TaxTMI 
TaxTMI 
2021 (2) TMI 1319
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.... 1. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in setting aside the issue regarding disallowance u/s. 14A r.w.r 8D(2)(iii) regarding the disallowance of administrative expenses to the file of the Assessing Officer to examine the issue a fresh. The order passed by the Ld. Commissioner of Income-tax (Appeals) is bad in law. 2. On the facts and in the circumstances of the case and in law, the Appellant prays that disallowance U/S.14A r.w.r 8D(2)(iii) regarding the disallowance of administrative expenses amounting to INR 8,17,52,359 be deleted and the said disallowance be restricted INR 1,46,90,230. Disallowance under Transfer pricing 3. On the facts and in the circumstances of the case and in law prevailing on the subject, the Appellant submits that the international transaction of providing corporate guarantee/counter guarantee to various banks and other corporate bodies for and on behalf of the associate enterprise is at arm's length and no adjustment was required to be made in respect thereof and the stand taken by the Assessing Officer/ Transfer Pricing Officer is incorr....
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....sidering the bank commission recovered By the Appellant from the AE while computation of adjustment in respect of international transaction of providing corporate guarantee / counter guarantee to the associate enterprise to the file of the Ld. Assessing Officer to examine the issue a fresh. The order passed by the Ld. Commissioner of Income-tax (Appeals) in this regard is bad in law. 9. On a without prejudice basis, the Appellant submit that guarantee fee charged by the banks from the Appellant has also been recovered from the Associated Enterprises. The Appellant has recovered these charges from the Associated Enterprise over and above the guarantee fee and same should be reduced from the Guarantee fees computed by the Ld. Assessing Officer." Further, the assessee has raised before us the following effective additional grounds of appeal: "1. Without prejudice to Ground No.1 and Ground No.2, on the facts and circumstances of the case, the Appellant prays that the disallowance under Sec. 14A of the Act should be restricted to the extent of exempt income earned during the year. 2. Whether on the facts and in the circumstances of the case and in law, the ....
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....). 2. Briefly stated, the assessee company which is an established ISO 9000:2001 surface transportation infrastructure company had e-filed its return of income for A.Y 2012-13 on 29.11.2012, declaring a total income of Rs. 418,28,93,299/-. Subsequently, the assessee filed a revised return of income on 28.03.2014, declaring a total income of Rs. 418,28,93,299/-. The return of income filed by the assessee was initially processed as such under Sec. 143(1) of the Act. Thereafter, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 3. Observing that the assessee had during the year under consideration entered into international transactions with its Associate Enterprises (for short "AEs‟), a reference under Sec. 92CA(1) was made by the A.O to the DCIT (Transfer Pricing)-2(3)(2),Mumbai (for short "TPO‟) for benchmarking the said transactions. As per order passed under Sec. 92CA(3), dated 18.01.2016 the TPO made an upward transfer pricing adjustment of Rs. 6,19,73,996/- as regards the international transaction of providing corporate guarantee by the assessee to its Associated Enterprises (for short "AEs), viz. (i). Elsamex S.A., Sp....
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....s earned by it during the year, the A.O drawing support from the CBDT Circular No. 05/2014, dated 11.02.2014 and certain judicial pronouncements rejected the same. Accordingly, the A.O worked out the disallowance u/s 14A r.w Rule 8D at Rs. 8,17,52,539/-, as under: Sr. No. Particulars Amount 1. U/rule 8D(2)(i) Nil 2. U/rule 8D(2)(ii) Nil 3. U/rule 8D(2)(iii) Rs. 8,17,52,359/- Total Rs. 8,17,52,359/- Observing that the assessee had suo motto offered a disallowance u/s 14A of Rs. 1,46,90,230/- in its revised return of income, the A.O restricted the additional disallowance to an amount of Rs. 6,70,62,129/- [Rs. 8,17,52,359/- (- ) Rs. 1,46,90,230/-]. Further, the A.O for computing the "book profit‟ of the assessee u/s 115JB of the Act added the aforesaid disallowance of Rs. 8,17,52,359/- that was worked out u/s 14A r.w Rule 8D. 6. Aggrieved, the assessee assailed the further disallowance that was worked out by the A.O u/s 14A r.w Rule 8D at Rs. 8,17,52,359/- before the CIT(A). It was observed by the CIT(A) that the issue pertaining to disallowance u/s 14A for the year in question was more or less the same as was there befor....
