Deduction of Cess not claimed earlier in return: ITAT remits issue back to AO

Sulzer Pumps India Limited Vs DCIT (ITAT Mumbai)

As mentioned earlier, for the year under consideration, the assessee has paid a sum of Rs.51,28,703/- as Cess in the return filed by it. It did not claim the amount paid, as deduction in the return filed by it for AY 2012-13. However, in the light of the recent decision of the Hon’ble Bombay High Court in Sesa Goa Limited (supra), the assessee has filed an additional ground claiming that it is eligible for deduction of the amount paid as Cess for the year under consideration.

In Ultratech Cement Ltd. (supra), the Bombay High Court has held that “ an additional ground relating to claim of deduction u/s.80IA could not be permitted to be raised, if necessary evidence that assessee was entitled to claim was not on record and the assessee had no reason to satisfy appellate authority that ground now raised was bonafide and same could not have been raised earlier for good reasons.”

The above additional ground is a purely legal one and following the decision in NTPC v. CIT (1998) 229 ITR 383 (SC), we admit it for adjudication.

Since, the above issue has been raised for the first time before the Tribunal, we deem it appropriate to restore the issue back to the AO for passing an order in the light of the ratio laid down in Sesa Goa Ltd. (supra). Thus the additional ground of appeal is allowed for statistical purposes.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The captioned appeals filed by the assessee are directed against the order passed by the Deputy Commissioner of Income Tax, Circle 15(3)(2), Mumbai (hereinafter the ‘AO’) u/s 143(3) r.w.s. 144C(13) of the Income Tax Act 1961, (the ‘Act’). As common issues are involved, we are proceeding to dispose off these appeals by a consolidated order for the sake of convenience. We begin with the AY 2012-13.

2. The assessee filed the grounds of appeal along with Form No 36B on 13.02.2017. Later on, it filed a revised grounds of appeal on 27.02.2020. In the revised one, the 8^th & 9^th grounds of appeal are not pressed by the Ld. Counsel for the assessee because of smallness of amounts. Considering it, as there is no difference between the original grounds of appeal and the revised one, we consider below the original one for adjudication.

3. The assessee, M/s. Sulzer Pumps India Private Limited, is engaged in the business of manufacturing and sale of single and multistage power-driven pumps for industrial use. The assessee is a part of the Sulzer group which is headquartered at Winterthur, Switzerland. It filed its return of income for the AY 2012-13 on 30.11.2012 declaring total income at Rs.54,27,19,898/-. The Assessing Officer (AO) referred the international transactions to the Transfer Pricing Officer (TPO) for determination of assessee’s income on an arm’s length basis. The TPO vide order dated 21.01.2016 passed u/s.92CA held the Arm’s Length Price (ALP) of certain international transactions as “Nil” on the ground that the receipt of the services was not established. The AO, thereafter made certain additions to the income returned by the assessee. The assessee preferred a reference to the Dispute Resolution Panel (DRP). The DRP approved the order passed by the TPO/AO. The AO, thereafter completed the assessment vide order dated 23.01.2017 u/s.143(3) r.w.s. 144C(13) of the Act. In the order, the income of the assessee was assessed at Rs.65,61,89,583/-after making the following adjustments:-

4. The 1^st and 2^nd grounds of appeal are general in nature and do not require any specific adjudication. The 3^rd ground of appeal will be dealt by us along with the remaining grounds of appeal on transfer pricing adjustment. The 3^rd ground of appeal reads as under :

“3. On the facts and in the circumstances of the case and in law, the TPO/ AO/ DRP erred in disregarding the transfer pricing study report maintained by the Appellant as per Section 95D of the Act read with Rule 10D of the Income Tax Rules, 1962 and the various submissions made by the Appellant.”

5. One common thread which runs through the submissions of the Ld. Counsel in the context of the order passed by the AO is the burden of proof. Considering it, we discuss below the grounds of appeal (4^th to 9^th); the order of the TPO/AO and DRP; the arguments of the Ld. Counsel and Ld. Departmental Representative (DR). After the above discussion, we give our findings on the 4th _to 9^th grounds of appeal in para 25 infra.

So we come to the other grounds of appeal serially. The 4^th ground of appeal is reproduced below:

“4. On the facts and in the circumstances of the case and in law, the AO and the TPO erred in concluding and the DRP erred in confirming the adjustment of Rs.3,85,71,874/- relating to the international transaction of payment of Asia Pacific (‘ASP’) Management fee to associated enterprise by determining its arm’s length price at NIL instead of Rs.3,85,71,874/-.”

6. During the year under consideration, the assessee had paid management fee of Rs.3,85,71,874/- to its AE Sulzer Pumps Ltd. It submitted before the TPO that Sulzer Asia Pacific Business Area, Shanghai, P.R. China, an AE of the assessee, provides administrative service to its foreign operating affiliates in the Asia Pacific region and that such service encompasses business area marketing including business intelligence, tender support and tracking system support, general management (including human resources), finance controlling, quality environment and safety support and segment support. The assessee further submitted before the TPO that the charges for such service are allocated based on the approximate time spent towards all group entities (including the assessee-company) receiving the services in Asia Pacific region. It was further explained that the central team spends approximately 25% of its time for the manufacturing entities of the Group operating in Asia-Pacific region for providing ASP management services and the assessee being a manufacturing entity, received a charge of 25% of the total costs incurred by the AE for providing such services.

However, the TPO was not convinced with the above explanation on the ground that the assessee was not able to substantially prove that the services have been rendered and also that the assessee was not able to justify the benefits derived from such services and the quantification of such services in terms of actual expenditure by the AE. Further the TPO held that the expenditure was incurred for the benefit of the Group as a whole, and therefore, no charging of such expenditure is required as it is not incurred in connection with an individual member of the group and the benefit would be available to all the entities within the Group. Accordingly, the TPO took the ALP of the above transaction at Nil and made an adjustment of Rs.3,85,71,874/- to the aggregated value of international transaction reported by the assessee.

We find that vide direction dated 29.11.2016, the DRP, following its order for the preceding AYs 2009-10, 2010-11 and 2011-12, confirmed the adjustment made by the TPO on this account. The AO by following the direction of the DRP has passed the final assessment order u/s 143(3) r.w.s. 144C(13) dated 23.01.2017, by making an adjustment of Rs.3,85,71,874/-.

7. Before us, the Ld. Counsel, referring to the submissions filed before the DRP, explains that various e-mail correspondences with its AE were filed before the TPO to demonstrate that the AE had actually rendered various services in the nature of general management, human resource, finance controlling, marketing etc. Regarding the contentions of the TPO that the assessee has not proved the benefits derived from such services, it is explained that the benefits to the assessee are like promoting the products manufactured by the assessee, improving its capacity and order book position, achieve world class standards, enhance productivity and efficiency of manpower, MIS system to ensure effective controls and minimize frauds, ensuring correct bids to potential customers etc. It is argued that the assessee had submitted benefit derived on account of such services along with detailed nature of services and the mechanism of cost and also a certificate from its AE certifying the details regarding ASP management fees such as total amount incurred by the AE in provision of the services, the amount allocated to the assessee and the fact that the amount is allocated on a cost to cost basis. As regards the determination of ALP of the transactions, it is explained that the management services are closely connected with the core business operations of the company and hence the said transaction of receipt of management services has been aggregated with the manufacturing activity for benchmarking purposes and based on the said analysis, the ASP management fee paid by the assessee meet with the ALP standard required under the Indian Regulations.

The Ld. Counsel submits that before the DRP, the assessee had relied on the decision of the Delhi High Court in EKL Appliances Ltd. v CIT (ITA Nos. 1068 & 1070/2011) and the order of the Tribunal in TNS India Pvt. Ltd. [TS-21-ITAT-2014(HYD)-TP], Dresser-Rand India Pvt. Ltd. v. ACIT (141 TTJ 385), Ericsson India Private Limited v. Dy. CIT [ITA No. 5141/Del/2011 (Delhi Tribunal)], McCann Erickson India Private Limited v. Addl. CIT Range [ITA No. 5871/Del/2011], AWB India Pvt. Ltd. [TS-67-ITAT-2013 (DEL)-TP] and Safran Aerospace India Pvt. Ltd. [TS-469-ITAT-2014(Bang)-TP].

8. On the other hand, the Ld. DR submits that the assessee was not able to substantially prove before the TPO that the services have been rendered and further, the assessee was not able to justify the benefits derived from such services in terms of actual expenditure by the AE. It is argued by him that the expenditure was incurred for the benefit of the Group as a whole and therefore, there is no necessity of charging such expenditure as it is not incurred in connection with the individual member of the Group, whereas the benefit would be available to all the members within the Group. Thus, the Ld. DR supports the order of the TPO /AO treating the ALP to be Nil and thereby making an adjustment of Rs.3,85,71,874/- to the aggregated value of international transactions reported by the assessee.

9. The 5^th and 7^th ground of the appeal are interrelated and they read as under:-

5. On the facts and in the circumstances of the case and in law, the AO and the TPO erred in concluding and the DRP erred in confirming the adjustment of Rs.3,31,93,243/-relating to the international transaction of payment of SAP software related support to associated enterprise by determining its arm’s length price at NIL instead of Rs.3,31,93,243/-.

7. On the facts and in the circumstances of the case and in law, the AO and the TPO erred in concluding and the DRP erred in confirming the adjustment of Rs.38,82,614/- relating to the international transaction of payment of annual charges for Microsoft licenses to associated enterprise by determining its arm’s length price at NIL instead of Rs.38,82,614/-.

10. In the present case, the SAP related payment has been made for availing several SAP related support services from the AE. The assessee explained before the TPO that there was agreement with the Sulzer Management AG and Microsoft which prepared this package for use by group entities. The assessee has aggregated the transaction and benchmarked it under TNMM. The payments of Microsoft license charges are annual maintenance cost of the SAP software paid to the AE. It had claimed that the budgeted rate of CHF 228 per user per month has been charged on the basis of number of users to arrive at the cost. However, the TPO was not convinced with the above explanation of the assessee on the ground that it is imperative that the assessee should have benchmarked this service separately. Further, as per the TPO, the assessee has not submitted any analysis on the basis of which such budgeted rate was arrived at; no list of employees for whom such licenses were obtained was ever submitted despite specific query being raised; the assessee also did not submit any detail of budget which was received by it and also did not submit the actual expenditures incurred.

As per the TPO the expected benefit from such service must be sufficiently direct and substantial so that an independent recipient in similar circumstances would be prepared to pay for it.

Following the order of the DRP for AY 2011-12, on the above issue, the TPO determined the ALP of SAP related charges at Nil.

As regards the payment of Microsoft license charges which are annual maintenance cost of the SAP software paid to the AE, since the ALP of SAP related charges has been determined at Nil, the TPO came to a finding that there cannot be any charge to maintain such software / license. Further, it is noted by him that though the assessee was asked to submit the list of employees who are utilizing such licenses and the work done by them, the assessee failed to submit those evidence. Therefore, the TPO determined the ALP of such charges at Nil. It has been followed by the AO.

11. Before us, the Ld. Counsel submits that SAP is an acronym for Systems, Applications and Products. SAP is especially well-known for its Enterprise Resource Planning (ERP) and data management programs. Companies widely use the SAP system for daily operations and reporting. Sulzer Pumps Ltd (AE) provides SAP (which includes SAP license cost without mark-up) and corporate IT related support services to various Sulzer Group entities including the assessee.

The Ld. Counsel submits that the assessee derives the following benefits as a result of the services provided by the AE to it:-

“a. The assessee employs SAP modules in respect of its various business processes and functions and hence, SAP infrastructure plays an integral and crucial factor in its overall operations.

b. SAP software products provide powerful instruments which helps the assessee in managing its financials, logistics, human resources, and other business areas.

c. The centralized system enhances productivity, provides better inventory management, endorses quality, decreases raw material cost, leads to effective HR management, reduces expenses and enhances profits of the assessee.

d. The SAP support team of the AE maintains the SAP infrastructure and operates help desk to resolve any issues reported by the users of assessee, hence helping in building better customer relationship.”

It is also argued by the Ld. Counsel that SAP related support services availed from AE provide direct benefit to the assessee in the form of ensuring continuity in its operations and functions, aligning policies and operations, enhancing output and insight, reducing costs by increasing flexibility and minimizing risk. Elaborating further, it is stated that such SAP related costs are allocated by the AE to the assessee on the basis of ‘number of users per month’; the cost of SAP support services involves SAP license cost without markup and SAP maintenance service fee with a markup of 5%.

It is stated that for the purpose of substantiating its claim, the assessee had also submitted the copy of SAP software related agreement, e-mail correspondences demonstrating the receipt of services from the AE, details of SAP tickets raised by Assessee while using SAP, sample copies of invoices and certificate from its AE certifying the total amount incurred by the AE and the amount allocated to the assessee including the details of number of users and the rate per month per user.

Regarding the adjustment on account of annual charges paid towards Microsoft licenses, the Ld. Counsel submits that Sulzer US Holding Inc. entered into Microsoft Volume Licensing Agreement with Microsoft Licensing GP, which in turn transferred all the license rights acquired under the said Agreement to Sulzer Management AG ( ‘AE’). Based on the Agreement, the AE entered into arrangement with the assessee and allocated the license cost without mark-up on the basis of the amount charged by Microsoft.

It is stated that the benefits derived by the assessee from the user Microsoft licenses are as under:-

“a. The assessee gets additional product use rights and the right to copy software onto multiple devices from one standard image using the licensing media.

b. The licenses require minimal paperwork at the end of the assessee, hence prove to be time-saving and hassle-free.

c. The licensing programme provides the assessee with automatic compliance management options.

d. License account management and asset-tracking can be done by the assessee, online though the Microsoft Service Centres

e. The assessee can access Microsoft Software Assurance for Volume Licensing, a comprehensive offering that helps in maximizing the value of the software investment.”

Finally, the Ld. Counsel submits that the assessee had submitted before the TPO copy of invoice raised by the AE on it and a certificate from its AE certifying the details of total cost incurred for the licenses along with the details of number of user licenses allocated to the assessee along with the amount charged by the AE to the assessee for the licenses. Therefore, it is submitted by him that since, the costs are allocated by the AE to the assessee based on the number of users/devices installed at actual cost and that the details of the same are available, treatment of the ALP of the Microsoft license that is essential for day to day operation of the assessee as Nil is clearly erroneous.

12. On the other hand, the Ld. DR submits that the assessee has not benchmarked the transaction separately; the assessee has not submitted any analysis on the basis of which such budgeted rate was arrived at ; no list of employees for whom such licenses were obtained was ever submitted despite specific query raised by the TPO ; the assessee did not submit any detail of budget which was received by it and also did not submit, the actual expenditure incurred and due to which there is a change in such budget consequent to which the charge on actual basis has been allocated to the assessee; the details of employees, the time spent by them, their time sheets evidencing the time spent have not been produced to authenticate the expenses claimed.

The Ld. DR further argues that expected benefit from such service must be sufficiently direct and substantial so that an independent recipient, in similar circumstances, would be prepared to pay for it. However, it is argued that the above ingredient is lacking in the present case.

As regards, the payment of Microsoft license charges, which are annual maintenance cost of the SAP software paid to the AE, it is stated by the Ld. DR that since the ALP of SAP related charges has been determined at Nil, there cannot be any charge to maintain such software/license. Finally, it is stated that as assessee failed to submit the list of employees who are utilizing such licenses and the work done by them, the TPO has rightly determined the ALP of such charges at Nil.

13. The 6^th ground of appeal reads as under:-

“6. On the facts and in the circumstances of the case and in law, the AO and the TPO erred in concluding and the DRP erred in confirming the adjustment of Rs.3,03,08,932/- relating to the international transaction of payment of trademark fees to associated enterprise by determining its arm’s length price at NIL instead of Rs.3,03,08,932/-.”

14. During the year under consideration, the assessee had paid royalty / fee for use of trademark /brand name ‘SULZER’ which is owned by its AE. To determine ALP of trademark royalty, the assessee had considered comparable uncontrolled price (‘CUP’) as the most appropriate method. It claimed that the use of brand name / trademark of ‘SULZER’ has resulted in certain benefits to the assessee for which it paid royalty to its AE and hence, the payment of royalty made by the assessee towards use of trademark was at arm’s length.

