DCIT Vs GE BE Pvt. Ltd. (ITAT Bangalore)
Conclusion: Education cess is not tax and thus not disallowable under section 40(a)(ii).
Held: Assessee-company was engaged in the business of contract manufacturing of components and parts of medical diagnostic imaging equipment and also engaged in provision of engineering design services to its affiliate worldwide. Assessee had raised an additional ground that AO erred in not allowing deduction under section 37(1) on account of Education Cesses paid by assessee while arriving at the assessed income for the year under appeal. It was held that education cess was not tax and hence was not disallowable. In the case of Chambal Fertilizers and Chemicals Ltd. Jt. CIT, which after taking into account aforementioned CBDT circular held that section 40(a)(ii) applies only to taxes and not to education cess. Thus, cess was not tax and no disallowance could be made under section 40(a)(ii) .
FULL TEXT OF THE ITAT JUDGEMENT
Present cross appeals has been filed by assessee as well as revenue against final order dated 28/12/2015 passed under section 143(3) read with section 144C of the act passed by Ld.DCIT Circle 3(1)(2), Bangalore for assessment year 2011-12 on following grounds of appeal:
ITA (TP) A No. 251/B/2016
“1.The directions of the Dispute Resolution Panel are opposed to law and facts of the case.
2. Whether the order of the Hon’ble DRP in rejecting comparable cases by insistence on strict comparability under TNMM defeats the very purpose of the law relating to determination of ALP under the IT Act.
3. Whether the Hon’ble DRP was right in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies.
4. Whether the Hon’ble DRP is correct in fact and law in concluding that the companies selected by the TPO are not comparable to the assessee overlooking the fact that reasonably accurate adjustments could be made to eliminate the material effects of the differences between them.
5. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed.
6. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above.”
ITA (TP) a No. 317/B/2016
“The grounds mentioned herein by the Appellant are without prejudice to one another.
1. That the order passed by the Learned Deputy Commissioner of Income-tax, Circle-3(1)(2), Bangalore Assessing Officer (“Assessing Officer” or “Ld. AO”) pursuant to the directions of the learned Dispute Resolution Panel (“DRP” or “Ld. Panel”) under section 143(3) read with Section 144C of the Income-tax Act, 1961 (“the Act”), also read with the order passed by the Learned Additional Commissioner of Income-tax (Transfer Pricing)-1(3) (” learned Transfer Pricing Officer” or “Ld. TPO”) under section 92CA of the Act, is erroneous on facts and bad in law and is liable to be quashed. [corresponding to ground 1 of original grounds of appeal]
2. That the Ld. AO/ DRP erred both in facts and in law in making an adjustment of INR 1,83,23,932 to the transfer price of the international transaction relating to Services segment of the Appellant. [corresponding to ground 2 of original grounds of appeal]
3. That the Ld. AO/ DRP erred in upholding the partial rejection of the TP documentation maintained by the Appellant in respect of the Services segment invoking the provisions of section 92C(3) of the Act and contending that the information or data used in the computation of the arm’s length price is not reliable or correct. [corresponding to ground 3 of original grounds of appeal]
4. That the Ld. AO/ DRP erred both in facts and in law in holding that the international transactions in the Services segment of the Appellant does not satisfy the arm’s length principle envisaged under the Act and in doing so grossly erred in:
a) Upholding the determination of the arm’s length margin/ price using financial year (‘FY) 2010-11 (not following the use of multiple year data as prescribed under Rule l0B(4) of the Income-tax Rules, 1962 (“the Rules”) data and considering additional comparables at the time of assessment proceedings, the data pertaining to which was not available to the Appellant at the time of complying with the Transfer Pricing Documentation (“TP Documentation”) requirements. [corresponding to ground 4(a) of original grounds of appeal]
b) Disregarding the application of multiple year/prior year data as used by the Appellant in the TP documentation and holding that current year (i.e. FY 2010-11) data for comparable companies should be used; [corresponding to ground 4(b) of original grounds of appeal]
c) Upholding the non-acceptance of the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, and upholding conducting a fresh economic analysis for the determination of the arm’s length price in connection with the impugned international transactions by the Ld. TPO and in holding that the Appellant’s international transaction in the services segment is not at arm’s length. [corresponding to ground 4(c) of original grounds of appeal]
d) Disregarding the functional comparability of the comparables identified by the Appellant with respect to the Services segment. [corresponding to ground 4(d) of original grounds of appeal]
e) Upholding the acceptance of companies that fail the parameters / tests of comparability analysis while performing the comparability analysis and arriving at the final set of comparables in the TP order with respect to the Appellant’s Services segment.
