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TMI Blog2022 (5) TMI 353X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961 [the Act] for the assessment year 2016-17 on the following amended grounds :- That on the facts and in the circumstances of the case and in law and based on the directions of the DRP: 1. The Ld. AO erred in law and on facts, in assessing the total income at INR 14,34,58,717/-as against returned income of INR 10,60,92,550/- Grounds of appeal relating_to transfer pricing adjustment of INR 3,73,66,167 2. The Ld. AO and Ld. Transfer Pricing Officer ( TPO ) erred in law and on facts, in making an upward adjustment of INR 3,73,66,167 to the total income of the Appellant in relation to the international transactions of provision of software development services ( IT Services ), and provision of Support services in relation to configuration of clinical trial study ( ITeS ) by the Appellant to its Associated Enterprise ( AE ), by re-determining the Arm's Length Price ( ALP ). 3. IT service segment 3.1 The Ld. AO and Ld. TPO erred in law and on facts, in rejecting the scientific benchmarking analysis in relation to international transaction of IT services undertaken by the Appellant in accordance with the provisions of the Act read with the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egmental) 4.2 The Ld. AO and Ld. TPO erred in law and on facts, in selecting additional 1 (one) alleged comparable company in relation to international transaction of ITeS by conducting fresh benchmarking analysis without taking cognizance of Rule 10B(2) and 10B(3) of the Rules and erroneously altering/modifying existing filters, and/or by applying additional filters. 4.2.1 The Appellant submits that 'SPI Technologies India Private Limited' cannot be considered as comparable companies to the ITeS segment of the Assessee. 5. The Ld. AO, Ld. TPO and Ld. DRP erred in law and on facts, in completely disregarding Appellant's submission of applying upper turnover filter as held by the Hon'ble Bangalore ITAT in Appellant's own case for Assessment Years 2011-12 and 2013-14. 6. The Ld. AO and Ld. TPO erred in law and on facts, in rejecting certain additional comparable companies proposed by the Appellant during the course of transfer pricing assessment which are ought to be considered in the final set of comparable companies in relation to international transaction of provision of IT services and ITeS, namely: IT Services: Agilisy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is consequential to the grounds of appeal in above paras; The Appellant submits that each one of our above grounds is without prejudice to the other. The Appellant craves leave to add, modify, amend, alter or delete, any or all of the above grounds of appeal during the course of hearing and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. 2. The assessee, Cenduit India is a subsidiary of Cenduit LLC. USA which is a specialized Interactive Response Technology (IRT) solutions provider. One of the IRT enable service offered by Cenduit LLC USA is preparation and management of clinical studies, based on the studyspecific requirements of its customers. The assessee undertakes two types of activities namely; (a) providing Support Services to Cenduit LLC in configuring the clinical trial study based on the clients requirement: and (b) providing Software Development Services to Cenduit LLC on a contract basis. Provision of Support Services in relation to configuration of clinical trial study: 3. The Project Managers of Cenduit LLC, meet the customers and capture their requireme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uracy of the data. Software Development Services: The Software Development of Cenduit India provides Software Development Services to Cenduit LLC in relation updation / development of IRT Software. 7. As per the Transfer Pricing ( TP ) document, the assessee has entered into the following International Transactions to its Associated Enterprises (AEs): Particulars Amt ( Paid ) Amt ( Recd ) Method Fixed Assets 19,65 . 937 TNMM Provision of Support Services in relation to configuration of clinical trial study 50,67,98,222 TNMM Provision of Software Development Services 8,79,51,560 TNMM Recovery of expenses 3,32,97,976 Other Reimbursement of expenses to AE 95,28,094 Other Outstanding Trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,35,45,687 1,25,52,025 8,60,97,712 8,43,26,601 Operating main (CIB) 16.73% 16.41% Reconciliation Total Operating Expenses as per the TPSR (X) 51,59,55,854 Total Operating Expenses as per the Audited Financials (Y) 51,78,28,904 Difference (X-Y) -18,73,050 Add: Finance Cost 5,53,241 Add: Loss on sale of Fixed Assets 5,45,209 Add: Corporate Social Responsibility 9,15,000 Net difference 1,40,400 9. After examination of the TP study of the assessee and considering the objections of the assessee, the TPO arrived at the final set of comparables as follows:- IT Services / SWD Segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. SPI Technologies India Pvt Ltd 37.77% 6. Eclerx Services Ltd. 56.44% 35 Percentile 20.44% Median 23.44% 65 Percentile 26.44% 10. Pursuant to the directions of the DRP, while there was no variation in the ITeS segment, the TPO revised the margin computation of the comparable companies in the IT Services as follows:- Sr. No. Name of company PLI (Weighted Average) 1. Kals Information Systems Pvt Ltd 8.31% 2. E-Zest Solutions Limited 10.87% 3. Rheal Software Pvt Ltd 14.50% 4. Sybrant Technologies Private Limited 14.74% 5. Harbinger Systems Pvt. Limited 15.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies which remain after the order of the DRP, viz., Persistent systems Ltd. and Sasken Communications Technologies Ltd., will go out of comparability because their turnover for the relevant previous year is Rs.610.13 Crores and 394.20 Crores respectively. So also the following four companies which are part of the set of 13 comparable companies will go out of comparable companies viz., Infosys Ltd. (Turnover of Rs.25,385 Crores), Larsen Toubro Infotech Ltd. (turnover of Rs.2331.81 Crores, Mindtree Ltd. (turnover of Rs.878.30 Crores and Tata Elxsi Ltd. (turnover of Rs.358.20 Crores). If the aforesaid six companies are excluded by applying turnover filter, then the profit margins of the remaining companies, even assuming those companies are regarded as comparable will be within the range of profit margin permissible in law and therefore the price charged by the Assessee in the international transaction would have to be regarded as at ALP. Therefore there would be no necessity to decide the other grounds of IT(TP)A No.59/Bang/2016 CO No.57/Bang/2016 Page 11 of 25 appeal in the Revenue s appeal regarding transfer pricing as well as the other grounds raised in the Cross-Objection. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 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 liable to be deducted in computing the income chargeable under the head profits and gains of business or profession . However, the Respondent - Revenue contends that cess is also included in the scope and import of the expression any rate or tax levied and consequently, the amounts paid towards the cess are not liable for deduction in computing the income chargeable under the head profits and gains of business or profession . 18. In relation to taxing statute, certain principles of interpretation are quite well settled. In New Shorrock Spinning and Manufacturing Co. Ltd. v. Raval, 37 ITR 41 (Bom.), it is held that one safe and infallible principle, which is of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome 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 clause (ii) of Section 40(a) of the IT Act. The fact that the legislature has not done so means that the legislature did not intend to prevent the deduction of amounts paid by a Assessee towards the cess , when it comes to computing income chargeable under the head profits and gains of business or profession . 24. The legislative history bears out that the Income-tax Bill, 1961, as introduced in the Parliament, had Section 40(a)(ii) which read as follows : (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 25. However, when the matter came up b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad 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 that this expression was in fact to be found in the Income-tax Bill, 1961 which was introduced in the Parliament. However, the Select Committee recommended the omission of expression cess and consequently, this expression finds no place in the final text of the provision in Section 40(a)(ii) of the IT Act, 1961. The effect of such omission is that the provision in Section 40(a)(ii) does not include, cess and consequently, cess whenever paid in relation to business, is allowable as deductable expenditure. 29. In Kanga and Palkhivala's The Law and Practice of Income Tax (Tenth Edition), several decisions have been analyzed in the context of provisions of Section 40(a)(ii) of the IT Act, 1961. There is reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chargeable under the head of profits and gains of business or profession . They are as follows :- (i) DCIT v. 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 v. 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) DCIT v. Bajaj Allianz General Insurance (ITA No. 1111 and 1112/PUN/2017 decided on 25th July, 2019) by the ITAT, Pune. 32. Again, Ms. Linhares, learned Standing Counsel for the Revenue was unable to say whether the Revenue had instituted the appeals in the aforesaid matters. Mr. Ramani, learned Senior Advocate for the Appellant submitted that to the best of his research, no appeals were instituted by the Revenue against the aforesaid decisions of the ITAT. 33. The ITAT, in the impugned judgment and order, has reasoned that since cess is collected as a part of the income tax and fringe benefit tax, therefore, such cess is to be construed as tax . According to us, there is no scope for such implications, when construing a taxing statute. Even, though, cess may be coll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. v. 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 further the Assessing Officer had no power or jurisdiction to grant such a deduction to the Appellant - Assessee. She submits that this is what precisely held by the ITAT in its impugned judgments and orders and therefore, the same, warrants no interference. 38. Although, it is true that the Appellant - Assessee did not claim any deduction in respect of amounts paid by it towards cess in their original return of income nor did the Appellant - Assessee file any revised return of income, according to us, this was no bar to the Commissioner (Appeals) or the ITAT to consider and allow such deductions to the Appellant - Assessee in the facts and circumstances of the present case. The record bears out that such deduction was clearly claimed by the Appellant - Assessee, both before the Commissioner (Appeals) as wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls) or the ITAT, before whom such deduction was specifically claimed was duty bound to consider such claim. Accordingly, we are unable to agree with Ms. Linhare's contention based upon the decision in Goetze (supra). 42. For all the aforesaid reasons, we hold that the substantial question of law No. (iii) in Tax Appeal No. 17 of 2013 and the sole substantial question of law in Tax Appeal No. 18 of 2013 is also required to be answered in favour of the Appellant - Assessee and against the Respondent-Revenue. To that extent therefore, the impugned judgments and orders made by the ITAT warrant interference and modification. Respectfully following the decision rendered by Hon'ble Rajasthan High Court and the Bombay High Court (referred above), we hold that the education cess is allowable as deduction. We direct the AO accordingly. 16. In view of the above order of the Tribunal, we are inclined to allow this ground. 17. No other grounds were pressed before us, accordingly they are dismissed. 18. In the result, the assessee s appeal is partly allowed for statistical purposes. Pronounced in the open court on this 12th day of January, 2022. - - T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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