2019 (2) TMI 1058 - AT - Income Tax

Tribunal Adjusts Corporate Guarantee, Interest Expenses, AI Report, Travel Expenses

The Tribunal partly allowed the appeal, directing the AO to restrict the adjustment for the provision of corporate guarantee at 0.5%, deleting the ... TPA - International taxation of provisions of corporate guarantee loan taken by AE’s - Held that:- 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 [2015 (5) TMI 395 - BOMBAY HIGH COURT] 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. Disallowance of expenses relatable to exempt income by invoking the provisions of section 14A of the Act read with Rule 8D - Held that:- 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 (8) TMI 119 - BOMBAY HIGH COURT]. 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. In view of the decision of Special Bench of ITAT Delhi in the case of Vireet Investments (P.) Ltd. [2017 (6) TMI 1124 - ITAT DELHI], 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. Disallowance in respect of difference in tour sales as per Annual Information Report (AIR) Reconciliation submitted by assessee - Held that:- The assessee before us could not filed any reconciliation qua the difference of ₹ 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. 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 - assessee before us contended that this expenditure is normal revenue expenditure and eligible for deduction under section 37(1) - Held that:- 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) Issues Involved:1. Adjustment made with respect to the international transaction of provision of corporate guarantee for loans taken by AEs.2. Disallowance of expenses relatable to exempt income by invoking the provisions of section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.3. Disallowance in respect of the Annual Information Report (AIR) reconciliation.4. Disallowance of travel booking engine expenses considered as Capital Work in Progress (CWIP) in the books of account and claimed as revenue in the return of income.Detailed Analysis:1. Adjustment Made with Respect to the International Transaction of Provision of Corporate Guarantee for Loans Taken by AEs:The assessee contested the adjustments made by the TPO/DRP/AO regarding the corporate guarantee provided to its subsidiaries. It argued that these transactions do not qualify as international transactions under Section 92B of the Act, and the notional adjustment of Rs. 7,14,67,809 was erroneous. The Tribunal referenced its own decision in the assessee's case for AY 2009-10 and 2010-11, supported by the Hon'ble Bombay High Court decision in CIT vs. Everest Kanto Cylinder Limited, directing the AO to restrict the adjustment to 0.5% of the loan amount. Consequently, the Tribunal directed the AO to restrict the adjustment at 0.5%, partly allowing the assessee's appeal.2. Disallowance of Expenses Relatable to Exempt Income by Invoking the Provisions of Section 14A of the Income Tax Act Read with Rule 8D of the Income Tax Rules:The AO disallowed Rs. 2,57,57,212 under Section 14A read with Rule 8D, over and above the assessee's suo-moto disallowance of Rs. 43,96,340. The Tribunal noted that the assessee had sufficient interest-free funds from IPO proceeds to cover the investments and referenced the Hon'ble Bombay High Court decision in CIT vs. HDFC Bank Ltd., which presumes investments were made from interest-free funds. Consequently, the Tribunal deleted the disallowance of interest expenses. Regarding administrative expenses, the Tribunal directed the AO to consider only those investments that yielded exempt income during the year, following the decision of the Special Bench of ITAT Delhi in ACIT vs. Vireet Investments (P.) Ltd. This issue was set aside and allowed for statistical purposes.3. Disallowance in Respect of the Annual Information Report (AIR) Reconciliation:The AO added Rs. 25,86,068 based on discrepancies between the AIR statement and the assessee's books. The assessee argued that the total tour sales recorded were higher than those in the AIR statement and that the addition should be limited to the profit margin. However, the Tribunal found no matching unaccounted purchases and upheld the addition of Rs. 25,86,068, dismissing the assessee's appeal on this issue.4. Disallowance of Travel Booking Engine Expenses Considered as Capital Work in Progress (CWIP) in the Books of Account and Claimed as Revenue in the Return of Income:The AO disallowed Rs. 1,20,24,914 incurred on the development of a travel booking engine and SAP software, treating it as capital expenditure. The Tribunal, referencing the Mumbai ITAT decision in Reliance Footprint Limited v. ACIT, held that these expenses were for expanding the existing line of business and did not create a new asset or provide enduring benefit. Thus, the Tribunal allowed the expenses as revenue expenditure under Section 37(1) of the Act, allowing the assessee's appeal on this issue.Conclusion:The appeal was partly allowed, with specific directions given for each issue. The Tribunal's decision was pronounced in the open court on 03-01-2019.