However, the TPO observed that the assessee is a public company incorporated on 19.06.1974; there exists two trademark license agreements between the assessee and Sulzer Management AG; though, the first agreement is in operation since, 2008, the assessee has started paying the trademark royalty from FY 2011-12. Elaborating further, the TPO held that the assessee was making such intra-group payments under the head technical knowhow /royalty in earlier years and no payment was being made to the AE, however without any established benefits accruing to it, the assessee has started making such payments to the AE. The TPO Referred to the OECD guidelines for the proposition that the expected benefit must be sufficiently direct and substantial so that an independent recipient in similar circumstances, would be prepared to pay for it and if, no benefit has been provided or was expected to be provided and the benefit is so remote, the service cannot be charged. Observing that the assessee has failed in the present case to prove with proper documentation and evidence that the services are actually rendered and received and the payments are commensurate with the benefits derived from them, the TPO proposed the ALP of the trademark as Nil.

15. Before us, the Ld. Counsel submits that the assessee is a licensed manufacturer engaged in the business of manufacturing and selling of industrial pumps; it had entered into a trademark license agreement with Sulzer Management AG i.e AE for use of the trademark; by virtue of said license agreement, the AE grants assessee right to use the trademark ‘SULZER’ on goods produced by the assessee. It is further explained that the assessee was originally incorporated in India as Khimline Pumps Limited in 1973 by Indian promoters. Grudally, Sulzer Group increased its stake in the assesse to acquire controlling interest in it and currently owns 99.53% shares in it; hence, the presence of Sulzer Group in India should be considered from the year in which the assessee became a subsidiary of Sulzer Group i.e from 1998 and not 1974.

Elaborating further, the Ld. Counsel explains that Sulzer Group has more than 135 years of experience in pump development and manufacturing worldwide ; Sulzer Group is a global player in manufacturing of pumps and has supreme technologies which produce different types of pumps with high quality ; hence, at the initial stage the main objective of the Sulzer Group was to revamp the business of the then Khimline Pumps Limited and enhance the technology so as to manufacture different types of pumps used in varied industries ; hence, Sulzer Group initially provided drawings of pumps and technical know-how to the assessee so as to equip the assessee with the required wherewithal to meet the global standards in pump industry.

It is thus stated that the assessee and the AE had mutually agreed to pay fees for trademark only after the assessee was equipped enough to manufacture pumps as per the standard of Sulzer Group ; hence, the AE and the Assessee entered into an agreement for paying royalty from 1 January 2008; however, due to commercial and business reasons it was mutually agreed between the parties to pay trademark fees from FY 2011-12. Finally it is stated that the benefits received by using the Sulzer brand are evident from substantial increase in sales and profits before tax (nine times) of the assessee since, 1998 to FY 2011-12.

16. On the other hand, the Ld. DR submits that though, the assessee has given the details of increase in the sales on the basis of its own turnover, it has not co-related the increase in its turnover on the basis of its market share in similar line of business; it is imperative on the part of the assessee to show the increase in turnover and profit before tax by comparing it with the immediately preceding year when agreement for use of trademark / brand name ‘ SULZER’ which is owned by its AE, was not in existence.

The Ld. DR further explains that in the instant case, the assessee has failed to prove with proper documentation and evidence that the services are actually rendered and received and that payments are commensurate with the benefit derived from them. Thus, he supports the order passed by the AO

17. The 8^th ground of appeal reads as under:-

“8. On the facts and in the circumstances of the cast and in law, the AO and the TPO erred in concluding and the DRP erred in confirming the adjustment of Rs.11,05,979/- relating to the international transaction of payment for engineering services availed from associated enterprise by determining its arm’s length price at NIL instead of Rs.11,05,979/-.”

18. The assessee has availed certain design and engineering support from Sulzer Pumps (US) Inc., in respect of orders received from third parties. It has aggregated the transaction and benchmarked it under TNMM and claimed it to be at ALP. During the TP assessment proceedings, the TPO rejected the benchmarking study of the assessee and held that assessee has failed to establish the Need-Evidence-Benefit Test. Accordingly, the TPO determined the ALP of the transaction at Nil. The adjustment made was upheld by the DRP and followed by the AO.

19. In this regard, the Ld. Counsel submits that during the year under consideration, the assessee had received order pumps from third party customer and for that the assessee required certain design and engineering support from its AE, Sulzer Pumps (US) Inc., and accordingly, the assessee raised purchase/service request order of the AE to provide design and engineering support and as per the pricing arrangement between the assessee and the AE, the AE charges the assessee at cost plus 5% for providing engineering services.

It is stated by him that the assessee had submitted a detailed note on the nature of services received along with copy of the e-mail correspondences that took place between the assessee and the AE regarding the services; it had also submitted the invoices raised by the AE on the assessee for providing the engineering services to him. In this regard, the Ld. Counsel refers to the following invoices:-

Thus, it is stated by the Ld. Counsel that the tax authorities erred in holding that the assessee failed to substantiate its claim of having received the engineering services.

20. On the other hand, the Ld. DR submits that the assessee failed to produce before the TPO the details of employees of the AE who worked for the assessee, the time spent by them, the time sheets evidencing the time spent ect. Elaborating further, it is stated that it is to be ascertained, how the original cost was determined and how it has been treated in the books of the AE, as the costs are allocated, but not audited.

21. The 9^th ground of appeal reads as under:-

9. On the facts and in the circumstances of the case and in law, the AO and the TPO erred in concluding and the DRP erred in confirming the adjustment of Rs.20,61,798/- relating to the international transaction of payment for global IT services availed from associated enterprise by determining its arm’s length price at NIL instead of Rs.20,61,798/-.

22. During the year under consideration, the assessee had paidRs.20,61,798/- to its AE towards receipt of Global IT Services. In order to determine the ALP of the payment made, the assessee used TNMM as the most appropriate method. The tax authorities, however, rejected the benchmarking of the assessee and determined the ALP at Nil on account of the services being incidental and duplicative in nature.

23. In this context, the Ld. Counsel submits that the assessee receives certain IT services which form the base for the international communication between Sulzer entities. The centralized IT services such as Sulzer address book and parts of the e-mail services are secured by the AE. The Global IT support fees is charged by AE to the assessee on per user basis at the rate of 100 CHF per user. In this regard, the Ld. Counsel explains that the services provided by the centralized IT team of the group, i.e the AE, is used in the day to day operations and is critical for the operations of the assessee and hence, the assessee derives direct benefits and not incidental benefits from the use of such services. It is stated that in order to support its claim, the assessee had submitted copy of the invoices raised by the AE on the assessee and the sample e-mail correspondences to demonstrate the receipt of the services by the assessee in particular. The Ld. Counsel submits that it has received IT support services from its AE in subsequent years as well i.e., AYs 2014-15, 2015-16 and 2016-17, wherein the TPO has not made any disallowance on that account. Thus, it is submitted that the addition made to the income of the assessee on account of having made the payment for IT support services is liable to be deleted.

24. The Ld. DR submits that the TPO has rightly rejected the benchmarking of the assessee and determined the ALP at Nil on account of the services being incidental and duplicative in nature. Referring to the OECD guidelines, it is argued by him that the services in the present case do not warrant an allocation as those rendered result in an incidental benefit. Thus, the Ld. DR supports the order passed by the TPO and AO.

25. We have heard the rival submissions and perused the relevant materials available on record. Having narrated at length the order of the TPO/AO and DRP, the contentions of the Ld. Counsel and the Ld. DR, we adjudicate below the above grounds appeal.

We find that the assessee had filed before the TPO on 22.06.2015 (i) Transfer pricing study report for financial year 2011-12 (ii) Form 3CEB for FY 2011-12 (iii) Financial statements of Sulzer India for the year ended 31 March 2012.

The assessee had also filed before the TPO on 04.09.2015 i) Copies of agreements for Trademark fees between Sulzer Management AG and Sulzer India, (ii) Copies of third party comparable agreements w.r.t trademark fees, (iii) Single year comparable companies margin for FY 20 1 1 -12, (iv) Calculation of operating margin of Sulzer India for FY 2011-12, (v) Description of services and benefits received for payment of ASP management fees, (vi) Copy of agreement for ASP management fees, (vii) E-mail correspondences for payment of ASP management fees, (viii) Copy of inter-company agreement for SAP, (ix) Tickets raised by Appellant for SAP support services, (x) Agreement between Sulzer Holding Inc. and Microsoft Licensing GP, (xi) Agreement between Sulzer Holding Inc. and Sulzer Management AG, (xii) Inter-company memo between Sulzer Management AG and Sulzer India, (xiii) Inter-company invoices and trail of correspondence for engineering services.

The assessee had also filed before the TPO on 24.09.2015 (i) Show cause reply for ASP Management fees, (ii) Name of personnel, cost allocation and benefits received from ASP Management services, (iii) Description of services and cost allocation for payment of SAP software related support, (iv) Sample copies of inter-company invoices for SAP software related support, (v) Description of payment of annual charges towards Microsoft licenses fees, (vi) Invoice raised by Sulzer Management AG on SPIL for Microsoft licenses fees

The assessee had also filed before the TPO on 08.12.2015 (i) Certificate from Sulzer Management AG for Microsoft Licencce fees along with invoice from Sulzer Holding US to Sulzer Management AG for Microsoft licenses fees, (ii) Certificate from AE for payment of ASP Management fees, (iii) Certificate from AE for payment of SAP software related support

The assessee had also filed before the TPO 15.12.2015 (i) Show cause reply for SAP software related support, (ii) Sample copies of email correspondence for SAP software related support, (iii) Show cause reply for payment of trademark fees, (iv) Show cause reply for payment of engineering services, (v) Show cause reply for payment of annual charges towards Microsoft licenses fees, (vi) Brief description for payment of Global IT support service.

Finally, the assessee had filed additional evidences before the DRP on 10.06.2016 (i) Detailed note on engineering services along with copies of invoices, (ii) Copy of inter-company invoice for payment of Global IT support service, (iii) Sample copies of email correspondence w.r.t. Global IT support service, (iv) Analysis and benefits derived by use of Sulzer brand. 25.1 In the instant case, we are of the considered view that given the range of transactions involved, the arm’s length method cannot be adequately applied on a transaction-by-transaction basis. Accordingly, for the purpose of determining the ALP, the assessee has rightly aggregated for the purpose of benchmarking (i) purchase of raw materials, sale of finished goods and engineering services that are essentials to its business, (ii) payment of ASP charges, IT and service charges to assist in business administration and (iii) payment of commission that assists the assessee in obtaining purchase orders from third parties.

25.2 Let us discuss a bit on the concept of burden of proof. This ambiguous term refers to two distinct concepts. The first concept is known particularly the burden of persuasion. A party meets this burden by convincing the fact-finder to view the facts in a way that favours that party. Today the phrase burden of proof most often bears this meaning. The second concept is known unambiguously as the duty of producing evidence, the burden of going forward with evidence, the production burden or the burden of evidence. A party meets this burden by introducing enough evidence to have a given issue considered in the case.

In burden of proof, the onus frequently shifts as the case proceeds from the person on whom it rested at first to his opponent. This occurs whenever, a prima facie case has been established on any issue of fact or whenever a rebuttable presumption of law has arisen.

Thus, the phrase burden of proof is used in two distinct meanings viz, the burden of establishing a case and the burden of introducing evidence. It is well-settled that the primary onus is on the assessee to maintain documentation to demonstrate that the price charged in an international transaction complies with the ALP and the method followed to ascertain the price is the most appropriate method. The assessee discharges this onus by maintaining the documentation; thereafter, the onus shifts to the tax authorities. In the event, the tax authorities disagree with the assessee’s view and seek additional explanation, the burden of proof against shifts to the assessee to prove why the method adopted by the assessee is correct.

In the instant case, as narrated hereinabove the assessee has discharged its onus by maintaining the documentation. Further, during the TP proceedings, the assessee has filed before the TPO sufficient details called for. Then the burden of proof has shifted to the TPO. However, the TPO has made the disallowances / adjustments on general propositions. We are reminded by the great aphorism of Justice Oliver Wendell Holmes in Lochner v. New York, 198 U.S. 45,76 (1905) that “general propositions do not decide concrete cases.”

As mentioned earlier, the assessee vide letter dated 27.02.2015, 04.09.2015, 24.09.2015, 08.12.2015 and 15.12.2015 has filed sufficient details in response to the queries raised by the TPO during the course of TP proceedings. Further, the assessee has filed before the DRP additional evidence dated 06.06.2016. However, instead of examining / scrutinizing those submissions, the tax authorities have made disallowances/adjustments on general propositions.

Having considered the above factual scenario, we allow the 4^th , 5^th, 6^th, 7th, 8^th and 9^th ground of appeal.

26. The 10^th ground of appeal reads as under:-

“10. On the facts and in the circumstances of the case and in law, the AO and the TPO erred in concluding and the DRP erred in confirming the adjustment of Rs.33,23,965/- relating to the international transaction of charges pertaining to Restricted Stock Units issued by associated enterprise, by determining its arm’s length price at NIL instead of Rs.33,23,965/-.”

27. The assessee had granted Restricted Stock Units(‘RSUs) to one of its employees, Mr. Ramanathan Venkatasubramanian. The assessee submitted before the TPO that considering the experience and competence of the employee, his appointment was considered to be very crucial and instrumental for the growth of the company; the employee was associated with the assessee –company since August, 2009 and the RSUs were granted in order to retain and motivate him; the employee continued his employment with the company till the time the RSUs were vested with him and hence, he was granted 457 stock units of Sulzer AG, the AE; the shares of the AE are listed on the Swiss Stock Exchange and hence, the market value of the shares on the respective vesting dates was considered to determine the value of RSUs.

However, the TPO held that such RSUs were not issued for the benefit of the assessee and completed the assessment by re-computing the ALP of the international transaction relating to recharged RSUs as Nil. The DRP

confirmed the said addition excluding the global pension charges amounting to Rs.22,18,890/-. The AO has followed the order of the DRP.

28. In this regard, the Ld. Counsel refers to the detailed working of the cost of RSUs charges which was filed before the TPO. The same is extracted below:-

It is stated that the purpose of granting the RSUs to the employee was to retain and motivate for continuing his employment with the assessee and the assessee is expected to derive benefits from the employee’s experience and exposure and hence, the assessee had awarded RSUs to him. Considering the same, it is stated that any cost incurred in exercise of the RSUs by the employees typically represents the cost of the assessee-company and since, the cost was initially incurred by the AE, the assessee reimbursed the same to its AE as the same was for the benefit of the assessee-company.

Finally, the Ld. Counsel submits that the assessee had submitted before the TPO copy of agreement between the assessee and the AE and also a copy of the RSUs plan award agreement between the employee of the assessee and its AE; further, the recharge note issued by the AE on the assessee in accordance with the RSUs plan award agreement showing the total recharge amount by the assessee and screenshots giving the details of share price, were also filed before him.

Thus, the Ld. Counsel concludes that the addition made on this account is liable to be deleted

29. On the other hand, the Ld. DR relying on the order of the TPO submits that the assessee has not benchmarked the transaction separately and it is imperative that the assessee should have benchmarked this transaction separately as that is what is required under the Indian TP regulations. Referring the order of the TPO, it is submitted by the Ld. DR that RSUs have been granted by the AE to Mr. Venkatasubramanian, which is an independent transaction and therefore, there was no need for the assessee to reimburse the AE and the RSUs were not issued for the benefit of the assessee; the assessee cannot keep on reimbursing the payments made by the AE to anyone unless the payments are made on behalf of the assessee. It is further argued that the AE started to grant the RSUs to Mr. Venkatasubramanian much before the agreement was entered between the assessee and the AE and as is evident that the first RSU was granted in 2009, whereas the agreement was entered on 15.03.2011, which appears to be an afterthought. Reiterating the findings of the TPO, the Ld. DR concludes that the assessee cannot take on the liability of the AE on itself, and therefore rightly the ALP of the transaction has been determined at Nil.

30. We have heard the rival submissions and perused the relevant material available on record. Reasons for our decision are giving below.

As mentioned earlier, the assessee had filed before the TPO on 15.12.2015 (i) Brief description for payment of ‘RSUs’, (ii) copy of agreement of RSUs (iii) copy inter-company invoice for RSUs (iv) Screenshot giving details of share price for RSUs (xi) Copy of recharge cost plan provided by AE w.r.t. RSUs.

Also, the assessee had filed before the DRP on 10/06/2016 screenshots from assessee’s books of accounts reflecting reversal of charges w.r.t. RSUs in subsequent years.

Having examined the details filed by the assessee before the TPO, we find that the purpose of the Sulzer RSU plan is (a) to reward contribution to the long-term performance of the company (b) to align the interest of the participants of the Plan with those of the shareholders of the company(c) to provide the participants of the Plan with an opportunity to benefit from the shareholder value created through the share price appreciation and (d) to enable the company to attract, retain and motivate highly qualified employees.

