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TMI Blog2020 (7) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... application money advanced by the assessee to the AE Saudi Ensas Company, treated by the TPO as loan - HELD THAT:- transfer pricing adjustment as regards charging of notional interest on the share application money that was given by the assessee to its wholly owned subsidiary company viz. Saudi Ensas Company for Engineering Services WLL, UAE, for which allotment of shares was pending on 31.03.2012, remains the same as was there before the Tribunal in the assessee s own case for A.Y 2009-10 and A.Y 2010-11 [ 2019 (10) TMI 995 - ITAT MUMBAI] . Finding ourselves to be in agreement with the aforesaid view of the Tribunal, we respectfully follow the same. Accordingly, we uphold the deletion of the addition that was made by the A.O/TPO towards charging of notional interest on share application money pending allotment of shares with its wholly owned subsidiary company - Decided against revenue. X X X X Extracts X X X X X X X X Extracts X X X X ..... eal before or at the time of hearing of the appeal as they may be advised from time to time." Further, the assessee had also raised before us an additional ground of appeal, which reads as under: "1.1 Whether on the facts and in the circumstances of the case and position on law, the Education Cess and the Secondary and Higher Education Cess is a disallowable expenditure u/s 40(a)(ii) of the Income-tax Act, 1961." It was submitted by the ld. A.R that the aforesaid additional ground of appeal was being raised on the basis of the recent judgment of the Hon‟ble High Court of Bombay in the case of Sesa Goa Limited vs. Joint Commissioner of Income-tax (2020) 107 CCH 375 (Bom). The ld. A.R submitted that the Hon‟ble High Court in its said judgment had observed, that if the legislature intended to prohibit the deduction of amounts paid by an assessee towards "Education Cess" or any other "Cess" and Higher and Secondary Education Cess, then, the legislature could have easily included reference to "cess" in clause (ii) of Sec. 40(a). It was further submitted by the ld. A.R that the High Court had observed, that as the legislature had not included "education cess" or any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3/- Further, it was observed by the A.O that the assessee had received dividend income on its investment at ₹ 36,08,34,228/-, which comprised of viz. (i). exempt dividend income :₹ 12,80,54,497/-; and (ii).dividend from overseas company which was subject to tax : ₹ 23,27,79,731/-. Against the exempt dividend income, the assessee had suo motto disallowed an amount of ₹ 17 lacs u/s 14A of the Act. It was the claim of the assessee that it had not incurred any interest cost on borrowings for making investment in exempt income yielding assets. It was further submitted by the assessee that its investment portfolio was handled by its MIS department which primarily attended to its accounts and banking operations. As such, it was submitted by the assessee that it did not have a separate department for handling its investment portfolio. As regards the staff cost, operating and administrative expenses and establishment/general expenses of MIS department, it was submitted by the assessee that out of the total expenses of ₹ 83.65 lacs incurred during the year viz. (i). Salary expenses: ₹ 55.07 lac; and (ii). Operating & Administrative, Establishment & Genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estments Ltd. Vs. CIT, New Delhi (Civil Appeal No. 104-109 of 2015), dated 12.02.2018 (SC). Also, taking cognizance of the fact that the dividend received by the assessee from its investments made in foreign companies was taxable in India, the CIT(A) directed the A.O to exclude such investments for the purpose of computing the disallowance u/s 14A of the Act. As regards the TP adjustment of ₹ 36,682/-, it was observed by the CIT(A) that the assessee had a small outstanding towards re-imbursement of expenses aggregating to ₹ 4,84,879/- from its wholly owned subsidiary company viz. Saudi Enas Company for Engineering Services W.L.L that was situated in Saudi Arabia. The TPO applying interest rate of 7.81% on the said outstanding amount had made an upward adjustment of ₹ 36,880/-. Observing, that interest was rightly charged u/s 92 of the Act on the amount outstanding from the AE beyond reasonable period, the CIT(A) upheld the charging of interest by the TPO. As regards the rate of interest to be charged on the aforesaid outstanding amount, the CIT(A) taking cognizance of the fact that the amount receivable by the assessee was in foreign exchange i.e US $, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the ld. A.R that the same was squarely covered by the judgment of the Hon‟ble High Court of Bombay in the case of Sesa Goa Limited vs. Joint Commissioner of Income-tax (2020) 107 CCH 375 (Bom). It was averred by the ld. A.R, that as held by the Hon‟ble High Court as the legislature had not included "education cess" or any other "cess" in clause (ii) of Sec. 40(a), therefore, it would mean that there was no prohibition in claiming deduction of such amounts while computing the income of the assessee under the head "Profits and gains of business or profession". 6. Per contra, the ld. D.R relied on the orders of the lower authorities. Insofar the issue pertaining to the disallowance u/s 14A was concerned, the ld. D.R fairly admitted that the same as held by the Tribunal in the preceding years i.e A.Y 2009-10 & A.Y 2010-11 was required to be restored to the file of the A.O, with a direction to examine the sufficiency or correctness of the suo motto disallowance of ₹ 17 lac offered by the assessee. 7. 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 j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , observing as under : "16. The aforesaid question arises in the context of provisions of Section 40(a)(ii) which inter alia provides that notwithstanding anything to the contrary in sections 30 to 38 of the IT Act, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession", - (a) in the case of any assessee - (ia)........................... (ib)................................ (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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce or analogy. It is also not permissible to construe a taxing statute by making assumptions and presumptions [See Goodyear Vs State of Haryana 188 ITR 402(SC)]. 21. There are several decisions which lay down rule that the provision for deduction, exemption or relief should be interpreted liberally, reasonably and in favour of the assessee and it should be so construed as to effectuate 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 cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Parliament stood as under:- "(ii) 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he basis of business profits may be allowed in computing such profits under this Act. 30. The Division Bench of the Rajasthan High Court (Jaipur Bench) in Income Tax Appeal No.52/2018 decided on 31st July, 2018 (Chambal Fertilisers and Chemicals Ltd. Vs CIT Range-2, Kota ), by reference to the aforesaid 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, the amounts paid towards such cess or NCCD did not qualify for exemption under the exemption Notification. This view of the High Court was upheld by the Apex Court in Unicorn Industries (supra ). 36. The aforesaid means that the Supreme Court refused to regard 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) upon which reliance is placed by the ITAT also makes it clear that the issue involved in the said case was limited to the power of the assessing authority and does not impinge on the powers of the ITAT under section 254 of the said Act. This means that in Goetze (supra), the Hon'ble Apex Court was not dealing with the extent of the powers of the appellate authorities but the observations were in relation to the powers of the assessing authority. This is the distinction drawn by the division Bench in Pruthvi Brokers (supra) as well and this is the distinction which the ITAT failed to note in the impugned order. 41. Besides, we note that in the present case, though the claim for deduction was not raised in the original return or by filing revised return, the Appellant - Assessee had indeed addressed a letter claiming such deduction before the assessment could be completed. However, even if we proceed on the basis that there was no obligation on the Assessing Officer to consider the claim for deduction in such letter, the Commissioner ( Appeals ) or the ITAT, before whom such deduction was specifically claimed was duty bound to consider such claim. Accordingly, we ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ad hoc disallowance u/s 14A offered by the assessee in A.Y 2009-10 and A.Y 2010-11, had for the sake of consistency followed its earlier order passed in the assessee‟s own case for A.Y 2008-09, and had restored the matter to the file of the A.O with a direction to examine the sufficiency or correctness of suo moto disallowance made by the assessee having regard to the assessee‟s accounts and explanations and proceed further after recording speaking reasons for his nonsatisfaction. The Tribunal while disposing off the appeals of the assessee for A.Y 2009-10 and A.Y 2010-11 in ITA No. 2822/Mum/2017 and ITA No. 2823.Mum/2017, had observed as under: 3.3.4 So far as the merits of the case are concerned, we find that this issue was restored by Tribunal to the file of learned AO in AY 2008-09 vide para 4.3.4 of ITA No. 1667/Mum/2012 order dated 08/07/2016, wherein learned AO was directed to examine the sufficiency or correctness of suo moto disallowance made by the assessee having regards to assessee's accounts and explanations and proceed further after recording speaking reasons for nonsatisfaction. We note that, in this AY, learned AO has already rejected the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is correct in deleting the said interest in just one paragraph in a non-speaking manner without understanding the basic fact that the TPO treated the share application money pending for quite a long time since 31.03.2011 without allotment of any shares (even as on 31.03.2015) as loan, and in stating that section 928 does not apply as no income arises without understanding the above fact. 1.3 Whether on the facts and circumstances of the case and in law, the C1T(A) is correct in ignoring the Hon,. Del. High Court decision in the case of CIT vs. EKL Appliances Ltd, 345 ITR 241 wherein it has been held that such re-characterisation is possible in exceptional circumstances as under ? "18. Two exceptions have been allowed to the aforesaid principle and they are - (i) where the economic substance of a transaction differs from its form ; and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. 