2022 (11) TMI 233 - AT - Income Tax

Disallowance u/s 40(a)(ia) - Addition on account of reimbursement of expenses to AE as per order of TPO - CIT upholding order of Transfer Pricing Officer (TPO)/AO making adjustment to income on account of reimbursement of expenses to AE by determining ALP at Rs. Nil - HELD THAT - Since, in the present case, it is an accepted fact that no TDS has been deducted in respect of payment therefore, the same is disallowable under section 40(a)(ia) of the Act. Further, in respect of balance payment nothing has been brought on record to show that tax was deducted at source. Accordingly, the balance payment is also disallowable under section 40(a)(ia) of the Act. We find that the TPO has also made adjustment in absence of proof of rendition and benefit of the services to the assessee. In view of the above submission, we deem it appropriate to direct the AO to disallow the expenditure in this year by invoking the provisions of section 40(a)(ia) - AO is further directed to examine the claim of the assessee for deduction in subsequent year as per law. In view of the aforesaid, the adjudication of transfer pricing adjustment on account of reimbursement of expenses to AE becomes academic in nature in the year under consideration, since, the same would make no difference to the assessed income of the assessee, as the said expenditure has already been held to the disallowable under section 40(a)(ia) even in view of the submissions of the assessee. The issue of transfer pricing adjustment can be examined in the assessment year in which this expenditure is claimed by the assessee. Ground no. 1 raised in assessee s appeal is allowed for statistical purpose. Ddisallowance of Mark to Market loss - 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 - Revenue has disallowed the loss arising on account of foreign exchange forward contract as a notional loss - HELD THAT - 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 D. Chetan Company 2016 (10) TMI 629 - BOMBAY 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. Disallowance u/s 14A - HELD THAT - We find that the claim of the assessee is supported by the decision of Vireet Investment (P) Ltd. 2017 (6) TMI 1124 - ITAT DELHI wherein it was held that only those investments are to be considered for computing average value of investments, which yield exempt income during the year. Accordingly, we direct the AO to only considered those investments for the purpose of computation of disallowance u/s 14A read with Rule 8D of the Rules, which yield exempt income during the year. As a result, ground No. 3 raised in assessee s appeal is allowed for statistical purpose.

Summary

Issues Involved:
1. Transfer pricing adjustment on account of reimbursement of expenses to Associated Enterprise (AE).
2. Disallowance of Mark to Market (MTM) loss.
3. Disallowance under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Account of Reimbursement of Expenses to AE:
The assessee contested the CIT(A)'s decision upholding the Transfer Pricing Officer (TPO)'s adjustment of Rs. 6,94,24,899/- to income, determining the Arm's Length Price (ALP) at Rs. Nil. The TPO argued that the assessee failed to prove the essentiality and benefit of the services rendered by AE and lacked credible evidence of services provided. Consequently, the TPO proposed an adjustment of Rs. 6,94,24,899/-, which the AO incorporated into the total income. The CIT(A) upheld this decision. During the hearing, the assessee admitted non-deduction of TDS on the reimbursement amount, leading to a disallowance under section 40(a)(ia) of the Act. The Tribunal directed the AO to disallow the expenditure under section 40(a)(ia) and examine the claim for deduction in the subsequent year, making the transfer pricing adjustment issue academic for the current year.

2. Disallowance of Mark to Market (MTM) Loss:
The assessee reported a foreign exchange loss of Rs. 27,61,01,141/-, including an MTM loss of Rs. 4,60,56,154/-. The AO disallowed the MTM loss, treating it as notional and speculative. The CIT(A) upheld this disallowance. However, the Tribunal referenced the Bombay High Court's decision in CIT vs. D. Chetan & Company, which held that forex forward contracts entered into to hedge business risks are not speculative but business transactions. The Tribunal found that the assessee's forex transactions were part of regular business activities and directed the AO to delete the disallowance of the MTM loss.

3. Disallowance under Section 14A:
The assessee claimed exempt dividend income and tax-free bond interest, making a suo-moto disallowance of Rs. 4,23,716/- under section 14A. The AO increased the disallowance to Rs. 21,65,141/-, later restricted to Rs. 17,41,425/- after accounting for the assessee's disallowance. The CIT(A) further reduced it to Rs. 14,02,557/-. The Tribunal, referencing the Special Bench decision in ACIT vs. Vireet Investment (P) Ltd., directed the AO to consider only those investments yielding exempt income during the year for computing the disallowance under section 14A read with Rule 8D.

Conclusion:
The appeal by the assessee was allowed for statistical purposes, with directions to the AO to re-examine the disallowance under section 40(a)(ia) for subsequent years, delete the MTM loss disallowance, and recompute the disallowance under section 14A considering only the investments yielding exempt income during the year.