Case Law Details

Case Name : Asian Paints Ltd Vs Add. CIT (ITAT Mumbai)
Appeal Number : I.T.A. No. 2754/Mum/2014
Date of Judgement/Order : 03/02/2021
Related Assessment Year : 2009-10

Asian Paints Ltd Vs ACIT (ITAT Mumbai)

We have considered rival submissions in the light of decisions relied upon and perused material on record. Undisputedly, the assessee in its computation of income has computed disallowance under section 14A of the Act at Rs.23,98,769 by applying certain principles of apportionment. Therefore, it is not a case of any disallowance being made by the assessee. In fact, a perusal of impugned assessment order clearly reveals that though a detailed submission was filed by the assessee justifying the suo motu disallowance, however, the Assessing Officer without recording a proper satisfaction to the effect that the computation made by the assessee is incorrect having regard to the books of account maintained, has proceeded to compute the disallowance simply on the reasoning that disallowance under section 14A of the Act has to be made by applying the methodology of Rule 8D. In our view, the aforesaid reasoning of the Assessing Officer is contrary to the mandate of section 14A(2) of the Act, therefore, unsustainable. Further, while deciding similar disallowance made by the Assessing Officer without recording proper satisfaction, the Tribunal, in assessee’s own case (supra) has deleted the disallowance. The aforesaid decision of the Tribunal was also upheld by the Hon’ble jurisdictional High Court (supra). In view of the above, we find no reason to uphold the disallowance made. Hence, we delete the same. This ground is allowed.

Assessee is eligible to claim deduction of education cess-

we find that the issue is squarely covered by the decision of the Hon’ble jurisdictional High Court in case of Sesa Goa Ltd vs JCIT (supra), wherein, it is held that education cess not being in the nature of rate or tax will not be covered u/s 40(a)(ii). The Hon’ble Rajasthan High Court has also expressed similar view in the decisions cited above. Even, different benches of the Tribunal have expressed identical view. In view of the above, we are unable to accept the submissions of learned Departmental Representative. Respectfully following the decision of the Hon’ble jurisdictional High Court (supra) and other decisions cited before us by the learned Counsel for the assessee, we hold that the assessee is eligible to claim deduction of education cess. This ground is allowed.

FULL TEXT OF THE ITAT JUDGEMENT

Captioned cross appeals arise out of the order dated 26-12-2013 of learned Commissioner of Income Tax (Appeals)-10, Mumbai for the assessment year 2009-10.

ITA No.2754/Mum/2014 (Assessee’s Appeal)

2. In the Memorandum of Appeal assessee had originally raised two effective grounds. Besides the above, subsequently, the assessee has raised three additional grounds, being ground nos. 3, 4 & 5. At the outset, we will deal with the main grounds raised by the assessee.

3. In ground 1, assessee has challenged addition of Rs.3,28,00,000/- on account of transfer pricing adjustment.

4. Briefly the facts are, the assessee, a resident company, is engaged in manufacture of paints and synthetic enamel in India and is considered to be a market leader. The assessee has also set up subsidiaries in various countries outside India for its business. During the year under consideration, the assessee had entered into various international transactions with its overseas associate enterprises (AEs). However, in this ground of appeal, we are concerned with the adjustment made on account of provision of letter of comfort. In course of proceedings before the Transfer Pricing Officer(TPO), he found that the assessee had issued non contractual letters of comfort / support to banks on behalf of some of its subsidiaries from time to time. He also noticed that while providing such letters of comfort / support, the assessee had not charged any fee. Being of the view that similar transactions between unrelated parties without charging fee would not have been undertaken, the TPO held that the transaction relating to provision of letter of comfort / support with AEs, is not at arm’s length. Having held so, he proceeded to determine the arm’s length fee for issuance of letter of comfort / support at 1.41% of loan availed by the AEs of Rs.82.07 crores. Accordingly, he proposed an adjustment of Rs.1,51,71,220. The adjustment proposed was added to the income of the assessee by the Assessing Officer while framing the assessment order. The assessee contested the aforesaid addition before the first appellate authority. After considering the submissions of the assessee in the context of facts and material on record, the learned Commissioner (Appeals) held that provision of letter of comfort to the AE is an international transaction. However, he did not agree with the decision of the TPO in applying the arm’s length fee of 1.4% on the loan taken. Equating the letter of comfort / support to corporate guarantee, learned Commissioner (Appeals) determined the arm’s length price of provision of letter of comfort / support at 20% of 0.20% which is the arm’s length price determined for provision of corporate guarantee. Thus, he sustained addition to the extent ofRs.3,28,280.

5. Drawing our attention to the letter of comfort / support, a sample copy of which is at page 123 of the paper book, the learned Counsel of the assessee submitted, the assessee has not undertaken any liability while providing such letter of comfort / support towards the loan availed by the AE. He submitted, as per the terms of the letter of comfort / support, assessee cannot be called upon to make good the loan amount in case of default by the AE. The only promise the assessee had made is to intimate the bank in case of any disinvestment/ divestment of share. He submitted, since there is no financial implication to the assessee arising out of the letter of comfort / support issued to the bank, it cannot be brought within the scope of international transaction. Hence, there cannot be any adjustment in that regard. In support of such contention, he relied upon the following decisions :-

(1) Indian Hotels Co Ltd vs Addl.CIT ITA 371/Mum/2010 & Others ord dt.31-01-2018

(2) M/s United Breweries (Holdings) Ltd vs Karnataka State Industrial Investment & Development Corporation Ltd – M.F.A No.4243 of 2007 (FPC)

(3) Tata International Ltd vs ACIT – ITA No.4376/Mum/2010 & Others dated 29-01-­2020

(4) The learned Departmental Representative strongly relying upon the observations of

6. The learned Commissioner (Appeals) submitted, by providing letter of comfort / support to the AE, the assessee has facilitated the loan availed by AE. Therefore, it has to be treated at par with corporate guarantee. Hence, the decision of learned Commissioner (Appeal) should be upheld.

7. We have considered rival submissions in light of the decisions relied upon and perused materials on record. After going through sample copy of letter of comfort / support given to the bank towards loan availed by the AE, we have noticed that there is no liability or responsibility fastened with the assessee for making good the liability of the AE in case of any default. There is nothing on record to suggest that in case of any default by the AE, the outstanding loan will be recovered from the assessee. Pertinently, while sustaining a part of the adjustment made by the TPO, learned Commissioner (Appeals) has equated the letter of comfort / support to corporate guarantee. In our view, on perusal of the letter of comfort / support, it cannot be construed to be in the nature of any sort of guarantee in respect of the loan liability of the AE. The only promise made by the assessee is, it will not make any divestment of the shares during the currency of the loan. In our view, in no way it makes the letter of comfort / support a guarantee of any kind as there is no financial implication on the assessee. On a careful reading of section 92B of the Income Tax Act, 1961 (in short, ‘the Act’), more particularly Explanation I(c), we are of the considered opinion that provision of letter of comfort / support cannot be termed as an international transaction within the meaning of the aforesaid provision. Our aforesaid view is well supported by the decisions cited by the learned Counsel for the assessee. Accordingly, we delete the addition of Rs.3,28,280/-. This ground is allowed.

8. In ground no. 2 assessee has challenged disallowance of Rs.102.26 lakhs u/s 14A of the Act r.w.r.8D.

9. Briefly the facts are, in course of assessment proceedings, the Assessing Officer noticed that during the year under consideration, the assessee had earned exempt income by way of dividend amounting to Rs.16,08,58,175/-.Whereas, the assessee on its own has disallowed an amount of Rs.23,98,769/- towards expenditure attributable to earning of exempt income. Being of the view that the disallowance computed by the assessee is not in accordance with Rule 8D and relying upon the decision of ITAT, Mumbai Special Bench in case of M/s Daga Capital Management Ltd (ITA No.8057/Mum/2003), the Assessing Officer disallowed an amount of Rs.1,26,25,090/-. Assessee contested the above disallowance before the first appellate authority. After considering the submissions of the assessee in the context of facts and materials on record; learned Commissioner (Appeals), however, did not find merit; hence, he sustained the disallowance made by the Assessing Officer. Of course, he directed the Assessing Officer to give the benefit of set off of suo motu disallowance made by the assessee.

10. The learned Counsel for the assessee submitted, before rejecting assessee’s computation of disallowance, the Assessing Officer has not recorded any satisfaction in terms of section 14A(2) of the Act, therefore, the disallowance made is unsustainable. He submitted, disallowance made by the Assessing Officer under identical facts and circumstances was deleted by the Tribunal while deciding assessee’s appeal in ITA No.7253/Mum/2012 dated 20­11-2015. He submitted, aforesaid decision of the Tribunal was upheld by the Hon’ble jurisdictional High Court while dismissing revenue’s appeal in Income Tax Appeal No.1464 of 2016 vide judgment dated 06-02-2019. Thus, he submitted, the issue is squarely covered by the aforesaid decision of the Hon’ble jurisdictional High Court.

11. The learned Departmental Representative strongly relied upon the observations of first appellate authority and Assessing Officer.

12. We have considered rival submissions in the light of decisions relied upon and perused material on record. Undisputedly, the assessee in its computation of income has computed disallowance under section 14A of the Act at Rs.23,98,769 by applying certain principles of apportionment. Therefore, it is not a case of any disallowance being made by the assessee. In fact, a perusal of impugned assessment order clearly reveals that though a detailed submission was filed by the assessee justifying the suo motu disallowance, however, the Assessing Officer without recording a proper satisfaction to the effect that the computation made by the assessee is incorrect having regard to the books of account maintained, has proceeded to compute the disallowance simply on the reasoning that disallowance under section 14A of the Act has to be made by applying the methodology of Rule 8D. In our view, the aforesaid reasoning of the Assessing Officer is contrary to the mandate of section 14A(2) of the Act, therefore, unsustainable. Further, while deciding similar disallowance made by the Assessing Officer without recording proper satisfaction, the Tribunal, in assessee’s own case (supra) has deleted the disallowance. The aforesaid decision of the Tribunal was also upheld by the Hon’ble jurisdictional High Court (supra). In view of the above, we find no reason to uphold the disallowance made. Hence, we delete the same. This ground is allowed.

13. Having decided the main grounds, now we will deal with additional grounds. After considering the rival submissions, we are of the view that the issues raised in the additional grounds do not require fresh investigation into facts and can be decided on the basis of material available on record. Therefore, we admit them.

14. In first additional ground numbered as ground 3 is on the issue of taxability of royalty income received from a subsidiary in Egypt. Briefly the facts are, during the year under consideration, the assessee had received royalty income of Rs.5.46 crores from one of its subsidiaries, in Egypt, viz. M/s SCIB Chemical – SAE.

15. Before us, the learned Counsel for the assessee submitted that as per Article 13 of India-Egypt Double Taxation Avoidance Agreement (DTAA), the royalty income is not taxable in India. He submitted, while deciding identical issue raised through an additional ground in Assessment Year 2008-09, the Tribunal has restored the issue to the Assessing Officer for fresh adjudication keeping in view the provisions of India-Egypt DTAA. He submitted, similar view was expressed by the Tribunal while deciding identical issue in Assessment Year 2006-07 in ITA No.3289/Mum/2015 dated 11-01-2017. Further, he submitted, in the draft assessment order passed for Assessment Year 2012-13 under section 143(3) r.w.s. 144C(1) of the Act, the Assessing Officer himself has accepted assessee’s claim that royalty income received from SCIB-SAE, Egypt is not taxable in India. Thus, he submitted, the issue may be restored back to the Assessing Officer for fresh adjudication.

16. The learned Departmental Representative strongly objecting to the ground now raised submitted, as the assessee had never claimed it in the return of income and had not raised the issue before the departmental authorities, the ground should not be admitted.

17. We have considered rival submissions and perused materials on record. Admittedly, in the return of income filed for the impugned assessment year the assessee had offered the royalty income received from its subsidiary in Egypt. For the first time through an additional ground raised before us the assessee has claimed that the royalty income is not taxable in India in view of Article 13 of India-Egypt tax treaty. No doubt, this is a purely legal issue. Further, we find that identical issue raised by the assessee through additional ground in Assessment Years 2008-09 and 2006-07 has been restored back to the Assessing Officer for fresh adjudication, keeping in view the provisions of the tax treaty between India and Egypt. We have also noted that while completing the assessment for Assessment Year 2012-13, the Assessing Officer has accepted assessee’s claim that royalty income is not taxable in view of Article 13 of India-Egypt tax treaty. In view of the above, we are inclined to restore this issue to the Assessing Officer for fresh adjudication keeping in view Article 13 of the India Egypt tax treaty as well as the decisions of the Tribunal. Needless to mention, the Assessing Officer shall afford reasonable opportunity of hearing to the assessee before finalising the issue. This ground may be treated as allowed for statistical purposes.

18. In additional ground numbered as ground no. 4, the assessee has claimed deduction of education cess paid on income-tax as allowable expenditure.

19. The learned Counsel for the assessee submitted, education cess paid on the tax computed is an allowable deduction. In this context, he relied upon the following decisions:-

(1) Sesa Goa Ltd vs JCIT (2020) 107 CCH 376 (Bom)

(2) Chambal Fertilizers & Chemicals Ltd vs PCIT – Income Tax Appeal No.52 of 2018 dt 31-07-2018 (Rajasthan High Court)

(3) Atlas Cocoa (India) Ltd vs ACIT – ITA No.1470/PUNE/2010 dt 21-10-2019

(4) Rekitt Benckiser (I) P Ltd vs DCIT (2020) 117 com 519 (Kol)

20. The learned Departmental Representative has filed a written submission, which reads as under :-

“ I. Education Cess- allowability as expenseAdditional Ground of the assessee

1. The Issue pertains to allowability of education cess as deduction. This is entirely unrelated to any of the issues which were subject matter of assessment or appeal. The recourse that should be available are as provided in statute which would be as available where the returned income is treated as the base. This was not raised before the assessing officer in the assessment proceedings and is therefore a settled matter. This is no different than the case, as Courts have held, that the revenue is precluded in raising additional grounds to bring a new issue for taxation that was not arising from the assessment order. This was not claimed in the return of income. It was neither the subject matter of the assessment order nor was it raised before AO or CIT(Appeals). Hence this additional ground raised on 10.8.20 numbered as ground no 4 in assessee’s appeal should not be admitted.

2. On merits of the claim, the contention of the revenue is that the same is disallowable u/s 40(a)(ii) and is not allowable u/s 37(1) as it is not incurred for business,

3. It is a well settled principle in the Indian context that income-tax of a taxpayer is not an allowable expenditure / deduction from taxable profits / income. This is also formally incorporated by section 40(a)(ii) of the Income-tax Act, 1961 (‘the Act’) which states as under:

“40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”, –

(a)(ii) any sum paid on account of any 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.

4. It is noted from the above that reference is to “any rate or tax”. Thus the reference is not to only a restricted definition of Income Tax canvassed by the assessee. It refers to any charge on the basis of profit and gains. There is a difference between “rate of tax” and “tax.

5. In the case of Indian Iron & Steel Co Ltd. v CIT (1968) 68 ITR 561 (Cal) which applied the Apex Court decision in the case of Tata Iron &Steel Co. Ltd. v State of Bihar (1963) 48 ITR 123(SC), it was held that in a mining business, profits accrue even at the stage of the mining and so a cess levied on the basis of the profits of the mine would not be deductible even though the assessee may not be selling the ore in that state. It is noted that interest paid u/s 220(2) of the Act for delayed payment of income tax is not allowable as it partakes the character of tax itself as held in Orissa Cement Ltd. v CIT (1993) 200 ITR 636(Del). Similarly it has been held that when tax is not an allowable expenditure , no expenditure in relation to the tax can be allowed as held in Mannalal Ratanlal v CIT (1965) 58 ITR 84 (Cal). Thus even interest on tax has been held not allowable though the term interest is not used in the section.

