While granting major relief to MakeMyTrip India, the New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that depreciation on website development cost at 60% is permissible as it falls within the ambit of software depreciation, as held by the Special Bench and affirmed by the Delhi High Court in DCIT vs. Amway India Enterprises [2012] 346 ITR 341 (Del). Further, the Court held that payment gateway charges paid to banks constitute fees for banking services and not commission or brokerage under Section 194H of the Income Tax Act, and are further exempted from TDS by the Central Government notification dated 31 December 2012.
The Court also held that AMP expenditure incurred for advertising and promoting consumer products is revenue in nature and not capital outlay, as no enduring benefit of a permanent character is derived. Further, the reimbursement of air ticket costs to a group company abroad, where the amount does not appear as business expenditure in the P&L account and no deduction is claimed, cannot be disallowed under Section 40(a)(ia) for non-deduction of TDS under Section 195(1) of the Income Tax Act.
As far as gateway charges to various banks on which no TDS was deducted, the Division Bench comprising Kavitha Rajagopal (Judicial Member) and Renu Jauhri (Accountant Member) observed that the amount retained by the bank is a fee charged for rendering banking services and cannot be treated as commission or brokerage paid in the course of use of any services by a person acting on behalf of another for buying or selling of goods. The bank merely provides banking services in the form of payment and subsequently collects the payment; it is not concerned with the buying or selling of goods.
The High Court further noted that the Central Government, by notification dated 31 December 2012, had notified that no TDS shall be made on credit card or debit card commission for transactions between the merchant establishment and the acquirer bank, which squarely applied to the charges paid to banks for providing the payment gateway facility.
As far as disallowance on reimbursement of air ticket costs to MMT-USA under Section 40(a)(ia) is concerned, the High Court upheld the CIT(A)’s finding that net proceeds due to foreign airlines does not appear as business expenditure in the assessee’s P&L account, no deduction was claimed, and therefore the question of adding back under Section 40(a)(i) does not arise. Article 8 of the India-US DTAA was held inapplicable since MMT-USA is not in the business of running an airline.
Briefly, the assessee, MakeMyTrip India Pvt Ltd., is a private limited company engaged in the business of a travel agent and tour operator. It is a wholly owned subsidiary of International Web Travel Pvt Ltd., Mauritius, which in turn is owned by SB Asia Infrastructure Fund II, Ltd., a partnership based in the Cayman Islands. For Assessment Year 2010-11, the assessee filed its return declaring NIL income. After making several disallowances and additions, the assessment was completed under Section 143(3) at a total income of Rs. 147.39 crores.
Since the Commissioner of Income Tax (Appeals) partly allowed the appeal, the Revenue Department approached the ITAT raising eight grounds covering four substantive issues: (i) depreciation on website development cost, (ii) TDS on payment gateway charges, (iii) disallowance of advertisement, marketing and publicity (AMP) expenditure, and (iv) TDS on payments made to MMT-USA.