Accordingly, such RSUs were granted to one of the assessee’s employee Mr. Venkatasubramanian. According to the agreement entered between the assessee and Sulzer Limited regarding the recharge of cost of such RSUs, the assessee had reimbursed its AE for the cost of RSU allotted to one of its employee. This is evident from the copy of the agreement filed before the TPO. The details of RSUs allotted to the assessee’s employee are as under:-

Accordingly, as per the date of joining Mr. Venkatasubramanian had been allocated 457 shares. The purpose of granting the RSUs to the employee was to retain and motivate him for continuing his employment with the assessee. The assessee expected to drive benefits from the employee’s experience and exposure and hence had awarded RSUs to him. Considering the same, any cost incurred in exercise of the RSUs by the employee typically represents the cost of the assessee-company. Since the cost was initially incurred by the AE, the assessee reimbursed the same to its AE as the same was for the benefit of the assessee-company.

Considering the above facts, we delete the adjustment of Rs.33,23,965/-and allow the 10^th ground of appeal.

31. The 11^th ground of appeal reads as under:-

“11. On the facts and in the circumstances of the case and in law, the AO has erred in concluding and the DRP erred in confirming that unreconciled income appearing in Form 26AS is unaccounted in the books of accounts amounting to Rs.9,70,797/-and should be charged to tax.”

32. During the course of assessment proceedings, the AO provided the assessee details available in AIR and asked the assessee to reconcile the TDS and receipts with the corresponding receipts accounted for in the books of accounts. The assessee could not reconcile an amount of Rs.9,70,797/- which was added by the AO.

33. The Ld. Counsel submits that the tax authorities has confirmed the addition of Rs.9,70,797/- to the income of the assessee being the unreconciled amount as per the books of accounts and Form 26AS. It is explained that the assessee was able to reconcile 97.17% of the entries recorded in its books of accounts and it was merely 2.83% of the entries which could not be reconciled by the assessee. Further, it is stated that merely because, it could not reconcile its 26AS and the books of accounts, the difference between the two cannot be said to be the income of the assessee.

34. On the other hand, the Ld. DR submits that as the assessee has failed to reconcile the receipt as reflected in the TDS return and the corresponding receipts in the books of the accounts of the assessee, the AO has rightly made an addition of Rs.9,70,797/-.

35. We have heard the rival submissions and perused the relevant materials available on record. In the instant case, admittedly there is difference in the receipts as per the TDS certificates and the receipts as appear in the books of accounts of the assessee. It is not a question of reconciling 97.17% of the entries and only 2.83% of the entries to be reconciled. It is the question of genuineness of the receipts and the amount involved. Therefore, we set aside the order of the AO on the above ground of appeal and restore the matter to him to pass an order afresh after giving reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant documents/ evidence before the AO. Accordingly, the 11^th ground of appeal is allowed for statistical purposes.

36. The assessee has filed an additional ground which is reproduced below:-

“That on the facts and in the circumstances of the case and in law, the amount paid by the assessee in the nature of Education Cess and Higher and Secondary Education Cess ought to be allowed as deduction in computing its business income for the year under consideration.”

37. The Ld. Counsel submits that for FY 2011-12, corresponding to the AY 2012-13, the assessee has paid a sum of Rs.51,28,703/- as Cess in the return filed by it. The assessee did not claim the amount paid as deduction in the return filed by it for AY 2012-13. It is stated that in the light of the recent decision delivered by the Hon’ble Bombay High Court in the case of Sesa Goa Ltd. v. Joint Commissioner of Income-tax [2020] 117 com 96 (Bombay.), the assessee is of the understanding that it is eligible for deduction of the amount paid as Cess for the year under consideration. Referring to the decision in NTPC Ltd. 229 ITR 383 (SC), The Ld. Counsel submits that the above mentioned additional ground of appeal is a pure question of law and the same may be admitted and adjudicated.

38. On the other hand, the Ld. DR submits that in the instant case, the assessee filed the return of income u/s. 139(1) and the said return is final and not revised ever. It is stated that if the additional ground of appeal is now admitted in favour of the assessee, it will result in reducing returned income. Elaborating further, it is explained by him that earlier upto 31^st March, 1989 “correctness and completeness” of return of income is the purpose of issue of notice u/s. 143(2), meaning final assessment can go either way, unlike provisions of law from 01.04.1989 [change brought above by Direct Tax laws (Amendment) Act, 1987] where purpose is “ to ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner”. Thus, as per him, post 01.04.1989, the outcome as a result of issue of notice u/s. 143(2) is restricted, unidirectional, for the purpose of revenue.

The Ld. DR further explains that the language of section 143(2) has undergone sea change; by not filing revised return of income u/s. 139(5), the legally available right under procedure prescribed by law is forfeited i.e, time barred; the adoption of appeal route to claim ineligible i.e, time barred claim ( restoration of a lost claim) is not acceptable and legally impermissible.

Summing up his arguments, the Ld. DR submits that there is a clear limitation inside section 143(2) after amendment w.e.f. 01.04.1989 and that limitation is cast in the powers available in the section, not unlimited power as prevailing prior to 01.04.1989; none of the existing case decisions of ITAT/HC/SC had occasion to discuss the limitation inside section 143(2) post amendment w.e.f. 01.04.1989 and possibility of consequent limitation in admission of additional grounds at appellate stage on totaling unconnected issues with the assessment proceedings; if limitation in power u/s. 143(1)/154 etc. applies, the same limitation in power in section 143(2) has to be factored before a decision of any additional ground is taken. Thus, it is stated by him that under each of sections being 143(1) or 143(2) or 154 or any other section has limited scope and action outside limit is not intended in any of these sections.

