Piaggio Vehicles Private Limited Vs ACIT (ITAT Pune)
Whether education cess can be allowed as deduction?
The Ld. Senior Counsel for the assessee has placed strong reliance on the decision of the Hon’ble Bombay High Court in the case of Sesa Goa Limited Vs. Joint Commissioner of Income Tax, (2020) 107 CCH 0376 MumHC, Tax Appeal 17 of 2013/18 of 2013 wherein the question raised before the Hon‟ble High Court was “whether Education Cess and Higher and Secondary Education Cess collectively referred to as “cess” is allowable as a deduction in year of its payment. It was held and observed by the Hon‟ble High Court that “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 income chargeable under head “profits and gains of business or profession”. There is no reference to any “cess”. Obviously, therefore, there is no scope to accept that “cess” being in nature of a tax is equally not deductable in computing income chargeable under head “profits and gains of business or profession”. If legislature intended to prohibit deduction of amounts paid by a assessee towards “education cess” or any other “cess” then legislature could have easily included reference to „cess‟ in clause (ii) of Section 40(a) of the Act. The fact that legislature has not done so means that legislature did not intend to prevent deduction of amounts paid by the assessee towards “cess” when it comes to computing income chargeable under head “profits and gains of business or profession”. Though the claim for deduction was not raised in original return or by filing revised return, assessee had indeed addressed a letter claiming such deduction before assessment could be completed. However, even if Court proceed on basis that there was no obligation on Assessing Officer to consider claim for deduction in such letter, the Commissioner (Appeals) or ITAT, before whom such deduction was specifically claimed was duty bound to consider such claim.
This substantial question of law was answered in favour of the assessee stating that the amount paid by the assessee towards education cess has to be allowed as deduction.
The Ld. Senior Counsel for the assessee submitted that since main grounds of this appeal have been remanded to the file of the Assessing Officer, similarly this ground may also be remanded to the file of the Assessing Officer.
After hearing both the parties herein, this additional ground in respect of “Education cess”‟ is also remanded to the file of the Assessing Officer to adjudicate the issue in view of the principles laid down by the Hon‟ble Jurisdictional High Court in the case of Pr. Commissioner of Income Tax, Kota Vs. Sesa Goa Limited Vs. JCIT (supra.) and Hon’ble Rajasthan High Court in the case of M/s. Chambal Fertilizers and Chemicals Ltd. (supra.).
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal preferred by the assessee emanates from the direction of the Ld. Dispute Resolution Panel-2 (in short “DRP”), Mumbai dated 13.09.2017 for the assessment year 2013-14 as per the following grounds of appeal on record :-
“On the facts and in the circumstances of the case and in law, the Hon’ble DRP and consequentially the learned AO have erred in completing assessment of the appellant on the following grounds which are without prejudice to each other:
1. General ground challenging the transfer pricing adjustment of 1,28,70,000
Erred in making transfer pricing adjustment amounting to Rs. 1,28,70,000 to the value of international transaction by rejecting the analysis undertaken/ provided by the Appellant for its international transaction pertaining to export of spare parts and components to its Associated Enterprises.
2. Inappropriately combining of export of service spare and export of parts and components in global sourcing segment
Erred in combining the international transactions pertaining to export of service spares to AE and export of parts and components in global sourcing segment and consequently, following combined benchmarking approach thereby, ignoring the vital differences in functions performed and risk undertaken by the Appellant for the international transactions pertaining to export of service spares to AE vis-a-vis export of parts and components in global sourcing segment.
3. Inappropriate rejection of external Transactional Net Margin Method (‘TNMM’) approach for benchmarking international transaction of export of spare parts and components in global sourcing segment
Erred in rejecting the external TNMM approach adopted by the Appellant and inappropriately applying internal TNMM for determining the arm’s length price for the international transaction of export of parts and components in the global sourcing segment.
4. Disregarding the decisions of Hon’ble Pune Income-tax Appellate Tribunal (‘ITAT’) for in Appellants case for AY 2006- 07 to AY 2009-10
Without prejudice to the other grounds of appeal, the learned TPO and the learned AO have erred in facts and in circumstances of the case by disregarding the decisions of Hon’ble Pune ITAT in Appellant’s case itself for A Y 2006-07 to A Y 2009-10 and thereby, ignoring the analysis conducted by the Appellant for logistic support services (export of spare parts and components in global sourcing segment) in its TP Study Report.
5. Inappropriate consideration of foreign exchange fluctuations as non operating item while computing margins of the tested party segment as well as non AE
Erred in considering foreign exchange fluctuations as non-operating item while computing operating margins of the tested party as well as margins from non-AE segment
6. Erroneous levy of penalty under section 271(I)(c) of the Act
Erred in proposing to levy penalty under section 271(1)(c) of the Act, without considering the fact that proposed transfer pricing adjustment to the international transactions is just on account of difference of opinion as to selection of methodology for undertaking the transfer pricing analysis, consequently resulting in an adjustment to income.
The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Hon‟ble ITAT to decide this appeal according to law.”
2. The assessee has also raised additional grounds of appeal which reads as follows:
“Ground No. 7: Deduction of education cess
7.1 On the facts and circumstances of the case and in law, the appellant prays that the liability for education cess on income tax paid for the year ought to be allowed as a deduction while computing the total income.
Ground 8: Restricting the rate of Dividend Distribution Tax paid on dividend paid to the Non-resident shareholder as per the Applicable Double taxation avoidance agreement (‘DTAA’)
8.1 Whether the Appellant is right in law to take a view that dividend declared and paid by it to its non-resident shareholder i.e Piaggio & C p.A., Italy (a tax resident of Italy), is liable to be taxed at the rate provided under Article 11 under the India-Italy Double Taxation Avoidance Agreement (i.e.15%) and not as per section 115-O of the Income-tax Act, 1961 (‘the Act’) (as Dividend Distribution Tax (DDT) (at the rate of 16.223%);
8.2 Where DDT paid by the Appellant as per the provisions of section 115-0 of the Act is held to be in excess of the rate applicable for taxability of dividend in India as per the India -Italy Double Taxation Avoidance Agreement, is the Appellant entitled for refund of such excess DDT ”
ADJUDICATION OF THE GROUNDS IN APPEAL MEMO
3. The Senior Counsel for the assessee opening his argument submitted that Ground No.1 is general in nature and hence, no adjudication is required.
4. Ground 2, 3 and 4 pertains to inappropriately combining of export of service spare and export of parts and components in global sourcing segment.
5. The Ld. Senior Counsel for the assessee referring to the order of the Transfer Pricing Officer (TPO) at Para 6 demonstrated that the activities performed by the assessee company pertains to sale of service spares and sourcing of spares and components. He further submitted that in various assessment years in the case of the assessee, this issue has been decided by the Tribunal in favour of the assessee. Thereafter, the Revenue has preferred appeal before the Hon’ble Jurisdictional High Court and appeals are as on date pending before the Hon’ble Higher
6. Referring to Para 4.2.1 of the DRP’s order, the Ld. Senior Counsel for the assessee demonstrated the above stated For the sake of completeness this relevant Para is extracted as follows:
“4.2.1 Findings
From the records, we find that similar disallowance made in AY 2012-13 was upheld by the DRP. In respect of these grounds, we have considered the facts of the case, the TPO orders and the submissions made. We find that this is recurring issue and Assessee has been granted relief by the ITAT in the earlier AYs, however, the department has preferred appeal before the High Court. As DRP is only an extension of the arm of the AO and since, DRP orders are no more appealable by the revenue, considering the fact that Revenue is still agitating the issue to keep issue alive, we hereby uphold the order of the TPO and the objections files are hereby rejected.”
5.2 The Ld. Senior Counsel for the assessee further submitted that even in the order of the TPO, the facts are clear that the assessee exports service spares to its AEs as well as non AEs. In addition, it also carries out sourcing of components required by the AE for manufacturing of two and three wheelers and sourcing of components required by the AE for manufacturing of four wheelers namely “New Quadracycle Poker” (NQP). That it was further analyzed by the TPO that against Tribunal decision in favour of the assessee, the Revenue filed appeal before the Hon’ble Jurisdictional High Court and it has formulated questions of law vide order No. ITA 2063 of 2012 dated 13.03.2013 which is as follows:
“a) Whether, on the facts and circumstances of the case and in law the Tribunal erred in deleting the Transfer Pricing Adjustment accepting artificially created sub-segments of international transactions on the basis of application of spares and components required for servicing of the vehicles and required for manufacturing of vehicles ignoring that the Function, Assets and Risk analysis for the assessee, the tested party, were same being a trader of such spares and components?”
5.3 Thereafter, the TPO vide Para 11 of its order stated that since the question of law has been framed in the case of the assessee by the Hon’ble High Court and considering that the facts of the case are similar to the year before the Hon’ble High Court, with a humble view to protect the right of revenue an addition is being proposed on the similar lines that of the order of the predecessor It was further reiterated in that same Para, TP adjustment was only being suggested to the Assessing Officer to protect the interest of the revenue at the stage of Hon’ble High Court. Demonstrating this Para, the Ld. Senior Counsel for the assessee submitted that even the TPO was convinced with the transaction of the assessee but only TP adjustment was made to secure the interest of the revenue at the stage of the Hon’ble High Court.
5.4 The Ld. Senior Counsel for the assessee brought notice to the Bench that in assessee’s own case for assessment year 2008-09 in ITA 2583/PN/2012 wherein the Tribunal has referred to assessee’s own case for assessment year 2006-07 wherein the facts are para-materia with that of the assessment year 2008-09 and therein, the issues raised in the present grounds of appeal No. 2 to 4, those issues were decided in favour of the assessee specifically the activities for benchmarking the transaction of the assessee is that the assessee is engaged in manufacture and sale of three wheeled motor vehicles for transportation of goods and passengers and also sale of spares and components of three wheeled motor vehicles manufactured by it to support its after sale market both in India and abroad. Further, the assessee is also engaged in sourcing of components which are required by its associated enterprises abroad for manufacturing of two/three/four wheeled motor vehicles. According to the assessee, having regard to the nature of transactions with its associated enterprises and non associated enterprise, the two kind of transactions are not comparable and therefore, there was no credible internal comparable transactions which could be used for benchmarking the impugned international transaction of export of spares and components to its associated enterprise.
6. The Tribunal for the assessment year 2006-07 in ITA 1480/PN/2010 dated 23.07.2012 has dealt with this issue in the following manner:
“7. The assessee has explained the varied nature of transactions which are comprised in the sales of “spares and components” amounting to Rs. 14,62,45,611/-. It has been explained that three categories of transactions are carried out in the activity of sale of “spares and components”. We may summarize the activities as follows – Category “A” represents sale of spares by the assessee to third party distributors as well as to the AEs, which are required for the purposes of servicing the vehicles sold by the assessee company; Category “B” represents sourcing of components required by the overseas AEs for manufacture of two and three-wheelers; and Category “C” represents sourcing of components required by the overseas AEs for manufacture of four-wheelers, namely, New Quadracycle Poker. The point sought to be made out by the assessee is that the export to third parties (i.e. non-AEs) is comprised of only Category “A” transactions, which has yielded the margin of 56.58%, whereas the exports to its AEs comprise of transactions of all three Categories, i.e. “A”, “B” and “C”, which has yielded the margin of 11.63% and therefore the two are incomparable. By referring to the following Chart depicting the operating margins of various sub-segments of the transactions‟ of the sales of spares and components:
