2021 (10) TMI 1420 - AT - Income Tax

TP Adjustment - Foreign Exchange Fluctuation - international transaction or not? - HELD THAT - Since the forex difference arises out of an international transaction, it is pertinent for the assessee to pass on the forex fluctuation to its AE. Hence, we hold that the assessee has correctly treated it under the operating income. Interest on Receivables - TPO reclassified the outstanding receivables beyond the credit period of 30 days as deemed loans to the AE and treated them as separate international transaction - TPO by applying a markup of 400 basis points on LIBOR on the receivables made an addition - HELD THAT - It is settled principle that there is no need to benchmark the interest on receivables wherein the interest has not been charged from either of the parties i.e. payables and receivables. In the instant case, period of 90 days has been allowed and the amounts have been received within the range of 90 to 95 days. In the absence of any fact to prove that the assessee is liable to payment of interest, no adjustment is warranted. There cannot be one straight jacketed formula to allege that the assessee has received interest or the delay was allowed to confer an undue advantage to the other party. There can be a delay in the collection of monies for the supplies made, even beyond the agreed limit, due to various factors which would be investigated on a case to case basis and also the case of Gillette India Limited 2017 (7) TMI 1188 - RAJASTHAN HIGH COURT wherein as affirmed the order of the Tribunal wherein it was held that the transaction of allowing credit period to the AE for realization of its sale proceeds is not an independent international transaction but is closely linked with the sale transactions of the AE. Decided in favour of assessee. Deduction of Education Cess - 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 - HELD THAT - keeping in view the provisions of the Act pertaining to Section 40(a)(ii) and Section 115JB, Circular of the CBDT No. 91/58/66ITJ(19), the orders of Co-ordinate Benches of ITAT and judicial pronouncements of the Hon ble High Court of Bombay 2020 (3) TMI 347 - BOMBAY HIGH COURT and Hon ble High Court of Rajasthan 2018 (10) TMI 589 - RAJASTHAN HIGH COURT , we hereby hold that the assessee is eligible to claim the deduction of the Education Cess as per the provisions of Section 37 of the Income Tax Act.

Summary

Issues Involved:
1. Foreign Exchange Fluctuation
2. Interest on Receivables
3. Deduction of Education Cess

Detailed Analysis:

Foreign Exchange Fluctuation:
During the year under consideration, the assessee recorded a foreign exchange gain of INR 10,17,49,505. The assessee argued that this gain arose from revenue receivables and export of services provided, forming an inherent part of the consideration received for export of services. It was contended that such gains should be included in the operating margin. The Tribunal agreed, noting that forex fluctuations are integral to 'transfer price' and thus should be treated as operating items. Reliance was placed on judgments such as PCIT vs. Ameriprise India (P.) Ltd., Mckinsey Knowledge Centre (P.) Ltd. v. Dy. CIT, and Virginia Transformer India P. Ltd. vs. ITO, concluding that forex gains/losses form part of the international transaction and should be included in the operating income.

Interest on Receivables:
The TPO reclassified outstanding receivables beyond the credit period of 30 days as deemed loans to the AE, imputing an interest addition of Rs.4,71,09,902/-. The assessee argued that these receivables are settled on an ongoing basis and are subsumed within the arm’s length price determination of the principal international transaction. The Tribunal found no need to benchmark the interest on receivables as the amounts were received within 90 to 95 days. Citing Pr. CIT vs. Kusum Health Care Pvt. Ltd. and Gillette India Limited, it was held that allowing credit periods for realization of sale proceeds is not an independent international transaction but is closely linked with the sale transactions of the AE. Thus, the appeal on this ground was allowed.

Deduction of Education Cess:
The assessee raised additional grounds for the deduction of Education Cess. The Tribunal, following the judgment of the Hon’ble Apex Court in National Thermal Power Co. Ltd. Vs CIT, admitted the additional ground. The assessee argued that education cess paid on Income Tax does not fall under the purview of Section 40(a)(ii) as it is levied on the amount of Income Tax, not on profits of business. The Tribunal referred to CBDT Circular No. 91/58/66-ITJ(19) and judgments from various courts, including Chambal Fertilisers and Chemicals Ltd. Vs JCIT, which held that education cess is an allowable expenditure. The Tribunal also noted that the proceeds from the collection of Education Cess are kept separate for a specified purpose, supporting the view that it is not in the nature of tax. Consequently, the Tribunal held that the assessee is eligible to claim the deduction of the 'Education Cess' under Section 37 of the Income Tax Act.

Conclusion:
The appeal of the assessee was allowed on all grounds. The Tribunal concluded that forex gains/losses should be treated as operating items, there is no need to benchmark interest on receivables within the allowed credit period, and education cess is allowable as a deduction under Section 37 of the Income Tax Act.