2018 (10) TMI 1265 - AT - Income Tax

Disallowance of traveling expenses - allowable busniss expenditure U/S 37 - disallowance of 50% of travel expenses being personal or capital in nature - Held that - The assessee did discharge its burden by placing entire material on record and no addition is warranted towards disallowance of 50% of the travelling expenses and we hereby order deletion of additions as were made by the AO and confirmed by Ld. CIT(A). - Decided in favour of the assessee. Disallowance of salary expenses - AO observed that the assessee is engaged by its parent holding company in Shanghai which is the only revenue generating activity of the assessee - 20% of the salary expenses stood disallowed on the grounds of being excessive vis-a-vis turnover/income declared in return of income filed with Revenue - Held that - The Revenue has not brought on record comparative analysis of other independent entities to bring on record cogent material to prove that the salaries paid to these employees were excessive. The only grievance of the revenue is that the said salary expenses were on the higher side vis-a-vis business generated by the assessee during the year, which in our opinion is no reason for making disallowance keeping in view factual matrix of the case and the explanation submitted by the assessee. We are of the considered view that no disallowance of 20% of the salary expenses is warranted keeping in view factual matrix of the case, which we order deletion .- Decided in favour of the assessee. Additions made u/s. 92 - assessee has purchased software for ₹ 3.2 crore from its foreign parent company based in Shanghai, China which was sold by the assessee for ₹ 3.2 crore to HCL Technologies Limited , without any mark-up for the assessee - Held that - The contention of the assessee that it has not incurred any expenses nor it did any value addition to software supplied by the foreign parent company cannot be prima-facie accepted on its face value based on material on record and it is for the assessee to support the same with cogent evidences. The complete details to that effect are not placed by the assessee before the authorities below as well before us. Restore the matter back to file of the AO for denovo determination of the issue on merits in accordance with law. Appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues Involved:

1. Disallowance of ?11,97,000/- in travelling expenses.
2. Disallowance of ?24,70,578/- in salary expenses.
3. Addition of ?32 Lakhs as mark-up on sales of software under Section 92 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of ?11,97,000/- in Travelling Expenses:

The assessee claimed travelling expenses amounting to ?29,95,103/-, which included foreign travel and training expenses. The Assessing Officer (AO) disallowed 50% of these expenses, amounting to ?14,97,550/-, on the grounds that some expenses were personal and some were capital in nature. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance but corrected the amount to ?11,97,000/-, noting that the actual expenditure was ?23.95 lakhs. The tribunal observed that the assessee provided complete details of the expenses and that the AO did not point out any specific defects. The tribunal concluded that the disallowance was based on conjectures and surmises without concrete evidence and ordered the deletion of the disallowance. The assessee succeeded on this ground.

2. Disallowance of ?24,70,578/- in Salary Expenses:

The AO disallowed 20% of the salary expenses, amounting to ?24,70,578/-, on the grounds that the salary expenses were disproportionately high compared to the income. The CIT(A) upheld the disallowance, noting that the assessee failed to demonstrate that the entire expenditure was meant for business purposes. The tribunal observed that the assessee provided complete details of the employees and salary expenses, and the genuineness of the salary payments was not doubted by the Revenue. The tribunal held that no disallowance was warranted as the disallowance was made without any comparative analysis or specific defects. The tribunal ordered the deletion of the disallowance, deciding this issue in favor of the assessee.

3. Addition of ?32 Lakhs as Mark-up on Sales of Software under Section 92:

The AO added ?32 Lakhs as a 10% mark-up on the sale of software, which the assessee had purchased from its foreign parent company for ?3.2 crores and sold to HCL Technologies Ltd. at the same price. The assessee contended that no mark-up was added as there was no value addition by the assessee. The CIT(A) upheld the addition, noting that the assessee failed to provide evidence that the software was to be delivered on a cost-to-cost basis as per any agreement or direction from the parent company. The tribunal observed that the assessee did not place complete details and evidence on record to support its claim. The tribunal restored the matter back to the AO for a denovo determination, directing the assessee to provide all necessary evidence and explanations. This ground was allowed for statistical purposes.

Conclusion:

The appeal filed by the assessee was partly allowed. The tribunal ordered the deletion of disallowances related to travelling and salary expenses and remanded the issue of the mark-up on software sales back to the AO for fresh consideration.