1.4 Whether on the facts and circumstances of the case and in law, the C1T(A) is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... narration of the facts would be instructive. As is discernible from the records, the assessee company had during the year ended 31.03.2011 paid an amount of ₹ 23,01,70,000/- as share application money to its WOS viz. Saudi Ensas Company for Engineering Services WLL, UAE. It was the claim of the assessee, that the share capital was infused to revive the company foreseeing the business opportunities available in Saudi Arabia. Observing, that the issue of share application money to the AES pending allotment of shares beyond the reasonable period of time as described under the FEMA Act had to be looked into from the Transfer Pricing angle, the TPO holding a conviction that as the money was given to the AE in the preceding year but no shares were allotted, thus computed the interest @7.61% on the said amount for the whole year and quantified the same at ₹ 1,81,20,323/-. On appeal, the CIT(A) relying on the judgment of the Hon‟ble High Court of Bombay in the case of Vodafone India Services Pvt. Ltd. Vs. Addl. CIT (2014) 368 ITR 1 (Bom) observed, that as a transaction of investment in share capital of subsidiaries outside India was not in the nature of a transaction refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, recharacterization of this transaction as advance / loan by revenue authorities, in our considered opinion, was not correct approach and this transaction could not be equated with loan transactions. The Ld. DR has contended that the transactions have not been recharacterized as loan but the same has been benchmarked since certain benefits have accrued to AE by infusion of fund which must be shared with the assessee. However, we find that ALP of the transaction has been computed in similar manner as it would be computed for a loan transaction. Further as already noted, assessee's AE ultimately became wholly owned subsidiary of the assessee and therefore, whatever benefit would accrue to AE, the same would indirectly accrue to the assessee. Therefore, not convinced with the approach of lower authorities, we hold that no addition would be warranted on this account. To arrive at aforesaid conclusion, we draw strength from the observation of Hon'ble Bombay High Court in Pr. CIT V/s Aegis Limited (ITA No. 1248 of 2016 dated 28/01/2019) wherein Hon'ble court has observed that in the absence of finding that the transaction was sham, the TPO could not have treated such transaction as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion money, the applicant is not allotted the shares. That aspect of the matter is determined by the relevant statute. This situation is not in pari materia with an interest free loan on commercial basis between the share applicant and the company to which capital contribution is being made. On these facts, it was unreasonable and inappropriate to treat the transaction as partly in the nature of interest free loan to the AE. Since the TPO has not brought on record anything to show that an unrelated share applicant was to be paid any interest for the period between making the share application payment and allotment of shares, the very foundation of impugned ALP adjustment is devoid of legally sustainable merits. 48. Let us also deal with two judicial precedents which have been heavily relied upon by the TPO, as also by the learned Departmental Representative, on which their case rests. None of these decisions, however, deal with the core issue before us i.e. whether a capital contribution can be deemed to be partly an interest free loan, for the period till the shares were actually allotted, and partly as capital contribution, after the subscribed shares were issued by the subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is interrelationship, on account of management, capital and control, which is sought to be neutralized by arm's length price adjustments. This was also not a case in which a capital contribution was deemed to be partly an interest free loan (i.e. for the period till the shares were actually allotted) and partly as capital contribution (i.e. when the subscribed shares were allotted by the subsidiary). Revenue, therefore, does not derive any advantage from these judicial precedents either. 49. In any event, it is not open to the revenue authorities to recharacterize the transaction unless it is found to be a sham or bogus transaction. While there are no specific powers vested in the TPO to recharacterize the transaction, even under the judge made law, such rechracterization can be done by the revenue authorities when the transactions are found to be substantially at variance with the stated form. In the present case, there cannot even a suggestion to hold that this is a bogus transaction because admittedly the subscribed shares capital has indeed been allotted to the assessee. The transaction is thus accepted to be genuine in effect. 50. In view of these discussions, as also ..... X X X X Extracts X X X X X X X X Extracts X X X X
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