Expeditors International (India) Pvt. Ltd. Vs DCIT (ITAT Delhi)
Education Cess is not of the nature described in sections 30 to 36, Education Cess is not in the nature of capital expenditure, Education Cess is not personal expense of the Assessee, it is mandatory for it to pay Education Cess and for the purpose of computation of Education Cess, the Income ‘Tax’ is taken as the criteria for computational purpose. Thus, the expense of Education Cess is mandatory expenses to be paid but does not fall under capital expense and personal expenditure and hence may be allowed as deduction.
We have also gone through the various judgments of judicial authorities pan India wherein the fresh claim of the assessee is considered and the deduction u/s 37 of Education Cess has been allowed. The Hon’ble High Court of Bombay held that the appellate authorities may confirm, reduce, enhance or annul the assessment or remand the case to the AO, because the basic purpose of a tax appeal was to ascertain the correct tax liability in accordance with the law.
Hence, keeping in view the provisions of the Act pertaining to Section 40(a)(ii) and Section 115JB, Circular of the CBDT No. 91/58/66-ITJ(19), the orders of Co-ordinate Benches of ITAT and judicial pronouncements of the Hon’ble High Court of Bombay and Hon’ble High Court of Rajasthan, we hereby hold that the assessee is eligible to claim the deduction of the ‘Education Cess’ as per the provisions of Section 37 of the Income Tax Act.
FULL TEXT OF THE ORDER OF ITAT DELHI
Since, the issues involved in ITA Nos. 17 to 20/Del/2021 are identical, they were heard together.
2. In ITA No. 17/Del/2021, the following grounds have been raised by the assessee:
“1. That on the facts and circumstances of the case and in law, the Assessing Officer ought to have considered that the education cess paid on the income tax was an allowable deduction for computing total income given the fact that the same was not hit by the provisions of Section 40(a) (ii) of the Act.”
3. In ITA No. 2242/Del/2015, following grounds have been raised by the assessee:
“1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld CIT(A) is bad in law and void ab-initio.
2. Disallowance of lease line connectivity charges (VSAT uplinking charges) amounting to Rs. 1,16,28,390/- paid by the appellant.
2.1 That on the facts and circumstances of the case and in law, the Ld CIT(A) has erred in not providing an adequate opportunity to the appellant of being heard and explained before treating the lease line charges as royalty liable to tax in breach of the principles of natural justice.
2.2 (a) Without prejudice to the above, that on the facts and circumstances of the case and in law, the Ld CIT(A) has erred in treating the lease line connectivity charges (VSAT uplinking charges) amounting to Rs.1,16,28,390/- as royalty under Explanation 6 to Section 9(1)(vi) of the Income Tax Act, 1961 (“the Act”) without providing any reasons and without appreciating that the amendments in the Act cannot be read into the Indo-US DTAA.
2.2 (b) That on the facts and circumstances of the case and in law, the Ld CIT(A) has erred in treating the payment of lease line connectivity charges as liable for tax and therefore disallowing the expense u/s 40(a)(i) of the Income-tax Act, 1961 (‘Act’).
2.2 (c) That on the facts and circumstances of the case and in law, both the Ld AO and the Ld CIT(A) has erred in considering the amount of the payment of lease line connectivity charges as Rs.11,628,390 instead of correct amount of Rs.3,119,927 as per the financial statements.
3. That on the facts and in the circumstances of the case and in law, the Ld CIT (A) has erred in not considering the provisions of Article 12 (3) of India-USA Double Taxation Avoidance Agreement (“The Treaty”) in accordance with section 90 of the Act.
4 That the Ld CIT(A) has erred in law in following the order of the Hon’ble Mumbai ITAT in case of Viacom 18 Media (P.) Ltd. Vs ADIT [2014] 44 taxmann.com 1 (Mumbai Trib) while ignoring the judgment of Hon’ble jurisdictional Delhi High Court in case of Infrasoft Ltd (39.taxmann.com 88) for arriving at the conclusion that the amendment in the Act overrides the benefit under the India-USA tax treaty.
5 On the facts and in the circumstances of the case and in law, the Ld CIT (A) has erred in upholding the levy of interest u/s 234B of the Act made by the A O.”
4. In ITA No. 2242/Del/2015, the assessee has also raised additional ground of appeal under Rule 11 of the Income Tax (AT) Rules, 1963 which is as under:
“6. That on the facts and circumstances of the case and in law, the Assessing Officer ought to have considered that the education cess (EC) and Secondary & High Education Cess (SHEC) paid on the income tax was an allowable deduction for computing total income given the fact that the same was not hit by the provisions of Section 40(a)(ii) of the Act.”
5. In ITA No. 2260/Del/2015, following grounds have been raised by the revenue:
“1. On the facts and in the circumstances of the case, the ld. CIT (A) erred in law in deleting the addition of Rs.25,01,93,313/- made on account of Arm’s Length Price.
2. On the facts and in the circumstances of the case, the ld. CIT (A) erred in law in deleting the addition of Rs.1,82,94,611/- made on account of non-deduction of TDS in respect of payment made towards Global Account Management charges.”
6. In ITA No. 5994/Del/2017, following grounds have been raised by the revenue:
“1. The ld. CIT (A) erred on law and on the facts of the case in deleting the addition of Rs.24,61,83,809/- made by the AO on account of ALP adjustment for royalty.
2. The ld. CIT (A) erred in law and on the facts of the case in deleting the addition of Rs.2,36,48,060/-made by the AO on account of global accounts adjustment and deleting Rs.1,82,94,611/- on account of lease line expenses.”
7. In ITA No. 3513/Del/2017, following grounds have been raised by the revenue:
“1. The ld. CIT (A) erred in law and on facts in deleting the addition of Rs.35,43,86,010/- made by the AO on the working of TPO made on account of CUP method was used to determine ALP of Infra Group Services as “Royalty”.
2. The ld. CIT (A) erred in law and on facts in deleting disallowances of Rs.3,19,94,651/- for u/s 40(a)(ia) of the Act. The judgment of the Hon’ble High Court relied upon is under challenge in SLP.”
8. In ITA No. 5538/Del/2018, following grounds have been raised by the revenue:
“1. The ld. CIT (A) erred in law and on the facts of the case in deleting the addition of Rs.32,79,49,164/- made on account of Arm’s Length Price.
2. The ld. CIT (A) erred in law and on the facts of the case in deleting the addition of Rs.3,84,88,293/-made on account of non-deduction of TDS in respect of payment made towards Global Account Management Charges.
3. The ld. CIT (A) erred in law and on the facts of the case in deleting the addition of Rs.1,81,052/-made on account of disallowance of expenses u/s 40(a)(ia) of the Act.”
9. In ITA No. 6953/Del/2018, following grounds have been raised by the revenue:
“1. The ld. CIT (A) erred in law and on the facts of the case in deleting the addition on account of difference in disallowance on a/c of Arm’s Length price of Rs.43,78,37,733/- on account of royalty payment.
2. The ld. CIT (A) erred in law and on the facts of the case in deleting the addition on account of Global Account Management Services off Rs.2,93,44,862/-on account of payment for fee for Technical Services (FTS), liable for withholding of tax u/s 195 of I.T. Act and in the absence of the same, are correctly added by the Assessing Officer u/s 40(a)(ia) of the Income Tax Act, 1961.”
10. The issues are common in all the 10 appeals hence adjudicated together.
11. The assessee is a part of the Expeditors Group which is engaged in the provision of global logistics services. The group is headquartered in Seattle, Washington and operates in three segments, i.e. airfreight, ocean freight and ocean services (customs brokerage and import services). It has offices in 167 locations across the globe and has 13 international service centres located worldwide.
12. The Assessee is engaged in the provision of logistics services in the Indian region. The logistics services provided ranges from packing, loading/ unloading, trucking, containerization, customs clearance and other cargo handling activities besides moving the goods via air/ sea. Expeditors India’s functions comprise the Indian leg of a logistics contract involving the transportation of consignments from the consignee (or Indian port/ airport) to the Indian Port/ airport (or consignee) while another Group entity typically handles similar services at the other end of the consignment in their respective region.
ITA No. 2260/Del/2015 A.Y. 2009-10(Ground No. 1)
ITA No. 5994/Del/2017 A.Y. 2010-11(Ground No. 1)
ITA No. 3513/Del/2017 A.Y. 2011-12(Ground No. 1)
ITA No. 5538/Del/2018 A.Y. 2012-13(Ground No. 1)
ITA No. 6953/Del/2018 A.Y. 2014-15(Ground No. 1)
Royalty:
13. The assessee contended that the international transactions undertaken by the assessee justified under the TNMM using 6 comparables in the similar line of business. OP/OC of the assessee is 8.23% as against 5.15% of the comparables. The assessee has also argued that the payment of royalty should be treated as justified. The assessee has also contended that these services are essential in a logistics support company and if some companies in the comparable list are not paying for such services, then, they will end up paying it in some other form either by incurring such expenses themselves by hiring such services from third parties. The fact that the PLI of the assessee is over and above the comparables show that the payments of these services made by the assessee is cheaper compared to the market price of such services.
14. The assessee had relied on the decision of Mumbai Bench of the ITAT in the case of Dresser-Rand India Pvt. Ltd. vs. Addl. CIT (ITA No. 8753-Mum-2010) wherein it has been held that how an assessee conducts his business is not for the revenue authorities to decide what is necessary for an assessee and what is not. Further, the above decision has upheld the use of TNMM as a most appropriate to benchmark the management charges. The assessee has also relied on the decision of the Hon’ble Delhi High Court in the case of CIT vs. EKL Appliances Limited wherein it has been held that the tax administrations should not disregard the actual transaction undertaken by the Assessee with its AE, unless the economic substance of the transaction differs from its form or where the substance and the form are the same but the conduct does not represent the manner in which two parties would have commercially interacted. The assessee has also relied on the decision of the Delhi Tribunal in the case of AWB India Pvt. Ltd vs. Addl. CIT (ITA No. 4454/Del/2011) wherein following the principle as laid down by the Hon’ble High Court in the case of EKL Appliances Ltd.(supra) it has been held that the assessee has the right to enter into an agreement according to which its business interests are protected and it is the Assessee’s prerogative to see and decide its business expediency.
15. The assessee has also furnished the case of TATA services ltd. which exclusively provides management services to the TATA group companies as an Indian example for requirement/ payment for such services. The documents filed before the US Tax Authority by the group company was also provided before the TPO which states that these services are provided to the group companies at arm’s length price. The assessee has also submitted that they provided the documentary evidences like the intra net snap shots, percentage of nominated business (global business referred by the related entities to the assessee) received by the assessee which are parts of the services for which the assessee pays the consideration in the form of royalty.
16. The assessee has also stated that the cost base of the AE which provides these services need not be the only basis for allocation of the service charges to the group companies. As these services are ultimately benefitting the assessee in terms of increasing its turnover, sales of the assessee is taken as the basis for allocation. This method is consistently followed by the assessee over the years and by the group companies world over.
17. The royalty payment is based on the agreement between the assessee and its parent company. The agreement is dated 15.12.2001. This issue of payment of royalty was subject matter the appeal before the Tribunal for the assessment year 2005-06 in ITA No. 2128/Del/2011 order dated 17.12.2020.
18. The relevant portion of the order of the Co-ordinate bench is as under:
“17. We find that CIT(A) while deciding the issue in favour of the assessee has given a finding that assessee had received the services received from its US parent company to whom the royalty was paid by the assessee. She has further given a finding that the TPO’s conclusion that “when the Revenue was split on the basis of FAR analysis, then no further payment would have been made by the assessee. Therefore, I am holding that ALP of royalty payment as nil” was without any basis or analysis on record. She has further given a finding that no evidence or analysis was made by TPO to hold that the arm’s length price for royalty transaction stands subsumed by the gross profit split on revenue received from logistics services on a predetermined basis. She has further given a finding that TPO has not providing any analysis or evidence to support his findings that no material benefit has been received by the assessee and no evidence has been brought on record to demonstrate that assessee’s business could be managed and operated by exclusion of various technical, operating and strategic services extended by the AE to the assessee. She has further noted that assessee was following the same business model, the royalty paid since 2001 has been found to be on an arm’s length basis and no adjustments were made in the past by TPO. It is a fact that CIT(A) has also considered the supplementary TNMM analysis to check the impact of royalty payment on assessee’s profit margin that of independent comparable companies to come to a conclusion that the ratio of operating profit to cost at sales of the assessee is comparable to that of uncontrolled entities but we are of the view that her decision to grant relief is not based solely on the aforesaid supplementary analysis furnished by the assessee at the behest of CIT(A). We find that CIT(A) has taken into consideration various other factors (which are extracted herein above) to come to the conclusion that the AO/TPO was not justified in making the addition. Considering the totality of aforesaid facts, we are of the view that as far as merits of the deletion of addition is concerned, no fallacy in the findings of CIT(A) has been pointed by the Revenue. We find no reason to interfere in the order of CIT(A) and thus the grounds of Revenue are dismissed.”
19. Respectfully following the decision of Co-ordinate Bench of ITAT in AY 2005-06 the AO is directed to delete the addition made on account adjustment of royalty.
ITA No. 2260/Del/2015 A.Y. 2009-10(Ground No. 2)
ITA No. 5994/Del/2017 A.Y. 2010-11(Ground No. 2)
ITA No. 3513/Del/2017 A.Y. 2011-12(Ground No. 2)
ITA No. 5538/Del/2018 A.Y. 2012-13(Ground No. 2)
ITA No. 6953/Del/2018 A.Y. 2014-15(Ground No. 2)
GAM expenses:
20. Global Accounting Manager (GAM) is a team of employees fully responsible to take care of a particular global customer of the Expeditors group and having operations in many countries. The Expeditor entity having the GAM team on its payroll has to incur expenses on the GAM team and their activities, viz. salary, operational expenses etc. These expenses are distributed to various countries in proportion to the revenue earned by Expeditors in that country from that particular customer account. The assessed has also reimbursed GAM charges to Expeditors Int’l of Washington Inc, USA. The payment represents costs allocated to the assessee on account of global customers.
21. The AO considered these expenses as payment of salary to non-resident and accordingly held that the same is liable to withholding tax under section 192 of the Act. In the absence of tax withholding, AO disallowed the expense under section 40(a) of the Act.
22. The Assessee has submitted that the payment to be classified as salary, it is necessary to have an employer-employee relationship between the payer and the payee. The principles according to which the relationship between employer and employee or master and servant is to be determined are well- settled, one of them being existence of a right of control on the manner in which the work is to be done. Assessee has relied on the decision of the Hon’ble Supreme Court in the case of State of Gujarat v. Raman Lal Keshav Lal Soni (AIR 1984 SC 161) and submitted that the payment cannot be considered as responsible for withholding any tax from these payments under section 192 of the Act. It was argued that the payment is a reimbursement by the assessee to other group companies on account of allocated expenses incurred by the GAM team. There are various judicial precedents wherein it has been held that reimbursement of expenses is not subjected to tax in India:
