TaxTMI 
TaxTMI 
2021 (7) TMI 831
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....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 the case and in law, the Ld. TPO/Hon'ble DRP have erred in not appreciating the fact that....
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....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 by the Ld. AO is bad in law and is liable to be deleted. 4.3 That on the facts and circumstances of the case and in law, the Ld. AO has erred in making addition amounting to I....
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....ompanies 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 Private Limited, Maveric Systems Limited and Infomile Technologies Limited as comparable to the Appellant without giving any cogent reasons. TP adjustment in relation to IT enabled services [INR NIL] The below grounds are without prejudice to the fact that TP adju....
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....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'ble DRP has erred in not allowing a risk adjustment to the Appellant on account of the fact that the Appellant is a captive service provider for its associated enterprises and is remunerated on a cost plus basis irrespective of the outcome of the services provided and hence undertakes no market risk, service liability risk, credit and collection ....
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....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's own case affirmed that when the assessee is a debt free company, the question of charging any interest on receivables do not arise. The SLP filed by the revenue has been summarily dismissed by the Hon'ble Supreme Court in CC No. 4956/2017. Even on general fundamentals, when the assessee is having their own funds and not paying interest on any loans, then there is no obligation....
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....ll. 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 income chargeable under the head "profits and gains of business or profession ". From the above, it is dearly discernible that the High Courts did not adjudicate on the allowability of education cess u/s. 37(1) and merely proceeded on the assumption that it was allowable if it was not hit by section 40(a)(ii). 3.11.2 However, when one looks at the scheme of the Act and examines the interplay of the provisions of section 40(a)(ii) and secti....
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.... 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 is the profit that is made, and you must ascertain what is the profit that is 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." This view of the House of Lords was noted with approval by the Hon'ble Supreme Court in CIT v Oriental Fire and General Insurance Co. Ltd. [2007] 161 Taxman 181 (SC). 3.11.2.3 The Ashton Gas decision was followed by Hon'ble....
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....ing 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 income is earned and not in the course of or in the process of earning income. It is out of the profits or income earned that surtax is to be paid. In other words, payment of surtax is application of the profits after they are earned. As discussed above, surtax is levied on excess chargeable profits computed in the manner laid down in the Act. It is a levy on the total income computed under the Act after it is adjusted in accordance with the First Schedule to the Act. Computation of income for the purpose of the Act has to precede the assessment o....
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.... 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) Education Cess - For assessment year 2012-13, additional surcharge called the "Education Cess on income-tax" and "Secondary and Higher Education Cess on income-tax" shall continue to be levied at the rate of two per cent, and one per cent, respectively, on the amount of tax computed, inclusive of surcharge, in all cases. No marginal relief shall be available in respect of such Cess." An 'additional surcharge' is, therefore, nothing but 'tax', as held by a three-judge Bench the Hon'ble Supreme Court in CIT vs. K Srinivasan [1972] 83 ITR 346 (SC). The following words ....
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....xtracted 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 Accordingly, when the Select Committee deliberated on the proposal, it was concerned with those state levies, which were either nominal in amount or were sometimes revenue in nature as evident from para 27 of the Select Committee Report dated 10th August, 1961 itself which is reproduced for easy reference: "27. Clause 40. - The Committee are of the view that all cesses should be allowed as business expenses because they are of small amounts and though sometimes computed on the basis of profits they are really of the nature of revenue expenditure. Therefore, the word "cess" occurring in item (a) (ii) has been omitted. The Committee furth....
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.... 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 from the basis prescribed in the Act, it is contended, it cannot fall within the four corners of section 40(a)(ii). It is not possible to agree with this contention either. The said decision was rendered with reference to sub-section (4) of section 10 of the Indian Income-tax Act, 1922 which corresponds to sub-clause (n) of clause (a) of section 40 of the present Act. The question therein was whether the amount payable as (i) road and public works cess levied under the Bengal Cess Act, 1880 and (ii) the education cess levied under the Bengal (Rural) Primary Education Act, 1930 falls within the mischief of section 10(4). This Court held that they do not. A perusal of the decision shows that the ro....