6. It is humbly submitted that the SC ruling in the case of Smith Kline & French [India] Ltd. 1996] 85 Taxrnan 683 (SC) in the context of disallowance of surtax under section 40(a)(ii) of the Act has not been appreciated by the Hon’ble Rajasthan HC. In this judgment, it was held by the SC that surtax was not allowable under section 40(a)(ii) of the Act since the same was in principle computed on business profits, going by the contextual meaning of provisions rather than literal reading of the same.

7. This SC judgment has also affirmed the Jurisdictional Hon’ble Bombay HC judgment in the case of Lubrizol India Ltd. [1991] 54 Taxman 363 (Bombay) where the broad and wide scope of the word ‘tax’ used in section 40(a)(ii) of the Act has been explained in detail. The Hon’ble Jurisdictional Bombay HC has held that:

The word ‘tax’ is used in conjunction with the words ‘any rate or tax’. The word ‘any’ goes both with the rate and tax.

– If the word ‘tax’ is considered only as per section 2(43) of the Act, the word ‘any’ used before it will be otiose and the further qualification as to the nature of levy will also become meaningless.

– The word ‘tax’ under section 2(43) of the Act is subject to “unless the context otherwise requires”.

– Accordingly, the word ‘any’ tax under section 40(a)(ii) of the Act refers to any kind of tax on the business profits or assessed at a proportion of or on basis of, any such business profits.

Although section 115JB of the Act (Minimum Alternate Tax) is a complete code by itself, the persuasive argument that the term ‘income-tax’ under Explanation2 to Section 115JB(2) includes ‘education cess’ and thus explains the intention of the Act, does not seem to have been taken before the Hon’ble Rajasthan HC.

8. The decisions cited by the assessee are the Hon’ble Rajasthan High Court in the case of Chambal Fertilizers and Chemicals Ltd. and the decision of the Hon’ble Bombay High the case of Sesa Goa Ltd. 117 com 96(Bom) which in turn follows the decision in the case of Chambal Fertilizers.

9. It is humbly submitted that in the case of Sesa Goa Ltd. the Hon’ble Bombay High Court queried the Ld Standing Counsel as to whether the Revenue had filed appeal against the decision of the Rajasthan High Court in the case of Chambal Fertilizers which could not be replied to by the Ld Standing Counsel. However, it is submitted that an SLP had been preferred by the Revenue against the decision of the Hon’ble Rajasthan High Court. This was dismissed on account of low tax effect.

Special Leave to Appeal (C) No(s). 10460/2018 (Arising out of impugned final judgment and order dated 15-05-2017 in ITA No. 919/2008 passed by the High Court Of Judicature For Rajasthan At Jaipur)

Nov 19, 2019

(2019) 106 CCH 0216 ISCC

10. The Hon’ble Bombay High Court, therefore, decided the issue on principles of interpretation of statute as urged by the appellant relying on Chambal Fertilizer’s case which relied in turn on Jaipuria Amalgamation Colleieris case.

11. Futher. as mentioned earlier, the Apex Court has explained the import of the phrase “any rate or tax levied” on “profits and gains of business or profession” mentioned in section. 40(a)(ia) in the case of Smith Kline and French (India) Ltd (219 ITR 581) which was not considered by the Hon’ble Bombay High Court in the case of Sesa Goa Ltd. and to that extent the decision is “per incuriam”.

12. In this regard it is to submit that Finance Act of the relevant financial year in chapter II mentions of surcharge as part of ‘income tax” as contained in section 2 This chapter is titled as “rates of income tax” and section 2 is under the broad subtopic “income-tax”. It is noteworthy to mention that subsection 11 of the section 2 mentions of the educational cess” being an additional surcharge and therefore, it is natural that it is part of “income tax” being only a surcharge.

13. It is also relevant to mention that section 40(a)(ii) mentions of ‘any rate or tax levied “as not an allowable expense. The above referred chapter II speaks of the same “rates” and income tax’. The decision of Rajasthan High Court, as referred above, it is humbly and respectfully submitted, has not considered this aspect. The said judgement relied primarily on a CBDT circular with respect to cess whose issuance date is far antedated to the inception of ‘education cess’ relevant to the current controversy and the Apex Court’s judgement in the case of Jaipuria Samla Amalgamated Collieries Ltd. in which their Honours held that cess was an allowable deduction. However. it is to bring to Your Honours’ notice that this judgement was concerned with the deducibility of road and public works cess under the Bengal Cess Act and education cess levied under the Bengal Primary Education Act and these cesses were determined not on the basis of profits and gains of business as computed under income tax act but were based on the annual net profits under relevant statutory provisions. The court therefore held that it was an allowable deduction as far as determination of the profits of business under income tax act is concerned.

14. Subsequent judgements of the Apex. Court in the case of Smith Kline and French (India) Ltd (219 ITR 581), judgement of High Court of Kerala in the case of AV Thomas and Co Ltd versus CIT (159 ITR 431) have reiterated this principle and distinguished Jaipuria Collieries judgement. Thus, it is humbly prayed that the judgement of Rajasthan High Court in Chambal Fertilisers and of Bombay High Court in Sesa Goa is per incuriamto this extent as the education cess presently under dispute is based on determination of profits under the head profits and gains of business and is to be computed as a rate of it.