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....home their respective contentions. We shall first deal with the observation of the CIT(A), wherein, he had directed the A.O to consider the assessee's claim for reduction of the disallowance u/s 14A r.w Rule 8D to an amount of Rs. 88,26,166/-, as against that suo motto offered by it in its return of income at Rs. 12,21,33,326/-. As noticed by us hereinabove, the A.O was of the view that in light of the judgment of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT (2006) 204 CTR 182 (SC), in the absence of a revised return of income, the seeking of reduction of the disallowance that was suo motto offered by the assessee in its return of income was not tenable. In fact, the A.O was of the view that in case the assessee wanted to raise the aforesaid claim, then, it was obligated to do so by filing a revised return of income. On the contrary, the CIT(A) relying on the judgement of the Hon'ble High Court of Bombay in the case of CIT Vs. Pruthvi Brokers and Shareholders (2012) 23 taxman.com 23 (Bom), had observed, that as there was no embargo on considering of the aforesaid claim of the assessee in the course of the appellate proceedings, thus, the contention of the as....
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....iven multiple reasons for reduction of the aforesaid disallowance u/s 14A, viz. (i) that as per the terms of NHAI the assessee on being awarded a project was compelled to incorporate a separate "Special Purpose Vehicle" (SPV) for executing the project and being a promoter had to invest as equity holder as per the terms of the concessionaire agreement; (ii) that the investments made by the assessee company to the extent of its net worth were out of its own funds, internal accruals or opening balances of internal accruals; (iii). that the borrowings were not utilised for equity investments of domestic companies; (iv). that the capital gains from the equity investments were taxable etc. In our considered view, the exhaustive contentions that were raised by the assessee to buttress its aforesaid claim for reduction of the disallowance under Sec. 14A were required to be verified and could not have been accepted by the CIT(A) on the very face of it. Insofar support drawn by the ld. A.R on the order passed by the Tribunal in the assessee's own case for the immediately preceding year i.e A.Y 2009-10, ITA No. 2393/Mum/2015 is concerned, the same being distinguishable on facts would not assi....
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.... with it and no disallowance was warranted u/s 14A. In our considered view, the CIT(A) had rightly directed the A.O to consider the aforesaid judicial pronouncements in the course of the "set aside‟ proceedings. As regards the claim of the revenue that the CIT(A) was in error in directing the A.O to consider only those investments made in non-subsidiary company which had yielded dividend income for the purpose of disallowance under Sec. 14A r.w. Rule 8D(2)(iii), as the same was contrary to the CBDT Circular No. 5 of 2014, dated 11.02.2014, we are unable to persuade ourselves to accept the same. Similar reliance placed by the revenue on the aforesaid CBDT Circular No. 5 of 2014, dated 11.02.2014 was rejected by the Hon'ble High Court of Madras in Redington India Ltd. Vs. Addl. CIT (2016) 97 CCH 219 (Mad) and by the Hon'ble High Court of Delhi in PCIT Vs. IL & FS Development Company Ltd. (2017) 399 ITR 483 (Del). At the same time, we in light of the judgment of the Hon'ble Supreme Court in Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC) are unable to subscribe to the observation of the CIT(A), wherein he had inter alia directed the A.O to consider only those investments ....
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..../2018, we herein direct the A.O to consider only those investments which had yielded dividend income for the purpose of computing the "average value of investments‟ for computing the disallowance under Sec. 14A r.w. Rule 8D(2)(iii). The Ground of appeal No. 2 is partly allowed for statistical purposes. 11. We shall now deal with the appeal filed by the revenue wherein it has assailed the observations of the CIT(A) as regards the disallowance made by the A.O u/s 14A r.w Rule 8D. As is discernible from the ground of appeal no. 1, we find that the revenue is aggrieved with the order of the CIT(A) wherein it is stated that the appellate authority had wrongly directed the A.O to follow the decision in the case of HDFC Bank, Mumbai Vs. DCIT-2(3), Mumbai & Ors., dated 25.02.2016 r.w CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom). However, we find that no such direction/observation is discernible from the order of the CIT(A). In fact, as the A.O had not made any disallowance of any interest expenditure u/s 14A r.w Rule 8D(2)(ii) during the year in question thus, there was no occasion on the part of the CIT(A) to have relied upon the aforesaid judgments of the Hon'ble High Court o....