(i) The learned TPO/DRP erred in law and facts in considering Accentia Technologies Ltd. as a functionally comparable company to the service segment of the Appellant even though this company should have been excluded since it is functionally dissimilar being engaged in product development also segmental details are not available. [corresponding to ground 4(e) of original grounds of appeal]
(ii) The learned TPO/DRP erred in law and facts in considering ICRA Online Ltd. (outsourced service segment), as a functionally comparable company to the service segment of the Appellant even though this company should have been excluded since it is functionally dissimilar engaged in providing data analytics services etc. [corresponding to ground 4(e) of original grounds of appeal]
f) Upholding the action of the learned TPO in rejecting certain companies which pass the test of comparability and are functionally comparable to the Appellant in respect of its Services segment.
(i) The learned AO/DRP erred in law and in facts in upholding the action of the learned TPO in rejecting Cades Digitech Private Limited from the final set of comparables even though this company should have been included since it is functionally comparable being engaged in providing services similar to the appellant. [corresponding to ground 4(f) of original grounds of appeal]
(ii) The learned AO/DRP erred in law and in facts in excluding Techprocess Solutions Limited (Transaction service segment) as the company is functionally dissimilar being engaged in providing services similar to that of the appellant. [corresponding to ground 4(f) of original grounds of appeal]
(iii) The learned AO/DRP erred in law and in facts in excluding Microland Limited because this company falls revenue earning filter whereas this company should have been included as it is functionally comparable to the service segment of the appellant. [corresponding to ground 4(f) of original grounds of appeal]
g) Upholding the learned TPO’s approach of disregarding certain filters as applied by the Appellant in selection of the comparable at the time of transfer pricing documentation and for the determination of comparables while conducting the search. [corresponding to ground 4(g) of original grounds of appeal]
h) Arbitrary adoption of certain filters for the determination of comparables while conducting the search.
The learned AO/DRP erred in confirming the action of learned TPO in the application of related party transaction filter of greater than 25% of sales as against 20% as applied by the appellant.
i) Rejecting certain companies which otherwise pass the test of comparability and are functionally comparable to the Appellant in respect of its Services segment and were also not particularly disputed by the Appellant.
(i) The learned AO/DRP erred in law and in facts in excluding Cosmic Global Ltd. because the company has subcontracting expenses whereas this company should have been included as it is functionally comparable. [corresponding to ground 4(i) of original grounds of appeal]
(i) The learned AO/DRP erred in law and in facts in excluding Cosmic Global Ltd. because the company has subcontracting expenses whereas this company should have been included as it is functionally comparable. [corresponding to ground 4(i) of original grounds of appeal]
(ii) The learned AO/DRP erred in law and in facts in excluding Mindtree Limited because the company is functionally different and has extra ordinary events during the year whereas this company should have been included as it functionally similar to the Appellant. [corresponding to ground 4(i) of original grounds of appeal]
(iii) The learned AO/DRP erred in law and in facts in excluding e4e Healthcare Business Service Private Limited inconsistency in accounting principles regarding the provision of bad debts written off whereas this company should have been included being functionally similar to the Appellant. [corresponding to ground 4(i) of original grounds of appeal]
j) Computing the working capital adjustments of certain comparable companies selected by the Ld. TPO/ DRP. [corresponding to ground 4(j) of original grounds of appeal]
k) Considering certain expenses like provision for doubtful debts, bad debts written off etc. as non-operating in nature while computing the Operating Profit! Total cost of the comparable companies selected by the Ld. AO / DRP. [corresponding to ground 4(k) of original grounds of appeal]
5. hat the Ld. AO/ DRP erred both in facts and in law in ignoring the limited risk nature of the services provided by the Appellant as detailed in the TP documentation and in upholding the conclusion of the learned TPO that no adjustment on account of risk differential is required while determining the Arm’s Length Price of the international transactions in the Services segment of the Appellant. [corresponding to ground 5 of original grounds of appeal]
6. That the learned AO erred in charging interest under section 234D of the Act. [corresponding to ground 6 of original grounds of appeal]
All the aforesaid grounds are without prejudice to one another. The Appellant craves leave to alter, amend, modify, amplify or withdraw any or all the above grounds of objection, or add any further grounds, before or at the time of hearing.”
Brief facts of the case are as under:
2. Assessee is a company and is engaged in the business of contract manufacturing of components and parts of medical diagnostic imaging equipment and also engaged in provision of engineering design services to its affiliate worldwide. It filed its return of income for year under consideration which was subsequently revised on 18/11/2011 declaring total income of Rs.86,34,42,657/-. The return was processed under section 143(1) of the Act, and the case was selected for scrutiny. Notices under section 143(2) and 142(1) was issued to assessee. In response to statutory notices, representative of assessee appeared before Ld.AO and filed requisite details as called for.
3. Ld.AO observed that assessee had international transaction exceeding Rs.15 crore and therefore reference was made to the transfer pricing officer to determined arm’s length price of the transaction as per provisions of section 92C of the Act.
4. Upon receipt of reference, Ld.TPO called upon assessee to file requisite details of the transaction in Form 3 CEB.
Ld. TPO observed that, assessee had following international transaction with its associated enterprise:
