DCIT, NEW DELHI vs. M/S MAKE MY TRIP (INDIA) PVT. LTD.,, GURGAON

Facts of the case, in brief, are that MakeMy Trip (India) Pvt. Ltd. (MMT India) was incorporated on 13 April 2000 as a Private limited company in New Delhi, India. MMT India is engaged in the business of online selling of travel products and solutions. It offers comprehensive services for the global traveller including air tickets, hotel reservations, car bookings and holidays. MMT India caters exclusively to the inbound ‘into India’ leisure and small-business travel market. MMT India is focused on tapping the potential of the lucrative Rs.100 billion Non Resident Indian market in North America, United Kingdom and Australia. MMT India has offices in New Delhi (IATA certified location), New York and Sydney. In addition to this the Company has appointed franchise partners in London and all major cities in India. The company also has a network of leading tour operators to provide travel related services within all cities and over 30 countries internationally. It filed its return of income on 31st October, 2007 declaring the total income at nil, i.e., loss of Rs.32,72,39,840/-. Since the assessee had entered into certain international transactions with its AEs, the AO referred the matter to the TPO for determination of the ALP of the international transactions entered into by the assessee u/s 92CA(1) of the IT Act. The TPO, during the course of TP assessment proceedings, noted that the assessee has entered into the following international transactions:-

He noted that for benchmarking of the international transactions relating to tours and ticketing services and customer handling, data management services and telemarketing services to its group entity, the assessee has used external TNMM to benchmark the transaction using NCP (Net Profit Margin on cost) as its PLI. The assessee has used nine companies as comparables. The average arithmetic mean for three years of comparable companies were shown at 7.40% which is less than the NCP margin of the assessee at 12.02%. Accordingly, it was claimed to be at arm’s length.

However, the TPO did not accept the arguments advanced by the assessee. He noted that the assesseee has less charged Rs.31,81,07,110/- in the matter of AMP expenses and, therefore, he proposed upward adjustment of the same. Without prejudice to these findings, he further noted that the assessee did not incur the expenses amounting to Rs.27,76,20,794/- claimed as ‘Advertisement and business promotion’ expenses incurred wholly and exclusively for the purpose of its business. Such expenses which are not incurred wholly and exclusively for the purpose of the assessee and which are incurred to further the interest of other persons including the group companies cannot be allowed to be claimed against the taxable income. Further, nature of such expenses is capital nature since these are incurred to give enduring benefit to the multinational group trading in Indian market. Therefore, he held that the claim of such expenses which are neither wholly and exclusively incurred for the purpose of business of the assessee and which are incurred for creating brand name of a multinational group in India cannot be allowed to be claimed against the taxable income of the assesseee. The TPO, invoking the brightline principle to arrive at the correct amount by which the assessee was required to be compensated/reimbursed, made addition of Rs.31,81,07,110/- on account of AMP services. Similarly, the TPO proposed an upward adjustment of Rs.1,47,93,024/- on account of ticketing and tours and travel packages. The AO accordingly made addition of Rs.33,29,00,134/- to the total income of the assesseee on account of transfer pricing adjustment which included Rs.31,81,07,110/- on account of AMP services and Rs.1,47,93,024/- on account of ticketing and tours and travel packages.

The AO, invoking the provisions of section 14A r.w. Rule 8D made a disallowance of Rs.5,71,124/- to the total income of the assessee. Similarly, following the decision of his predecessor, the AO rejected the claim of depreciation on website development cost amounting to Rs.2,55,09,969/-. The AO accordingly determined the total income of the assesseee at Rs.3,17,41,387/-

In appeal, the ld.CIT(A) deleted the addition of Rs.31,81,07,110/- made by the AO on account of adjustment of AMP expenses, but, restricted the adjustment of Rs.1,47,93,024/- on account of short charge to MMT US for ticketing services and tours/travel packages to Rs.50,000/-. So far as the disallowance u/s 14A is concerned, he restricted the same to Rs.73,910/- as against Rs.5,71,124/- made by the AO. So far as disallowance of depreciation on website development charges at Rs.2,55,09,969/- is concerned, he directed the AO with certain directions in the light of the decision of the Tribunal in assessee’s own case for A.Y. 2004-05. However, neither the assessee nor the Revenue is in appeal before us against the above finding of the CIT(A) for which we are not concerned with the same.