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....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 accordance with the provisions of section 10 of the Act......... These profits arrived at according to the provisions of the two Cess Acts can by no stretch of reasoning be equated to the profits which are determined under section 10 of the Act. It is not possible to see, therefore, how section 10(4) could be applicable at all in the present case". The learned counsel pointed out that this Court has in the said decision approved the decision of the Privy Council in CIT v Gurupada Dutta [1946] 14 ITR 100 and has further observed that the Parliament must be deemed to have accepted the view taken by the Privy Council by not changing the language of the relevant provision in the Act [section 40(a)(ii)]. ....
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....fits 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, rejected." 14. Heard the arguments of both the parties and perused the material available on record. 15. The similar issue has been adjudicated by the Co-ordinate Bench of ITAT in a number of cases wherein the "Education Cess" is held to be an allowable deduction. The relevant part of the order depicting the ratio in the case of Bharat Rasayan Ltd. Vs ACIT in ITA No. 1231/Del/2019 vide order dated 02.02.2021 is reproduced hereunder: "26. Reading the provisions of Section 40(a)(ii), the assessee argued that education cess paid on Income Tax doesn't come under the purview of the definition as it is levied on the amount of Income Tax but not on profits of business. The ld. AR relied on the Circular No. 91/58/66-ITJ(19) by CBDT ....
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.... 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 been examined by the Co-ordinate Bench of ITAT in ITA No. 685/Cal./2014 wherein the amount of the cess paid has been held to be an allowable deduction. 34. Further, we find that the Hon'ble High Court of Judicature for Rajasthan at Jaipur in ITA No. 52/2018 in the case of Chambal Fertilizers and Chemicals Ltd. held that in view of the Circular of CBDT where the word 'cess' is deleted, the claim of the assessee for deduction is acceptable. In that case, the Hon'ble High Court held that there is difference between the cess and tax and cess cannot be equated with the cess. 35. We have also gone through the provisions of Sec. 115 of the Income Tax act 1961 which are as under: "Explanation 2 to section 115JB (2) of the Act defines the term 'Income-tax' in an inclusive manner, which includes cess. Provision o....
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....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 compulsory exaction of money by public authority for public purposes enforceable by law, and is not payment for services rendered". In bringing out the essential features of a tax this definition also assists in distinguishing a tax from a Fee. It is true that between a tax and a fee there is no generic difference. Both are compulsory exactions of money by public authorities; but whereas a tax is imposed for public purposes and is not, and need not, be supported by any consideration of service rendered in return, a fee 1 AIR 1954 SC 282, 2 1961 (2) SCR 537 is levied essentially for services rendered and as such there is an element of quid pro quo between the person who pays the fee and the public authority which imposes it. If specific services are rendered to a specific area or to a specific class of persons or trade or business in any local area, and as a condition precedent for the said services or in return for them cess is levie....
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....y 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 paid but does not fall under capital expense and personal expenditure and hence may be allowed as deduction. 43. We have also gone through the various judgments of judicial authorities pan India wherein the fresh claim of the assessee is considered and the deduction u/s. 37 of Education Cess has been allowed. The Hon'ble High Court of Bombay held that the appellate authorities may confirm, reduce, enhance or annul the assessment or remand the case to the AO, because the basic purpose of a tax appeal was to ascertain the correct tax liability in accordance with the law. To mention a few, * DCIT Vs M/s. Agrawal Coal Corporation Pvt. Ltd. IT A Nos. 801 to 803/Indore/2018. * Atlas Cop co India Ltd. Vs AC IT in IT A No. 736/Pune/2011 * Tata Autocomp Hendrickson Vs DCIT in ITA No. 2486/Pune/2017 * Symantec Software India Pvt. Ltd. Vs DCIT in ITA No. 1824/Pune/2018 * Sicpa India Pvt. Ltd. Vs ACIT in ITA No. 704/Kol/2015 * Philips India Ltd. Vs ACIT in ITA No. 261....