SOTC TRAVEL SERVICES P.LTD,MUMBAI vs. DCIT RG 3(3)(1), MUMBAI

The present appeal has been listed for hearing before us pursuant to the order dated 05/08/2022, passed by the Co–ordinate Bench of the Tribunal in SOTC Travel Services Private Ltd. v/s DCIT, M.A. no.127/ Mum./2021 (in ITA no.3656/Mum./2016, for the assessment year 2009–10), whereby, the earlier order dated 15.12.2020, passed under section 254(1) of the Act was recalled and appeal was directed to be re–fixed for hearing.

3. In this appeal, the assessee has raised following grounds:– “1 Addition on account of reimbursement of expenses to AE as per order of TPO “(i) The Ld. CIT (A) erred in law and facts in upholding order of Transfer Pricing Officer (TPO)/AO making adjustment of Rs. 6,94,24,899/- to income on account of reimbursement of expenses to AE by determining ALP at Rs. Nil. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. (ii) The CIT (A) erred in law and facts in upholding order of Transfer Pricing Officer (TPOVAO treating reimbursement of expenses as payment for services rendered by AE. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. (iii) The Ld. CIT (A) ought to have held that there is no need to find ALP of reimbursement of expenses as there is no income content and it has not resulted into any direct or tangible benefit to the assessee. (iv) The Ld. CIT (A) erred in law and facts in upholding the order of A.O. in alternatively disallowing reimbursement of expenses u/s 40(a)(ia) of the Act for non-deduction of TDS. The reasons given by him for doing so are wrong, contrary to the facts of the case and against provisions of law.

Disallowance u/s 14 A (i) The Ld. CIT (A) erred in law and facts in upholding the disallowance of Rs. 11,28,076/-(14,02,557-2,74,481) out of expenses u/s 14A of the Act. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. (ii) The Ld. CIT (A) erred in law and facts in upholding the disallowance of Rs. 11,28,076/- out of expenses u/s 14A of the Act, with reference to investment made in subsidiary companies in addition to Rs. 2,74,481/- disallowed by the assessee in the return of income. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law.”

The issue arising in ground no. 1, raised in assessee’s appeal, is pertaining to transfer pricing adjustment on account of reimbursement of expenses to Associated Enterprise (‘AE‟).

The brief facts of the case pertaining to this issue are: The assessee is engaged in the business of Tour Operators, Ticketing and other travel related services. For the year under consideration, the assessee filed its original return of income on 30.09.2009 declaring loss of Rs. 13,03,66,534. The return of income was subsequently revised on 31.03.2011 declaring current year loss of Rs. 12,64,10,325. During the course of assessment proceedings, reference was made to the Transfer Pricing Officer (‘TPO‟) for determination of arm’s length price of international transactions entered into by the assessee. During the course of transfer pricing assessment proceedings, the assessee was asked to provide the details of reimbursement made by the assessee to its AEs. In reply, assessee submitted that the expenses amounting to Rs. 6,94,24,899 were reimbursed to the AE pertaining to the pilot project, wherein the AE was involved in the Page | 3

The learned CIT(A) vide impugned order dated 29.02.2016 dismissed the appeal filed by the assessee on this issue. Being aggrieved, the assessee is in appeal before us.

Having considered the submissions of both the sides and perused the material available on record, we find that during the course of assessment proceedings, the assessee was asked to file the details of TDS deducted while making such reimbursement of expenses. The assessee was also asked to show cause as to why disallowance under section 40(a)(ia) of the Act be not made in case no TDS has been deducted by the assessee while making such payments. In response, assessee submitted that out of total payment of Rs. 6,94,24,899/-, the assessee has already suo-moto Page | 4

During the course of hearing, learned Authorised Representative (‘learned AR’) submitted that in subsequent years assessee has deducted requisite tax at source and therefore, such sum would become allowable in the subsequent year. Accordingly, it was submitted that there is no objection if entire amount of Rs. 6,94,24,899/- is disallowed under section 40(a)(ia) of the Act in the year under consideration. On the other hand, learned Departmental Representative (‘learned DR’) vehemently relied upon the orders passed by the lower authorities.

The brief facts of the case pertaining to this issue are: During the course of assessment proceedings, on perusal of Profit & Loss Accounts and various details filed by the assessee, it was observed that assessee has debited a sum of Rs. 27,61,01,141/- on account of foreign exchange loss. Accordingly, the assessee was asked to submit the details of the same along with amounts claimed by it on account of Mark to Market loss. The AO vide order dated 29.05.2014 disallowed Mark to Market loss of Rs. 4,60,56,154/- by treating the same as notional loss arising from recording the forex transactions on Mark to Market basis. The learned CIT(A) vide impugned order dismissed the appeal filed by the assessee on this issue. Being aggrieved, the assessee is in appeal before us.

During the course of hearing, learned AR submitted that loss arising from forex transaction recorded on Mark to Market basis is an allowable expenditure and the same is not speculative in nature. On the other hand, learned DR vehemently relied upon the orders passed by the lower authorities.

We have considered the rival submissions and perused the material available on record. As per the assessee, it is travel agent and tour operator having business all over the globe and hence its business is impacted by variations in currency rates. Around 50% of the transactions are in foreign currency and therefore the foreign exchange risks are hedged using forward Page | 7

The Revenue has disallowed the loss arising on account of foreign exchange forward contract as a notional loss. We find that in CIT vs. D. Chetan & Company (2017) 390 ITR 36 (Bom.), following question of law came for consideration before the Hon’ble jurisdictional High Court: “Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in deleting the addition of „Mark to Market‟ Loss of Rs. 78,10,000/- made by the Assessing Officer on account of disallowance of loss on foreign exchange forward contract loss and not appreciating the fact that the said loss was a notional loss and hence cannot be allowed.?”

While deciding the same, the Hon’ble jurisdictional High Court observed as under: “7. The impugned order of the Tribunal has, while upholding the finding of the CIT (Appeals), independently come to the conclusion that the transaction entered into by the Respondent assessee is not in the nature of speculative activities. Further the hedging transactions were entered into so as to cover variation in foreign exchange rate which would impact its business of import and export of diamonds. These concurrent finding of facts are not shown to be perverse in any manner In fact, the Assessing Officer also in the Assessment Order does not find that the transaction entered into by the Respondent assessee was speculative in nature. It further holds that at no point of time did Revenue challenge the assertion of the Respondent assessee that the activity of entering into forward contract was in the regular course of its business only to safeguard against the loss on account of foreign exchange variation. Even before the Tribunal, we find that there was no submission recorded on behalf of the Revenue that the Respondent assessee should be called upon to explain the nature of its transactions. Thus, the submission now being made is without any foundation as the stand of the assessee on facts was never disputed. So far as the reliance on Accounting Standard-11 is concerned, it would not by itself determine whether the activity was a part of the Respondent-assessee's regular business transaction or it was a speculative transaction. On present facts, it was never the Revenue's contention that Page | 8

As is evident from the record, in the present case, the Revenue has disallowed the foreign exchange loss on the basis that the same is notional in nature. It is also not been denied that these contracts are entered into by the assessee in the course of its business of travel agent and tour operator. Therefore, respectfully following the aforesaid decision of Hon’ble jurisdictional High Court, we direct the AO to delete the addition made on account of disallowance of Mark to Market loss. As a result, ground no. 2 raised in assessee’s appeal is allowed.

The issue arising in ground no. 3, raised in assessee’s appeal, is pertaining to disallowance under Section 14A of the Act.

During the course of hearing, learned AR urged that only those investments which yielded exempt income during the year should be considered for computation of disallowance under section 14A of the Act. On the other hand, learned DR relied upon the orders passed by the lower authorities.

We have considered the rival submissions and perused the material available on record. We find that the claim of the assessee is supported by the decision of the Special Bench of the Tribunal in the case of ACIT vs. Vireet Investment (P) Ltd. (2017) 165 ITD 27 (Delhi-Trib.), wherein it was held that only those investments are to be considered for computing Page | 10

In the result, appeal by the assesse is allowed for statistical purpose. Order pronounced in the open court on 10.10.2022.