Aggrieved with such part relief granted by the CIT(A), the assessee as well as the Revenue are in appeal before us by raising the following grounds:-

The ld. DR strongly supported the order of the TPO. He submitted that the assessee had spent Rs.31,36,22,787/- on AMP out of which Rs.3,60,01,993/- has been reimbursed to it by the subsidiary MakeMy Trip Inc. This was 50.40% of assessee’s operating income of Rs.62.22 crores. The assessee had selected nine comparable companies from the ITES sector for benchmarking the charge received by it from MMT US for its back office activity for rendering ticketing services and tours and travel related services to MMT US. Out of the nine companies selected by the assessee, financials of six companies for F.Y. 2006-07 were available. The remaining three companies had spent 40.0583% of the sales as AMP expenses as against 50.40% in case of the assessee. Therefore, applying the same benchmark, the TPO had determined the excess AMP expenses by the assessee at Rs.313,259,999/-. The ld. DR submitted that the TPO has rightly made the addition of the above amount to the total income. He submitted that because of the development of brands in India, the US company is capitalizing that brand building and developing brand in US. Therefore, to some extent, the AMP expenses has to be considered for the purpose of TP adjustment. However, the TPO has not done any adjustment. Further, the CIT(A) has accepted certain additional evidences and given relief to the assessee. Therefore, he submitted that the matter should be restored back to the file of the TPO for fresh adjudication of the issue. So far as the short charge of Rs.1,47,93,024/- on account of ticketing and tours & travel packages is concerned, he submitted that the TPO has given justifiable reasons while proposing upward adjustment. Therefore, the same should be upheld.

The ld. Counsel, on the other hand, heavily relied on the order of the CIT(A). He submitted that the ld.CIT(A) has given a categorical finding that the brand is owned by the assesseee and not by the US company. Further for the A.Y. 2010-11 the Department has accepted that it is not an international transaction. So far as the additional evidences filed before the CIT(A) are concerned, he submitted that these are only for the AMP expenditure and the documents are vital. Referring to the decision of the Hon’ble Delhi High Court in the case of CIT vs. Virgin Securities and Credits P. Ltd., reported in 332 ITR 396, he submitted that the Hon’ble High Court in the said decision has held that before admitting the additional evidences, the CIT(A) had obtained a remand report from the AO. The additional evidence was crucial to the disposal of the appeal and had a direct bearing on the quantum of the claim made by the assessee. Rule 46A of the Income-tax Rules, 1962 permits the CIT(A) to admit additional evidences if he finds that the same is crucial for disposal of the appeal. He submitted that the ld.CIT(A) in the instant case has obtained a remand report from the AO. Therefore, the Revenue should not have any grievance since the AO was given due opportunity of being heard before admission of the additional evidence which is vital for determination of the case in hand.

He also relied on various other decisions filed in the case law compilation and synopsis.

So far as the argument of the ld. DR that AMP expenses was not incurred by the assessee wholly and exclusively for the business of the assessee and was capital in nature is concerned, the ld. Counsel for the assessee, referring to the decision of the Hon’ble Delhi High Court in the case of CIT vs. Salora International Ltd., 308 ITR 199, submitted that the Hon’ble High Court in the said decision has held that where the assesseee incurred advertisement expenditure for launching products and the Tribunal had given the finding that the assessee had to incur such expenditure to meet the competition in the market for selling the product, then, the entire expenditure is allowable as revenue expenditure and the finding of the Tribunal does not call for any interference and, therefore, no substantial question of law arises.

We have considered the rival arguments made by both the sides, perused the orders of the AO the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions relied upon by both the sides. We 11 find, the TPO, in the instant case, has made transfer pricing adjustment of Rs.33,29,00,134/- which comprises of two additions, i.e., on account of AMP services of Rs.31,81,07,110/- and ticketing and tours & travel package services of Rs.1,47,93,024/-. So far as the addition on account of AMP services of Rs.31,81,07,110/- is concerned, it is the case of the TPO that the assessee has less charged the above amount from its AE. According to the TPO, the assessee had spent Rs.31,36,22,787/- on AMP out of which only Rs.3,60,01,993/- had been reimbursed to it by its subsidiary MakeMy Trip.com Inc. This was 50.40% of the assessee’s operating income of Rs.62.22 crores. Since, according to the TPO, out of the nine comparables selected by the assessee, the financials of six companies for A.Y. 2006-07 were available and the remaining three companies had spent only 0.05% of sales as its AMP as against 50.40% in the case of the assessee, the TPO concluded that the assessee had spent excessively of AMP of Rs.31,32,51,999/- meaning thereby that as against Rs.31,36,22,787/- spent by the assessee on AMP, only Rs.3,62,788/- should have been spent. The TPO, therefore, treated this excess AMP expenses as international transaction and inferred that it was for promotion of MakeMy Trip brand only for which the assessee should have been compensated. It is also the case of the TPO that the beneficiary of this excess AMP was parent company MMT Mauritius since, later on, MMT Mauritius had listed 50 lakh shares at USD 15 each totaling to USD 70 million on Nasdaq, USA on 13th August, 2010. According to the TPO, MMT Mauritius has been benefitted by the listing of the company in the US at a premium. According to the TPO, when the assessee 12 MMT India was in losses, the shares of its parent MMT Mauritius were being quoted at a premium at Nasdaq IN USA. Therefore, the beneficiary of excess AMP expenses by MMT India was MMT Mauritius. Therefore, MMT Mauritius should have compensated MMT India for services rendered in connection with promotion of marketing intangibles which accrued to the benefit of MMT Mauritius. It is also the case of the TPO that even otherwise also such huge expenditure of AMP should have been capitalized since the assessee derives an enduring benefit.

We find, the ld.CIT(A) after obtaining a remand report from the AO had given a finding that the assessee is the owner and sole beneficiary of MakeMy Trip or MMT brand since the trade mark ‘MakeMy Trip’has been registered in the name of MakeMy Trip (India) Pvt. Ltd., w.e.f. 25th April, 2006. Event the TPO himself at various places of his order has accepted that MMT India is the owner of MMT brand. We find the ld. CIT(A) had also given a finding that neither the share premium received from incoming shareholders upon IPO listing nor steady value creation in the hands of founder/existing shareholders be deemed to qualify as any kind of benefit accruing to MMT Mauritius under the provisions of the Act. Further, he has also given a finding that the AMP expenses incurred by the assessee is wholly and exclusively for the purpose of business and not capital in nature. While admitting the additional evidence, he had also given justifiable reasons as to why he has accepted the same under Rule 46A of the IT Rules. The relevant findings of the CIT(A) from para 7 onwards read as under:- “7.0 Finding: 7.1 During the course of appellate proceedings, the appellant furnished a copy of agreement dated 01.04.2006 between appellant and MMT Mauritius. It also furnished a list of 3 new comparables viz. Thomas Cook, Cox & King, Shree Raj Travels & Tours for tire purpose of application of bright line test, Since these documents were not furnished before AO, these were sent to AO requiring him to furnish his remand report u/r 46A. The AO furnished his remand report vide letter dated 03.12.2012, The appellant also furnished a rejoinder to it vide letter dated 28.12.2012. I have considered both remand report and the rejoinder in context, of factual matrix of the case. The AO has argued that adequate opportunities were provided to the appellant during assessment stage and therefore there is no case u/r 46A for admission of these additional evidences. The appellant has argued that intercompany covenant has been furnished to substantiate its claim that the brand is owned by the appellant, a fact which even the AO has not explicitly denied. Further, financials of 3 new comparables have been furnished because the AO has wrongly taken comparables of ITES companies which were taken by the appellant for the purpose of bench marking its receipts from provision of ticketing & tour and package services to MMT Inc. US. It is seen that the appellant has taken this plea before the AO also but it was not considered. The AO did not ask for copy of intercompany agreement during assessment stage to verify the actual ownership of the brand. Therefore, considering the fact that these additional evidences are vital to decide the relevant issue, I hereby admit the additional evidence u/r 46A. 7.2 After considering the TPO/AO’s orders and the arguments of the appellant, 1 am of the considered view that appellant is the owner and sole beneficiary of the MakeMyTrip or MMT brand. The trademark ‘MakeMyTrip’ has been registered in name of MakeMyTrip (India) Pvt. Ltd. w.e.f. 25.04.2006 as evidenced by registration certificate dated 29.10.2008 issued by Government of India, Registrar of Trade marks. Further, Para 2 of the intercompany covenant dated 01.04.2006 establishes beyond all doubt that MMT India is the owner and sole beneficiary of MMT brand. Even the TPO himself has indicated at various places of his order his acceptance that MMT India is the owner of MMT brand. Therefore Blight Line Test or Arm’s Length AMP Expenditure Test suggested in the OECD Guidelines/Australian Tax Office Guidelines/ US case laws, which is relevant only in the context of promotion of brand owned by the foreign AE, is not applicable in the appellant’s case. The said bright line test comes into operation in a situation where a business enterprise is incurring excessive AMP expenditure for promoting a brand owned by its foreign AE. Based on appellant's submissions 14

So far as the ground raised by the Revenue relating to acceptance of additional evidence is concerned, we find that the ld.CIT(A), in the instant case, has called for a remand report from the AO and, thereafter, only has admitted the same and has given his finding on the basis of such additional evidence. The Hon’ble Delhi High Court in the case of Virgin Securities and Credits P. Ltd. (supra) has held that when the additional evidence was crucial to the disposal of the appeal and had a direct bearing on the quantum of the claim made by the assessee, Rule 46A of IT Rules, 1962 permits the CIT(A) to admit the additional evidence if he finds that the same is crucial for the disposal of the appeal. The various other decisions relied on by the ld. Counsel for the assessee also support his case that when the evidences are very important for effective adjudication of the grounds raised by the assessee in the appeal and when the CIT(A) forwards these additional evidences to the AO for his comments in the shape of a remand report, then, the same is required to be admitted. It has also been held in various decisions that if the evidence goes to the very root of the matter and essential for rendering substantial justice, then, the same is required to be admitted. Since, in the instant case, the ld.CIT(A) has forwarded those additional evidences to the AO for his comments in the shape of a remand report and since the additional evidence goes to the root of the matter and are essential for rendering substantial justice, therefore, we do not find any merit in the grounds raised by the Revenue for admission of such additional evidence in violation of Rule 46A of the IT Rules.

So far as the grievance of the Revenue that the AMP expenses incurred by the assessee is capital in nature is concerned, we find the Hon’ble Delhi High Court in the case of Salora International Ltd. (supra) has observed as under:- “3. The first issue that is sought to be raised in this appeal pertains to advertising expenditure of approx. Rs. 3.08 crores. According to the AO, the expenditures was incurred for launching of its products. The AO was of the view that such expenditure was of an enduring nature and, therefore, treated one-third as "capital expenditure" and only allowed the two-thirds of the said amount as "expenditure, to the assessee". The CIT(A) allowed the entire amount after treating the expenditure as "revenue expenditure". The findings of the CIT(A) were confirmed by the Tribunal by virtue of the impugned order. Particularly, the Tribunal held that there was a direct nexus between the advertising expenditure and the business of the assessee and that the assessee had to incur such expenditure to meet the competition in the Indian market for selling its products in India. A finding was returned that unless the assessee made its products known to the market, its business would suffer. Consequently, the Tribunal held the entire expenditure on advertising to be of a revenue nature and allowed the same. The Tribunal also noted the decision of the Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) wherein the Supreme Court held that there could be cases where the expenditure even if it was incurred for obtaining of a benefit of an enduring nature may, nevertheless, be on the revenue account and, in such cases, the test of "enduring benefit" may breakdown.”

We find the Hon’ble Delhi High Court in the case of Jubilant Foodwork Pvt. Ltd. (supra) has held that the expenditure incurred by the assessee on advertisement expenses is revenue in nature since no permanent character or advantage is achieved via the same and such expenses for advertising consumer products generally are a part of the process of profit earning and not in the nature of capital outlay. Similar view has been taken by the Hon’ble Delhi High Court in the case of CIT vs. Monto Motors Ltd. (supra).

In view of the above discussion and in view of the detailed order passed by the CIT(A) on this issue and considering the fact that the Revenue in assessee’s own case for AYs 2010-11 onwards has not considered such AMP expenses as international transaction, therefore, we do not find any infirmity in the order of the CIT(A) in deleting the addition of Rs.31,81,07,110/- on account of adjustment of AMP expenses as computed u/s 92CA(3) of the IT Act.

So far as the order of the CIT(A) in restricting the adjustment of Rs.1,47,93,024/- on account of short charge to MMT US for ticketing charges and tours and travel package services to Rs.50,000/- is concerned, we find the ld.CIT(A) while deciding the issue has observed as under:- “10.0 Finding; I have carefully gone through various submissions of the appellant. I find force in the appellant’s contention that comparison of gross profit mark ups earned by the appellant from “Ticketing” and “Tour Management Services” rendered to MMT US can not be compared with the corresponding mark ups earned from rendering of similar services to other customers because the efforts made by MMT US for acquisition of customers, marketing and business development expenditure etc and the business risks assumed by MMT US would not be factored in such comparison. If at all this comparison has to be made, then corresponding expenses incurred by MMT US ought to be factored in, as was accepted by my predecessor in appeal for AY 2005-06. The appellant has worked out that approximately 16.44 percent of AE’s operating expenses will be allocated to the appellant since the appellant will receive 16.44 percent of the total gross profit of AE if the TPO’s approach is applied. Accordingly, Rs. 1.474 crores (being 16.44 percent of the AE’s operating expenses amounting to Rs. 8.965 crores) is required to be allocated to the appellant. After such factoring in, the addition to be made on this account would remain Rs.50,000 only as per working furnished by the appellant. Therefore, following the reasoning of then CIT(A) given in appellate order for AY 2005-06, out of Rs 1,47,93,024 added by the AO, addition of only Rs 50,000 is upheld and the balance Rs 1,47,43,024 is deleted. The grounds of appeal no. 3 to 7 are therefore partly allowed.”

We do not find any infirmity in the order of the CIT(A) on this issue. We find, while restricting the addition to Rs.50,000/- as against Rs.1,47,43,024//- added by the AO/TPO, he has upheld the order of his predecessor for A.Y. 2005- 06. The assessee had also given the break-up on the basis of the finding given by 19 the CIT(A) in A.Y. 2005-06. Nothing substantial was brought to our notice either by the Ld. AR or by the ld. DR against the finding given by the ld.CIT(A) on this issue. We, therefore, uphold the same and the ground raised by the assessee and the Revenue on this issue are dismissed. Accordingly, ground of appeal Nos.1-7 filed by the Revenue and ground No.1 raised by the assessee are dismissed.

Ground of appeal No.8 and 9 filed by the Revenue and ground of appeal No.2 by the assessee relate to the part relief given by the CIT(A) out of the addition made by the AO u/s 14A of the IT Act.

In the result, the appeals filed by the assessee and the Revenue are partly allowed for statistical purposes. (By the assessee) & ITA No.4974/Del/2013 (by the Revenue) (Assessment Year: 2008-09)

Grounds of appeal

The Ld. CIT (A) erred in holding that the assessee was not under an obligation to deduct tax on the payment gateway charges made to Citi Bank and American Express Bank as order u/s 195/197 is valid only for the Indian branches of the above bank and not for the payments received on behalf of the Head Office. The Credit Card Commission payments are not received by the branches of the above bank located at various places in Indian but by the Head Office of the above bank. Hence, the above order is not valid for the payment gateway charges. 9. That the order of the Ld. CIT (A) is erroneous and is not tenable on facts and in law. 10. That the grounds of appeal

Grounds No.1 to 7 filed by the Revenue are identical to grounds of appeal No.1 to 7 in Revenue’s appeal for A.Y. 2007-08 in . We have already decided the issue and the grounds raised by the Revenue have been dismissed. Following similar reasonings, the above grounds raised by the Revenue are dismissed.

