee from its AE in US. CIT(A) has erred in excluding operating fee and receipt from Taj Lounge from total receipts of business for computing deduction u/s 80HHD without appreciating that the said receipt being part of total receipts of the business cannot be excluded from the purview of total receipts for the purpose of computation of deduction Issues Involved:1. Disallowance of interest on interest-free advances.2. Disallowance of interest on share application money pending allotment.3. Disallowance of expenditure on replacement of carpets.4. Disallowance of expenditure on replacement of linen.5. Transfer pricing adjustments.6. Computation of deduction under Section 80HHD.Detailed Analysis:1. Disallowance of Interest on Interest-Free Advances:- Assessment Year 2003-04: The Revenue challenged the deletion of disallowance of interest attributable to interest-free advances given by the assessee to its group companies. The Tribunal upheld the disallowance of Rs. 13,94,869/- but deleted the disallowance of Rs. 25,90,000/- and Rs. 16,83,978/- following the Third Member decision in DCIT vs. Indian Hotel Co. Ltd. (92 ITD 97), where it was held that advances to subsidiary companies for business purposes did not justify interest disallowance.- Assessment Year 2004-05: The Tribunal followed the same rationale and sustained the disallowance only to the extent of interest attributable to the advance given to M/s Taj & Taida.2. Disallowance of Interest on Share Application Money Pending Allotment:- Assessment Year 2003-04: The CIT(A) deleted the disallowance of Rs. 1,48,000/- made by the A.O., holding that the share application money was paid out of interest-free funds. The Tribunal upheld this decision, referencing its earlier orders where similar issues were decided in favor of the assessee.- Assessment Year 2004-05: The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 61,400/- on similar grounds.3. Disallowance of Expenditure on Replacement of Carpets:- Assessment Year 2003-04: The Tribunal upheld the CIT(A)'s decision to treat the expenditure of Rs. 53,42,708/- on replacement of carpets as revenue expenditure, following its consistent view in earlier years.- Assessment Year 2004-05: The Tribunal upheld the CIT(A)'s decision to treat the expenditure of Rs. 95,99,982/- on similar grounds.4. Disallowance of Expenditure on Replacement of Linen:- Assessment Year 2003-04: The Tribunal upheld the CIT(A)'s decision to treat the expenditure of Rs. 3,60,00,638/- on replacement of linen as revenue expenditure, following its consistent view in earlier years.- Assessment Year 2004-05: The Tribunal upheld the CIT(A)'s decision to treat the expenditure of Rs. 3,49,60,045/- on similar grounds.5. Transfer Pricing Adjustments:- Interest on Outstanding Interest:- Assessment Year 2003-04: The Tribunal upheld the CIT(A)'s deletion of the TP adjustment of Rs. 74,21,000/-, holding that LIBOR was an appropriate arm's length rate, following the decision in Hinduja Global Solutions Ltd. vs. ACIT.- Assessment Year 2004-05: The Tribunal upheld the CIT(A)'s deletion of the TP adjustment of Rs. 77,85,779/- on similar grounds.- Letters of Comfort:- Assessment Year 2003-04: The Tribunal restored the issue to the A.O./TPO to examine whether the letters of comfort constitute international transactions.- Assessment Year 2004-05: The Tribunal restored the issue to the A.O. with the same directions.- Sales Promotion Services:- Assessment Year 2003-04: The Tribunal upheld the CIT(A)'s deletion of the TP adjustment of Rs. 40,74,045/-, agreeing that the assessee's profit margin was higher than the average margin of Indian comparables.- Assessment Year 2004-05: The Tribunal upheld the CIT(A)'s deletion of the TP adjustment of Rs. 15,21,495/- on similar grounds.6. Computation of Deduction under Section 80HHD:- Assessment Year 2004-05: The Tribunal set aside the CIT(A)'s decision to exclude operating fees of Rs. 32,70,93,451/- and receipts from Taj Lounge of Rs. 4,16,04,715/- from total business receipts, restoring the A.O.'s inclusion of these amounts for computing the deduction under Section 80HHD.Conclusion:Both appeals filed by the Revenue were partly allowed. The Tribunal upheld several deletions of disallowances and TP adjustments by the CIT(A) while restoring certain issues to the A.O./TPO for further examination.