CLEARTRIP PRIVATE LIMITED,MUMBAI vs. DY COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE-2(4), MUMBAI

In the learned Assessing Officer is aggrieved by the deletion of the addition made by the learned Assessing Officer on account of Share issue receipt of ₹33,33,15,000/- received by Assessee from its Holding Company Cleartrip Inc. Mauritius. Addition is made by the LD AO based on past assessment years and deleted by the LD CIT (A) based on past years appellate orders.

Following solitary ground was taken as under:-

In the assessee is aggrieved on disallowance of advertisement and sales promotion expenses of ₹22,77,70,391/- being 20 % of Total Advertisement and publicity expenses u/s 37 (1) of the Act confirmed by the learned CIT (A). Disallowance is made by the LD AO based on past assessment years and confirmed by the LD CIT (A) based on past years appellate orders.

The brief facts of the case shows that i. Assessee is a company engaged in the business of travel agency and providing travel related services through its Web portal to various customers. It is a wholly owned subsidiary of Cleartrip Inc., Mauritius. Cleartrip Inc., Mauritius is a wholly owned subsidiary of Cleartrip Inc., Cayman Island. Several individuals and private equity funds have invested in Cleartrip Inc. Cayman Island. iii. The learned Assessing Officer found that assessee has received ₹33,33,15,000/- as share premium from Cleartrip Inc., Mauritius. The assessee has issued 1,66,65,750 equity shares at a face value of ₹10 each at a premium of ₹10 having total issue price of ₹20 per share on 29 March 2016. iv. The allotment was made to the holding company namely Cleartrip Inc., Mauritius [address international financial services court, 28 Cyber city Ebena, Mauritius]. v. The learned Assessing Officer found that the above share consideration has come from Cleartrip Inc., Mauritius, which in turn received the same from Cleartrip, Cayman Island, in which the funds are flowing from the private equity investors from USA. vi. The learned Assessing Officer also noted that the assessee company is constantly incurring losses and therefore, ordinary business prudent suggests that none would invest in a company after paying a premium. vii. Therefore, assessee was issued show cause notice to provide the details of the investors. ii. Copy of certificate of incorporation of holding company. iii. Copy of shareholders registered by Cleartrip Mauritius showing issue of shares to Cleartrip Inc., Cayman Island. iv. Copy of certificate of current outstanding of cleartrip Inc. Mauritius. v. Copy of foreign inward remittance certificate issued by its authorized dealer bank on receipt of money from cleartrip Inc., Mauritius. vi. Copy of form number FCGPR filed with Reserve Bank of India. vii. Copy of return of allotment of shares filed with the Registrar of Companies. viii. Copy of the valuation report justifying the fair price of the share. ix. Copy of bank statement of the assessee xi. Copy of financial statement of cleartrip incorporation Mauritius. ix. The learned Assessing Officer asked the assessee to show the ultimate source of the funds. The learned Assessing Officer also referred matter to FT&TR to ascertain the real nature of these transactions and actual source of the funds. x. The learned Assessing Officer further verified the valuation report and found that assessee has used Discounted Cash Flow (DCF) and Net Asset Value (NAV) method for valuation of shares. He noted that assessee is making constantly losses, which are increasing. He noted that assessee has determined the premium at ₹9.40 per share to bring in conformity with the issue price of ₹20.

Accordingly, assessment order under Section 143(3) of the Act was passed on 3rd July, 2019, determining the total income of the assessee at a loss of ₹2,99,59,387/- against the returned loss of ₹59,95,10,511/-.

Aggrieved by the assessment order, assessee preferred an appeal before the learned Commissioner of Income tax (Appeals). The learned CIT (A) i. vide Para no.6.3 deleted the addition of ₹33,33,15,000/- following his own finding for A.Y. 2017-18. He followed his predecessor order for A.Y. 2012-13 to A.Y. 2014-15, while deciding the deletion of the addition for A.Y. 2017-18. Thus, the addition of ₹33,33,15,000/- was deleted and the learned Assessing Officer is in appeal before us against this issue.

The learned Departmental Representative arguing the appeal of the learned Assessing Officer on the issue of the deletion of addition of ₹33,33,15,000/- u/s 68 of the Act on issue of shares to assessee’s holding company cleartrip Inc. Mauritius, supported the order of the learned Assessing Officer. He referred to paragraph no. 4.1 to paragraph no. 4.6 of Assessment order and vehemently supported the same. He submitted that i. The learned Assessing Officer has asked the assessee to submit the details of the actual investors. ii. Money has been routed through Private equity funds in Cayman Island Company, from Cayman Island Company to the Mauritius Company and there from, assessee has received the huge share capital. iii. As the assessee is constantly making losses no prudent person would invest in such loss making company at premium. v. Therefore, the learned CIT (A) has clearly erred in deleting the addition based on earlier year’s decision.

The learned Authorized Representative submitted that i. Identical issue arose in case of the assessee for A.Y. 2012-13, 2013-14 and 2015-16. She referred to the order of the co-ordinate Bench in assessee’s own case in to 2542 and 6964/Mum/2019 dated 13 April 2023, where the addition is deleted. She referred to Para No. 5 to 14 of the order. She further referred to Para No.20 to show that identical grounds were raised for A.Y. 2012.13, wherein the addition of ₹36.02 crores was deleted by the learned Commissioner of Income tax (Appeals). She referred to paragraph no.21 to 24 of the order wherein the co-ordinate Bench has decided the issue upholding the order of the learned CIT (A) deleting the addition under Section 68 of the Act. ii. Even independently, the assessee has proved identity, creditworthiness of the investor holding company and genuineness of the transaction of the share issue to its holding company. iv. It was stated that to substantiate the identity of investors, the assessee has submitted a certificate of incorporation, certificate of incumbency and tax residency certificate issued by Mauritius revenue authorities of investor. She further referred to various documents to substantiate identity of Cleartrip Inc., Cayman of Island by submitting certificate of incorporation and shareholder register of Mauritius entity evidencing the issue of shares to its Cayman Island holding company. v. To substantiate the identity of ultimate shareholders, she submitted the list of shareholders in Cayman Island Company and their profiles. vi. She referred to the financial statements of Cleatrip Inc., Mauritius and the bank statement of Mauritius entity along with the bank statement of Assessee to show the sources of fund in the bank account of Mauritius Company. This was shown to prove the creditworthiness of the investors. vii. To show the genuineness of the transaction, she referred to the foreign inward remittance certificate issued by the banks being an authorized dealer, form no. FCGPR filed with the Reserve Bank of India and Valuation Report issued by SLM Company LLP Chartered Accountant. She referred to the valuation viii. Further, the addition is made by disregarding all the evidences placed before the learned Assessing Officer. ix. Provisions of section 56 (2) mentioned by LD AO does not apply to a non-resident shareholder and explanation section 68 do not apply to the facts of the case. x. Therefore, she submitted independently for this year, the addition could not have been made under Section 68 of the Act and further identical addition made in earlier assessment years have also been deleted by the co-ordinate Bench in assessee’s case and

Accordingly, filed by the learned Assessing Officer is dismissed.

In the appeal of the assessee in the solitary ground raised is disallowance of advertisement and sales promotion expenses of ₹20,77,70,391/-. Facts show that assessee has incurred Advertisement and publicity expenses. The LD AO held that assessee along with its fellow subsidiaries of cleartrip is doing worldwide business, so the benefits of this expense have gone to subsidiaries. Hence, 20 % if such expenses were disallowed by the LD AO and CIT (A) confirmed it. Both the lower authorities confirmed their action based on the findings in earlier Assessment Years. The matter reached coordinate

The learned Authorized Representative submitted that identical issue first arose in the case of the assessee for A.Y. 2012-13, which have been decided by the co- ordinate bench; vide order dated 13 April 2023. She referred to paragraph no.9 to 10 of the appeal to show that identical disallowance was made. She referred to paragraph no.15 of the order to show that how in that year the learned CIT (A) confirmed the addition. She further referred to paragraph no.16, 17 and 18 to show that the learned CIT (A) identically confirmed the 20% of such expenditure. She further referred to the appeal of the assessee before ITAT for A.Y. 2012-13 vide Para no.29 to 35 of the order, wherein the issue was remitted back to the file of the learned Assessing Officer. It was submitted that the co-ordinate Bench rejected the adhoc disallowance made by the learned Assessing Officer and sustained by the learned Commissioner of Income tax (Appeals). However, the co-ordinate Bench directed the learned Assessing Officer to lift the corporate veil and collect all the information related to advertisement and sales promotion expenses as well as the expenses incurred by the sisters concern and apportion the same in the basis of the turnover.

The learned departmental representative vehemently supported the order of the learned lower authorities and submitted that that though the coordinate bench in assessee’s own case has decided that ad hoc disallowances not proper however restored the matter back to the file of the learned assessing officer for disallowance of appropriate proportion based on the turnover on examination.

We have carefully considered the rival contention and perused the orders of the lower authorities as well as perused the order of the coordinate bench in assessee’s own case for earlier years. It held as under :-

During the year the assessee has debited the advertisement and sales promotion expenses of ₹ 1,038,851,955/–. The learned assessing officer following the assessment order is for assessment year 2012 – 13 and 2013 – 14 to 2015 – 2016 made disallowance of 20% of such expenditure amounting to ₹ 207,770,391/–. When the matter reached before the learned CIT – A he also following his own order in assessee’s own case for earlier years confirm the above disallowance. The coordinate bench has also decided the issue for assessment years 2012 – 13, 2013 – 14, 2014 – 15 and 2015 – 16. Before the coordinate bench, the assessee submitted that the conditions for allowance of expenditure under section 37 of the Income Tax Act are satisfied in the case of the assessee. Assessee has incurred this expenditure for its own benefit and its own business. It was further that stated that the even if there is an incidental indirect third-party benefit, it would not result into characterization of expenditure as not incurred wholly and exclusively for the business of the assessee, no disallowance in the hands of the assessee can be made. The coordinate bench considered the argument of the assessee that ultimately held that assessee is a web- based service provider and all its services are rendered through its own website which is not only meant for the

Accordingly ITA number 2598/M/2022 filed by the assessee is allowed.

ITA number 2599/M/2022 is filed by the assessee and ITA number 2601/M/2022 is filed by the learned assessing officer for assessment year 2018 – 19 against the appellate order passed by THE COMMISSIONER OF INCOME TAX (APPEALS) – 48, Mumbai (the learned CIT – A dated 29/8/2022.

The facts shows that assessee filed its return of income on 28 November 2018 declaring loss of ₹ 504,090,907/–. The return of income was selected for the scrutiny. During the course of assessment proceedings following issues emerged:- i. The learned assessing officer noted that assessee has issued share capital along with the premium of ₹ 387,547,500 received by Assessee from Cleartrip Inc. Mauritius. The learned assessing officer referred to the FT &TR division on 17 March 2021 to ascertain the real nature of the transaction of issue of shares issued by the appellant and to establish the actual source of the sum so invested by the cleartrip incorporation Mauritius. The assessee submitted identical details, which it submitted in the earlier assessment years whenever the shares were issued to the cleartrip incorporation Mauritius. The learned assessing officer based on the assessment orders of its earlier year made an addition of ₹ ii. The assessee has also incurred the advertisement and sales promotion expenditure amounting to ₹ 1,097,769,117/–. Based on the earlier years assessment order the learned assessing officer disallowed 20% of such expenditure amounting to ₹ 219,553,823/–. iii. The assessee has also debited a sum of ₹ 6,065,232/– to the profit and loss account because of employee stock option scheme cost. The AO noted that it has been granted by the ultimate holding company i.e. clearTrip incorporation Cayman Island. The assessee explained that wherever the holding entity grants such benefit to the employees of the subsidiary entity, the cost of such ESOP needs to be recorded as an expense in the profit and loss account of the subsidiary entity. It was further stated that such benefit granted to the employees of the assessee entity in order to compensate them and ensure continuity of the services to the assessee. It is a salary or employees compensation. Accordingly these expenditure are allowable under section 37 (1) of The act. The learned assessing officer held that such expenditure are capital expenditure iv. The reasons for selection of the return of income for the purpose of scrutiny was to examine the large payments made under section 194H to persons who have not filed return of income in comparison to total payments on TAN corresponding to PAN in form number 26Q. On examination, it was found that assessee has made payment to four different entities. The assessee submitted the preliminary details. The learned assessing officer issued notices under section 133 (6) of the act to those four parties to submit their income tax returns. Three parties replied to the notices issued and submitted the income tax return. However, no reply was received from two parties and no confirmation was received from that party. The assessee was informed accordingly. On investigation, it was further found that Tech process payment services Ltd and Avenues India private limited have not filed the return of income for assessment year 2018 – 19. Therefore, the assessee was further questioned about the genuineness of the parties to show as to why the commission paid to the above party should not be treated as unexplained expenditure. Assessee submitted

Accordingly, against the returned income of a loss of ₹ 501,490,907/–, the assessment under section 143 (3) of the act was passed on 21/3/2022 determining the total income of the assessee at ₹ 387,547,500. The assessee was aggrieved by the following additions/disallowances made by the learned assessing officer in the assessment order: – i. disallowance of advertisement and sales promotion expenditure of ₹ 219,553,823 ii. disallowance of employee stock option expenses claimed of ₹ 6,065,232 iii. disallowance of payments made to tech process payment services Ltd and M/s iv. addition on account of unexplained share capital and premium received from holding company under section 68 of the income tax act of ₹ 387,547,500

Assessee aggrieved with assessment order preferred an appeal before the learned CIT – A. He passed an appellate order dated 29/8/2022. The learned that CIT – A i. deleted the addition under section 68 of the income tax act of ₹ 387,547,500 based on the findings given in the appellate order in assessee’s own case by the learned CIT – F for assessment year 2017 – 18 holding that assessee has proved the identity, creditworthiness of the investor and genuineness of the transaction. ii. With respect to the disallowance of advertisement and sales promotion expenses under section 37 of the income tax act of ₹ 219,553,823, he followed his own decision in assessee’s own case for earlier years and confirmed the disallowance being 20% of the advertisement and sales promotion expenditure incurred by the assessee. iii. With respect to the disallowance of employee stock option expenses of ₹ 6,065,232, he confirmed the disallowance for the reason that the assessing officer iv. With respect to the disallowance of payment made to Techprocess payment, services Ltd and Avenue India private limited were confirmed. Though assessee submitted before the learned CIT – A that Tech process private limited ceased to exist as the entity because of the reason of its amalgamation with another company. It was also stated that the return of income was also filed by the amalgamated company, the learned CIT – A held that though the above company might have merged however no confirmation of the said amount was brought on record either before the assessing officer or the CIT – A. Accordingly he confirmed the disallowance of expenditure of ₹ 156,467,346/– on account of payment made to Techprocess payment services Ltd. v. With respect to the payment of ₹ 41,816,851/– two avenues India private limited, the assessee submitted that this company did not exist as it got amalgamated into Infibeam incorporation Ltd, thus the return of income for assessment year 2018 – 19 was filed by the amalgamated company, the learned CIT – A held that assessee did not furnish the

As per ITA number 2601/M/2022 the learned assessing officer is aggrieved with the order of the learned CIT – A wherein the addition of ₹ 387,547,500/– being the amount of share capital issued to its holding company was added by the learned assessing officer under section 68 of the income tax act but deleted by the learned CIT – A.

Both the parties confirmed that identical issue arose in the assessee’s own case for earlier years wherein the coordinate bench has confirmed the order of the learned CIT – A deleting the addition.

The ld DR reiterated the findings of the ld AO and submitted that there is reference made to FT & TR division but it is still awaited.

The learned authorized representative submitted that identical details are available in paper book filed for assessment year 2018 – 19 containing 63 pages wherein complete details with respect to the identity of the investor, identity of the ultimate holding company, identity of ultimate shareholders in ultimate holding company to prove the identity of the investor. To prove the creditworthiness of the investor, the financial statement and bank statement of the investor along with the source of the funds available with the investor are

We have carefully considered the rival contention and perused the orders of the lower authorities. The fact shows that the assessee has issued 1,93,77,375 equity shares having a face value of ₹ 10 per share which holding company Cleartrip . Incorporation Mauritius at a premium of ₹ 10 per share is amounting to ₹ 387,547,500. The assessee submitted that the investor company is a company Incorporated under the laws of Mauritius on 23 September 2005 [tax file number 58711] i. ground number 1 ad hoc disallowance of advertisement and sales promotion expenses being 20% of the total expenditure ii. ground number 2 disallowance of ESOP expenses holding it to be a capital expenditure iii. ground number 3 disallowance of payment made to Tech process payment services Ltd and M/s Avenue India private limited 032. with respect to the ground number 1 where the disallowance of sales promotion and advertisement expenditure of ₹ 219,553,823/– made by the learned assessing officer and confirmed by the learned CIT – A,

The ld AR repeated submission made for AY 2016-17.

The learned departmental representative vehemently supported the orders of the lower authorities and submitted that in case of the assessee in earlier years the coordinate bench set-aside the issue back to the file of the learned assessing officer with certain directions.

We have carefully considered the rival contention and perused the orders of the lower authorities. No adverse facts or finding of the ld AO was drawn to our attention. Lower authorities did not attempt to show that the assessee for its own business not wholly and exclusively incurs expenses. We find that the issue in this appeal is identical to the ground number 1 in appeal of the assessee for assessment year 2016 – 17. While deciding the appeal of the assessee for assessment year 2016 – 17, we have directed the learned assessing officer to delete the disallowance of the expenses. The facts in this case are no different. Therefore, according to our decision in assessee’s appeal for assessment year 2016 – 17, we direct the learned assessing officer to delete the disallowance of advertisement and sales promotion expenses of ₹ 219,553,823. Ground number 1 of the appeal is allowed.

Ground number [3] of the appeal of the assessee is with respect to the disallowance of expenditure paid to two parties [1] Techprocess process payment services Ltd and [2] Avenue India private limited amounting to ₹ 15.64 crores and ₹ 4.18 crores. These expenses are disallowed by the learned assessing officer holding that the assessee has failed to substantiate these expenditure as both these parties did not respond to the notices under section 133 (6) of the act and assessee also failed to file confirmation of the above parties. Further, the learned assessing officer found that both these entities did not file the return of income despite being huge amount paid by the assessee to them. Therefore the disallowance resulted under section 37 (1) of the act. Before the learned CIT – A assessee explained that both these entities of amalgamated with other entities and for

After hearing the parties, we find that due to peculiar circumstances in the case of two parties the addition has been confirmed as those were non-filers and no confirmation was filed. However, it is apparent that assessee has filed the agreement with all those parties. Therefore in the interest of justice we set-aside this issue back to the file of the learned assessing officer with a direction to the assessee to substantiate, within 90 days from the date of receipt of this order, payment of the above expenditure to these 2 entities by submitting their confirmation along with necessary evidence to substantiate the expenditure and also the income shown by the companies subject to the time period [Pre and Post Amalgamation] by submitting their ROI. On furnishing such details, the ld AO may decide issue in accordance with law. Failure to submit information in time by assessee, may also result in identical disallowance. Accordingly, ground number 3 of the appeal is allowed with above direction.