Facts of the case, in brief, are that during the course of assessment proceedings, the AO noted that the assessee has claimed bank charges of Rs.12,52,49,946/- in the P&L Account. From the details furnished by the assessee, the AO noted that the assessee has paid the following charges:-

It was further stated that no tax has been deducted on the above two payments on account of the following:- “1. that the assessee is a e-commence company and is using automated facility to charge a customer through its website using his debit/credit/prepaid card or bank account (Net banking) on-line. 2. that TDS provisions are not applicable to its case. 3. that the services provided by bank do not fall under the definition of ‘Technical Services’ as given in explanation 2 to section 9(l)(vii) of the I.T. Act. 4. that since the services provided by bank do not fall within the purview of technical services as defined in the Income Tax Act, no tax was liable to be deducted on these services.”

Relying on various decisions, it was submitted that neither the provisions of section 194H nor the provisions of section 194J are applicable to the assessee and, therefore, the payment gateway charges are not liable for tax deduction at source either u/s 194H or u/s 194J. However, the AO was not satisfied with the argument advanced by the assessee. Rejecting the various explanations given by the assessee and observing that the payments made to bank in respect of payment gateway services is commission on which tax was liable to be deducted u/s 194H of the IT Act and the AO made an addition of Rs.11,99,39,901/- to the total income of the assessee.

In appeal, the ld.CIT(A) held that the assessee had furnished nil TDS certificate obtained from Citi Bank and American Express Bank u/s 195 of the IT Act. The certificates furnished from Citi Bank and American Express Bank shows that gateway charges were received by the Indian Branches on their own account and payments have been duly declared in their respective return of income only in India. He, therefore, held that the assessee was under obligation to deduct tax while making payment of gateway charges to Citi Bank and American Express Bank. After going through the process involved in payment gateway facility, he held that there is no human intervention involved at the time of clearance of the payments through gateway facility. Following the ratio of the decision in the case of Bharti Cellular Ltd. (supra), he held that no technical services within the meaning of Explanation-2 to section 9(1)(vii) of the Act are provided by the banks when the payment is cleared through gateway facility. He, thereafter, held that the provisions of section 194H would be applicable to payment gateway charges paid to banks. Since the assessee has not made TDS as per provisions of section 194H on these payments, he upheld the action of the AO in disallowing these payments u/s 40(a)(ia) of the Act. He, however, held that payments made to Citi Bank and American Bank are not considered for the purpose of disallowance u/s 40(a)(ia) of the Act. Aggrieved with such order of the CIT(A), both the Revenue and the assessee are in appeal before us.

We have heard the rival arguments made by both the sides and perused the record. It is the submission of the ld. DR that provisions of Explanation (2) to section 195 are applicable to the assessee according to which tax is required to be deducted from any payment made to a non-resident outside India. The assessee has the option to obtain a No-deduction Certificate from the AO which he has not done in the instant case. It is the submission of the ld. Counsel for the assessee that identical issue had come up before the Tribunal in assessee’s own case for A.Y. 2009-10 and the Tribunal, vide order dated 26th September, 2017, has decided the issue pertaining to non-deduction of taxes on payment gateway charges in favour of the assessee with certain directions/observations. Further, the appeal filed by the Revenue was dismissed by the Hon’ble High Court. Under these circumstances and considering the totality of the facts of the case, we deem it proper to restore this issue to the file of the AO with a direction to decide the issue afresh in the light of the decision of the Tribunal in assessee’s own case for A.Y. 2009-10 and decide the issue as per fact and law. Needless to say, the AO shall give due opportunity of being heard to the assessee while deciding the issue. We hold and direct accordingly. The grounds of appeal No.1 to 5 by the assessee and ground of appeal No.8 by the Revenue are accordingly allowed for statistical purposes.