TMI Blog2020 (7) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer pricing adjustment as regards charging of notional interest on the share application money that was given by the assessee to its wholly owned subsidiary company viz. Saudi Ensas Company for Engineering Services WLL, UAE, for which allotment of shares was pending on 31.03.2012, remains the same as was there before the Tribunal in the assessee's own case for A.Y 2009-10 and A.Y 2010-11 [ 2019 (10) TMI 995 - ITAT MUMBAI] . Finding ourselves to be in agreement with the aforesaid view of the Tribunal, we respectfully follow the same. Accordingly, we uphold the deletion of the addition that was made by the A.O/TPO towards charging of notional interest on share application money pending allotment of shares with its wholly owned subsidiary company - Decided against revenue. - ITA No. 6612/Mum/2018 And ITA No. 7028/MUM/2018 - - - Dated:- 30-6-2020 - Shri Pramod Kumar (Vice President) And Shri Ravish Sood (Judicial Member) For the Assessee : Shri. Nitesh Joshi For the Revenue : Shri. Uodal Raj Singh, D.R ORDER PER RAVISH SOOD, JM The captioned cross-appeals filed by the assessee and the revenue are directed against the order passed by the CIT(Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al before or at the time of hearing of the appeal as they may be advised from time to time. Further, the assessee had also raised before us an additional ground of appeal, which reads as under: 1.1 Whether on the facts and in the circumstances of the case and position on law, the Education Cess and the Secondary and Higher Education Cess is a disallowable expenditure u/s 40(a)(ii) of the Income-tax Act, 1961. It was submitted by the ld. A.R that the aforesaid additional ground of appeal was being raised on the basis of the recent judgment of the Hon‟ble High Court of Bombay in the case of Sesa Goa Limited vs. Joint Commissioner of Income-tax (2020) 107 CCH 375 (Bom). The ld. A.R submitted that the Hon‟ble High Court in its said judgment had observed, that if the legislature intended to prohibit the deduction of amounts paid by an assessee towards Education Cess or any other Cess and Higher and Secondary Education Cess, then, the legislature could have easily included reference to cess in clause (ii) of Sec. 40(a). It was further submitted by the ld. A.R that the High Court had observed, that as the legislature had not included education cess or any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Interest on Share Application money pending allotment with its AE in UAE. ₹ 1,81,20,323/- Total ₹ 1,81,57,003/- Further, it was observed by the A.O that the assessee had received dividend income on its investment at ₹ 36,08,34,228/-, which comprised of viz. (i). exempt dividend income :₹ 12,80,54,497/-; and (ii).dividend from overseas company which was subject to tax : ₹ 23,27,79,731/-. Against the exempt dividend income, the assessee had suo motto disallowed an amount of ₹ 17 lacs u/s 14A of the Act. It was the claim of the assessee that it had not incurred any interest cost on borrowings for making investment in exempt income yielding assets. It was further submitted by the assessee that its investment portfolio was handled by its MIS department which primarily attended to its accounts and banking operations. As such, it was submitted by the assessee that it did not have a separate department for handling its investment portfolio. As regards the staff cost, operating and administrative expenses and establishment/general expenses of MIS depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be excluded for the purposing of computing the disallowance u/s 14A of the Act was concerned, the same was rejected by the CIT(A) in the backdrop of the judgment of the Hon‟ble Supreme Court in the case of Maxopp Investments Ltd. Vs. CIT, New Delhi (Civil Appeal No. 104-109 of 2015), dated 12.02.2018 (SC). Also, taking cognizance of the fact that the dividend received by the assessee from its investments made in foreign companies was taxable in India, the CIT(A) directed the A.O to exclude such investments for the purpose of computing the disallowance u/s 14A of the Act. As regards the TP adjustment of ₹ 36,682/-, it was observed by the CIT(A) that the assessee had a small outstanding towards re-imbursement of expenses aggregating to ₹ 4,84,879/- from its wholly owned subsidiary company viz. Saudi Enas Company for Engineering Services W.L.L that was situated in Saudi Arabia. The TPO applying interest rate of 7.81% on the said outstanding amount had made an upward adjustment of ₹ 36,880/-. Observing, that interest was rightly charged u/s 92 of the Act on the amount outstanding from the AE beyond reasonable period, the CIT(A) upheld the charging of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involved was not being pressed. Accordingly, the Ground of appeal No. 2 as per the concession of the ld. A.R is dismissed as not pressed. As regards the additional ground of appeal raised by the assessee was concerned, it was submitted by the ld. A.R that the same was squarely covered by the judgment of the Hon‟ble High Court of Bombay in the case of Sesa Goa Limited vs. Joint Commissioner of Income-tax (2020) 107 CCH 375 (Bom). It was averred by the ld. A.R, that as held by the Hon‟ble High Court as the legislature had not included education cess or any other cess in clause (ii) of Sec. 40(a), therefore, it would mean that there was no prohibition in claiming deduction of such amounts while computing the income of the assessee under the head Profits and gains of business or profession . 6. Per contra, the ld. D.R relied on the orders of the lower authorities. Insofar the issue pertaining to the disallowance u/s 14A was concerned, the ld. D.R fairly admitted that the same as held by the Tribunal in the preceding years i.e A.Y 2009-10 A.Y 2010-11 was required to be restored to the file of the A.O, with a direction to examine the sufficiency or correctness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly, the Hon‟ble High Court had concluded that there was no prohibition on the deduction of any amount paid towards cess in Sec. 40(a)(ii), while computing the income chargeable under the head profits and gains of business or profession , observing as under : 16. The aforesaid question arises in the context of provisions of Section 40(a)(ii) which inter alia provides that notwithstanding anything to the contrary in sections 30 to 38 of the IT Act, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession , - (a) in the case of any assessee (ia)........................... (ib)................................ (ic) ............................ (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. [Explanation 1.-For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion as to a tax. Nothing is to be read in, nothing is to be implied, into the provisions which has not been provided by the legislature [See CIT Vs Radhe Developers 341 ITR 403 ]. One can only look fairly at the language used. No tax can be imposed by inference or analogy. It is also not permissible to construe a taxing statute by making assumptions and presumptions [See Goodyear Vs State of Haryana 188 ITR 402(SC)]. 21. There are several decisions which lay down rule that the provision for deduction, exemption or relief should be interpreted liberally, reasonably and in favour of the assessee and it should be so construed as to effectuate the object of the legislature and not to defeat it. Further, the interpretation cannot go to the extent of reading something that is not stated in the provision [See AGS Tiber Vs CIT 233 ITR 207]. 22. Applying the aforesaid principles, we find that the legislature, in Section 40(a)(ii) has provided that any rate or tax levied on profits and gains of business or profession shall not be deducted in computing the income chargeable under the head profits and gains of business or profession . There is no reference to any cess . Obvious ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 30. The Division Bench of the Rajasthan High Court (Jaipur Bench) in Income Tax Appeal No.52/2018 decided on 31st July, 2018 (Chambal Fertilisers and Chemicals Ltd. Vs CIT Range-2, Kota ), by reference to the aforesaid CBDT Circular dated 18th May, 1967 has held 16 TXA17 18-13 dt. 28.02.2020 that the ITAT erred in holding that the education cess is a disallowable expenditure under Section 40(a)(ii) of the IT Act. Ms. Linhares was unable to state whether the Revenue has appealed this decision. Mr. Ramani, learned Senior Advocate submitted that his research did not suggest that any appeal was instituted by the Revenue against this decision, which is directly on the point and favours the Assessee. 31. Mr. Ramani, in fact pointed out three decisions of ITAT, in which, the decision of the Rajasthan High Court in Chambal Fertiliser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and cleared from a unit located in the Industrial Growth Centre or other specified areas with the State of Sikkim. The High Court had held that the levy of education cess, higher education cess and NCCD could not be included in the expression duty of excise and consequently, the amounts paid towards such cess or NCCD did not qualify for exemption under the exemption Notification. This view of the High Court was upheld by the Apex Court in Unicorn Industries (supra ). 36. The aforesaid means that the Supreme Court refused to regard the levy of education cess, higher education cess and NCCD as duty of excise when it came to construing exemption Notification. Based upon this, Mr. Ramani contends that similarly amounts paid by the Appellant Assessee towards the cess can never be regarded as the amounts paid towards the tax so as to attract provisions of Section 40(a)(ii) of the IT Act. All that we may observe is that the issue involved in Unicorn Industries (supra ) was not at all the issue involved in the present matters and therefore, the decision in Unicorn Industries ( supra ) can be of no assistance to the Respondent Revenue in the present matters. 37. Ms. Linha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm, reduce, enhance or annul the assessment or remand the case to the Assessing Officer. This is because, unlike an ordinary appeal, the basic purpose of a tax appeal is to ascertain the correct tax liability of the Assessee in accordance with law. 40. The decision in Goetze (supra) upon which reliance is placed by the ITAT also makes it clear that the issue involved in the said case was limited to the power of the assessing authority and does not impinge on the powers of the ITAT under section 254 of the said Act. This means that in Goetze (supra), the Hon'ble Apex Court was not dealing with the extent of the powers of the appellate authorities but the observations were in relation to the powers of the assessing authority. This is the distinction drawn by the division Bench in Pruthvi Brokers (supra) as well and this is the distinction which the ITAT failed to note in the impugned order. 41. Besides, we note that in the present case, though the claim for deduction was not raised in the original return or by filing revised return, the Appellant Assessee had indeed addressed a letter claiming such deduction before the assessment could be completed. However, even if w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is of the aforesaid facts, we are of the considered view that the lower authorities had rightly declined to accept the suo motto disallowance u/s 14A of ₹ 17 lac made by the assessee on an ad hoc basis. At the same time, we find that the Tribunal while dealing with an identical claim of ad hoc disallowance u/s 14A offered by the assessee in A.Y 2009-10 and A.Y 2010-11, had for the sake of consistency followed its earlier order passed in the assessee‟s own case for A.Y 2008-09, and had restored the matter to the file of the A.O with a direction to examine the sufficiency or correctness of suo moto disallowance made by the assessee having regard to the assessee‟s accounts and explanations and proceed further after recording speaking reasons for his nonsatisfaction. The Tribunal while disposing off the appeals of the assessee for A.Y 2009-10 and A.Y 2010-11 in ITA No. 2822/Mum/2017 and ITA No. 2823.Mum/2017, had observed as under: 3.3.4 So far as the merits of the case are concerned, we find that this issue was restored by Tribunal to the file of learned AO in AY 2008-09 vide para 4.3.4 of ITA No. 1667/Mum/2012 order dated 08/07/2016, wherein learned AO was dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces of in law, the CIT,A) is correct in deleting the interest charged of ₹ 1,81,20,323 on the average share application money of ₹ 23.8 crore advanced by the assessee to the AE Saudi Ensas Company, treated by the TPO as loan ? 1.2 Whether on the facts and circumstances of the case and in law, the C/T(A) is correct in deleting the said interest in just one paragraph in a non-speaking manner without understanding the basic fact that the TPO treated the share application money pending for quite a long time since 31.03.2011 without allotment of any shares (even as on 31.03.2015) as loan, and in stating that section 928 does not apply as no income arises without understanding the above fact. 1.3 Whether on the facts and circumstances of the case and in law, the C1T(A) is correct in ignoring the Hon,. Del. High Court decision in the case of CIT vs. EKL Appliances Ltd, 345 ITR 241 wherein it has been held that such re-characterisation is possible in exceptional circumstances as under ? 18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form ; and (ii) where the form and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as regards charging of notional interest on the share application money that was given to its wholly owned subsidiary company viz. Saudi Ensas Company for Engineering Services WLL, UAE, for which allotment of shares was pending on 31.03.2012. In order to appreciate the nature of the controversy involved in the present appeal, the narration of the facts would be instructive. As is discernible from the records, the assessee company had during the year ended 31.03.2011 paid an amount of ₹ 23,01,70,000/- as share application money to its WOS viz. Saudi Ensas Company for Engineering Services WLL, UAE. It was the claim of the assessee, that the share capital was infused to revive the company foreseeing the business opportunities available in Saudi Arabia. Observing, that the issue of share application money to the AES pending allotment of shares beyond the reasonable period of time as described under the FEMA Act had to be looked into from the Transfer Pricing angle, the TPO holding a conviction that as the money was given to the AE in the preceding year but no shares were allotted, thus computed the interest @7.61% on the said amount for the whole year and quantified the same at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee company. No doubt, there was inordinate delay in allotment of shares, nevertheless, the assessee was successful in explaining the delay 20 VOLTAS LIMITED Assessment Years 2009-10 2010-11 in allotment of share and was able to demonstrate with evidences the circumstances which led to delay in allotment of shares. Therefore, recharacterization of this transaction as advance / loan by revenue authorities, in our considered opinion, was not correct approach and this transaction could not be equated with loan transactions. The Ld. DR has contended that the transactions have not been recharacterized as loan but the same has been benchmarked since certain benefits have accrued to AE by infusion of fund which must be shared with the assessee. However, we find that ALP of the transaction has been computed in similar manner as it would be computed for a loan transaction. Further as already noted, assessee s AE ultimately became wholly owned subsidiary of the assessee and therefore, whatever benefit would accrue to AE, the same would indirectly accrue to the assessee. Therefore, not convinced with the approach of lower authorities, we hold that no addition would be warranted on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if ALP determination was to be done in respect of such deemed interest free loan on allotment of shares under the CUP method, as has been claimed to have been done in this case, it was to be done on the basis as to what would have been interest payable to an unrelated share applicant if, despite having made the payment of share application money, the applicant is not allotted the shares. That aspect of the matter is determined by the relevant statute. This situation is not in pari materia with an interest free loan on commercial basis between the share applicant and the company to which capital contribution is being made. On these facts, it was unreasonable and inappropriate to treat the transaction as partly in the nature of interest free loan to the AE. Since the TPO has not brought on record anything to show that an unrelated share applicant was to be paid any interest for the period between making the share application payment and allotment of shares, the very foundation of impugned ALP adjustment is devoid of legally sustainable merits. 48. Let us also deal with two judicial precedents which have been heavily relied upon by the TPO, as also by the learned Departmental Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ownership and control of subsidiary being in the hands of the assessee, which was recognized as a significant factor for commercial expediency. However, as we have seen in the earlier discussions, such commercial expediency of granting interest free loans is wholly irrelevant because it is the impact of this interrelationship, on account of management, capital and control, which is sought to be neutralized by arm's length price adjustments. This was also not a case in which a capital contribution was deemed to be partly an interest free loan (i.e. for the period till the shares were actually allotted) and partly as capital contribution (i.e. when the subscribed shares were allotted by the subsidiary). Revenue, therefore, does not derive any advantage from these judicial precedents either. 49. In any event, it is not open to the revenue authorities to recharacterize the transaction unless it is found to be a sham or bogus transaction. While there are no specific powers vested in the TPO to recharacterize the transaction, even under the judge made law, such rechracterization can be done by the revenue authorities when the transactions are found to be substantially at varia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E. The Grounds of appeal Nos. 1.1 to 1.7 are dismissed. 12. As regards the disallowance made by the A.O u/s 14A r.w Rule 8D of the Act, we find that the only grievance of the revenue is that the CIT(A) had erred in directing the AO not to consider the assets which did not yield dividend income for computation of average value of investment for making the disallowance u/ s. 14A. On a perusal of the order of the CIT(A), we find that he had concluded as hereinabove after taking cognizance of the order of the Special bench of the ITAT, Delhi in the case of ACIT, Circle 17(1), New Delhi Vs. M/s Vireet Investments (P) Ltd. (2017) 165 ITD 0027 (Delhi) (SB) . We have given a thoughtful consideration and finding no infirmity in the aforesaid view so taken by the CIT(A), uphold the same. The Ground of appeal No. 2 raised by the revenue is dismissed. 13. The appeal of the revenue is dismissed. 14. Resultantly, the appeal of the assesse viz. ITA No. 6612/Mum/2018 is partly allowed, while for the appeal of the revenue viz. ITA No. 7028/Mum/2018 is dismissed. Order pronounced under rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962, by placing the details on the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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