The Ld. DR refers and relies on the decision of the Hon’ble Bombay High court in the case of M/s. Ultratech Cement Ltd. vs. Addl.CIT (ITA No.1060 of 2014) order dated 18/04/2017.

39. We have heard the rival submissions and perused the relevant materials available on record. The reasons for our decisions are given below.

As mentioned earlier, for the year under consideration, the assessee has paid a sum of Rs.51,28,703/- as Cess in the return filed by it. It did not claim the amount paid, as deduction in the return filed by it for AY 2012-13. However, in the light of the recent decision of the Hon’ble Bombay High Court in Sesa Goa Limited (supra), the assessee has filed an additional ground claiming that it is eligible for deduction of the amount paid as Cess for the year under consideration.

In Ultratech Cement Ltd. (supra), the Bombay High Court has held that “ an additional ground relating to claim of deduction u/s.80IA could not be permitted to be raised, if necessary evidence that assessee was entitled to claim was not on record and the assessee had no reason to satisfy appellate authority that ground now raised was bonafide and same could not have been raised earlier for good reasons.”

The decision rendered by the Hon’ble Bombay High Court is a recent one – dated 28^th February, 2020. As mentioned earlier, the assessee has filed Form No. 36B along with the grounds of appeal on 13.02.2017. Thus there was no occasion for the assessee to file the above ground on 13.02.2017. It is well settled that the decision of the High Court would have binding force in the state in which the court has jurisdiction as held in CIT vs. Benoykumar 32 ITR 466 (SC); CIT vs. Jyotikana 32 ITR 705 (SC). Thus, the decision of the High Court are binding on the Sub-ordinate courts, authorities and Tribunal situated within its jurisdictional territory as held in Taylor vs. CIT 232 ITR 771; CGT v Jain 230 ITR 839; CIT v Sunil Kumar 212 ITR 238; CIT v Thana Elec 206 ITR 727; Indian Tube v CIT 203 ITR 54; CIT v Joshi and Joshi 202 ITR 1017. CIT v Highway 217 ITR 234; CIT v Maganlal 210 ITR 580.

The above additional ground is a purely legal one and following the decision in NTPC v. CIT (1998) 229 ITR 383 (SC), we admit it for adjudication. Further in Sesa Goa Ltd. (supra), the Hon’ble Bombay High Court has held that:

“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 before the Select Committee of the Parliament, it was decided to omit the word “cess” from the aforesaid clause from the Income-tax Bill, 1961. The effect of the omission of the word “cess” is that only any rate or tax levied on the profits or gains of any business or profession are to be deducted in computing the income chargeable under the head “profits and gains of business or profession”. Since the deletion of expression “cess” from the Income-tax Bill, 1961, was deliberate, there is no question of reintroducing this expression in Section 40(a)(ii) of IT Act and that too, under the guise of interpretation of taxing statute.

26. In fact, in the aforesaid precise regard, reference can usefully be made to the Circular No. F. No. 91/58/66-ITJ(19), dated 18th May, 1967 issued by the CBDT which reads as follows :—

“Interpretation of provision of Section 40(a)(ii) of IT Act, 1961 – Clarification regarding.- “Recently a case has come to the notice of the Board where the Income-tax Officer has disallowed the ‘cess’ paid by the assessee on the ground that there has been no material change in the provisions of section 10(4) of the Old Act and Section 40(a)(ii) of the new Act.

2. The view of the Income-tax Officer is not correct. Clause 40(a)(ii) of the Income-tax Bill, 1961 as introduced in the 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, 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 the decision of Privy Council in CIT Gurupada Dutta [1946] 14 ITR 100 (PC), where a union rate was imposed under a Village Self Government Act upon the assessee as the owner or occupier of business premises, and the quantum of the rate was fixed after consideration of the ‘circumstances’ of the assessee, including his business income. The Privy Council held that the rate was not ‘assessed on the basis of profits’ and was allowable as a business expense. Following this decision, the Supreme Court held in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT 1971 [82 ITR 580] that the expression ‘profits or gains of any business or profession‘ has reference only to profits and gains as determined in accordance with Section 29 of this Act and that any rate or tax levied upon profits calculated in a manner other than that provided by that section could not be disallowed under this sub-clause. Similarly, this sub-clause is inapplicable, and a deduction should be allowed, where a tax is imposed by a district board on business with reference to ‘estimated income‘ or by a municipality with reference to ‘gross income’. Besides, unlike Section 10(4) of the 1922 Act, this sub-clause does not refer to ‘cess‘ and therefore, a ‘cess‘ even if levied upon or calculated on the basis of business profits may be allowed in computing such profits under this Act.”

Since, the above issue has been raised for the first time before the Tribunal, we deem it appropriate to restore the issue back to the AO for passing an order in the light of the ratio laid down in Sesa Goa Ltd. (supra). Thus the additional ground of appeal is allowed for statistical purposes.

40. In the result, the appeal for AY 2012-13 is partly allowed.

At the end, we discuss the grounds of appeal for AYs 2013-14 and 2014­15. During the course of hearing the Ld. counsel submits that he would not like to press the 5^th ground of appeal (revised) for AY 2014-15. Having considered his submission, we dismiss the 5^th ground of appeal for AY 2014­15 as not pressed.

We find grounds of appeal for AYs 2013-14 and 2014-15 are similar to AY 2012-13. Similar is the additional ground of appeal decided hereinabove.

As the grounds of appeal in AY 2013-14 and AY 2014-15 are similar to grounds of appeal for AY 2012-13 and facts being identical, our above decision for AY 2012-13 applies mutatis mutandis to AYs 2013-14 and 2014­15.

41. To sum-up, the appeals are partly allowed.

Order pronounced in the open Court on 23/03/2021.