TMI Blog2021 (2) TMI 1319X X X X Extracts X X X X X X X X Extracts X X X X ..... ibed in Rule 8D vide the IT(Fifth Amendment) Rules 2008, w.e.f 24.03.2008 thus, no infirmity arises from the disallowance worked out by the A.O by following the said prescribed method. The Ground of appeal No. 1 raised by the assessee is dismissed. Disallowance u/s 14A r.w Rule 8D(2)(iii) while disposing off the assessee s appeal - We herein direct the A.O to consider only those investments which had yielded dividend income for the purpose of computing the average value of investments‟ for computing the disallowance u/s 14A r.w. Rule 8D(2)(iii). The Ground of appeal No. 2 is partly allowed for statistical purposes. Disallowance of interest expenditure u/s 14A r.w Rule 8D(2)(ii) - revenue is aggrieved with the order of the CIT(A) wherein it is stated that the appellate authority had wrongly directed the A.O to follow the decision in the case of HDFC Bank, Mumba[ 2014 (8) TMI 119 - BOMBAY HIGH COURT] - HELD THAT:- We find that no such direction/observation is discernible from the order of the CIT(A). In fact, as the A.O had not made any disallowance of any interest expenditure u/s 14A r.w Rule 8D(2)(ii) during the year in question thus, there was no occasion on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee before us from its AEs for providing corporate guarantee for and on their behalf, which was been benchmarked by it by applying external CUP method was at arm s length and no adjustment as regards the same was liable to be made. We herein direct the A.O/TPO to vacate the upward transfer pricing adjustment made as regards the international transaction of providing of corporate guarantee by the assessee to its AEs. The Grounds of appeal raised by the assessee are allowed in terms of our aforesaid observations. Levy of Education Cess and the Secondary and Higher Education Cess on the total income of the assessee is allowable as deduction u/s 37 - HELD THAT:- As relying on SESA GOA LIMITED case [ 2020 (3) TMI 347 - BOMBAY HIGH COURT] we herein direct the A.O to allow the assessee s claim for deduction of education cess and secondary and higher education cess u/s 37 of the Act. The additional ground of appeal no. 2 is allowed. - ITA No. 4177/Mum/2018, ITA No.3638/Mum/2018 - - - Dated:- 15-2-2021 - Shri S. Rifaur Rahman, Accountant Member and Shri Ravish Sood, Judicial Member For the Assessee : Shri Sa ndeep Bhalla, A.R For the Revenue : Shri Sushil Kumar Mishr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and in law, the Ld. Commissioner of Income-tax (Appeals) has erred in determining the arm's length rate in respect of the corporate guarantee / counter guarantee given/arrange by the Appellant, at 1.80% per annum after arbitrarily reducing 0.2% from the guarantee rate of 2% per annum determined by the Assessing officer / Transfer Pricing Officer. The Appellant submits that the said approach adopted by Ld. Commissioner of Income-tax (Appeals) and the Assessing Officer / Transfer Pricing Officer is arbitrary, ad-hoc, unjustified, solely based on assumptions not backed by scientific basis of computation and invalid. 6. The Ld. Commissioner of Income-tax (Appeals) while determining the rate at 1.80% per annum has contradicted its own view that corporate guarantee rates cannot be compared to bank guarantee rates. The Appellant prays that the scientific benchmarking conducted considering the various factors by the Appellant needs to be accepted. 7. On the facts and in the circumstances of the case and in law and without prejudice to the preceding grounds, the appellant submits that the average inter-bank guarantee rate adopted by the Assessing Officer/ Transfer Pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while calculating the disallowance u/s 14A r.w.r 8D, without considering the fact that the order of HDFC Bank did not address the aspect of determination of disallowance u/s 14A as per rule 8D which was applicable from A.Y. 2008-09 onward. 2. On the facts and circumstances of the case and in law, the Ld CIT(A) erred in advising the AO to consider only those Investment made in the Non-subsidiary company which have yielded dividend income for the purpose of the disallowance u/s 14A r.w.r. 8D(2)(iii) without appreciating that the CBDT Circular No. 5 of 2014 dt. 11.02.2014 clearly states that an amount equal to one-half percent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and till last day of the previous year needs to be disallowed. 3. On the facts and circumstances of the case and in law, the Ld CIT(A) erred in not appreciating that the CBDT circular does not differentiate between investment which have yielded dividend income during the year and investment which may yield divided income. 4. The appellant prays that the order of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the normal provisions at Rs. 431,19,29,420/- and determined the book profit‟ under Sec. 115JB at Rs. 413,64,82,161/-. 5. Aggrieved, the assessee assailed the order passed by the A.O under Sec. 143(3) r.w.s 144C(3), dated 30.05.2016 in appeal before the CIT(A). It was stated by the assessee that no disallowance u/s 14A r.w Rule 8D was called for in its case. It was submitted by the assessee that its disallowance of Rs. 67,32,57,565/- made in its original return filed on November 29, 2012 was thereafter on the basis of a valid revised return of income filed on March 28, 2014 restricted to an amount of Rs. 1,46,90,230/-. Further, it was submitted by the assessee that no direct expenditure was incurred for earning the exempt dividend income. As regards the investments made by the assessee towards exempt income yielding shares, it was submitted by the assessee that out of the total value of shares of domestic companies of Rs. 1775,26,37,570/-, investments in shares amounting to Rs. 1494,85,27,160/- were made in the earlier assessment years. It was, thus, the claim of the assessee that the investment in the shares of domestic companies were made over the years and not out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s original return of income, on the basis of a valid revised return of income. Also, it was observed by the CIT(A) that unlike the preceding years the A.O in the case of the assessee for the year in question had not worked out any disallowance u/s 14A r.w Rule 8D(2)(ii). In the backdrop of the aforesaid facts, the CIT(A) directed the A.O to follow the directions that were given in context of the aforesaid issue while disposing off the appeal of the assessee for A.Y 2010- 11, while computing the disallowance u/s 14A for the year in question. As regards the grievance of the assessee that the A.O had erred in adding the disallowance worked out u/s 14A r.w Rule 8D for computing the book profit‟ u/s 115JB of the Act, the CIT(A) relying on the order of the Special bench‟ of the Tribunal in the cae of ACIT, Circle 1(7), New Delhi Vs. Vireet Investment Pvt. Ltd. (ITA No. 503/Del/2012, dated 16.06.2017), therein observed that computation as contemplated in clause (f) of Explanation 1 to Sec. 115JB(2) was to be made without resorting to the machinery proviso provided in Sec. 14A r.w Rule 8D of the Income tax Rules, 1962. 7. Before us, it was admitted by the authorised repres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of the CIT(A), we find that he had while restoring the aforesaid issue directed the A.O to follow certain directions, viz. : (a) Follow decision in the case of HDFV Bank, Mumbai Vs. DCIT-2(3), Mumbai Ors dated 25.02.2016 r.w CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom).(HC) (b) Investments made in the non-subsidiary company which have yielded dividend income can only be considered for the purpose of the disallowance under Sec. 14A r.w. rule 8D(2)(iii) (c) Investment earning interest income is to be eliminated in computation of disallowance under Sec. 8D(2)(ii). 8. As both the assessee and the revenue are aggrieved with the observations of the CIT(A) w.r.t the issue of disallowance u/s 14A r.w Rule 8D, we shall, therefore, deal with the same. On a perusal of the respective grounds of appeal raised by both the parties, we find, that the assessee is inter alia aggrieved with the order of the CIT(A) on the issue of disallowance u/s 14A, for the reason, that instead of accepting its claim for restricting the disallowance u/s 14A r.w Rule 8D to an amount of Rs. 88,26,166/- as against that which was suo motto offered in the return of income at Rs. 12, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee that the disallowance under Sec. 14A is liable to be restricted to the extent of the exempt income received or receivable by the assessee during the year in question, the same, merits acceptance. Our aforesaid view is fortified by the judgement of the Hon ble High Court of Delhi in Joint Investments Pvt. Ltd. Vs. CIT (2015) 372 ITR 694 (Del). We, thus, in terms of our aforesaid observations uphold the restoration of the aforesaid issue by the CIT(A) to the file of the A.O, with a rider that the disallowance be restricted to the extent of the exempt income received or receivable by the assessee during the year under consideration. 9. We shall now deal with the claim of the revenue that the CIT(A) while directing the A.O to reconsider the assessee s claim for reduction of disallowance u/s 14A, had erred, in directing the A.O to follow the decisions of the Hon ble High Court of Bombay in the case of HDFC Bank, Mumbai Vs. DCIT -2(3), Mumbai and Others, dated 25.02.2016 r.w. CIT Vs. HDFC Bank Ltd, (2014) 366 ITR SOT (Bom), for the reason, that the said judicial pronouncements did not address the aspect of determination of disallowance under Sec. 14A as per Rule 8D that was appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any are dismissed, while for the additional ground of appeal No. 12 raised by the assessee is allowed. The Grounds of appeal Nos. 1 to 3 raised by the revenue are partly allowed in terms of our aforesaid observations. We have deliberated on the aforesaid issue under consideration for the year in question and find, that the assessee is aggrieved with the disallowance u/s 14A r.w Rule 8D(2)(iii) worked out by the A.O at Rs. 8,17,52,359/- as against Rs. 1,46,90,230/- that was suo motto offered by it in its revised return of income. Before adverting any further, we may herein observe that the additional ground of appeal raised by the assessee wherein it had sought restriction of the disallowance u/s 14A to the extent of the dividend income received during the year under consideration merits acceptance. Accordingly, following our view taken while disposing off the cross-appeals of the assessee and the revenue for A.Y 2010-11 and A.Y 2011-12 vide our consolidated order passed in ITA No. 2927/Mum/2018 and ITA No. 3145/Mum/2018, dated 28.01.2021, we herein direct the A.O to restrict the disallowance u/s 14A to the extent of the exempt dividend income received by the assessee during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We shall now deal with the grievance of the revenue that the CIT(A) has erred in advising the A.O to consider only those investments made in the nonsubsidiary companies which had yielded dividend income for the purpose of disallowance u/s 14A r.w Rule 8D(2)(iii), which as claimed by the revenue is contrary to the CBDT Circular No. 5 of 2014, dated 11.02.2014. We find that the aforesaid grievance of the revenue had been addressed by the Tribunal while disposing off the revenue s appeal in the case of the assessee for A.Y 2010-11 in ITA No. 3145/Mum/2018, dated 28.01.2021. It was observed by the Tribunal that it was the claim of the revenue that the CIT(A) was in error in directing the A.O to consider only those investments made in non-subsidiary company which had yielded dividend income for the purpose of disallowance under Sec. 14A r.w. Rule 8D(2)(iii) could not be accepted as the same was contrary to the CBDT Circular No. 5 of 2014, dated 11.02.2014. Observing that a similar reliance placed by the revenue on the aforesaid CBDT Circular No. 5 of 2014, dated 11.02.2014 was rejected by the Hon ble High Court of Madras in Redington India Ltd. Vs. Addl. CIT (2016) 97 CCH 219 (Mad) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Credit to the foreign banks in respect of the credit facilities that were provided by them to its AEs, viz. (i). Elsamex S.A., Spain; and (ii). ITNL International Pte Ltd., Singapore. On a perusal of the records, we find that the assessee had provided corporate guarantee to its AEs, viz. (i). corporate guarantee to its AE i.e Elsamex S.A., Spain on EURO 37.5 million which was to remain in force till the said amount of credit facility was not repaid in full by the borrower or the guarantor; (ii). corporate guarantee to its AE i.e ITNL International Pte Ltd., Singapore on USD 125 million (with an option to increase further by USD 25 million) out of which the AE had used only USD 140 million; and (iii). Stand by Letter of Comfort/Guarantee issued in favour of its AE i.e Elsamex S.A., Spain. The assessee company had during the year charged guarantee fees of 1% p.a of the value of guarantee facility provided to its AEs. As regards the stand by letter of credit the assessee company had only recovered the actual bank charges from the AEs. The guarantee fee charged and the bank charges recovered by the assessee from its AEs during the year are tabulated as under: Sr. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nker s guarantee, and hence, a discounting over the bank guarantee would be required. After considering the various factors, viz. risk profile and final status of applicant; period/amount /terms/securities of the guarantee; and difference between the bank guarantee and the corporate guarantee, the TPO adopted the average of the bankers rate of 2% per annum for charging the guarantee fees and made an upward transfer pricing adjustment of Rs. 6,19,73,996/- as regards the international transaction of provision of corporate guarantee by the assessee to its AEs. 16. After receiving the order of the TPO u/s 92CA(3), the A.O passed a draft assessment order u/s 143(3) r.w.s 144C(1), dated 31.03.2016, wherein he inter alia proposed to make an upward transfer pricing adjustment of Rs. 6,19,73,996/-. However, the assessee vide its letter dated 25.04.2016 requested that a final assessment order be passed. Accordingly, the A.O framed the assessment vide his order passed u/s 143(3) r.w.s 144C(3), dated 30.05.2016, wherein he inter alia made a transfer pricing adjustment of Rs. 6,19,73,996/-. 17. On appeal, the CIT(A), vide his order dated 05.03.2018 observed that the TPO had carried out ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctive contentions in context of the aforesaid issue in question. As observed by us hereinabove, the assessee had charged guarantee fees of 1% p.a of the value of corporate guarantee facility provided to its AEs. However, the A.O after ostensibly considering certain factors, viz. risk profile and final status of applicant; period/amount /terms/securities of the guarantee; and difference between the bank guarantee and the corporate guarantee, had adopted the average of the bankers rate of 2% per annum for charging the guarantee fees and made an upward transfer pricing adjustment of Rs. 6,19,73,996/- w.r.t the international transaction of providing of corporate guarantee by the assessee to its AEs. On appeal, the CIT(A) holding a conviction that the rate of 2% adopted by the TPO for benchmarking the aforesaid international transaction was close to the SBI rates and required to be further discounted thus, substituted the same by a rate of 1.80%. In our considered view the very basis adopted by the TPO for benchmarking the international transaction of providing of corporate guarantee by the assessee for and on behalf of its AEs i.e by considering the average of the bankers rate of 2% pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble High Court of Bombay in the case of Sesa Goa Limited vs. Joint Commissioner of Income-tax (2020) 107 CCH 375 (Bom). In the case before the