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TMI Blog2021 (7) TMI 831X X X X Extracts X X X X X X X X Extracts X X X X ..... 96 - DELHI 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 [ 2017 (7) TMI 1058 - SC ORDER ] Even on general fundamentals, when the assessee is having their own funds and not paying interest on any loans, then there is no obligation on the assessee to charge interest from the interest free loan given nor any provision of the Act mandate the Assessing Officer to add notional interest received to the total income - the assessee being a debt free company, the action of the revenue making adjustment on account of notional interest on the receivables cannot be held to be legally valid. Reconciliation of income credited to P L account and in the amount reflected in AS-26 - HELD THAT:- DRP held that the reconciliation is primary correct and directed the AO to verify and give effect which the AO failed to carry out. The AO is hereby directed to follow the directions given by the ld. DRP without fail while passing the order giving effect to the ITAT order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision 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 the Appellant has provided services to non-AEs wherein no interest is charged on overdue receivable by the Appellant. 2.5 That on the facts of the case and in law, the Ld. TPO/Hon'ble DRP have erred in determining the arm's length interest rate for inter-company receivables at LIBOR plus 400 basis points on an arbitrary basis without any cogent reasons. 2.6 That on the facts of the case and in law, the Ld. TPO/Hon'ble DRP have erred in granting the credit of period of 60 days instead of 90 days having regard to the provisions of Section 92CE of the Act. 2.7 That on the facts of the case and in law, the Ld. TPO/Hon'ble DRP have erred, by not appreciating that Appellant has earned more than arm's length return in its other segments, and such excess remuneration should be set off' with the proposed adjustment. TP adjustment in relation to marketing support services [INR 2,82,89,2601] 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 INR 1,47,84,084 on account of difference in the income credited to profit and loss account and offered to tax by the Appellant in its return of income filed for AY 2016-17 vis-a-vis the amount appearing in the Form 26AS statement for AY 2016-17. 4.4 That on the facts and circumstances of the case and in law, the Ld. AO has erred in making addition of INR 1,47,84,084 merely on the basis of information available in Form 26AS statement for the subject AY without appreciating the fact that the same does not represent income earned by the Appellant for subject AY. 4.5 That on the facts and circumstances of the case and in law, the Ld. AO has erred in not following the directions of the Hon'ble DRP, wherein the Hon'ble DRP has directed the Ld. AO to verify the details and delete the addition. Incorrect computation of interest under section 234B of the Act 5. That on the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 adjustment in relation to IT enabled services ( ITeS ) was deleted by Ld. AO/Ld. TPO while giving effect to Hon'ble DRP directions, 8. That on the fact of the case and in law, the Ld. AO/TPO/Hon'ble DRP has erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the ALP of the Appellant's international transaction pertaining to provision of ITeS by the Appellant and holding that the said international transaction is not at an arm's length without sharing the detailed accept reject matrix for selection or rejection of companies evaluated by him. 8.1 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 wrong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 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 risk as against comparable companies that are the full- fledged risk taking entrepreneurs. Initiation of penalty proceedings 13. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. Dispute of Comparable: 3. The dispute with regard to the Transfer Pricing Adjustment relates to the selection of one comparable namely, Interactive Man Power Solution Pvt. Ltd. (IMSPL). 4. The assessee is an Indian company incorporated in the year 2000 which is engaged primarily in software programming and applications developers providing services on behalf of and to Avaya US and other Avaya Group entities. The assessee provides support for switching integration and PBX system and specifically deals with IBR, call centre and CM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee'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 on the assessee to charge interest from the interest free loan given nor any provision of the Act mandate the Assessing Officer to add notional interest received to the total income. Hence, keeping in view the entire factum of the case, the assessee being a debt free company, the action of the revenue making adjustment on account of notional interest on the receivables cannot be held to be legally valid. TDS AS-26: 11. This ground relates to reconciliation of income credited to P L account and in the amount reflected in AS-26. The ld. DRP held that the reconciliation is primary correct and directed the AO to verify and give effect which the AO failed to carry out. The AO is hereby directed to follow the directions given by the ld. DRP without fail while passing the order giving effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder 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 section 37(1), it becomes clear that in the scheme of the interplay of the twin provisions, it is the allowability of an expenditure or an item or a claim, which has to be first examined u/s. 37(1) and only if the said expenditure, item or claim is found to pass muster u/s. 37(1), then a further examination is to be necessarily made whether the said expenditure, item or claim is hit by the embargo placed in section 40(a)(ii) of the Act. This is clearly evident from section 40(a)(ii) which starts with a non-obstante clause, which reads as follows: 40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession ,- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 Gujarat High Court in S.L.M. Maneklal Industries Ltd. v CIT [1988] 39 Taxman 42 (Gujarat), wherein the question arose whether surtax was an expenditure 'laid out or expended wholly and exclusively for the purposes of business or profession' u/s. 37(1). Answering in negative, the Hon'ble Court held thus: 8. A contention similar to the one, raised in the instant case, came up for consideration in the case of Ashton Gas Co. v. Attorney General [1906] AC 10 (HL). That was a case in which it was statutorily provided that the profits of Ashton Gas Co. to be divided amongst the shareholders in any year should not exceed the rate of 10 per cent per annum on the ordinary share capital. The company distributed 10 per cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 of surtax under the Act. Unless and until computation of total income under the Act is made, the question of chargeable profits and levy of surtax under the Act does not arise. Admittedly, income-tax is not an admissible deduction for the purpose of computing profits and gains or the total income under the Act. In our opinion, surtax stands on the same footing as income-tax inasmuch as it is also a tax on the total income computed under the Act after its adjustment under the Act. Payment of both income-tax and surtax is application of income after it is earned and not an expenditure incurred for the purpose of business. It is not a deduction before one arrives at the profits inasmuch as it is not payment for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x 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 of Grover, J elucidate the law in unequivocal terms: In our judgment it is unnecessary to express any opinion in the matter because the essential point for determination is whether surcharge is an additional mode or rate for charging income tax. The meaning of the word surcharge as given in the Webster's New International Dictionary includes among others to charge (one) too much or in addition. ........ also additional tax . Thus, the meaning of surcharge is to charge in addition or to subject to an additional or extra charge. If that meaning is applied to section 2 of the Finance Act 1963 it would lead to the result that income tax and super tax were to be charged in four different wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 further feel that in sub-clause (b) reference to Hindu undivided family, association of persons and body of individuals should be omitted. The clause has been amended accordingly. [See Select Committee Report on the Income-Tax Bill, 1961 p ix-x (LS Secretariat, New Delhi, 1961)] 3.11.3.2.3 Thus, the context of the Select Committee Report and the subsequent clarification by the CBDT vide its circular F. No. 91/58/66-1X1(19), dated 18th May, 1967 was the 'cess', levied under state legislation such as coal cess, state duty cess and other cesses levied by the local bodies/states, which is obviously outside the prohibition contained in section 40(a)(ii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ither. 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 road and public works cess was levied on immovable property to provide for construction and maintenance of roads and other works of public utility. Under section 5 of the Bengal Cess Act, 1880 all immovable property, with certain exceptions, was subjected to payment of road cess and public works cess. Section 6 of the Bengal Cess Act provided that the said cesses shall be assessed on the annual value of lands and, until provision to the contrary was made by Parliament, on the annual net profits from mines, quarries, tramways, railways and other immovable property at such rates as were to be determined in the manner prescribed. Similarly, the education ces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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)]. 7. We are unable to see as to how these observations help the assessees herein. Firstly, it may be mentioned, section 10(4) of the 1922 Act or section 40(a)(ii) of the present Act do not contain any words indicating that the profits and gains spoken of by them should be determined in accordance with the provisions of the Act. All they say is that it must be a rate or tax levied on the profits and gains of business or profession. The observations relied upon must be read in the said context and not literally or as the provisions in a statute. But so far as the issue herein is concerned, even this literal reading of the said observations does not hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 dated 18.05.1967, which states the effect of the omission of the words 'cess' from Section 40(a)(ii) is that only taxes paid are to be disallowed in the assessment for the assessment years 1962-63 onwards. 27. The ld. AR also relied on the judgment of Hon'ble Rajasthan High Court in the case of Chambal Fertilisers and Chemicals Ltd. Vs JCIT in ITA No. 52/2018 dated 31.07.2018 wherein the same issue has been decided in favour of the assessee and particularly held that education cess is an allowable expenditure. 28. Further, he argued that in the case of ITC Vs ACIT in ITA No. 685/Kol/2014 dated 27.11.2018 where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pur 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 of the explanation 2 to section 115JB is as given below:- For the purposes of clause (a) of Explanation 1, the amount of income-tax shall include- (i) any tax on distributed profits under section 115-O or on distributed income under section 115R; (ii) any interest charged under this Act; (iii) surcharge, if any, as levied by the Central Acts from time to time; (iv) Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and (v) Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic 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 levied against the said area or the said class of persons or trade or business the cess is distinguishable from a tax and is described as a fee. Tax recovered by public authority invariably goes into the consolidated fund which ultimately is utilised for all public purposes, whereas a cess levied by way of Fee is not intended to be, and does not become, a part of the consolidated fund. It is earmarked and set apart for the purpose of services for which it is levied. 40. We also find that the proceeds from collection of Education Cess are not cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;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. 2612/Kol/2019 * ITC Limited Vs ACIT in ITA No. 685/Kol/2014 * DCIT Vs The Peerless General Finance Investment Co. Ltd. in ITA No. 1469/Kol/2019. * ACIT Vs ITC Infotech in ITA No. 220/Kol/2017 * Reckitt Benckiser India Pvt. Ltd. Vs DCIT (2020) 117 taxmann.com 519 (Kol.) * Crystal Crop. Protection Pvt. Ltd. Vs JCIT in ITA No. 1539/Del/2016 * Midland Credit Management India Vs ACIT in ITA No. 3892/Del/2017 * Voltas Ltd. Vs ACIT in ITA No. 6612/Mum/2018 * Sesa Goa Ltd. Vs JC ..... X X X X Extracts X X X X X X X X Extracts X X X X
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