15. Another factor that is worth considering is that the tax and consequent cess on it are ‘below the line entities’ in statement of accounts and therefore, can at best be considered as an application of profit rather than expenditure for the purpose of business. Alternatively, it can be said that when a business runs – to loss, it need not pay cess but yet that per se will not stop i he business from running. Therefore, the purpose of the cess can not, be- equated to the purpose of running the business.

16. It isfurther submitted that Bombay HC decision is per-ujcuriam as it has not taken into account the Apex Court judgement in C1T v. K. Srinivasan 83 ITR 346 (SC) that holds that surcharge levied by the Finance Act every year is to be treated as income-tax. The Supreme Court in CIT vs K. Srinivasan 83 ITR 346 (SC) that holds that surcharge levied by the Finance Act every year is to be treated as income-tax. The Supreme Court in CIT vs K.Srinivasan (1972) held – held – headnote – Section 2 of the Finance Act, 1964 – Income-tax and Super-tax – Assessment year 1964-65 – Whether term ‘income-tax’ as employed in section 2 includes surcharge and additional surcharge whenever provided -Held, yes.

Holds that- “The meaning of surcharge is to charge in addition or to subject to an additional or extra charge. If that meaning is applied to section 2 of the Finance Act, 1963, it would lead to the result that income-tax and super-tax were to be charged in. four different way or at. four different rates which may be described as(i) the basic charge or rate (In Part I of the First Schedule); (ii) surcharge: (iii) special surcharge; and. (iv) additional surcharge calculated in the manner provided in the Schedule. Read in this way, the additional charges form a part of the income-tax and super-tax. According to the revenue, the word ‘surcharge’ has been used in Article 271 for the purpose of separating it from the basic charge of a tax or duty of the purposes of distributing the proceeds of the same between the Union and the States. The proceeds of the surcharge are exclusively assigned to the Union.

Even in the finance Act itself it is expressly stated that, the surcharge is meant for the purpose of the union.

In the result, the view of the High Court could not be sustained. Thus, the words ‘income-tax’ in the Finance Act, 1964 in sub-section (2b) and sub-section (2)(b) of section 2 would include surcharge and additional surcharge.”

17. Under section 2(13] of the Finance Act 2018 (also earlier Finance Acts), ‘Health and Education Cess’ is an additional surcharge. Going by the ratio laid down by the SC, this cess. therefore, does qualify as Income-tax. It is worth noting that Cess is charged under sub-sections (13) of section 2 of Chapter 11 of the Finance Act. In this regard, it is relevant to note that the heading of Chapter II is ‘Rates of Income-tax’ and the heading of section 2 of Chapter II is ‘Income-tax’. It is, thus. It is thus very clear that Education Cess charged under sub-sections (11) and (12) of section 2 of Chapter II of the Finance Act is a part of Income-tax chargeable. Sec 2(37A) that defines rate or rates in force too refer to rates in Finance Act thereby taking under its sweep the cess being a surcharge.

18. As regards the CBDT circular referred to earlier, the removal of the word cess on advice of select committee cannot be a guiding factor for the simple reason that education cess has been defined as a rate/tax being part of the surcharge in relevant finance act. Had it been not done so, it would not have been tax and consequently, we could not have disallowed it under the circular. Conversely, without the select committee’s raison d’etre, it appeals to common sense that cess on State Acts, district boards. industry specific, computed on turn-over or otherwise, but not on profits was required to be allowed and hence it was removed from Act. Otherwise too the circular obviously did not create a vested right in the assessee so as to influence the outcome of the current dispute. The Circular in question is reproduced below.

SECTION 40(a)(ii) OF THE INCOME-TAX ACT, 1961- BUSINESS DISALLOWANCE TAXES – RATE OR TAX LEVIED ON PROFITS OMISSION OF WORD “CESS” FROM CLAUSE (a)(ii) – EFFECT OF SECTION -4O – ONLY TAXES PAID ARE TO BE DISALLOWED CIRCULAR : NO. 9l/58/66-ITJ|19). DATED 18-5-1967

1 . Recent!v a case has come to the notice of the Board where the Income-tax Officer has disallowed the “cess” paid by the assessee on “he -round that there has been no material change in the provisions of sectioni1 0(4) of the 1922 Act and section 40(a)(ii) of the 1961 Act.

2. The view of the Income-tax Officer is not correct. Clause 40(a)(ii) of the Income-tax Bill. 1.961, 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 derided 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 onwards.

3. The Board desire that the changed position may please be brought 10 one .nonce of all the Income-tax Officers so that further litigation on this account may be avoided.”

19. A careful reading of the circular suggests that taxes paid ;ire to be disallowed. It nowhere mentions that cess of every type has to be allowed. It obviously reserves the space under the nomenclature of cess wherein if still it retains character of tax. it: has to be disallowed. Excessive reliance on the select committee’s recommendation is. it is humbly submitted, ignoring the difference between interpretation of ‘current law’ and that of ‘to be enacted future law’. The gravamen in this respect is whether cess is tax and not absence the word cess from the section. Had the word cess remained in the section, there \vas no need for us to argue that cess is tax else it would tantamount to bis-an-idem (twice used term in the same section). Finally, as the cess is a rate charged on tax payable, am differential advantage meted out to assessees based on the nature of income, say for instance business as opposed to salary, may be vulnerable on vires for constitutionality.

20. The assessee referred to the inclusion of “cess” in section 43B to contend that it means that it is otherwise allowable. In my view, this is a misinterpretation. Firstly, before applying section 43B, the expense concerned must otherwise be allowable. The assessee is using section 43B to make an expense which is not otherwise allowable to make it allowable. Secondly, the term “cess” relates to various levies by other statutory authorities and not to “education cess” levied in addition to income tax.

21. The assessee has also mentioned that “education cess” is levied on Indirect Taxes also. This has no bearing on the “education cess” disallowable u/s 40(a)(ii).

22. An interesting point to be noted is that, if interpretation canvassed by the appellant is followed, the income-tax computation will become a loop or a reiterative calculation – education cess is computed on income-tax and when claimed as a deduction will change the base for income-tax amount on which “education cess” is to be again computed.

23. Thus it is humbly submitted that considering:

– the rationale of the SC judgment in case of Smith Kline and K. Srinivasan; jurisdictional Bombay HC judgement in case of Lubrizol; -these were not considered in the case of Chambal Fertilizers and Sesa Goa by the respective Hon’ble High Courts

– the fact that the SC judgment in case of Jaipuria and CBDT Circular of 1967 pertain to a period much before education cess was introduced; -‘education cess’ is not an expenditure incurred wholly and exclusively for the purpose of the business and hence not allowable;

-the Finance Act states that ‘education cess’ is in the nature of an additional surcharge , ‘surcharge’ on income-tax should be disallowed under section 40(a)(ii) of the Act.

It is humbly. prayed that the fresh claim of ..the assessee vide this additional ground may not be acceded to.”

21. Having considered rival submissions in the light of decisions relied upon, we find that the issue is squarely covered by the decision of the Hon’ble jurisdictional High Court in case of Sesa Goa Ltd vs JCIT (supra), wherein, it is held that education cess not being in the nature of rate or tax will not be covered u/s 40(a)(ii). The Hon’ble Rajasthan High Court has also expressed similar view in the decisions cited above. Even, different benches of the Tribunal have expressed identical view. In view of the above, we are unable to accept the submissions of learned Departmental Representative. Respectfully following the decision of the Hon’ble jurisdictional High Court (supra) and other decisions cited before us by the learned Counsel for the assessee, we hold that the assessee is eligible to claim deduction of education cess. This ground is allowed.

22. In the third additional ground numbered as ground no. 5, the assessee has raised the issue of applicability of beneficial rate as per the applicable DTAA to the dividend distribution tax (DDT) paid under section 115-O of the Act and has claimed refund of the excess amount.

23. Having considered rival submissions, we restore the issue to the Assessing Officer for examining assessee’s claim of applicability of beneficial rate of tax as per the applicable DTAA to the DDT paid under section 115-O of the Act. This ground is allowed for statistical purposes.

ITA No.4203/Mum/2015 (Department’s Appeal)

24. In ground no.1, the revenue has challenged the decision of learned Commissioner (Appeals) in restricting the adjustment of corporate guarantee to 0.2% p.a.

25. Briefly the facts are, in course of proceeding before the TPO, he noticed that the assessee had provided corporate guarantee to Standard Chartered Bank towards loan availed by two of its overseas AEs situated in Singapore and China. He found that for the corporate guarantee so provided, the assessee had charged commission of 0.20% to the AEs. Being of the view that commission charged to AEs for corporate guarantee is not at arm’s length, the TPO observed that considering the risk factor and safety level, assessee’s AEs can be given triple BBB grade, corporate fund as per the information received from M/s CIRISIL. He observed, while the yield on the AAA bond is 9.98% that of BBB Bond has to be taken with a 20% mark up on the credit spread. Accordingly, he determined the arm’s length price of corporate guarantee commission at 7.07% p.a., thereby, proposing an adjustment of Rs.7,08,95,979. The adjustment proposed by TPO was added to the income of the assessee. Assessee contested the addition before the first appellate authority. After considering the submissions of the assessee, in the context of facts and materials on record, the learned Commissioner (Appeals) noticed that in assessee’s own case for earlier assessment year, the Tribunal has accepted the commission on corporate guarantee charged at 0.20% to be at arm’s length. Following the same, he deleted the addition made on account of adjustment to the commission charged on corporate guarantee.

26. The learned Departmental Representative strongly relied upon the observations of the TPO and submitted that the determination of ALP at 7.07% is proper.

27. The learned Counsel for the assessee submitted that this issue is squarely covered by the decisions of the Tribunal in the preceding assessment years.

28. We have considered rival submissions and perused materials available on record. We find, this is a recurring dispute between the assessee and the revenue from earlier assessment years. While deciding assessee’s appeals for the assessment years 2006-07, 2007-08 and 2008­09, the Tribunal in separate orders has accepted commission on corporate guarantee provided to AEs charged at 0.20% to be at arm’s length. The aforesaid decisions of the Tribunal have been upheld by the jurisdictional High Court while dismissing the appeals of the revenue. The latest order passed by the Hon’ble High Court in this regard is for the assessment year 2008-09 in Income Tax Appeal No.1564 of 2016 order dated 06-02-2019. Therefore, following the consistent view of the co-ordinate benches and the Hon’ble jurisdictional High Court, we uphold the decision of learned Commissioner (Appeals) on this issue. Ground of the revenue is dismissed.

29. In ground no. 2, the revenue has challenged the decision of learned Commissioner (Appeals) restricting the disallowance on account of letter of comfort to 0.04% as against 1.41% made by the TPO. While deciding identical issue in ground no. 1 of assessee’s appeal in ITA No.2754/Mum/2014, accepting assessee’s claim we have held that provision of letter of comfort does not come within the ambit of international transaction defined under section 92B; hence, have deleted the adjustment. In view of the above, this ground does not require separate adjudication; hence, dismissed.

30. In ground no. 3, revenue has challenged allowance of assessee’s claim of deduction under section 35(2AB) of the Act.

31. Briefly the facts are, in the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed weighted deduction under section 35(2AB) at Rs.22.885 crores. Whereas, as per the certificate issued by Department of Industrial & Scientific Research (DSIR) to the Director General of Income-tax (Exemption), eligible R&D expenditure has been reduced to Rs.22.237 crores. Noticing the above, the Assessing Officer reduced an amount of Rs.32.40 lakhs from the deduction claimed by the assessee. The assessee contested the aforesaid disallowance before the first appellate authority. After considering the submissions of the assessee in the context of facts and materials on record and keeping in view the decision of the Tribunal in assessee’s own case for earlier assessment year, he directed the Assessing Officer to verify the nature of expenditure and if it is found that the expenditure so incurred is for the purpose of R&D, it has to be allowed.

32. The learned Departmental Representative submitted, deduction under section 35(2AB) of the Act has to be allowed on the basis of quantum of expenditure approved by DSIR.

33. The learned Counsel for the assessee submitted, the issue is covered by the decision of the Tribunal in assessee’s own case for Assessment Year 2007-08. He submitted, the revenue’s appeal against the decision of the Tribunal is still pending before the Hon’ble High Court.

34. We have considered rival submissions and perused the material on record. While deciding identical issue in assessee’s own case for Assessment Year 2007-08, the Tribunal in ITA No.2176/& 2178/Mum/2012 dated 20-12-2013 has directed the Assessing Officer to allow assessee’s claim of deduction, if, on verification it is found that the expenditure claimed was actually incurred on research and development activity irrespective of the fact whether the entire amount was approved by DSIR or not. Since, learned Commissioner (Appeals) has decided the issue keeping in view the aforesaid direction of the Tribunal, in our view, there is no infirmity in such decision. Accordingly, ground raised is dismissed.

35. In ground no. 4, the revenue has challenged deletion of disallowance made on account of expenditure incurred on television advertisement in relation to corporate advertisement.

36. Briefly the facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee had claimed deduction of Rs.37,31,78,551/- towards expenditure incurred for TV advertisement. After verifying the details furnished by the assessee, he noticed that a part of the expenditure incurred by the assessee is of enduring nature; hence has to be treated as capital expenditure. Further, he noticed, similar expenditure incurred in Assessment Years 2006-07 to 2008-09 was treated as capital expenditure by the Assessing Officer. Following the view taken in earlier assessment years, he disallowed an amount of Rs.10,84,64,506 by treating it as capital in nature. However, he allowed depreciation on such expenditure. Assessee contested the above disallowance before the first appellate authority. Taking note of the fact that similar disallowance made in earlier assessment years has been deleted by the Tribunal, the learned Commissioner (Appeals) deleted the disallowance.

37. We have considered rival submissions and perused materials on record. As could be seen, this is a recurring dispute between the parties since assessment year 2006-07 onwards. While deciding the issue in assessment years 2006-07 and 2007-08, the Tribunal has deleted similar disallowance made by the Assessing Officer. The aforesaid decision of the Tribunal has also been upheld by the Hon’ble jurisdictional High Court. In the latest order passed by the Tribunal for the assessment year 2008-09 in ITA No. 7253.Mum/2012 dated 20-11-2015, the Tribunal has reiterated its earlier view. In view of the aforesaid, we uphold the decision of learned Commissioner (Appeals) on the issue. Ground is dismissed.

38. In ground no. 5, revenue has challenged the decision of learned Commissioner (Appeals) in allowing assessee’s claim of additional depreciation.

39. Briefly the facts are, in course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed carried over amount of additional depreciation relating to the immediately preceding assessment year. Therefore, he called upon the assessee to justify the claim. Though, the assessee furnished a detailed submission stating that the balance portion of additional depreciation, which could not be claimed in the preceding assessment year has to be allowed in the impugned assessment year; however, the Assessing Officer was not convinced. Accordingly, he disallowed the additional depreciation claimed of Rs.1,72,86,752/-. Assessee contested the disallowance before learned Commissioner (Appeals). Taking note of the decision cited by the assessee including the decision of the Tribunal in assessee’s own case for Assessment Year 2008-09, learned Commissioner (Appeals) deleted the disallowance made by the Assessing Officer.

40. The learned Departmental Representative supporting the decision of the Assessing Officer submitted, additional depreciation is a onetime allowance granted to the assessee for installing new plant and machinery. Any unclaimed amount cannot be set off in the subsequent assessment year.

41. The learned Counsel for the assessee strongly relying upon the decision of the first appellate authority submitted, the issue is now squarely covered by a number of judicial precedents including the decision of the Tribunal in assessee’s own case.

