COX & KING (INDIA) LTD,MUMBAI vs. DCIT 1(1)(1), MUMBAI

ORDER

PER N.K. PRADHAN, AM

Cox & Kings Ltd. 2.1 The assessee (Cox & Kings Ltd.) is engaged in travel and tour business and also deals in foreign exchange. The assessee is a part of Cox & Kings Group, which has its offices in UK, USA, Japan etc. The main services offered by the company are destination management or inbound tourism, outbound tourism and business travel. During the impugned assessment year, the assessee had provided corporate guarantee to third party banks for loans obtained by its subsidiaries (AEs). During the course of assessment proceedings, the assessee submitted before the Assessing Officer (AO) that no commission is chargeable on such guarantee provided by it on behalf of its AEs. However, it further submitted that it has charged guarantee commission @ 0.5% on account of loan advanced by the bank to certain AEs and in cases where no commission has been charged by the assessee, a suo motu voluntary adjustment towards guarantee commission has been made by the assessee in its return of income @ 0.5% on the amount of loan advanced by the bank to AEs. During the course of transfer pricing proceedings, the Transfer Pricing Officer (TPO) contended that provision of guarantee is a service rendered by the assessee which has conferred a benefit to the said AEs, accordingly, it should be remunerated at arm’s length. It was the submission of the assessee before the TPO that in order to buy peace and without admitting that no guarantee commission is chargeable, it has made a voluntary adjustment of Rs.9,97,44,142/- in the return of income on the provision of guarantee, being 0.5% of the loan amount advanced by the bank to the AEs. The assessee also submitted before the TPO that the above position has been accepted by the ITAT, Mumbai in Cox & Kings Ltd. AY 2009-10 and AY 2010-11. The assessee also relied upon various other decisions of Tribunals, wherein arm’s length rate of guarantee commission adjustment has upheld in the range of 0.2% to 0.5%. However, the TPO was not convinced with the above submissions of the assessee and proceeded for making a notional adjustment towards guarantee commission by adopting the bank guarantee rates obtained from State Bank of India. The Dispute Resolution Panel (DRP) agreed with the order of the TPO. 2.2 Before us, the Ld. counsel of the assessee submits that the above issue is decided in favour of the assessee by the order of the ITAT in assessee’s own case for AYs 2009-10, 2010-11 and 2012-13. On the other hand, the Ld. DR supports the order passed by the DRP. 2.3 We have heard the rival submissions and perused the relevant materials on record. We find that the Tribunal has accepted in assessee’s own case for AYs 2009-10 and 2010-11 in & 7770/Mum/2014 dated 04.11.2015, wherein it has followed the decision of the Hon’ble Bombay High Court in the case of CIT v. Everest Kanto Cylinder Ltd. (2015) 378 ITR 57 (Bom) and observed as under: “Considering the above stated facts, we direct the AO to restrict the adjustments to 0.5% as upheld by the Hon’ble High Court in the case of Everest Kanto Cylinders (supra).” Facts being identical, we follow the above order of the Co-ordinate Bench in assessee’s own case and direct the AO to restrict the adjustment at 0.5% of the loan amount advanced by the bank to its AEs.

Cox & Kings Ltd. Thus this issue of the assessee’s appeal is allowed for statistical purposes.

3. The ground of appeal No. 11 to 17 relate to disallowance in respect of Annual Information Report (AIR) reconciliation. 3.1 During the course of assessment proceedings, the AO asked the assessee to reconcile the total sales (including tour sales) recorded in the books of account with the sales as per the AIR statement. The assessee submitted party-wise comparison of total sales (including tour sales) during the year as reported in AIR statement vis-à-vis books of accounts. The assessee also requested the AO to call for information from the said parties so that it can reconcile the mismatch between the AIR statement and its books of accounts. For this purpose, the assessee submitted the address of the said parties (out of 18, the details of 6 parties was available with the assessee, for the rest of the parties, the assessee had not made any transaction during the year). Further, the assessee had also written letters to the said parties asking details of the transaction entered by them with the assessee, so that the un-reconciled AIR entries can be reconciled. However, none of the parties replied to the assessee. The AO did not agree with the aforesaid contentions and submission of the assessee and made an addition of the un-reconciled tour sales of Rs.44,96,114/- to the total income of the assessee. 3.2 Before us, the Ld. counsel submits that pursuant to the final assessment order passed by the AO, the assessee suo motu attempted to reconcile the tour sales pertaining to the said 18 parties, where the difference of Rs.44,96,114/- was arising. The assessee shared the party’s Cox & Kings Ltd. 18 parties as appearing in its books of accounts and co-ordinated with them in an attempt to reconcile the difference in tour sales. As a result of this exercise, the assessee has been able to reconcile the tour sales in relation to most of the parties. The Ld. counsel submits supporting evidence of the same on a sample basis and further states that the assessee is still in the process of reconciling the tour sales made to a few of the parties. It is thus submitted that these evidences are merely in connection with reconciliation of tour sales as reflected in the AIR statement vis-a-vis the books of account and these evidences do not bring any new fact on record but merely support the facts already on record before the lower authorities and therefore, these may be admitted.

On the other hand, the Ld. DR supports the order passed by the AO. 3.3 We have heard the rival submissions and perused the relevant materials on record. CBDT vide Instruction No. 05/2013 dated 8th of July, 2013 has stated that:- 2. The Hon'ble Delhi High Court vide its judgement in the case 'Court On its Own Motion vs. U01 and Ors' (W.P. (C) 2659/2012 & W.F. (C) 5443/2012 dated 14.03.2013) has issued seven mandamuses for necessary action by Income-tax Department, one of which is regarding the issue of non-credit of TDS to the taxpayer due to TDS mismatch despite the assesse furnishing before the assessing officer, TDS certificate issued by the deductor.

4. The ground of appeal No. 18 to 20 relate to disallowance of travel booking engine and SAP software expenses considered as Capital Work- in-Progress (‘CWIP’) in the books of account and claimed as revenue in the return of income.

Cox & Kings Ltd. 4.1 During the year under consideration, the total expenses incurred for the development of the travel booking engine and implementation of SAP software are Rs.62,78,22,758/- which includes salary expenses of Rs.3,23,26,441/- paid to staff/employees who were not wholly and exclusively involved in the development and implementation of the above software and their involvement was less than 60% of their total activity. In response to a query raised by the AO to explain why the expenses of Rs.3,23,26,441/- being treated as revenue expenses, the assessee submitted that as the travel booking engine and SAP software were internally generated assets, all the direct and indirect expenses incurred on their development were capitalized under CWIP as the assets had not come into existence. However, the expenses of Rs.3,23,26,441/- (being in the nature of salaries of employees not wholly and exclusively working for the said development) were items of revenue in nature. However, the AO did not agree with the above contentions of the assessee and disallowed the said salary expenses of Rs.3,23,26,441/-. The DRP confirmed the disallowance made by the AO. 4.2 Having heard the rival submissions and perused the relevant materials on record, we find that on an identical issue, the ITAT, Mumbai in assessee’s own case for AY 2012-13 has held that the salary and professional fees incurred for the development of the travel booking engine is to be allowed as a revenue expense as the same has not been incurred to acquire a new asset to be used in a new line of business. The relevant extract of the said order is reproduced below:

Cox & Kings Ltd. "The expenses incurred by Appellant 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 Appellant for providing tours and travel services can be carried out more effectively and efficiently. Thus, incurring of these expenses for travel booking engine, the Appellant 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 Appellant and by incurring the same the Appellant has not created any new line of business or asset which can be given enduring benefit to the Appellant. 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 Rs.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) of the Act.” 4.3 Facts being identical, we follow the above order of the Co-ordinate Bench and allow ground of appeal No. 18 to 20.

5.1 Before us, the Ld. counsel submits that during the year under consideration, the assessee had granted loans and advances to one of its subsidiaries, CNK Australia for meeting its day to day working capital requirements and duly charged interest of Rs.2,17,01,393/- on the same. While making payment of interest on such advances, CNK Australia withheld taxes @ 15% as per the laws applicable in Australia amounting to Rs.32,55,209/- and remitted the balance amount to the assessee. A Cox & Kings Ltd. Australian Tax Authorities evidencing the withholding of taxes by CNK Australia is filed by the Ld. counsel. It is stated that the said interest income earned by the assessee from CNK Australia is taxable in India as per Article 11- Interest of the India-Australia Double Taxation Avoidance Agreement (‘DTAA’). The Ld. counsel submits that the AO did not grant foreign tax credit of Rs.32,55,209/- by holding that no details are available on record to show that the interest income had been offered to tax in India and that such interest income was not reflected as a part of interest income in Note 20 of the audited financial statement. It is stated that the assessee filed a rectification application dated 30.11.2017 disclosing that the interest income of Rs.2,17,01,393/- was netted off against the finance cost reflected under Schedule 23 of the audited financial statements and the said application is pending for disposal with the AO till date. 5.2 We find that the rectification application filed by the assessee on the above matter u/s 154 of the Act on 30.11.2017 regarding non-grant of foreign tax credit is pending before the AO. Along with it, the assessee has filed the details of foreign tax credit along with the certificate issued by the Australian Taxation Office evidencing the deduction of tax by CKL Australia. Also, the assessee has filed before the AO the details of corresponding interest income offered to tax by the assessee. In view of the above, we direct the AO to decide the above issue as per the provisions of the Act and dispose off the rectification application Cox & Kings Ltd. 30.11.2017 without further delay. Thus the ground of appeal

No. 21 to 23 are allowed for statistical purposes.

6. The ground of appeal No. 24 relates to non-grant of TDS. It is stated by the Ld. counsel that in the return of income filed for the impugned assessment year, the assessee had claimed TDS credit of Rs.13,35,60,477/-, whereas as per the updated Form No. 26AS issued by the Income Tax Department, the total TDS credit eligible to the assessee is Rs.13,79,24,037/-. It is stated that in the final assessment order, the AO has given TDS credit to the extent of Rs.13,23,15,727/- only, resulting into short TDS credit to the extent of Rs.56,08,310/-. It is further stated that the assessee has filed a rectification application dated 30.11.2017 before the AO. As evident from the record, the assessee has filed a rectification application dated 30.11.2017 before the AO. We direct the AO to pass an order after verifying the facts and dispose off the said rectification application.

7. The ground of appeal No. 25 relates to non-grant of dividend distribution tax (‘DDT’). It is submitted by the Ld. counsel that during the impugned assessment year, CKL had declared and paid dividend of Rs.13,65,27,890/- to its shareholders and duly deposited the consequent DDT on the same of Rs.2,28,12,582/- (along with interest) to the Government Treasury. However, in the final assessment order the AO has not granted credit of such DDT paid by CKL.