Hon ble High Court the following substantial question of law was inter alia raised : iii. Whether on the facts and in the circumstances of the case and in law, the Education Cess and Higher and Secondary Education Cess is allowable as a deduction in the year of payment. After exhaustive deliberations, the Hon ble High Court had observed that the legislature in Sec. 40(a)(ii) had though provided that any rate or tax levied on profits and gains of business or profession shall not be deducted in computing the income chargeable under the head profits and gains of business or profession , but then there was no reference to any cess . Also, the High Court observed that there was no scope to accept that cess being in the nature of a tax was equally not deductible in computing the income chargeable under the head profits and gains of business or profession . It was further observed that if the legislature would had intended to prohibit the deduction of amounts paid by an assessee towards say, education cess or any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the income chargeable under the head profits and gains of business or profession . However, the Respondent Revenue contends that cess is also included in the scope and import of the expression any rate or tax levied and consequently, the amounts paid towards the cess are not liable for deduction in computing the income chargeable under the head profits and gains of business or profession . 18. In relation to taxing statute, certain principles of interpretation are quite well settled. In New Shorrock Spinning and Manufacturing Co. Ltd. Vs Raval, 37 ITR 41 (Bom.), it is held that one safe and infallible principle, which is of guidance in these matters, is to read the words through and see if the rule is clearly stated. If the language employed gives the rule in words of sufficient clarity and precision, nothing more requires to be done. Indeed, in such a case the task of interpretation can hardly be said to arise : Absoluta sententia expositore non indiget. The language used by the Legislature best declares its intention and must be accepted as decisive of it. 19. Besides, when it comes to interpretation of the IT Act, it is well established that no tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the legislature has not done so means that the legislature did not intend to prevent the deduction of amounts paid by a Assessee towards the cess , when it comes to computing income chargeable under the head profits and gains of business or profession . 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 expr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Vs Gurupada Dutta 14 ITR 100, where a union rate was imposed under a Village Self Government 15 TXA17 18-13 dt.28.02.2020 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 he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... July, 2019) by the ITAT, Pune. 32. Again, Ms. Linhares, learned Standing Counsel for the Revenue was unable to say whether the Revenue had instituted the appeals in the aforesaid matters. Mr. Ramani, learned Senior Advocate for the Appellant submitted that to the best of his research, no appeals were instituted by the Revenue against the aforesaid decisions of the ITAT. 33. The ITAT, in the impugned judgment and order, has reasoned that since cess is collected as a part of the income tax and fringe benefit tax, therefore, such cess is to be construed as tax . According to us, there is no scope for such implications, when construing a taxing statute. Even, though, cess may be collected as a part of income tax, that does not render such cess , either rate or tax, which cannot be deducted in terms of the provisions in Section 40(a)(ii) of the IT Act. The mode of collection, is really not determinative in such matters. 34. Ms. Linhares, has relied upon M/s Unicorn Industries Vs Union of India and others, 2019 SCC Online SC 1567 in support of her contention that cess is nothing but tax and therefore, there is no question of deduction of amounts paid towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. She submits that this is what precisely held by the ITAT in its impugned judgments and orders and therefore, the same, warrants no interference. 38. Although, it is true that the Appellant Assessee did not claim any deduction in respect of amounts paid by it towards cess in their original return of income nor did the Appellant Assessee file any revised return of income, according to us, this was no bar to the Commissioner (Appeals) or the ITAT to consider and allow such deductions to the Appellant Assessee in the facts and circumstances of the present case. The record bears out that such deduction was clearly claimed by the Appellant Assessee, both before the Commissioner (Appeals) as well as the ITAT. 39. In CIT Vs Pruthvi Brokers Shareholders Pvt. Ltd. 349 ITR 336, one of the questions of law which came to be framed was whether on the facts and circumstances of the case, the ITAT, in law, was right in holding that the claim of deduction not made in the original returns and not supported by revised return, was admissible. The Revenue had relied upon Goetze (supra ) and urged that the ITAT had no power to allow the claim for deduction. However, the Divi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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