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.... disallowance under Sec. 14A r.w Rule 8D(2)(iii). We, thus, respectfully following the view taken by the Tribunal while disposing off the revenue's appeal for A.Y 2010-11 in ITA No. 3145/Mum/2018, though approve the view taken by the CIT(A) that only those investments which had yielded exempt income during the year are to be considered for computing the "average value of investments‟ while working out the disallowance u/s 14A r.w Rule 8D(2)(iii), but then considering the judgment of the Hon'ble Apex Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC) are not persuaded to further confine the same only to the extent of such investments which were made by the assessee in non-subsidiary companies. The Grounds of appeal No. 2 & 3 raised by the revenue are partly allowed in terms of our aforesaid observations. 13. The Grounds of appeal Nos. 4 & 5 raised by the revenue being general in nature are dismissed as not pressed. 14. We shall now deal with the grievance of the assessee that the A.O/TPO had erred in the failing to appreciate that the international transaction of providing corporate guarantee/counter guarantee by the assessee to various banks and....
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....resaid transaction using external Comparable Uncontrolled Price (for short "CUP") method as the most appropriate method. However, the TPO on the basis of his observation recorded in his order passed u/s 92CA(3), dated 18.01.2016 observed that as per the information gathered the charges for the service of giving a foreign guarantee by State Bank of India (SBI) varied between 1.305% - 2.025% per annum. Another indicator which as per the TPO could be considered as a yard stick for the rate of guarantee fee prescribed in the Safe Harbour Rules was 1.75% for a highly adequate creditor and 2% otherwise. Observing that the rates prescribed by SBI were more conservative and more representative, the A.O adopted the same for benchmarking the transaction of providing of corporate guarantee by the assessee to its AEs. At the same time, it was observed by the TPO that the Hon'ble High Court of Bombay in its order passed in the case of CIT Vs. Everest Kento Cylinders Ltd. (2015) 378 ITR 57 (Bom) had observed that though the bank guarantees were the contracts of guarantee but the same were required to be reasonably adjusted for the reason that the corporate guarantees were not as liquid as the ba....
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....m its AEs, while determining the guarantee fees that was received by the assessee from its AEs. It was submitted by the ld. A.R that the Hon'ble High Court of Bombay in the case of CIT Vs. Everest Kento Cylinders Ltd. (2015) 378 ITR 57 (Bom) had after observing that corporate guarantee provide by a bank for and on behalf of its subsidiary AE cannot be compared with guarantees issued by commercial banks, had approved the corporate guarantee @0.5% that was charged by the assessee from its AE. It was, thus, the claim of the ld. A.R that as the assessee in the present case had charged guarantee fee @1% p.a of the value of the facility thus, said international transaction was at arm's length and no adjustment was called for in the hands of the assessee. 19. Per contra, the ld. D.R relied on the orders of the lower authorities. 20. We have deliberated at length on the issue under consideration in the backdrop of the contentions advanced by the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, and also considered the judicial pronouncements pressed into service by them in order to drive home their respe....
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....rdingly, we herein direct the A.O/TPO to vacate the upward transfer pricing adjustment of Rs. 6,19,73,996/- made as regards the international transaction of providing of corporate guarantee by the assessee to its AEs. The Grounds of appeal nos. 3 to 9 raised by the assessee are allowed in terms of our aforesaid observations. 21. We shall now deal with the additional ground of appeal raised by the assessee wherein it had claimed that the levy of Education Cess and the Secondary and Higher Education Cess on the total income of the assessee is allowable as deduction u/s 37 of the Act. 22. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, and also the judicial pronouncements relied upon by them in context of the aforesaid additional ground of appeal. Insofar the claim of the Ld. A.R that unlike "rates" and "taxes" the amount paid by an assessee towards "Education Cess" or any "other cess" viz. the Secondary and Higher Education Cess is not a disallowable expenditure u/s 40(a)(ii) of the Income-tax Act, 1961, we find that the said issue is squarely covered by the recent order of the ....
