TaxTMI 
TaxTMI 
2021 (7) TMI 831
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....terest on overdue receivables [INR 5.92.86.7971] 2. That on the fact of the case and in law, the Ld. AO/TPO/Hon'ble DRP have erred, in making an adjustment of INR 5,92,86,797 to the total income of the Appellant in respect of notional interest on overdue receivables. 2.1 That on the facts of the case and in law, the Ld. AO/TPO/Hon'ble DRP have erred in making the said adjustment despite Appellant being a debt free company and no TP adjustment can be made for overdue receivables as upheld in Appellant's ITAT case for AY 2014-15 (ITA No. 7290/Del/2018) and AY 2015-16 (ITA No. 9131/Del/2019). 2.2 That on the facts of the case and in law, the Ld. TPO/Hon'ble DRP have erred in re-characterizing the inter-company receivables as a separate international transaction of an unsecured loan and imputing interest on such transaction. 2.3 That on the facts of the case and in law, the Ld. TPO/Hon'ble DRP have erred in not appreciating that inter-company receivables arising out of provision of services by the Appellant to its AE is closely linked to such transaction and no separate TP adjustment is warranted. 2.4 That on the facts of....
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....mparable to the Company. 3.1.2 That on the facts of the case and in law, the Ld. TPO, erred in rejecting the additional companies identified by the Appellant namely Cameo Corporate Services Limited and Murugappa Management Services Limited as comparable to the Appellant without giving any cogent reasons. Corporate tax grounds: Addition on account of difference in the income offered to tax by the Appellant in the return of income vis-a-vis Form 26AS statement [INR 1,47,84,0841] 4.1 That on the facts and circumstances of the case and in law, the Ld. AO has passed a non-speaking order and proceeded, to make addition of INR 1,47,84,084 without giving any detailed reasons for making addition of INR 1,47,84,084 as unexplained income taxable under section 68 of the Act read with section 115BBE(1) of the Act to the income of the Appellant. 4.2 That on the facts and circumstances of the case and in law, the Ld. AO has erred in invoking the provisions of section 68 read with section 115BBE of the Act without appreciating the fact that there is no unexplained credit in the books of account of the Appellant for the subject AY and thus, addition made....
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.... reject matrix for selection or rejection of companies evaluated by him. 7.1 That on the facts of the case and in law, the Ld. TPO/Hon'ble DRP have erred, in law and on facts and circumstances of the case, by wrongfully rejecting comparable companies and including certain non-comparable companies to the final set of comparable companies for the purpose of determining the ALP of the subject international transaction on an ad-hoc basis, thereby resorting to cherry picking of comparable companies. 7.1.1 That on the facts of the case and in law, the Ld. TPO/Hon'ble DRP, erred in selecting Cigniti Technologies Limited, Tata Elxsi Limited, RS Software (India) Limited, Acewin Agriteck Limited, Megri Soft Limited, Cybage Software Private Limited and Cybercom Datamatics Information Solutions Limited as comparable companies by erroneously contending that these companies render software services. 7.1.2 That on the facts of the case and in law, the Ld. TPO, in particular, erred in rejecting the additional companies identified by the Appellant namely Sagar Soft (India) Limited, Kals Information Systems Limited, Sankhya Infotech Limited, Isummation Technologies....
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....identified by the Appellant namely Sundaram Business Services Limited, Crystal Hues Limited, Suprawin Technologies Limited, Jindal Intellicom Private Limited, ISN Global Solutions Private Limited and ACE Software Exports Ltd. as comparable to the Appellant without giving any cogent reasons. Other Grounds 9. That on the facts of the case and in law, the Ld. TPO/Hon'ble DRP have erred, in law and on facts and circumstances of the case, by selecting companies which are earning supernormal profits as compared to the Appellant. 10. That on the facts of the case and in law, the Ld. TPO/Hon'ble DRP have erred, in law and on facts and circumstances of the case, by treating foreign exchange gain/loss as non-operating item while determining the ALP of the international transactions. 11. That on the facts of the case and in law, the Hon'ble DRP has erred, in law and on facts and circumstances of the case, by considering provision for doubtful debts and provision written back as non-operating items while computing the operating margins of the Appellant and comparable companies. 12. That on the fact of the case and in law, the Ld. TPO/Hon....
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....me as provided in the service agreement with the AE's. The TPO held that the delayed payments are being treated as unsecured loans advanced to the AE and charged interest @ 12.51% (6 months LIBOR plus 400 basic point for computing notional interest) for the delayed period. The ld. DRP held that the TPO action cannot be faulted with relying on the judgment of Hon'ble Delhi High Court in the case of CIT Vs Cotton Naturals India Pvt. Ltd. 55 Taxman 401 and the order of the ITAT in BECHTEL India Pvt. Ltd. Vs ACOT 84 Taxman 121 for the assessment year 2012-13. 9. Before us, the ld. AR argued that re-characterizing the overdue receivables as unsecured loans extended by the assessee to it's AE is an erroneous belief which cannot be held to be correct. He relied on the orders of the Tribunal in assessee's own case for the assessment years 2014-15 and 2015-16. 10. In all these years, the assessee is found to be a debt free company and there is no dispute on these facts. We have considered the judgment of Pr. CIT Vs BECHTEL India Pvt. Ltd. for the assessment year 2010-11 vide order dated 21.07.2016. The Hon'ble High Court after examining the order in the assessee....
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....the Hon'ble High Courts have examined the question whether 'cess' is included in section 40(ii) of the Income Tax Act 1961 and having answered this question in negative, both the Hon'ble Courts have assumed that since it is not included in section 40(a)(ii), it becomes allowable u/s. 37(1) of the Act. They did not examine the allowability of education cess in terms of the requirements of section 37(1) at all. For instance, the Hon'ble Rajasthan High Court in Chambal Fertilizers was examining the following question of law: "3. Whether under the facts and circumstances of the case the Ld. ITAT has not erred in holding that the education cess is a disallowable expenditure u/s. 40(a)(ii) of the Act?" Likewise, the Hon'ble Bombay High Court in Sesa Goa framed this question in the following terms: "17. Therefore, the question which arises for determination is whether the expression "any rate or tax levied" as it appears in Section 40(a)(ii) of the IT Act includes "cess". The Appellant -Assessee contends that the expression does not include "cess" and therefore, tire amounts paid towards "cess" are liable to be deducted in computing the i....
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....sively for the purposes of business or profession'. The answer to this question is clearly in negative because 'education cess' is not expenditure at all. Rather, it is a charge upon the profits, similar to income tax. Any expenditure to earn a profit cannot be a part of the profit itself. It is an application of an income and not an expenditure 'laid out or expended wholly and exclusively for the purposes of business or profession' so as to pass the tests envisaged u/s. 37(1). This principle was enunciated by the House of Lords in Ashton Gas Company v Attorney General and Others (1906) AC 10 (HL). The following observation of Earl of Halsbury is illuminating in this regard: "Profit is a plain English word; that is what is charged with income-tax. But if you confound what is the necessary expenditure to earn that profit with the income-tax, which is a part of the profit itself, one can understand how you get into the confusion which has induced the learned counsel at such very considerable length to point out that this is not a charge upon the profits at all. The answer is that it is. The income-tax is a charge upon the profits; the thing which is taxed....
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..... The income-tax is a charge upon the profits; the thing which is taxed is the profit made before you deduct the tax- you have no right to deduct the income-tax before you ascertain what the profit is. I cannot understand how you can make the income-tax part of the expenditure. I share Buckley, J.'s difficulty in understanding how so plain a matter has been discussed in all the Courts at such extravagant length.' As pointed out above, in the instant case, what is being charged is the total income of the assessee after making adjustments as provided in the Act. It is the profit which the assessee has made which is being taxed. 10. Applying the ratio of the decision of the Supreme Court, surtax cannot be said to be an expenditure incurred wholly and exclusively for the purpose of the business of the assessee. Payment of surtax had nothing to do with the conduct of the business of the assessee. It was not an expenditure incurred for the purpose of business or for the purpose of earning profit. It is only after the profit or income is earned that, as pointed out above, the question of payment of surtax would arise. It is an event which takes place after the in....
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....st of deductibility at the first stage itself-i.e. under the terms of section 37(1) and, therefore, there is no further need to examine the embargo u/s. 40(a)(ii). This aspect of law was not noticed in Sesa Goa and Chambal Fertilizers and the Hon'ble High Courts simply assumed the allowability of 'education cess' as an expenditure 'laid out or expended wholly and exclusively for the purposes of business or profession' u/s. 37(1) and just proceeded to examine the prohibition contained in section 40(a)(ii). 3.11.3 That brings us to section 40(a)(ii) and even if one were to assume the deductibility of 'education cess' u/s. 37(1) of the Act, the question arises whether the bar contained in section 40(a)(ii) operates qua 'education cess'. To put it simply, the real question would be to see whether 'education cess' is tax so as to fall within the mischief of section 40(a)(ii). 3.11.3.1 It may be noticed at the outset that education cess was introduced as an additional surcharge as explained in the Explanatory Memorandum to Finance Bill 2012. The relevant excerpt from the said Memorandum reads as follows: "(2) Educatio....
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....te legislation. The evidence of the same is available through a plethora of cases before various judicial fora at relevant time (as available on various databases). These items of 'cess' were of nominal amount and were sometimes revenue in nature. It was these kinds of 'cess' which was under consideration before the Select Committee on Income Tax Bill 1961, as evident from the minutes of the Select Committee meeting dated 20th June, 1961 (when Shri B.P. Khaitan, speaking for Indian Chamber of Commerce, Calcutta, took up the issue of proposal from Income Tax Bill 1961 on clause 40(a)(ii), which is extracted herein below: "Shri B.P. Khaitan: Coming to clause 40, item 2 in sub-clause (a) provides that any sum paid on account of any cess, rate or tax, levied as a proportion of the profits, will not be allowed to be deducted in computing business income. I submit that it should be clarified. Take, for instance, the cess on coal. That should be deducted in computing business income. Shri Morarji Desai: We will consider this." [See Select Committee on the Income-Tax Bill, 1961: Evidence, p 84 (LS Secretariat, New Delhi, 1961)] 3.11.3.2.2....
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....its or gains of any business or profession' has reference only to profits as per section 28 of the Act, and any rate or tax levied upon profits not 'assessed on the basis of profits' should be an allowable expense. Since education cess was not levied upon determined as per section 28 of the Act, is claimed to be an allowable expense. 3.11.3.3.1 The Panel, however, does not find the argument acceptable. It may be noted that Jaipuria Samla was a decision, which followed CIT v Gurupada Dutta (1946] 14 ITR 100 in the context of 'cess' levied under the Bengal Cess Act, 1880 and is no longer good law under the Income tax Act 1961 as held by the Supreme Court in Smith Kline & French (India) Ltd. V CIT [1996] 85 Taxman 683 (SC), where BP Jeevan Reddy, J explicated the law in the following terms: "6. The learned counsel for the appellants placed strong reliance upon the decision of this Court in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT [1971] 82 ITR 580 to contend that a tax has to be computed in accordance with the provisions of the Act to fall within the mischief of section 40(a)(ii). In as much as the surtax is computed on a basis different ....
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....t taxes 'levied on the profits or gains of any business or profession or assessed at a proportion of or otherwise on the basis of any such profits or gains' within the meaning of section 40(a)(ii) as explained hereinabove. The learned counsel, however, relied upon the following observations in the said decision: "the words 'profits and gains of any business, profession or vocation' which are employed in section 10(4) can, in the context, have reference only to profits or gains as determined under section 10 and cannot cover the net profits or gains arrived at or determined in a manner other than that provided by section 10. The whole purpose of enacting sub-section (4) of section 10 appears to be to exclude from the permissible deductions under clauses (ix) and (xv) of subsection (2) such cess, rate or tax which is levied on the profits or gains of any business, profession or vocation or is assessed at a proportion or on the basis of such profits or gains. In other words, sub-section (4) was meant to exclude a tax or a cess or rate the assessment of which would follow the determination or assessment of profits or gains of any business, profession or vocation in acco....
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....76-77 of 1995. Similarly, Civil Appeal No. 3246 of 1995 is preferred against the decision of the Gauhati High Court following the decision in Doom Dooma Tea Co. Ltd.'s case (supra). On enquiry, the office has informed that no Special Leave Petition/Civil Appeal has been filed against the decision in Doom Dooma Tea Co. Ltd.'s case (supra). For the aforesaid reasons, we cannot agree with the view taken by the Gauhati High Court in the aforesaid decisions." 3.11.3.3.2 Thus, respectfully following the judgment of the Supreme Court in Smith Kline cited supra, the Panel holds that there is no requirement in section 40(a)(ii) to the effect that for disallowing any rate or tax levied on profits, the said profits and gains should be determined in accordance with the provisions of the Act. 3.11.3.3.3 The Panel accordingly holds that 'education cess' fails the fundamental tests of deductibility u/s. 37 and is also hit by the mischief of section 40(a)(ii) of the Income Tax Act, 1961 in view of law laid down in K Srinivasan and Smith Kline cited supra. 3.11.3.4 The assessee's additional ground on this count, therefore, fails and is, accordingly, re....
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....ii) of the I.T Act - clarification regarding. Section 40(a)(ii) - Recently a case has come to the notice of the Board where the ITO has disallowed the 'cess' paid by the assessee on the ground that there has been no material change in the provisions of Section 10(4) of the old Act and Section 40(a)(ii) of the new Act. 2. The view of the ITO is not correct. Clause 40(a)(ii) of the IT Bill, 1961 as introduced in the Parliament stood as under: "(a) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains." When the matter came up before the Select Committee, it was decided to omit the word 'cess' from the clause. The effect of the omission of the word 'cess' is that only taxes paid are to be disallowed in the assessments for the years 1962-63 and onwards. 3. The Board desire that the changed position may please be brought to the notice of all the ITOs so that further litigation on this account may be avoided." 33. The similar issue of allowability of cess u/s. 37 has be....
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....he case so far as Education Cess is concerned. Therefore, the education cess on this reasoning cannot be equated as tax or surcharge. Based on this, it can be said that since the word 'Cess' is not specifically included in the definition, it cannot be considered a part of tax, and accordingly, it should not be disallowed in u/s. 40(a)(ii) of the Act. 38. Further, we are guided by the judgment of the Constitutional bench which was also referred in the case of Dewan Chand Builders & Contractors Vs Union of India & Others in Civil Appeal No. 1830 of 2008 dated 18.11.2011. 39. The Constitution Bench of this Court in Hingir Rampur Coal Co. Ltd. Vs. State of Orissa was faced with the challenge to the constitutional validity of the Orissa Mining Areas Development Fund Act, 1952, levying Cess on the petitioner's colliery. The Bench explained different features of a 'tax', a 'fee' and 'cess' in the following passage: "The neat and terse definition of Tax which has been given by Latham, C.J., in Matthews v. Chicory Marketing Board (1938) 60 C.L.R. 263 is often cited as a classic on this subject. "A Tax", said Latham, C.J., "is a ....
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.... Explanation 1.-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession." 42. From the above, we find that Education Cess is not of the nature described in sections 30 to 36, Education Cess is not in the nature of capital expenditure, Education Cess is not personal expense of the Assessee, it is mandatory for it to pay Education Cess and for the purpose of computation of Education Cess, the Income 'Tax' is taken as the criteria for computational purpose. Thus, the expense of Education Cess is mandatory expenses to be....