42. We have considered rival submissions and perused materials on record. The facts on record clearly reveal that assessee had purchased and installed new plant and machinery in the preceding assessment year which is eligible for additional depreciation @20%. However, since the new assets were put to use for less than 180 days in the preceding assessment year, the claim of additional depreciation allowable at 20% was restricted to half of it, i.e. 50%. Thus, in effect, the assessee was allowed additional depreciation of 10%. Now, it is well settled by a number of judicial precedents that if for use of new plant and machinery for a period of less than 180 days the entire amount of additional depreciation cannot be claimed in the subject assessment year, the balance unclaimed amount can be claimed in the subsequent assessment year. It is also a fact on record, against similar claim allowed by learned Commissioner (Appeals) in assessee’s own case in Assessment Year 2008-09, the revenue has not preferred any appeal before the Tribunal. In view of the above, we uphold the decision of learned Commissioner (Appeals) on the issue. Ground raised is dismissed.

43. In ground 6, the revenue has challenged deletion of disallowance of Rs.1,610.45 lakhs on account of expenditure incurred on trip scheme.

44. Briefly the facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee had debited an amount of Rs.16,10,45,094/- towards expenditure incurred on account of trip scheme. Noticing this, he called upon the assessee to justify the claim. After verifying the details furnished by the assessee, the Assessing Officer observed that the amount was paid to SOTC for foreign trip of its dealers. Being of the view that the expenditure incurred was not for the purpose of assessee’s business, he held the same as not allowable. Further, he held that since the assessee has not deducted tax at source on the expenditure incurred, which is nothing but in the nature of commission paid to dealers and distributors, the same has to be disallowed under section40(a)(ia) of the Act. Accordingly, he disallowed the deduction claimed by the assessee. Assessee contested the disallowance before the first appellate authority. After considering the submissions of the assessee in the context of facts and materials on record, learned Commissioner (Appeals) deleted the disallowance made by the Assessing Officer.

45. Strongly relying upon the observations of the Assessing Officer, the learned Departmental Representative submitted, the expenditure incurred by the assessee for trip scheme is nothing but commission paid to dealers and distributors; hence, subject to deduction of tax under section 194H Act. The assessee having failed to do so, the amount has to be disallowed under section 40(a)(ia) of the Act.

46. The learned Counsel for the assessee submitted, there is no question of payment of any commission to the dealers and distributors as there is no principal – agent relationship between the assessee and them. He submitted, the transactions with the distributors were carried out purely on principal to principal basis. Therefore, there is no liability to deduct tax under section 194H of the Act. In support, the learned Counsel relied upon the following decisions:-

1. CIT, Pune vs Intervet India Pvt Lted (ITA 1616/2011–Bombay High Court)

2. CIT vs Reliance Xommunication Infrastructure Ltd (ITA no.702 od 12017 – Bombay High Court

3. DCIT vs BCH Electric Ltd (ITA 1336/Kol/2012)

4. ACIT vs Raymond Ltd ITA 5889/M/10

5. CIT vs Piramal Healthcare Ltd 230 Taxman 505 (Bom)

6. CIT vas Qatar Airways 332 ITR 253 (Bom)

7. Radhasaomi Satsang vs CIT (193 ITR 321 (SC)

47. Without prejudice, the learned Counsel submitted, since no amount has been paid or credited to the distributors, question of deduction of tax at source does not arise. Further, he submitted, whatever amount the assessee has paid to SOTC has been subjected to TDS provisions. Therefore, there cannot be any further disallowance under section 40(a)(ia) of the Act. Further, he submitted, the expenditure incurred is purely for the purpose of business as it is in the nature of an incentive linked to quantum of purchases made by the dealer. Finally, he submitted, the assessee is claiming such deduction for past 20 years. Except the impugned assessment year, the expenditure has never been disallowed. Therefore, there is no reason to deviate in the impugned assessment year.

47. We have considered rival submissions and perused materials on record. As could be seen from the facts on record, to expand its business the assessee has devised a trip scheme wherein it organized foreign trips to its dealers and distributors based on achieving a specific target assigned by the assessee. On achieving such target, the dealer / distributor is entitled to undertake the trip organized by the assessee through SOTC. Thus, from the aforesaid facts it is very much clear that the entire trip scheme is for the purpose of expanding assessee’s business by encouraging the dealers and distributors to achieve a specific target of purchase. Thus, the scheme is closely linked to assessee’s business activity. It is also a fact that the assessee has not paid any amount to the dealers and distributors, but amount spent has been paid to SOTC for organizing the trip. It is also a fact on record that the amounts paid to SOTC has been subjected to TDS as per the relevant provision. Therefore, the allegation of the Assessing Officer that the amount has not been subjected to deduction of tax is without any basis. As regards the applicability of section 194H of the Act, by no means, the Assessing Officer has established on record that dealers/distributors are agents of the assessee. Further, as we find, the trip scheme has been introduced by the assessee from past 20 years and the deduction claimed by the assessee on account of such trip scheme has never been disallowed by the Assessing Officer except for the impugned assessment year. Therefore, even applying the rule of consistency, the expenditure claimed by the assessee has to be allowed. Accordingly, we do not find any infirmity in the decision of learned Commissioner (Appeals). Ground raised is dismissed.

49. Ground nos. 7 & 8 are general in nature; hence dismissed.

50. As a result, appeal of the revenue is dismissed.

51. In conclusion, appeal of the assessee is partly allowed and appeal of the revenue is dismissed.

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