2026 (4) TMI 104 - AT - Income Tax

Transfer pricing, withholding tax and deferred revenue principles applied to delete major additions and allow business deductions.

Transfer pricing adjustment on AMP expenditure was deleted where the brand belonged to the assessee and the bright line test was found inapplicable, while ... TP adjustment on AMP and allied service charges - nature of expenses of Advertisement and publicity expenditure -Disallowance made u/s. 40(a)(ia) on payment to banks for payment gateway charges - Accrual of deferred contract receipts - Tax deduction at source on payment for air ticket cost - Allowability of ESOP expenditure - Depreciation on computer peripherals Transfer pricing adjustment - AMP expenditure - Short charge to associated enterprise - ticketing charges and tours and travel packages services - HELD THAT: - The Tribunal followed its earlier orders in the assessee's own case [2020 (6) TMI 698 - ITAT DELHI] on the same recurring controversy and found no reason to depart from that view. On that basis, the deletion of the AMP adjustment and the relief granted in respect of the alleged short charge to the associated enterprise were allowed to stand, and the same view was applied mutatis mutandis in the later assessment years where identical grounds were raised. [Paras 34, 35, 42, 46, 51] Advertisement and publicity expenditure - Revenue versus capital expenditure - Enduring benefit - HELD THAT: - For A.Y. 2011-12, the Tribunal noted that the same question had already been considered in the assessee's own case for earlier years and that the contention that such expenditure was capital in nature had been rejected. Respectfully following that view, it held that the advertisement and publicity outlay, incurred wholly and exclusively for business purposes, could not be treated as capital merely on the footing of an alleged enduring benefit. The same conclusion was then applied to the Revenue's identical grounds for later years Disallowance made u/s. 40(a)(ia) on payment to banks for payment gateway charges - HELD THAT:- Tribunal in assessee’s own case in [2020 (6) TMI 698 - ITAT DELHI] decided the issue in favour of the assessee as held no TDS shall be deductible on credit/debit card commission between the merchant and the acquirer bank with effect from January 1, 2013. The Payment Gateway facility charges being similar to credit/debit commission, the aforesaid beneficial notification equally applies to the transactions, prior to the effective date of notification - CIT(A) failed to appreciate that the Appellant has been making payments to various banks on account of Payment Gateway charges from Financial Year 2000-01 onwards and no adverse inference has been drawn by the Income-tax department in this regard in the past and therefore payment made to banks should not be disallowed. Accrual of income - Deferred revenue recognition - Contingent receipts - Advance income received - HELD THAT: - The Tribunal upheld the finding that the signing bonus and sign-up fee were received subject to continuing contractual obligations, including exclusive use and performance over the agreed term, and were refundable in whole or proportionately upon breach. Since the assessee followed the mercantile system and recognised the receipts proportionately in accordance with the contractual obligations and accounting standard relied upon by the Commissioner (Appeals), the balance pertaining to the unexpired period could not be treated as accrued income in the year of receipt. [Paras 13, 14, 15, 16] The deletion of the addition on account of deferred revenue income for A.Y. 2009-10 was affirmed. Section 195 withholding - non deduction of TDS on reimbursement of ticketing cost - HELD THAT: - The Tribunal accepted the Commissioner (Appeals)'s finding that the payment represented ticket cost on a cost-to-cost basis and not consideration for managerial, technical or consultancy services. It further accepted that the payment did not satisfy the character of fees for technical services or fees for included services, and that the amount was not taxable in India in the hands of MMT US. Since section 195 applies only where the sum paid is chargeable to tax in India, no disallowance under section 40(a)(i)/(ia) could be sustained. The same reasoning was applied mutatis mutandis to the Revenue's identical grounds for A.Ys. 2012-13 to 2015-16. [Paras 18, 34, 41, 45, 49] The deletion of the TDS disallowance on payments to MMT US was upheld for all the years in which the issue arose. ESOP expenditure - Business expenditure - Employee remuneration - HELD THAT: - The Tribunal agreed in principle that ESOP expenditure is allowable and found no infirmity in the Commissioner (Appeals)'s view that the cost reimbursed by the assessee to its parent in respect of options exercised by its employees formed part of employee compensation incurred wholly and exclusively for business purposes. In doing so, it noted the reliance placed on Lemon Tree Hotels Pvt Ltd. [2015 (11) TMI 404 - DELHI HIGH COURT] and also recorded that, in the assessee's own case for A.Y. 2011-12, the Tribunal had not found fault with the ESOP scheme. The same conclusion was applied to the Revenue's grounds for the subsequent years. [Paras 38, 39, 43, 47, 50] The Revenue's challenge to the allowability of ESOP expenditure was dismissed. Depreciation on computer peripherals - Rate of depreciation - The assessee's claim for higher depreciation on certain computer peripherals was rejected. - HELD THAT: - On the assessee's own submission that the issue stood covered against it by the Tribunal's earlier order in its own case for A.Y. 2009-10, the Tribunal dismissed the grounds relating to depreciation on computer peripherals. [Paras 21, 22] The assessee's grounds claiming higher depreciation on computer peripherals were dismissed. Final Conclusion: All the Revenue's appeals for A.Ys. 2009-10 and 2011-12 to 2015-16 were dismissed. The assessee's appeal for A.Y. 2011-12 was partly allowed, with relief granted on advertisement and publicity expenditure but the claim for higher depreciation on computer peripherals rejected. Issues: (i) Whether the transfer pricing adjustment on account of advertisement, marketing and publicity expenses and the alleged short charge for ticketing and tour management services was sustainable. (ii) Whether disallowance under section 40(a)(ia) was warranted in respect of payment gateway charges and the cost of air tickets paid through MMT US. (iii) Whether the deferred revenue receipts from the Amadeus and Apollo DKV agreements were taxable in full in the year of receipt. (iv) Whether ESOP-related expenditure and depreciation on certain computer peripherals were allowable as claimed.Issue (i): Whether the transfer pricing adjustment on account of advertisement, marketing and publicity expenses and the alleged short charge for ticketing and tour management services was sustainable.Analysis: The adjustment on AMP expenditure was deleted because the brand was found to belong to the assessee, the bright line test was held inapplicable on those facts, and the expenditure was treated as incurred wholly and exclusively for business purposes and not as capital in nature. For ticketing and tour management services, the lower authorities' restricted adjustment was upheld because the comparison adopted by the Revenue was not accepted without factoring in the corresponding functions, expenses and risks of the AE. The Tribunal also noted that the Revenue itself had not treated similar AMP expenditure as an international transaction in later years.Conclusion: The transfer pricing addition on AMP expenditure was deleted, and the restricted addition for ticketing and tour management services was sustained.Issue (ii): Whether disallowance under section 40(a)(ia) was warranted in respect of payment gateway charges and the cost of air tickets paid through MMT US.Analysis: The payment gateway charges were held not to attract disallowance because the banking facility did not amount to taxable technical or commission service in the hands of the recipient on the facts found. Likewise, the cost of air tickets paid to MMT US was held not to be fees for technical services or fees for included services, since the transaction was only a purchase on cost basis, involved no managerial, technical or consultancy element, and did not satisfy the make available requirement under the treaty.Conclusion: The disallowance under section 40(a)(ia) was deleted for both categories of payments.Issue (iii): Whether the deferred revenue receipts from the Amadeus and Apollo DKV agreements were taxable in full in the year of receipt.Analysis: The receipts were held not to have accrued in full in the year of receipt because they were contingent on exclusive and continued performance over the contractual term and were refundable pro rata or in full on breach or termination. The Tribunal accepted the matching and accrual-based treatment adopted in the accounts and held that only the proportionate income relating to the year had accrued, while the balance was taxable in later years over the life of the agreements.Conclusion: The additions on account of deferred revenue income were deleted.Issue (iv): Whether ESOP-related expenditure and depreciation on certain computer peripherals were allowable as claimed.Analysis: ESOP expenditure was held to be an allowable business expenditure incurred to retain and compensate employees, following the settled view that such cost is revenue in nature. The partial disallowance of depreciation on computer peripherals was not interfered with, while the assessee's challenge to the advertisement and publicity disallowance for the relevant year was accepted in line with the earlier finding that such expenditure was revenue expenditure.Conclusion: ESOP expenditure and the assessee's claim on advertisement and publicity expenditure were allowed, while the depreciation issue did not result in further relief.Final Conclusion: The Revenue's appeals were dismissed, and the assessee obtained partial relief on the disputed additions, resulting in a partly favourable outcome for the assessee overall.Ratio Decidendi: An expenditure or receipt is to be taxed or disallowed according to its real legal character, and contingent receipts are taxable only when they accrue, while business expenditure is allowable where it is incurred wholly and exclusively for business and does not constitute capital outlay; transfer pricing and withholding consequences cannot be sustained where the underlying transaction is not shown to involve a taxable service or an international transaction on the proved facts.