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............... (ic) ............................... (ii) any sum paid on account of any 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. [Explanation 1.-For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.] [Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any 9 TXA17&18-13 dt.28.02.2020 sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;] 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, the amounts paid towards "cess" are liab....
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....uate the object of the legislature and not to defeat it. Further, the interpretation cannot go to the extent of reading something that is not stated in the provision [See AGS Tiber Vs CIT 233 ITR 207]. 22. Applying the aforesaid principles, we find that the legislature, in Section 40(a)(ii) has provided that "any rate or tax levied" on "profits and gains of business or profession" shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession". There is no reference to any "cess". Obviously therefore, there is no scope to accept Ms. Linhares's contention that "cess" being in the nature of a "Tax" is equally not deductable in computing the income chargeable under the head "profits and gains of business or profession". Acceptance of such a contention will amount to reading something in the text of the provision which is not to be found in the text of the provision in Section 40(a)(ii) of the IT Act. 23. If the legislature intended to prohibit the deduction of amounts paid by a Assessee towards say, "education cess" or any other "cess", then, the legislature could have easily included reference to "cess" in cl....
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....ess' 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 Income Tax Officers so that further litigation on this account may be avoided.[Board's F. No.91/58/66-ITJ(19), dated 18-5-1967.]" 27. The CBDT Circular, is binding upon the authorities under the IT Act like Assessing Officer and the Appellate Authority. The CBDT Circular is quite consistent with the principles of interpretation of taxing statute. This, according to us, is an additional reason as to why the expression "cess" ought not to be read or included in the expression "any rate or tax levied" as appearing in Section 40(a)(ii) of the IT Act. 28. In the Income Tax Act, 1922, Section 10(4) had banned allowance of any sum paid on account of 'any cess, rate or tax levied on the profits or gains of any business or profession'. In the corresponding Section 40(a)(ii) of the IT Act, 1961 the expression "cess" is quite conspicuous by its absence. In fact, legislative history bears out....
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....id CBDT Circular dated 18th May, 1967 has held 16 TXA17&18-13 dt. 28.02.2020 that the ITAT erred in holding that the "education cess" is a disallowable expenditure under Section 40(a)(ii) of the IT Act. Ms. Linhares was unable to state whether the Revenue has appealed this decision. Mr. Ramani, learned Senior Advocate submitted that his research did not suggest that any appeal was instituted by the Revenue against this decision, which is directly on the point and favours the Assessee. 31. Mr. Ramani, in fact pointed out three decisions of ITAT, in which, the decision of the Rajasthan High Court in Chambal Fertilisers and Chemicals Ltd.(supra) was followed and it was held that the amounts paid by the Assessee towards the 'education cess' were liable for deduction in computing the income chargeable under the head of "profits and gains of business or profession". They are as follows :- (i) DCIT Vs Peerless General Finance and Investment and Co. Ltd. (ITA No.1469 and 1470/Kol/2019 decided on 5th December, 2019 by the ITAT, Calcutta; (ii) DCIT Vs Graphite India Ltd. (ITA No.472 and 474 Co. No.64 and 66/Kol/2018 decided on 22nd November, 2019 )by the ITAT, Calcutta; (iii....
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....gard the levy of education cess, higher education cess and NCCD as "duty of excise" when it came to construing exemption Notification. Based upon this, Mr. Ramani contends that similarly amounts paid by the Appellant - Assessee towards the "cess" can never be regarded as the amounts paid towards the "tax" so as to attract provisions of Section 40(a)(ii) of the IT Act. All that we may observe is that the issue involved in Unicorn Industries (supra ) was not at all the issue involved in the present matters and therefore, the decision in Unicorn Industries ( supra ) can be of no assistance to the Respondent - Revenue in the present matters. 37. Ms. Linhares, learned Standing Counsel for the Revenue however submitted that the Appellant - Assessee, in its original return, had never claimed deduction towards the amounts paid by it as "cess". She submits that neither was any such claim made by filing any revised return before the Assessing Officer. She therefore relied upon the decision of the Supreme Court in Goetze (India) Ltd. Vs Commissioner of Income Tax (2006) 284 ITR 323 (SC) to submit that the Assessing Officer, was not only quite right in denying such a deduction, but fu....